Ouster, Inc. (OUST) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report on Form 10-K.
On April 20, 2023, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Certificate of Incorporation to effect a one-for-10 reverse stock split of our common stock and a corresponding reduction in our authorized shares of common stock (the “Reverse Stock Split”). The historical share and per share information included herein have been adjusted to reflect the Reverse Stock Split.
Overview
We founded Ouster in 2015 with the invention of our high-performance digital lidar. To continue to grow our business in the coming years, we have expanded and plan to continue to maintain and opportunistically expand our sales and marketing efforts and our software development capabilities, and to accelerate sensor development efforts. We are headquartered in San Francisco, CA.
We are a leading global provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, which allows each to understand and visualize the surrounding world and enable safe operation and autonomy. We design and manufacture digital lidar sensors that we believe are one of the highest-performing, lowest-cost lidar solutions available today across each of our four target markets: industrial automation; smart infrastructure; robotics; and automotive.
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We also provide perception software platforms for smart infrastructure deployments. Our software enables real-time people and object detection, classification, and tracking for actionable, intuitive, and customizable insights while preserving personally identifiable information. Our digital lidar sensors leverage a simplified architecture based on two semiconductor chips and are backed by a suite of patent-protected technology.
We have invested heavily in patents since our inception, pursuing comprehensive coverage of invention families and use cases, with broad international coverage. We believe that our extensive patent coverage creates material barriers to entry for anyone aiming to compete in the digital lidar space.
Our product offering currently includes four models of sensors in our OS product line: the hemispheric field of view OSDome, the ultra-wide field of view OS0, the mid-range OS1, and the long-range OS2. Within our OS sensor models, we offer numerous customization options, all enabled by embedded software. For each of our three models in the OS product line, we offer resolution options of 128 lines vertically (“channels”), 64 channels, or 32 channels, as well as many beam spacing options. On October 19, 2022, we announced the launch of our newest OS series scanning sensors, REV7, powered by our next-generation L3 chip. REV7 features the all-new OSDome sensor, as well as upgraded OS0, OS1, and OS2 sensors that deliver double the range, enhanced object detection, increased precision and accuracy, and greater reliability. The new REV7 sensors offer performance upgrades that we believe will enhance Ouster’s market opportunity, driven by new opportunities for longer-range and mapping applications. We are currently developing our solid-state DF product line, which is a suite of short, mid, and long-range solid-state digital lidar sensors that provide uniform precision imaging without motion blur across an entire field of view.
We believe the simplicity of our digital lidar design gives us a meaningful advantage in costs related to manufacturing, supply chain and production yields. Within our OS sensor models, we offer numerous customization options, all enabled by embedded software which minimizes changes to manufacturing or inventory. Our main manufacturing partners are Benchmark and Fabrinet. Benchmark and Fabrinet manufacture the majority of our products at their facilities in Thailand, which we expect will continue to reduce our product costs and allow us to continue to rapidly scale production to meet our anticipated product demand. Based on cost quotes for our products in mass production, we anticipate our manufacturing costs per unit will decrease further with higher volumes.
Merger with Velodyne Lidar, Inc.
On November 4, 2022, we entered into an Agreement and Plan of Merger (the “Velodyne Merger Agreement”) with Velodyne Lidar, Inc., a Delaware corporation (“Velodyne”), Oban Merger Sub, Inc., a Delaware corporation and one of our direct, wholly owned subsidiaries (“Velodyne Merger Sub I”) and Oban Merger Sub II LLC, a Delaware limited liability company and one of our direct, wholly owned subsidiaries (“Velodyne Merger Sub II”).
On February 10, 2023, we completed our merger of equals with Velodyne pursuant to the terms of the Agreement and Plan of Merger with Velodyne, Merger Sub I and Merger Sub II (the “Velodyne Merger”). In connection with the closing of the Velodyne Merger, we and Velodyne now operate as a single combined company. We believe the Velodyne Mergers will enhance our robust suite of product offerings; grow our diverse customer base; increase operational efficiencies; further develop our innovative product roadmap in anticipation for the future needs of the market; reduce our production costs; improve our path to profitability; and strengthen our future financial position.
Our product offerings acquired through the Velodyne Merger includes three models of sensors. The Alpha Prime (VLS-128) is a lidar sensor designed for autonomous driving and advanced vehicle safety, offering a 300-meter range with 128 lasers and real-time 3D data at 0.1-degree vertical and horizontal resolution. Recognized at the Pace Automotive Award in 2019, it provides a superior combination of range, resolution, and precision for Level 4 and Level 5 autonomous vehicles in both highway and low-speed urban environments. On the other hand, the Puck (VLP-16) is designed for mass production and affordability, featuring 16 lasers, a 100-meter range, and a multi-laser design with lower power consumption, lighter weight, and a compact footprint, making it suitable for low-speed autonomy and driver assistance. The Puck Hi-Res (VLP-16 Hi-Res) is an enhanced version of the original Puck, designed for applications requiring high image resolution, maintaining a 100-meter range and introducing a tighter laser distribution for more details in the 3D image at longer ranges, enabling better object identification.
