TUSIMPLE HOLDINGS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus (the "Prospectus") filed with theSecurities and Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act"), onApril 16, 2021 . In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the section titled "Special Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and the section titled "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview When used in this report, the terms "TuSimple", "Company", "we", "us", and "our" meanTuSimple Holdings Inc. and all subsidiaries.TuSimple is an autonomous technology company that is revolutionizing the estimated$4 trillion global truck freight market. We have developed industry-leading autonomous technology specifically designed for semi-trucks, which has enabled us to build the world's first Autonomous Freight Network ("AFN") in partnership with world-class shippers, carriers, railroads, freight brokers, fleet asset owners, and truck hardware partners. We believe that our technology and our AFN will make long haul trucking significantly safer as well as more reliable, efficient, and environmentally friendly, creating significant benefits for all who rely on the freight ecosystem to deliver essential goods. Our AFN provides autonomous freight capacity as a service through multiple service models based on users' needs. We believe that allowing our users the flexibility to select different service models is critical to providing a superior customer experience and will help drive rapid adoption of our network. •Carrier-Owned Capacity. Shippers, carriers, and railroads that prefer to own their fleet will be able to purchase our purpose-built L4 autonomous semi-truck from a semi-truck original equipment manufacturer ("OEM") partner and subscribe to TuSimple Path-a comprehensive turnkey product to enable autonomous operations across our network. TuSimple Path includes features such as our on-board autonomous driving software, TuSimple Connect cloud-based autonomous operations oversight system, HD digital route mapping support, and emergency roadside assistance. Users will payTuSimple a per mile, usage-based fee for access to TuSimple Path and benefit from lower overall freight costs with an expected payback period of less than one year on their upfront incremental capital investment to purchase our purpose-built L4 autonomous semi-trucks. •TuSimple Capacity. Our fleet of purpose-built L4 autonomous semi-trucks, financed through third party fleet asset owners, will serve users that desire access to safe, reliable, low cost, and more environmentally friendly freight transportation without owning semi-truck assets. Users of TuSimple Capacity can range from relatively smaller users of freight logistics to large shippers, carriers, and railroads seeking to supplement their own captive fleet for incremental freight capacity. We will charge users of TuSimple Capacity a per mile rate to ship freight, which we expect will be at a meaningful discount to prevailing market freight rates. We believe that our competitive advantage in terms of pricing will be enabled by our anticipated cost structure, which is expected to be significantly lower than that of human-operated semi-trucks. Users will benefit directly from lower shipping costs compared to conventional truck freight. We are also working in partnership with leading semi-truck OEMs Navistar and Traton as well as components partners to build the world's first purpose-built L4 autonomous semi-truck to be operated exclusively on our network. We believe that this collaborative approach to create semi-trucks designed and built with integrated auto-grade components and sensors will increase our AFN's reliability at scale. Vertically integrating through partnerships with OEMs and Tier 1 suppliers allows us to maintain strong supply chain and hardware design control while remaining capital light and primarily focusing on developing proprietary autonomous technology. We have developed a robust ecosystem of shippers, carriers, railroads, freight brokers, fleet asset owners, and third-party service providers, includingUPS , McLane, U.S. Xpress, Werner, Schneider, and CN, that provide critical validation and enhance the network effect benefits of our approach. We believe that our partnership network creates a significant and sustainable competitive advantage, especially as we work with shippers, carriers, and railroads to strategically locate our AFN terminals near their distribution centers. The continued growth of our AFN infrastructure and partnerships will continue to improve our user experience and drive more users to our platform which will allow us to further densify our strategic terminal network and reinforce rapid network growth. 19 -------------------------------------------------------------------------------- Coronavirus ("COVID-19") Impact The extensive impact of the pandemic caused by COVID-19 and the measures taken in response thereto has resulted and will likely continue to result in significant disruption to the global economy, as well as businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, states, counties and other jurisdictions have imposed, and may impose in the future, various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, limitations on gatherings of people, reduced operations, extended closures of businesses and vaccine requirements. The COVID-19 pandemic and measures to prevent its spread have had the following impact on our business: •Our Workforce. Employee health and safety is our priority. In response to COVID-19, we established new protocols to help protect the health and safety of our workforce. We will continue to stay up-to-date and follow county and CDC guidelines regarding requirements for a healthy work environment. •Operations and Supply Chain. As a result of COVID-19, we experienced some delays in our supply chains