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Amazon Warrant
Amazon.com NV Investment Holdings LLC, a wholly-owned subsidiary of Amazon.com, Inc. (“Amazon”), holds a warrant (“Amazon Warrant”) to acquire shares of our common stock. We assumed the Amazon Warrant as part of the Velodyne Merger. As a result of the issuance and sale by us of an additional 2,878,875 shares of common stock in the year ended December 31, 2023 pursuant to the At-Market-Issuance Sales Agreement at prices below the exercise price of the Amazon Warrant, an antidilution adjustment to the terms of the Amazon Warrant occurred, resulting in the increase in the number of shares issuable under the Amazon Warrant by 618 shares of common stock and a reduction to the original strike price of the Amazon Warrant to $50.70 per share. As of December 31, 2023, there were 3,264,516 shares of common stock issuable under the Amazon Warrant. The exercise price and the warrant shares issuable upon exercise of the Amazon Warrant are subject to further antidilution adjustments, including in the event we make certain sales of common stock (or securities exercisable or convertible into or exchangeable for shares of our common stock) at a price less than the exercise price of the Amazon Warrant. The Amazon Warrant is subject to vesting; 50% of the unvested Amazon Warrant as of the date of the Velodyne Merger vested as a result of the Velodyne Merger and the remainder will vest over time based on payments by Amazon or its affiliates to us in connection with Amazon’s purchase of goods and services from us.
Factors Affecting Our Performance
Commercialization of Lidar Applications. We believe that lidar and system solutions, including our subscription-based software, are approaching an inflection point of adoption across our target end market applications, and that we are well-positioned to capitalize on this market adoption. However, as our customers continue research and development projects that rely on lidar technology, it is difficult to estimate the timing of ultimate end market and customer adoption. As a result, we expect that our results of operations, including revenue and gross margins, will continue to fluctuate on a quarterly and annual basis for the foreseeable future. As the market for lidar solutions matures and more customers reach a commercialization phase with solutions that rely on our technology, the fluctuations in our operating results may become less pronounced. In May 2023, the Company announced that it had been awarded a serial production agreement with Motional, a global leader in driverless technology, to be Motional’s exclusive supplier of long-range lidar using the VLS-128 lidar sensor through 2026, and we intend to seek to establish similar relationships with other customers. In 2024, our strategic business objectives include expanding software solutions. Accordingly, we expect to make progress towards growing our revenue and expanding gross margins. Nonetheless, our revenue and gross margins may not increase as we expect unless and until more customers commercialize their products and lidar technology becomes more prevalent across our target end markets.
Number of Customers in Production. For certain strategic customers and markets, our products must be integrated into a broader platform, which then must be tested, validated, and achieve system-level performance and reliability thresholds that enable commercial production and sales. The time necessary to reach commercial production varies from six months to seven years, based on the market and application. For example, the production cycle in the automotive market tends to be substantially longer than in our other target markets, including industrial automation, smart infrastructure and robotics. It is critical to our future success in each of our target end markets that our customers reach commercial production and sales and that they select our products in their commercial production applications. Because the timelines to reach production vary significantly and the revenue generated by each customer in connection with commercial production and sales is unpredictable, it is difficult for us to reliably predict our financial performance.
Customers’ Sales Volumes. Our customer base is diversified and we aim to continue to penetrate into diverse end markets to increase our sales volumes. Ultimately widespread adoption of our customers’ products that incorporate our lidar solutions will depend on many factors, including the size of our customers’ end markets, end market penetration of our customer’s products that incorporate our digital lidar solutions, our end customers’ ability to sell their products, and the financial stability and reputation of the customers. In 2024, our strategic business objectives include growing our installed base of customers. We believe our sales volume by customer depends on the end market demand for our customers’ products that incorporate our digital lidar solutions as well as our ability to grow our sales force.
Average Selling Prices (“ASPs”), Product Costs and Margins. Our product costs and gross margins depend largely on the volumes of sensors shipped, the mix of existing and new products sold and the number and variety of solutions we provide to our customers. We anticipate that our selling prices will vary by target end market and application due to market-specific supply and demand dynamics. We expect to continue to experience some downward pressure on margins from signing anticipated large multi-year agreements in the near term with multi-year negotiated pricing. We expect that these customer-specific selling price fluctuations combined with our volume-driven product costs may drive fluctuations in revenue and gross margins on a quarterly basis. However, notwithstanding any short-term price surcharges on our products, we expect that over time our volume-driven product costs will decrease.