which temporarily limited our ability to outfit semi-trucks with key components during the second quarter of 2020; however, we have not experienced material disruptions in our shipping activity or in our ability to continue developing our AFN to date. In the future, we may experience supply chain disruptions from third party suppliers and any such supply chain disruptions could cause delays in our development timelines. We will continue to monitor the situation for any potential adverse impacts and execute appropriate countermeasures, as necessary. While we have not experienced significant disruptions to our business due to the COVID-19 pandemic to date, the broader and long-term implications of the COVID-19 pandemic, and the measures taken in response thereto, on our workforce, operations and supply chain, user demand, results of operations, and overall financial performance remain uncertain. See "Risk Factors" for further discussion of the possible impact of COVID-19 on our business. Key Factors Affecting Our Performance We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those set forth in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q. Driver-Out Pilot Program Development of our L4 autonomous semi-truck technology continues to progress and we continue to move towards the launch of our Driver-Out Pilot Program. We are currently verifying the safety case prior to launch. The safety case verification process is multifaceted to mitigate the risk inherent in the system and includes proper testing, verification, validation of various software and hardware modules, and validation that our risk management system will identify issues and signs of degradation from both software and hardware to help the system react appropriately to risk events. The safety case also includes what we expect to be the final on-road validation of the pilot with safety drivers on board. Upon successful completion, we will start our Driver-Out runs, which we expect to conduct on open public roads, both on surface streets and highways in theU.S. , primarily on hub-to-hub routes on a major freight corridor alongI-10 in theState of Arizona . The Driver-Out runs are expected to begin by year end and their successful completion is expected to be a key milestone towards full commercialization of our L4 autonomous semi-truck technology. Full Commercialization of our AFN at Scale We have achieved approximately 5.4 million cumulative road miles driven by our autonomous fleet to date, consisting of all miles driven by our testing fleet globally, either in autonomous mode or data collection mode, and recorded approximately 945,000 revenue miles from our freight capacity services during the three months endedSeptember 30, 2021 . Prior to full commercialization of our AFN at scale, we must increase the number of users, grow our network of terminals, expand our high definition digital mapped routes, increase the number of purpose-built L4 autonomous semi-trucks and achieve several research and development milestones. While our purpose-built L4 autonomous semi-trucks are not yet commercially available, we have received significant interest from potential users, with 6,875 reservations as ofSeptember 30, 2021 . Additionally, we continue to grow our database of HD digital maps of freight corridors and surface streets with approximately 9,900 mapped miles as ofSeptember 30, 2021 . Due to the fixed costs associated with operating our AFN, including labor for operating terminals, autonomous operations oversight systems, and maintaining our purpose-built L4 autonomous semi-trucks, we expect our gross margins to improve as more users are added to our AFN and as we achieve economies of scale. Until we can generate sufficient additional revenue from our AFN, we expect to finance our operations through equity and/or debt financings. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development efforts. 20 --------------------------------------------------------------------------------Continued Investment in R&D and Innovation We believe that we are the industry-leading autonomous truck company with the most efficient and reliable autonomous trucking technologies and an unmatched product and service offering. Our financial performance will be significantly dependent on our ability to maintain this leading position. We expect to incur substantial and increasing research and development expenses and stock-based compensation expenses as a result. As evidenced by our 357 issued patents as ofSeptember 30, 2021 , we develop most of our key technologies in-house to achieve a rapid pace of innovation. Accordingly, we dedicate significant resources towards research and development and invest heavily in recruiting talent, especially for software developers and engineers with high levels of experience in artificial intelligence and designing and developing autonomous driving related algorithms. Our research and development staff totaled approximately 1,000 full-time employees and accounted for approximately 77% of our approximately 1,300 total full-time employees as ofSeptember 30, 2021 . We will continue to recruit and retain talented software developers and engineers to grow our strength in our key technologies. We expect to incur additional stock-based compensation expenses as we support our growth and status as a publicly traded company. We expect our strategic focus on innovations will further solidify our leadership position. Improvement of Operating Efficiency We aim to improve operating efficiency in every aspect of our business, such as research and development, supply chain, collaboration with business partners, and sales and marketing, as well as service offerings. As we continue to scale our AFN, we expect utilization rates across our network, including terminals, routes, and semi-trucks, to increase, leading to improved operating efficiency. Investment in Sales. General and Administrative Activities As we continue to grow we expect to increase our investments in sales, general and administrative activities and functions, including real estate and facilities, information technology, human resources, legal, finance, and marketing. Components of Results of Operations Revenue To date, all of our revenue recognized has been from freight capacity services provided through the TuSimple Capacity service model on our AFN. Revenue is recognized over time as the goods are transported from one location to another based on the number of miles traveled. Shipments are completed within a short period of time, typically spanning one to two days. As we continue to grow and improve our technology, we expect a new revenue stream through our Carrier-Owned Capacity service model. We expect to derive revenue from per-mile fees charged to users of Carrier-Owned Capacity on our AFN. Recognition of this future revenue will be subject to the terms of any arrangements with our partners or users, which have not yet been negotiated. To date, we have not recorded any revenue under the Carrier-Owned Capacity service model. Cost of Revenue Our cost of revenue consists primarily of fuel costs, depreciation of property and equipment (including semi-trucks acquired under capital leases), labor costs, and other costs directly attributable to the provision of freight capacity services. Currently, we operate a large portion of our semi-trucks with two occupants, a safety engineer and a safety driver. We expect to gradually lower the average number of occupants in our semi-trucks as we continue to improve our autonomous technology and to the extent we ultimately remove all occupants upon achievement of full driver-out, L4 autonomous operations. Research and Development Research and development costs consist primarily of personnel-related expenses, including stock-based compensation costs, associated with software developers and engineering personnel and consultants responsible for the design, development, and testing of our autonomous truck driving solutions, depreciation of equipment used in research and development, and allocated overhead costs. Research and development costs are expensed as incurred. We expect our research and development expenses to increase in absolute dollars as we increase our investment in scaling our AFN through our proprietary technologies and as we continue to expand our technical workforce, which would impact our personnel-related and stock-based compensation costs. Sales and Marketing Sales and marketing costs consist primarily of personnel-related expenses associated with our sales and marketing activities, advertising expenses, sponsorship, public relations, and other related marketing activities. Although we incurred limited sales and marketing expenses in the nine months endedSeptember 30, 2020 and 2021, we expect that our sales and marketing expenses will increase in absolute dollars from period to period as we further scale our AFN, educate market participants on the benefits of autonomous trucking and our autonomous trucking solutions, hire additional sales and marketing personnel, increase our marketing activities, grow our domestic and international operations, and build brand awareness. 21 -------------------------------------------------------------------------------- General and Administrative General and administrative costs consist primarily of personnel-related expenses, including stock-based compensation costs, associated with our management and administration activities, professional service fees and other general corporate expenses. We will continue to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and stock exchange listing standards, additional insurance expenses, investor relations activities, and other administrative and professional services. We also expect to increase the size of our general and administrative function and to continue to expand our workforce, which would impact our personnel-related and stock-based compensation costs, to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars. Change in Fair Value of Warrants Liability The change in the fair value of warrants liability consists of the net changes in the fair value of our outstanding warrants to purchase redeemable convertible preferred stock that are remeasured at the end of each reporting period and upon their exercise. All outstanding warrants were exercised or expired during the nine months endedSeptember 30, 2021 , and we recorded one final remeasurement at fair value as of the exercise date. Gain on Loan Extinguishment The gain on loan extinguishment was a result of the Paycheck Protection Program ("PPP") loan forgiveness by the lender. We expect this to be a one-time event. Other Income (Loss), Net Other income, net consists primarily of interest income earned on our cash and cash equivalents, interest expense on our related party borrowings, income from government grants, and foreign currency exchange gains (losses), net of remeasurement of transactions and monetary assets and liabilities denominated in currencies other than the functional currency at the end of the period. Provision for Income Taxes Provision for income taxes consists primarily ofU.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. Since inception, we have incurred operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented. We have a full valuation allowance for net deferred tax assets, including federal and state net operating loss carryforwards and research and development credit carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income. 22 -------------------------------------------------------------------------------- Results of Operations The following table sets forth our condensed consolidated results of operations data for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 2020 2021 Revenue$ 584 $ 1,785 $ 1,106$ 4,211 Costs and expenses: Cost of revenue 1,330 3,487 2,958 8,715 Research and development (1) 60,041 84,506 100,202 204,774 Sales and marketing (1) 459 910 1,139 2,629 General and administrative (1) 15,271 28,831 27,204 83,537 Total costs and expenses 77,101 117,734 131,503 299,655 Loss from operations (76,517) (115,949) (130,397) (295,444) Change in fair value of warrants liability (970) - (970) (326,900) Gain on loan extinguishment - - - 4,183 Other income (expense), net (116) 459 (81) 982 Loss before provision for income taxes (89,452) (115,490) (143,297) (617,179) Provision for income taxes - - - - Net loss (89,452) (115,490) (143,297) (617,179) Accretion of redeemable convertible preferred stock (11,943) - (11,943) (4,135)