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Competition. Lidar is an emerging market, and there are many competitors for the growing market. This has created downward pressure on our ASPs. We expect this pressure to continue to push our ASPs lower in the coming years. However, we believe that because of our complementary metal-oxide-semiconductor, digital lidar technology, we are well-positioned to scale more rapidly than our competitors and leverage our scale to deliver positive gross margins.
Continued Investment and Innovation. We believe that we are a leading lidar provider. Our financial performance is significantly dependent on our ability to maintain this leading position which is further dependent on the investments we make in research and development. We believe it is essential that we continue to identify and respond to rapidly evolving customer requirements, including successfully progressing our digital lidar roadmap and developing technologies that will enhance the operating performance of our products. For example, our next generation L4 custom silicon chip is taped out and we believe it will bring significant improvements in range, field of view, and manufacturability, along with safety certifications to the OS sensor family, and we currently plan to integrate the Chronos chip into its solid-state digital flash sensors in 2024. If we fail to continue our innovation, our market position and revenue may be adversely affected, and our investments in that area will not be recovered.
Market Trends and Uncertainties. We anticipate increasing demand for our digital lidar solution. We estimate a multibillion dollar total addressable market (“TAM”) for our solutions in the future. We define our TAM as automation applications in the industrial, smart infrastructure, robotics and automotive end markets where we actively engage and maintain customer relationships. Each of our target markets is potentially a significant global opportunity, and these markets have historically been underserved by limited or inferior technology or not served at all. We believe we are well positioned in our market as a leading provider of high-resolution lidar sensors.
Although increasing adoption of semi-autonomous solutions that rely on lidar technology may generate higher demand, we may not be able to take advantage of demand if we are unable to anticipate regulatory changes and adapt quickly enough to meet such new regulatory standards or requirements applicable to us or to our customers’ products in which our lidar sensors are used. Market acceptance of semi-autonomous solutions and active safety technology depend upon many factors, including cost, performance, safety performance, regulatory requirements and international taxes or tariffs related to such technologies. These factors may impact the ultimate market acceptance of our lidar technology.
International Expansion. We view international expansion as an important element of our strategy to increase revenue and achieve profitability. We continue to position ourselves in geographic markets that we expect to serve as important sources of future growth. We have an existing presence in three regions: Americas; Asia-Pacific; and Europe, Middle East and Africa. We intend to expand our presence in these regions over time including through distribution partnerships. Expanded global reach will require continued investment and may expose us to additional foreign currency risk, international taxes and tariffs, legal obligations and additional operational costs, risks and challenges that may impact our ability to meet our projected sales volumes, revenue and gross margins.
Components of Results of Operations
Revenue
The majority of our revenue comes from the sale of our lidar sensors and accessories both directly to end users and through distributors both domestically and internationally. We recognize revenue from product sales when the performance obligation of transferring control of the product to the customer has been met, generally when the product is shipped. We also recognize revenue by performing services related to product development, validation, maintenance under our extended warranty contracts and shipping; however, we do not expect product development and validation and license and services to be material components of revenue, cost of revenue or gross margin in the foreseeable future. Performance obligations related to services are generally recognized over time, based on cost-to-cost input basis or straight-line over time. Amounts billed to customers related to shipping and handling are classified as revenue, and we have elected to recognize the cost of shipping activities that occur after control has transferred to the customer as a fulfillment cost rather than a separate performance obligation. All related costs are accrued and recognized within cost of revenue when the related revenue is recognized.
Most of our customers are innovators and early technology adopters incorporating our products into their solutions. Currently, our product revenue consists of both customers ordering small volumes of our products that are in an evaluation phase and customers that order larger volumes of our products and have more predictable long-term production schedules. However, we believe we are still at the very beginning of the lidar adoption curve, and some customers are still learning their growth and demand rates which can impact the timing of purchase orders quarter to quarter. As we grow our business, we expect to continue to improve our own understanding of our customers’ needs and timelines, and expect the timing of orders will have a less notable impact on our quarterly results.
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Cost of Revenue
Cost of revenue consists of the manufacturing cost of our lidar sensors, which primarily consists of sensor components, personnel-related expenses, including salaries, benefits, and stock-based compensation directly associated with our manufacturing organization, and amounts paid to our third-party contract manufacturer and vendors. Our cost of revenue also includes depreciation of manufacturing equipment, amortization of intangible assets, an allocated portion of overhead, facility and IT costs, warranty expenses, excess and obsolete inventory and shipping costs.
Gross Profit and Gross Margin
Our gross profit equals total revenues less our total cost of revenues, and our gross margin is our gross profit expressed as a percentage of total revenue. Subject to quarterly fluctuations and volatility, we expect unit costs to decline as we manufacture higher unit volumes of sensors and a greater portion of our sensors are produced by our contract manufacturers in Thailand.