Net loss attributable to common stockholders
(1) Includes stock-based compensation expense as follows (in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 2020 2021
Research and development $ 402 $ 22,382 $ 547 $ 49,520
General and administrative 7,241 9,599 8,776 40,708
Sales and marketing 2 101 2 652
Total stock-based compensation expense $ 7,645
Upon the Company's IPO, a one-time stock-based compensation expense of$42.6 million was incurred for the nine months endedSeptember 30, 2021 relating to awards for which the time-based vesting condition has been satisfied or partially satisfied on that date and for which the performance condition was satisfied upon the occurrence of the IPO. Comparison of the Three and Nine Months EndedSeptember 30, 2020 and 2021 Revenue Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 % Change 2020 2021 % Change ($ in thousands) ($ in thousands) Revenue $ 584$ 1,785 206 %$ 1,106 $ 4,211 281 % 23
-------------------------------------------------------------------------------- Three Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Revenue increased by$1.2 million , or 206%, from$0.6 million for the three months endedSeptember 30, 2020 to$1.8 million for the three months endedSeptember 30, 2021 , due to growth in ourU.S. business from an increase in paid miles through increased commercial utilization ofTuSimple fleets and partners' fleets (brokerage) that supplement our capacity and increases in our rate per mile charged. During the three months endedSeptember 30, 2021 , we expanded our revenue-miles by 149% from the same period in the prior year as a result of expanded routes and commercial partnerships. Nine Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Revenue increased by$3.1 million , or 281%, from$1.1 million for the nine months endedSeptember 30, 2020 to$4.2 million for the nine months endedSeptember 30, 2021 , primarily due to growth in ourU.S. business from an increase in paid miles through increased commercial utilization ofTuSimple fleets and partners' fleets (brokerage) that supplement our capacity and increases in our rate per mile charged. During the nine months endedSeptember 30, 2021 , we expanded our revenue-miles by 218% from the same period in the prior year as a result of expanded routes and commercial partnerships. Cost of Revenue Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 % Change 2020 2021 % Change ($ in thousands) ($ in thousands) Cost of revenue$ 1,330 $ 3,487 162 %$ 2,958 $ 8,715 195 % Three Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Cost of revenue increased by$2.2 million , or 162%, from$1.3 million for the three months endedSeptember 30, 2020 to$3.5 million for the three months endedSeptember 30, 2021 , primarily due to increased operating costs associated with the generation of revenue. Gross loss margin for the three months endedSeptember 30, 2021 was 95%, an improvement from the gross loss margin for the three months endedSeptember 30, 2020 of 128%. This improvement is a result of increased revenue-miles per truck, improved leverage through better fixed cost utilization, and an increase in the number of semi-trucks in ourTuSimple fleet. Nine Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Cost of revenue increased by$5.8 million , or 195%, from$3.0 million for the nine months endedSeptember 30, 2020 to$8.7 million for the nine months endedSeptember 30, 2021 , primarily due to increased operating costs associated with the generation of revenue. Gross loss margin for the nine months endedSeptember 30, 2021 was 107%, an improvement from the gross loss margin for the nine months endedSeptember 30, 2020 of 167%. This improvement is a result of increased revenue-miles per truck, improved leverage through better fixed cost utilization, and an increase in the number of semi-trucks in ourTuSimple fleet. Research and Development Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 % Change 2020 2021 % Change ($ in thousands) ($ in thousands)
Research and development$ 60,041 $ 84,506 41 %$ 100,202 $ 204,774 104 % 24
-------------------------------------------------------------------------------- Three Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Research and development expenses increased by$24.5 million , or 41%, from$60.0 million for the three months endedSeptember 30, 2020 to$84.5 million for the three months endedSeptember 30, 2021 . The increase was primarily attributable to an increase of$46.4 million in personnel-related costs, mainly driven by an increase in employee headcount in the ordinary course of business and increased stock-based compensation expense of$22.0 million , an increase of$4.0 million in equipment, supplies, and materials, an increase of$2.4 million in depreciation and allocated facility costs, driven by an increase in headcount and expansion of our facilities, an increase of$2.3 million in research and development costs incurred under our joint development agreements, and an increase of$1.7 million in vehicle and equipment-related costs, mainly driven by an increase in the number of semi-trucks