Operating Expenses
Research and Development Expenses
Research and development (“R&D”) activities are primarily conducted at our San Francisco based headquarters and our additional R&D facilities in Scotland and Canada and consist of the following activities:
•Design, prototyping, and testing of proprietary electrical, optical, and mechanical subsystems for our digital lidar products;
•Robust testing for industrial and autonomous vehicle safety certifications;
•Development of new products and enhancements to existing products in response to customer requirements including firmware development and software development of lidar integration products;
•Custom system-on-a-chip (“SoC”) design for Ouster’s digital lidar products; and
•Development of custom manufacturing equipment.
R&D expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly involved in R&D activities, third-party engineering and contractor costs, prototype expenses, amortization of intangible assets, and an allocation of shared overhead costs including facilities, utilities and IT-related costs that support R&D activities.
R&D costs are expensed as they are incurred. Our investment in R&D will continue to grow as we invest in new lidar technology and related software. Our absolute amount of R&D expenses is expected to grow over time; however, we expect R&D as a percentage of revenue to decrease over time as our business grows.
Sales and Marketing Expenses
Our business development, customer support and marketing teams are located in offices worldwide. Selling and marketing expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly involved in business development, customer support, and marketing activities, and marketing expenses including trade shows, advertising, and demonstration equipment. Sales and marketing expenses also include amortization expense of intangible assets related to customer relationships associated with the acquisitions. We have experienced additional sales and marketing expenses as a result of our global expansion, and expect sales and marketing spend as a percentage of revenue to decrease over time as our business grows.
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General and Administrative Expenses
General and administrative expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, of our executives and members of the board of directors, finance, human resources, an allocation of shared overhead costs including facilities, utilities and IT-related costs that support general and administrative activities, as well as amortization of intangible assets, fees related to legal fees, patent prosecution, accounting, finance and professional services, as well as insurance and bank fees. Our absolute amount of general and administrative expenses will grow over time; however, we expect the general and administrative spend as a percentage of revenue to decrease over time as our business grows. We have experienced and may in the near-term experience additional increases in general and administrative expenses related to legal, accounting, finance and professional services costs associated with the Velodyne Merger, litigation activities, hiring more personnel and consultants to support our growing international expansion and compliance with the applicable provisions of the Sarbanes-Oxley Act (“SOX”) and other SEC rules and regulations as a result of being a public company.
Goodwill Impairment Charges
In the year ended December 31, 2023, we recorded goodwill impairment charges of $166.7 million. These charges were primarily driven by the decrease in the Company’s market capitalization during the period. Our goodwill impairment analysis includes a comparison of the aggregate estimated fair value of our reporting unit to our total market capitalization. There were no goodwill impairment charges during the year ended December 31, 2022. As of December 31, 2023, our remaining goodwill balance was nil.
Interest Income, Interest Expense, and Other Income (Expense), Net
Interest income consists primarily of income earned on our cash and cash equivalents and short-term investments. These amounts will vary based on our respective balances and market rates. Interest expense consists primarily of interest on our debt, amortization of debt issuance costs and discounts, fees paid on refinancing and loss on debt extinguishment from our former credit line with Hercules. Other income (expense), net consists primarily of realized and unrealized gains and losses on foreign currency transactions and balances, realized gains and losses related to sales of our available-for-sale investments, the change in fair value of the private placement warrant liability.
Income Taxes
Our income tax provision consists of federal, state and foreign current and deferred income taxes. Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in the quarter. Our effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on deferred tax assets as it is more likely than not that some, or all, of our deferred tax assets will not be realized. We continue to maintain a full valuation allowance against our U.S. Federal and state deferred tax assets, excluding specific balances due to the Velodyne Merger. Income tax provision for the years ended December 31, 2023 and 2022, respectively, was not material to the Company’s consolidated financial statements.
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Results of Operations:
The following table summarizes key components of our results of operations for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| (dollars in thousands) | ||||||
| Revenue | $ | 83,279 | $ | 41,029 | ||
| Cost of revenue(1) | 74,965 | 30,099 | ||||
| Gross profit | 8,314 | 10,930 | ||||
| Operating expenses(1): | ||||||
| Research and development | 91,210 | 64,317 | ||||
| Sales and marketing | 41,639 | 30,833 | ||||
| General and administrative | 81,982 | 61,203 | ||||
| Goodwill impairment charges | 166,675 | — | ||||
| Total operating expenses | 381,506 | 156,353 | ||||
| Loss from operations | (373,192) | (145,423) | ||||
| Other (expense) income: | ||||||
| Interest income | 9,038 | 2,208 | ||||
| Interest expense | (9,303) | (2,694) | ||||
| Other income (expense), net | (130) | 7,654 | ||||
| Total other income (expense), net | (395) | 7,168 | ||||
| Loss before income taxes | (373,587) | (138,255) | ||||
| Provision for income tax expense | 523 | 305 | ||||
| Net loss | $ | (374,110) | $ | (138,560) |
The following table sets forth the components of our consolidated statements of operations and comprehensive loss data as a percentage of revenue for the periods presented:
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| (% of total revenue) | |||||
| Revenue | 100 | % | 100 | % | |
| Cost of revenue(1) | 90 | 73 | |||
| Gross profit | 10 | 27 | |||
| Operating expenses(1): | |||||
| Research and development | 110 | 157 | |||
| Sales and marketing | 50 | 75 | |||
| General and administrative | 98 | 149 | |||
| Goodwill impairment charges | 200 | — | |||
| Total operating expenses | 458 | 381 | |||
| Loss from operations | (448) | (354) | |||
| Other (expense) income: | |||||
| Interest income | 11 | 5 | |||
| Interest expense | (11) | (7) | |||
| Other income (expense), net | — | 19 | |||
| Total other income (expense), net | — | 17 | |||
| Loss before income taxes | (448) | (337) | |||
| Provision for income tax expense | 1 | 1 | |||
| Net loss | (449) | % | (338) | % |
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(1)Includes stock-based compensation expense as follows:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| (dollars in thousands) | ||||||
| Cost of revenue | $ | 2,854 | $ | 783 | ||
| Research and development | 24,551 | 14,611 | ||||
| Sales and marketing | 9,966 | 7,065 | ||||
| General and administrative | 20,354 | 10,862 | ||||
| Total stock-based compensation | $ | 57,725 | $ | 33,321 |
Comparison of the years ended December 31, 2023 and 2022
Revenue
| Year Ended December 31, | 2023 - 2022 Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Revenue by geographic location: | ||||||||||||||
| Americas | $ | 45,744 | $ | 15,977 | $ | 29,767 | 186 | % | ||||||
| Asia-Pacific | 12,929 | 9,510 | 3,419 | 36 | ||||||||||
| Europe, Middle East and Africa | 24,606 | 15,542 | 9,064 | 58 | ||||||||||
| Total | $ | 83,279 | $ | 41,029 | $ | 42,250 | 103 | % |
Revenue
Revenue increased by $42.3 million, or 103%, to $83.3 million for the year ended December 31, 2023 from $41.0 million for the prior year. The increase in revenue was driven by higher volume that was primarily due to the Velodyne Merger, which contributed $29.0 million of revenue in 2023. In addition, the Company realized higher revenues relating to sales of our OS sensors.
Geographic Locations
Revenue increased across the geographic regions of the Americas, Asia-Pacific, and Europe, Middle East and Africa as compared to the comparable period in the prior year. The revenue increases in those geographic regions were primarily attributable to the Velodyne Merger, our focus and investment in our global sales team and increased demand for our OS sensors during the year ended December 31, 2023.
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Cost of Revenue and Gross Margin
| Year Ended December 31, | 2023 - 2022 Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Cost of revenue | $ | 74,965 | $ | 30,099 | $ | 44,866 | 149 | % |
Cost of revenue and Gross Margin
Cost of revenue increased by $44.9 million, or 149%, to $75.0 million for the year ended December 31, 2023 from $30.1 million for the prior year. The increase in cost of revenue was primarily attributable to the Velodyne Merger. In addition, the Company recognized $10.0 million in inventory write downs primarily related to canceling certain Velodyne products and transitioning to the REV7 sensors. In addition, we had higher costs due to higher OS product revenues in the year ended December 31, 2023.
Gross margin fell to 10% for the year ended December 31, 2023 from 27% in the prior year primarily as a result of the factors described above related to the Velodyne Merger.
Operating Expenses
| Year Ended December 31, | 2023 - 2022 Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Research and development | $ | 91,210 | $ | 64,317 | $ | 26,893 | 42 | % | ||||||
| Sales and marketing | 41,639 | 30,833 | 10,806 | 35 | ||||||||||
| General and administrative | 81,982 | 61,203 | 20,779 | 34 | ||||||||||
| Goodwill impairment charges | $ | 166,675 | $ | — | $ | 166,675 | 100 | % | ||||||
| Total operating expenses: | $ | 381,506 | $ | 156,353 | $ | 225,153 | 144 | % |
Research and Development
Research and development expenses increased by $26.9 million, or 42%, to $91.2 million for the year ended December 31, 2023 from $64.3 million in the prior year. The increase was primarily attributable to the Velodyne Merger, which increased headcount-related expenses including stock based compensation by $19.0 million in 2023.