in our fleet. These increased costs were partially offset by a one-time, non-cash charge of$32.3 million related to the excess fair value of redeemable convertible preferred stock warrants issued over the cash proceeds received in conjunction with the issuance of shares of Series D-1 redeemable convertible preferred stock and redeemable convertible preferred stock warrants to Traton SE recorded in the three months endedSeptember 30, 2020 . There were no such warrants outstanding during the three months endedSeptember 30, 2021 . Nine Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Research and development expenses increased by$104.6 million , or 104%, from$100.2 million for the nine months endedSeptember 30, 2020 to$204.8 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to an increase of$106.9 million in personnel-related costs, mainly driven by an increase in employee headcount in the ordinary course of business and increased stock-based compensation expense of$49.0 million . The stock-based compensation expense for this period includes a one-time charge of$22.1 million incurred in connection with the IPO, with the remaining increase due to time-based vesting and additional grants during the period. The remainder of the increase in research and development expenses for the period was primarily driven by an increase of$11.1 million in research and development costs incurred under our joint development agreements, an increase of$7.9 million in depreciation and allocated facility costs, driven by an increase in headcount and expansion of our facilities, an increase of$7.2 million in equipment, supplies, and materials, and an increase of$3.9 million in vehicle and equipment-related costs, mainly driven by an increase in the number of semi-trucks in our fleet. These increased costs were partially offset by a one-time, non-cash charge of$32.3 million related to the excess fair value of redeemable convertible preferred stock warrants issued over the cash proceeds received in conjunction with the issuance of shares of Series D-1 redeemable convertible preferred stock and redeemable convertible preferred stock warrants to Traton SE recorded in the nine months endedSeptember 30, 2020 . There were no such warrants outstanding during the nine months endedSeptember 30, 2021 Sales and Marketing Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 % Change 2020 2021 % Change ($ in thousands) ($ in thousands) Sales and marketing$ 459 $ 910 98 %$ 1,139 $ 2,629 131 % Three Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Sales and marketing expenses increased by$0.4 million , or 98%, from$0.5 million for the three months endedSeptember 30, 2020 to$0.9 million for the three months endedSeptember 30, 2021 . The increase was primarily attributable to an increase in business development, public relations, and marketing consulting services incurred for continuation of investments in the TuSimple brand. Nine Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Sales and marketing expenses increased by$1.5 million , or 131%, from$1.1 million for the nine months endedSeptember 30, 2020 to$2.6 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to an increase in business development, public relations, and marketing consulting services incurred in connection with the IPO and the subsequent continuation of investments in the TuSimple brand. 25 --------------------------------------------------------------------------------
General and Administrative
Three Months Ended September Nine Months Ended September
30, 30,
2020 2021 % Change 2020 2021 % Change
($ in thousands) ($ in thousands)
General and administrative $ 15,271 $ 28,831 89 % $ 27,204 $ 83,537 207 %
Three Months Ended September 30, 2021 Compared with the Same Period in 2020
General and administrative expenses increased by $13.6 million , or 89%, from
$15.3 million for the three months ended September 30, 2020 to $28.8 million for
the three months ended September 30, 2021 . The increase was primarily
attributable to an increase of $7.2 million in personnel-related costs, mainly
driven by an increase in employee headcount in the ordinary course of business
and increased stock-based compensation expense of $2.4 million , an increase of
$4.5 million in office and facility-related costs, driven primarily by the
acquisition of director and officer insurance appropriate for public companies,
and an increase of $1.1 million in legal, accounting and other professional
services, driven mainly by increased usage of professional service firms to
prepare for public company reporting and other complex matters.
Nine Months Ended September 30, 2021 Compared with the Same Period in 2020
General and administrative expenses increased by $56.3 million , or 207%, from
$27.2 million for the nine months ended September 30, 2020 to $83.5 million for
the nine months ended September 30, 2021 . The increase was primarily
attributable to an increase of $42.2 million in personnel-related costs, mainly
driven by an increase in employee headcount in the ordinary course of business
and increased stock-based compensation expense of $31.9 million . The stock-based
compensation expense for this period includes a one-time charge of $20.2 million
incurred in connection with the IPO, with the remaining increase due to
time-based vesting and additional grants in the period. The remainder of the
increase in general and administrative expenses for the period was primarily
driven by an increase of $7.7 million in office and facility-related costs,
driven by the acquisition of director and officer insurance appropriate for
public companies and the expansion of facility and operations, and an increase
of $3.2 million in legal, accounting and other professional services, driven
mainly by increased usage of professional service firms to prepare for public
company reporting and other complex matters.