Sales and Marketing
Sales and marketing expenses increased by $10.8 million, or 35%, to $41.6 million for the year ended December 31, 2023 from $30.8 million in the prior year. The increase was primarily attributable to the Velodyne Merger, which increased headcount-related expenses including stock based compensation by $8.1 million in 2023.
General and Administrative
General and administrative expenses increased by $20.8 million, or 34%, to $82.0 million for the year ended December 31, 2023 from $61.2 million in the prior year. The increase was primarily attributable to the Velodyne Merger, which increased headcount-related expenses including stock based compensation and litigation related costs by $29.6 million.
Goodwill Impairment Charges
Goodwill impairment charges were $166.7 million for the year ended December 31, 2023 and related to the reasons described above under “Goodwill impairment charges.” There were no goodwill impairment charges during the year ended December 31, 2022.
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Interest Income, Interest Expense and Other Income (Expense), Net
| Year Ended December 31, | 2023 - 2022 Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest income | $ | 9,038 | $ | 2,208 | $ | 6,830 | 309 | % | ||||||
| Interest expense | (9,303) | (2,694) | (6,609) | 245 | ||||||||||
| Other income (expense), net | (130) | 7,654 | (7,784) | (102) |
Interest income was $9.0 million for the year ended December 31, 2023 compared to $2.2 million for the prior year. The increase in interest income was primarily attributable to a higher average cash and cash equivalent balance driven by additions from the Velodyne Merger transaction and higher interest rates earned on held balances.
Interest expense was $9.3 million for the year ended December 31, 2023 compared to $2.7 million for the prior year. We utilized proceeds from a revolving credit line with UBS to prepay and terminate our existing term loan with Hercules. We recognized a loss of extinguishment of debt of $3.6 million and recorded it is interest expense, along with amortization of debt issuance costs and discount in the year ended December 31, 2023. Interest expense recorded in the year ended December 31, 2022 primarily consisted of interest and amortization of debt issuance cost and discount on the Loan and Security Agreement with Hercules Capital, Inc. and interest expense on the Revolving Credit Line Agreement with UBS Bank USA and UBS Financial Services Inc.
Other income (expense), net was $(0.1) million for the year ended December 31, 2023 compared to $7.7 million for the prior year. Other income (expense) included the fair value change of private placement warrant liability and was not material during the year ended December 31, 2023. During the year ended December 31, 2022, we recorded a gain of $7.4 million for the fair value change of private placement warrant liability.
Income Taxes
| Year Ended December 31, | 2023 - 2022 Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Loss before income taxes | $ | (373,587) | $ | (138,255) | $ | (235,332) | 170 | % | ||||||
| Provision for income tax expense | 523 | 305 | 218 | 71 | ||||||||||
| Effective tax rate | (0.14) | % | (0.22) | % |
Our effective tax rate was (0.14)% for the year ended December 31, 2023 compared to our effective tax rate of (0.22)% for the prior year. Our tax expense changed by $0.2 million during the year ended December 31, 2023, compared to the prior year, primarily due to withholding taxes in the United States and income tax expense from profitable foreign jurisdictions.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and short-term investments, cash generated from product revenues, sales of common stock under our at-the market equity offering program and proceeds from debt financing.
Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we develop and grow our business.
As of December 31, 2023 we had an accumulated deficit of $816.0 million and cash, cash equivalents, restricted cash and short-term investments of approximately $191.8 million. Management believes that our existing sources of liquidity will be adequate to fund our operations for at least twelve months from the date of this Annual Report on Form 10-K. However, we may need to raise additional capital in the future to support our operations.
We manage our cash and cash equivalents with financial institutions that we believe have high credit quality and, at times, such amounts exceed federally insured limits. The failure of any bank with which we maintain a commercial relationship could cause us to lose our deposits in excess of the federally insured or protected amounts. We have experienced recurring losses from operations, and negative cash flows from operations, and we expect to continue operating at a loss and to have negative cash flows from operations for the foreseeable future. Because we are in the growth stage of our business and
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operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide. We may require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. In particular, current macroeconomic conditions, including elevated inflation rates and high interest rates, have resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.
ATM Agreement
On April 29, 2022, we entered into an open market sale agreement with B. Riley Securities, Inc., Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc. (the “ATM Agreement”), pursuant to which we may offer and sell shares of our common stock with an aggregate offering price of up to $150.0 million under an “at the market” offering program. Subject to the terms and conditions of the agreement, we may sell the shares in amounts and at times to be determined by us but we are under no obligation to sell any of the shares. Actual sales, if any, will depend on a variety of factors to be determined by us from time to time, including, among other things, market conditions, the trading price of our common stock, capital needs and determinations by us of the appropriate sources of funding. During the year ended December 31, 2022, we sold 783,371 shares of common stock for net proceeds of $15.8 million under the ATM Agreement, and during the year ended December 31, 2023, we sold 2,878,875 shares of common stock for net proceeds of $32.2 million. We currently intend to use the net proceeds from the sale of shares pursuant to the ATM Agreement for working capital and general corporate purposes.
Debt Arrangements
On April 29, 2022, we entered into the Loan Agreement with Hercules, which provided us with a term loan facility of up to $50.0 million, subject to terms and conditions (the “Term Loan Facility”). As of December 31, 2022, $40.0 million had been drawn under the Term Loan Facility, and could be used for general working capital purposes subject to certain terms and conditions. On October 25, 2023, the Company entered into the Credit Line Account Application and Agreement for Organizations and Businesses (the “Credit Agreement”) and the Addendum to Credit Line Account Application and Agreement (the “Addendum”; and the Credit Agreement as amended, modified, and/or supplemented by the Addendum, the “UBS Agreement”) by and among the Company, UBS Bank USA (the “Bank”), and UBS Financial Services Inc. The facility under the UBS Agreement matures and terminates on August 2, 2025 (the “Maturity Date”).
The UBS Agreement provides us with a revolving credit line of up to $45.0 million, subject to certain terms and conditions. We initially borrowed $44.0 million, and all of the proceeds were used to prepay and terminate our Term Loan Facility with Hercules on October 25, 2023. We recognized a loss on extinguishment of debt of $3.6 million and recorded it as interest expense in its consolidated statements of operations and comprehensive loss.
Pursuant to the terms of the UBS Agreement, we have agreed to maintain minimum liquidity, comprised of unencumbered cash and cash equivalents, U.S. treasuries and other assets acceptable to the Bank, of $52.0 million in an account maintained with the Bank or its affiliates at all times. The facility under the UBS Agreement is secured by our assets in securities accounts and any other accounts maintained with the Bank or its affiliates, and any supporting obligations, general intangibles and other rights ancillary or attributable to such assets, subject to customary exceptions.
Loans under the UBS Agreement bear interest at a rate equal to (x) for variable rate loans, the sum of (i) the applicable SOFR average plus 0.110%, plus (ii) 1.20%, and (y) for fixed rate loans, the sum of either (1) CME Term Rate or (2) the U.S. Treasury Rate, as applicable and as defined in the UBS Agreement, as determined based on the duration of the advance, plus the applicable liquidity premium with a range of 0.15% to 0.50%, as set forth in the UBS Agreement. Interest payments are due (x) for variable rate loans, on the last day of each calendar month, and on each date that any portion of the principal amount is due, including on the Maturity Date, and (y) for fixed rate loans, on the last day of the applicable interest period, and on each date that any portion of the principal amount is due, including on the Maturity Date. We may repay any variable rate loans at any time in whole or in part, without penalty. We may repay any fixed rate loans in whole, but not in part, subject to certain breakage costs.
We have agreed to pay an unused line fee in an amount equal to (i) the commitment amount of $45.0 million less the average daily balance of the sum of the principal amount of the obligations outstanding during the preceding calendar quarter, multiplied by (ii) 0.50% per annum, and such unused line fee is payable quarterly in arrears on the last day of each calendar quarter.
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The UBS Agreement also contains affirmative and negative covenants customary for a credit line of this type, including requirements for maintenance of the collateral accounts and certain limitations on withdrawal of cash from such collateral accounts. The UBS Agreement also provides for customary events of default, including, among others, non-payment, failure to maintain an amount equal to the greater of (x) the outstanding loans and (y) the collateral value as determined by the Bank, in the securities accounts maintained with the Bank, bankruptcy, or breach of a covenant, representation and warranty.
For additional information regarding the terms of the UBS Agreement, see Note 6. Debt to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the consolidated balance sheet as of December 31, 2023, while others are considered future commitments. Our contractual obligations primarily consist of non-cancelable purchase commitments with various parties to purchase goods or services, primarily inventory, entered into in the normal course of business and operating leases. For information regarding our other contractual obligations, refer to Note 8. Leases and Note 9. Commitments and Contingencies.
Cash Flow Summary
| For the Years ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| (dollars in thousands) | ||||||
| Net cash provided by (used in): | ||||||
| Operating activities | $ | (137,890) | $ | (110,690) | ||
| Investing activities | 50,601 | (5,147) | ||||
| Financing activities | 15,657 | 55,602 |
Operating Activities
During the year ended December 31, 2023, operating activities used $137.9 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of $374.1 million, impacted by our non-cash charges of $257.7 million primarily consisting of inventory write-down of $10.0 million, interest expense and loss on extinguishment of debt of $4.0 million, goodwill impairment charges of $166.7 million, depreciation and amortization of $17.1 million, stock-based compensation of $57.7 million, loss on write-off of construction in-progress and right-of-use asset impairment of $1.7 million, and amortization of right-of-use asset of $4.5 million. The cash used in changes in our operating assets and liabilities of $21.5 million was primarily due to an increase in inventories of $4.0 million, a decrease in accounts payable of $8.5 million, an increase in accrued and other liabilities of $8.1 million.