Change in Fair Value of Warrants Liability
Three Months Ended September 30, Nine Months Ended September 30,
2020 2021 % Change 2020 2021 % Change
($ in thousands) ($ in thousands)Change in fair value of warrants liability$ (970) $ - * $ (970) (326,900) * * Percentage not meaningful Three and Nine Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Loss from the change in fair value of warrants liability of$1.0 million for the three and nine months endedSeptember 30, 2020 was driven by the remeasurement of redeemable convertible preferred stock warrants at fair value. The loss of$326.9 million for the nine months endedSeptember 30, 2021 was driven by the same remeasurement, immediately prior to their exercise dates during the period. There were no such warrants outstanding during the three months endedSeptember 30, 2021 . Gain on Loan Extinguishment Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 % Change 2020 2021 % Change ($ in thousands) ($ in thousands) Gain on loan extinguishment $ - $ - * $ -$ 4,183 * * Percentage not meaningful 26
-------------------------------------------------------------------------------- Three and Nine Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Gain on loan extinguishment of$4.2 million for the nine months endedSeptember 30, 2021 was driven by the forgiveness of the PPP loan by the lender. Other Income (Expense), Net Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 % Change 2020 2021 % Change ($ in thousands) ($ in thousands) Other income (expense), net$ (116) $ 459 *$ (81) $ 982 *
* Percentage not meaningful
Three Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Other income, net increased by$0.6 million , from a loss of$0.1 million for the three months endedSeptember 30, 2020 to income of$0.5 million for the three months endedSeptember 30, 2021 . The increase was primarily attributable to an increase in interest income earned on cash and cash equivalents. Nine Months EndedSeptember 30, 2021 Compared with the Same Period in 2020 Other income, net increased by$1.1 million , from a loss of$0.1 million for the nine months endedSeptember 30, 2020 to income of$1.0 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to an increase in interest income earned on cash and cash equivalents. Liquidity and Capital Resources We have financed our operations primarily through the sale of capital stock, which has historically been sufficient to meet our working capital and capital expenditure requirements. As ofSeptember 30, 2021 , our principal sources of liquidity were$1.4 billion of cash and cash equivalents, exclusive of restricted cash of$1.5 million . InApril 2021 , we closed our IPO and concurrent private placement, resulting in net proceeds of$1.0 billion and$35.0 million , respectively. Cash and cash equivalents consist primarily of cash on deposit with banks, certificates of deposit, and money market funds. Based on our current operating plan, we believe that the net proceeds from our IPO and concurrent private placement, together with our existing cash and cash equivalents and anticipated cash generated from sales of our services, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including, but not limited to, the rate of our growth, our ability to attract and retain users and their willingness to pay for our services, and the timing and extent of spending to support our efforts to develop our L4 autonomous semi-trucks and AFN. Further, we may enter into future arrangements to acquire or invest in businesses, products, services, strategic partnerships, and technologies. As such, we may be required to seek additional equity and/or debt financing. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations may be materially and adversely affected. 27 --------------------------------------------------------------------------------
Cash Flows The following table summarizes our cash flows for the periods presented (in thousands):
Nine Months Ended September 30,
2020 2021
Net cash (used in) provided by:
Operating activities $ (64,784) $ (186,365)
Investing activities $ (2,910) $ (12,420)
Financing activities $ 73,568 $ 1,300,013
Operating Activities
Net cash used in operating activities was $64.8 million and $186.4 million for
the nine months ended September 30, 2020 and 2021, respectively. The increase
was primarily due to an increase in net losses and working capital as we
continue to operate, develop, and expand our AFN and L4 autonomous semi-truck
technology, grow our research and development and general support personnel, and
incur incremental expenses associated with being a public company.
Investing Activities
Net cash used in investing activities was $2.9 million and $12.4 million for the
nine months ended September 30, 2020 and 2021, respectively, as we continue to
invest in technological assets and equipment to expand our AFN.
Financing Activities
Net cash provided by financing activities was $73.6 million and $1.3 billion for
the nine months ended September 30, 2020 and 2021, respectively. The increase
was driven primarily by the net proceeds from the sale of Class A common stock
in our IPO and concurrent private placement of approximately $1.0 billion , net
of issuance costs, proceeds from the exercise of warrants for redeemable
convertible preferred stock of $183.0 million , and proceeds from the issuance of
redeemable convertible preferred stock of $54.7 million , net of offering costs.
Commitments and Contractual Obligations
At September 30, 2021 , there were future minimum lease payments of $5.3 million
and $45.3 million for capital and operating leases, respectively.
Update on CFIUS Review
On March 1, 2021 , Staff Chairperson of the Committee on Foreign Investment in
the United States ("CFIUS" or the "Committee"), acting at the direction of the
Committee, requested that we file a written notice regarding the 2017 purchase
of our redeemable convertible preferred shares by Sun Dream Inc. , an affiliate
of Sina Corporation (the "Sina Investment "). CFIUS formally accepted our notice,
which was filed jointly with Sina Corporation, and the matter is currently under
review.
The Committee recently informed us that the transaction that is the subject of
its review (the "2017 Transaction") is the 2017 acquisition of the U.S. business
of TuSimple LLC by Tusimple (Cayman) Limited , which was our name prior to our
deregistration as a Cayman Islands exempted company and domestication as a
corporation incorporated under the laws of Delaware , rather than the Sina
Investment .
TuSimple LLC was a single-member California limited liability company
established by TuSimple co-founder Dr. Xiaodi Hou in late 2015 as a purchasing
and contracting vehicle to carry out initial start-up activities in the U.S. In
2017, the tangible assets accumulated through TuSimple LLC were transferred to
TuSimple, Inc. , a newly-formed subsidiary of Tusimple (Cayman) Limited , after
which TuSimple LLC was dissolved.
A majority of the shares of Tusimple (Cayman) Limited at the time of the 2017
Transaction were held by Dr. Xiaodi Hou , Mo Chen and Sun Dream, Inc. Dr. Hou and
Mr. Chen are both members of our Board of Directors. Dr. Hou is a U.S. citizen,
Mr. Chen is a citizen of Canada , and Sun Dream, Inc. , which currently holds
approximately 5.8% of the voting power in our company, is ultimately controlled
by a U.S. citizen. All of the current members of our Board, and our entire
senior management team, are solely citizens of the United States or Canada .
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CFIUS has 45 days from the date of acceptance of our joint notice to complete
its review of the 2017 Transaction, after which CFIUS could (i) conclude that
the 2017 Transaction is not a covered transaction subject to CFIUS jurisdiction,
(ii) clear the 2017 Transaction by concluding that it presents no unresolved
national security concerns, or (iii) initiate a 45-day investigation of the 2017
Transaction. It is not uncommon for CFIUS to initiate the 45-day investigation
period, and if such an action is taken in our case, it would not indicate one
way or the other whether CFIUS will eventually identify a national security
concern with the 2017 Transaction. At the conclusion of the investigation
period, if CFIUS determines to clear the 2017 Transaction, it may require the
parties to enter into an agreement to mitigate any unresolved national security
concerns as a condition to clearance. To date, CFIUS has not advised the parties
of any final determinations. Although we cannot predict the outcome of the CFIUS
review at this time, we continue to cooperate fully with the Committee. We
believe that we are moving closer to resolution, but have not yet reached a
definitive outcome of the process as of this date.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, any off-balance sheet financing
arrangements or any relationships with unconsolidated entities or financial
partnerships, including entities sometimes referred to as structured finance or
special purpose entities, that were established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with
GAAP. The preparation of these condensed consolidated financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. 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.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
discussed in the Prospectus except as described in Note 1. Description of
Business and Summary of Significant Accounting Policies to our condensed
consolidated financial statements and except for the determination of the fair
value of our Class A common stock, which is used in estimating the fair value of
stock-based awards at grant date as discussed below.
Prior to our IPO, our common stock was not publicly traded; therefore, we
estimated the fair value of our common stock as discussed in the Prospectus.
Following our IPO, the closing sale price per share of our Class A common stock
as reported on the Nasdaq on the date of grant is used to determine the fair
value of our Class A common stock.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups (JOBS) Act. The JOBS Act provides that an emerging growth company can
take advantage of an extended transition period for complying with new or
revised accounting standards. This provision allows an emerging growth company
to delay the adoption of some accounting standards until those standards would
otherwise apply to private companies. We have elected to use the extended
transition period under the JOBS Act for the adoption of certain accounting
standards until the earlier of the date we (i) are no longer an emerging growth
company or (ii) affirmatively and irrevocably opt out of the extended transition
period provided in the JOBS Act. As a result, our financial statements may not
be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
We expect to lose EGC status and meet all applicable criteria to become a large
accelerated filer by December 31, 2022 .
Recent Accounting Pronouncements
For information on recently issued accounting pronouncements, refer to Note 1.
Description of Business and Summary of Significant Accounting Policies in our
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business, which
primarily relate to fluctuations in foreign exchange rates.