During the year ended December 31, 2022, operating activities used $110.7 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of $138.6 million, impacted by our non-cash charges of $41.4 million primarily consisting of depreciation and amortization of $9.5 million, stock-based compensation of $33.3 million, change in right-of-use asset of $2.7 million, interest expense and amortization of debt issuance costs and debt discount of $1.0 million, a $7.4 million change in fair value of warrant liabilities, inventory write down of $1.6 million allowance for expected credit losses of $0.3 million and loss from disposal of property and equipment of $0.4 million. The cash used in changes in our operating assets and liabilities of $13.5 million was primarily due to an increase in accounts receivable of $0.9 million, an increase in inventories of $13.7 million, an increase in prepaid expenses and other assets of $3.1 million, an increase in accounts payable of $4.2 million, an increase in accrued and other liabilities of $3.2 million and a decrease in operating lease liability of $3.2 million.
Investing Activities
During the year ended December 31, 2023, cash used in investing activities was $50.6 million, which was attributed primarily to the Velodyne Merger and proceeds and purchases of short-term investments.
During the year ended December 31, 2022, cash used in investing activities was $5.1 million, which was primarily related to purchases of property, plant and equipment of $5.4 million, partially offset by sales of property and equipment of $0.3 million.
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Financing Activities
During the year ended December 31, 2023, cash provided by financing activities was $15.7 million, consisting primarily of $14.6 million of proceeds from the issuance of common stock under the ATM Agreement and proceeds from employee stock purchase program of $1.2 million.
During the year ended December 31, 2022, cash provided by financing activities was $55.6 million, consisting primarily of $39.1 million of proceeds from borrowings, net of debt discount and issuance costs, $16.3 million of proceeds from the issuance of common stock under the ATM Agreement, net of commissions and fees, proceeds from exercise of stock options of $0.5 million and proceeds from ESPP purchase of $0.4 million.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that can significantly impact the amounts we report as assets, liabilities, revenue, costs and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates under different assumptions and conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance as these policies involve a greater degree of judgment and complexity.
Business Combinations
Business combinations are accounted for under the acquisition method. We recognize the assets acquired and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. We assess the fair value of assets acquired, including intangible assets, and liabilities assumed using a variety of methods. Each asset acquired and liability assumed is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant estimates and assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset, future cash inflows and outflows, probabilities of success, asset lives, and the appropriate discount rates. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred.
During the measurement period, which extends no later than one year from the acquisition date, we may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the consolidated statements of operations within other income (expense), net.
Goodwill
The recoverability of goodwill is evaluated annually or whenever events or changes in circumstances indicate that the fair value of the reporting unit is less than its carrying amount. The Company’s impairment evaluation of goodwill consists of a qualitative assessment to determine if it is more likely than not that the fair value of its single reporting unit is less than its carrying amount. The Company’s qualitative assessment considers factors including changes in the macroeconomic, industry and market conditions, a sustained share price or market capitalization decrease, and if there is any other specific event. If this qualitative assessment indicates it is more likely than not that the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, we compare the estimated fair value of the asset to its carrying amount with an impairment loss recognized for the amount, if any, by which carrying value exceeds estimated fair value.
When the Company performs the quantitative test for goodwill, fair values are determined using a combination of the discounted cash flow approach (“income approach”) and the guideline public company method (“market approach”). This approach requires the use of significant estimates and assumption including forecasted future cash flows, long-term future growth rates and discount rates. Estimating the fair value of reporting unit requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is reasonably possible that the judgments and estimates described above could change in future periods.
In connection with the Company’s goodwill impairment assessments for the year ended December 31, 2023, the Company impaired all of its goodwill.
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Inventory Valuation
Inventories are stated at the lower of cost or estimated net realizable value. Costs are computed under the standard cost method, which approximates actual costs determined on the first in, first out basis. We record write-downs of inventories which are obsolete or in excess of anticipated demand. Significant judgment is used in establishing our forecasts of future demand and obsolete material exposures. We consider marketability and product life cycle stage, product development plans, demand forecasts, and assumptions about future demand and market conditions in establishing our estimates. If the actual component usage and product demand are significantly lower than forecast, which may be caused by factors within and outside of our control, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and our customer requirements, we may be required to increase our inventory write-downs. A change in our estimates could have a significant impact on the value of our inventory and our results of operations.