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Foreign Currency Exchange Risk
The functional currency of our foreign subsidiaries is the local currency or
U.S. dollar depending on the nature of the subsidiaries' activities. Foreign
currency transactions recognized in the condensed consolidated statements of
operations are converted to the functional currency by applying the exchange
rate prevailing on the date of the transaction. Our results of operations and
cash flows are subject to fluctuations due to changes in foreign currency
exchange rates. During the three months ended September 30, 2021 , the foreign
currency translation adjustment recorded to other comprehensive loss was $0.1
million . The effect of a hypothetical 10% change in foreign currency exchange
rates applicable to our business would not have had a material impact on our
historical condensed consolidated financial statements for the three and nine
months ended September 30, 2020 and 2021. As the impact of foreign currency
exchange rates has not been material to our condensed consolidated financial
statements, we have not engaged in any foreign currency hedging strategies. As
our international operations grow, we will continue to reassess our approach to
manage our risk relating to fluctuations in currency rates.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information
we are required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded,
processed, summarized, and reported within the time periods specified in SEC
rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Our management, with the participation and supervision of our Chief Executive
Officer and our Chief Financial Officer, have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of such date, our disclosure
controls and procedures were not effective due to the material weakness in our
internal control over financial reporting described below. In light of this
fact, our management has performed additional analyses, reconciliations, and
other post-closing procedures and has concluded that, notwithstanding the
material weakness in our internal control over financial reporting, the
condensed consolidated financial statements for the periods covered by and
included in this Quarterly Report on Form 10-Q fairly present, in all material
respects, our financial position, results of operations and cash flows for the
periods presented in conformity with GAAP.
Previously Reported Material Weakness
As disclosed in the section titled "Risk Factors" in Part II, Item 1A of this
Quarterly Report on Form 10-Q, we previously identified control deficiencies in
the design and implementation of our internal control over financial reporting
that constituted a material weakness. A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our
financial statements will not be prevented or detected on a timely basis.
The material weakness identified in our internal control over financial
reporting related to a lack of appropriately designed and implemented controls
over the review and approval of manual journal entries (including consolidation
entries) and the related supporting journal entry calculations. We have
concluded that this material weakness arose because, as a private company, we
did not have the necessary business processes, systems, personnel, and related
internal controls necessary to satisfy the accounting and financial reporting
requirements of a public company.
Remediation Plans
We have commenced measures to remediate the identified material weakness,
including: (i) the hiring of additional finance and accounting personnel over
time to augment our accounting staff and to provide more resources for complex
accounting matters and financial reporting; (ii) further developing and
implementing formal policies, processes and documentation procedures relating to
our financial reporting; and (iii) the adoption of new technological solutions.
We intend to continue to take steps to remediate the material weakness described
above and further evolving our accounting processes.
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The actions we are taking are subject to ongoing executive management review and
are also subject to audit committee oversight. To date, we have hired additional
financial and accounting personnel with technical accounting experience,
implemented new technology solutions to assist with our financial reporting
process, and refined our month-end reconciliation process by adding robust
documentation, evidence of review, and detailed support for journal entries. We
are still implementing formal policies, processes, and documentation procedures
related to the review and approval of manual journal entries. We will not be
able to fully remediate this material weakness until these steps have been
completed and have been operating effectively for a sufficient period of time.
We currently expect that the material weakness will be remediated by December
31, 2021 , and costs associated with the remediation plan are not expected to be
material. If we are unable to successfully remediate the material weakness, or
if in the future, we identify further material weaknesses in our internal
control over financial reporting, we may not detect errors on a timely basis and
our condensed consolidated financial statements may be materially misstated.
Changes in Internal Control over Financial Reporting
We are taking actions to remediate the material weakness relating to our
internal control over financial reporting, as described above. Except as
otherwise described herein, there were no changes in our internal control over
financial reporting identified in connection with the evaluation required by
Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period
covered by this Quarterly Report on Form 10-Q that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Limitations on the Effectiveness of Controls
The effectiveness of any system of disclosure controls and procedures and
internal control over financial reporting, including ours, is subject to
inherent limitations, including the exercise of judgment in designing,
implementing, operating, and evaluating the controls and procedures, and the
inability to eliminate misconduct completely. Accordingly, in designing and
evaluating the disclosure controls and procedures, management recognizes that
any system of internal control over financial reporting, including ours, no
matter how well designed and operated, can only provide reasonable assurance,
not absolute assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to apply its
judgment in evaluating the benefits of possible controls and procedures relative
to their costs. Moreover, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. We intend to continue to monitor and
upgrade our internal controls as necessary or appropriate for our business but
cannot assure you that such improvements will be sufficient to provide us with
effective internal control over financial reporting.
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