VELODYNE LIDAR The following discussion of Velodyne's results of operations and financial condition should be read in conjunction with the information set forth in Velodyne's financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon our current expectations, estimates and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to, among other considerations, the matters discussed under "Cautionary Note Regarding Forward-Looking Statements" and Item 1A: "Risk Factors."
Overview
We are a global leader in lidar technology providing smart, powerful lidar solutions for autonomous vehicles, advanced driver assistance systems (ADAS), delivery solutions, robotics, industrial, infrastructure, navigation, mapping, and more. Our broad range of high-performance sensor and software solutions provide flexibility, quality and performance to meet the needs of a wide range of industries, including robotics, industrial, intelligent infrastructure, autonomous vehicles and ADAS. Our lidar-based smart vision solutions are deployed in many non-automotive applications, including autonomous mobile robots, UAVs, drones, last-mile delivery, precision agriculture, advanced security systems, and smart city initiatives. Through our direct sales team as well as through distributors, we sell to both automotive customers, including top automotive OEMs, system integrators, and last-mile delivery providers, as well as to non-automotive customers, who are providing an array of applications, including industrial, drone, and security applications. We also license our technology and provide development services to customers and business partners.
Impact of COVID-19
The extensive impact of the COVID-19 pandemic has resulted and will likely
continue to result in significant disruptions to the global economy, as well as
businesses and capital markets around the world, despite the reports of declines
in severity. The pandemic has resulted in government authorities implementing
numerous measures to try to contain the virus, such as travel bans and
restrictions, quarantines, stay-at-home orders, and business shutdowns.
The ongoing COVID-19 pandemic has disrupted and affected our operations, supply
chain, customer demand, and our results of operations. For example, the timing
of customer orders and our ability to fulfill orders we received were impacted
by various COVID-19 related government mandates across our worldwide operations.
Certain current and prospective customers delayed purchases based on budget
constraints or project delays related to COVID-19. Our offices and R&D and
manufacturing facilities have been, and from time-to-time may continue to be,
impacted due to national and regional government declarations requiring
closures, quarantines and travel restrictions. We also experienced an increase
in raw materials and assembly costs.
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On March 27, 2020 , the U.S. government enacted the CARES Act administered by the
Small Business Administration (the "SBA"). In the nine months ended September
30, 2021 , we benefited from a $10.0 million PPP loan from and forgiven by the
SBA.
The continued impact of the COVID-19 pandemic on our operational and financial
performance will depend on various future developments, including the duration
and spread of the outbreak and impact on our customers, suppliers, and
employees, all of which are uncertain at this time. We expect the COVID-19
pandemic may adversely impact our future revenue and results of operations, but
we are unable to predict at this time the size and duration of this adverse
impact. At the same time, we have seen some signs of positive effects for our
long-term business prospects and partnerships during the pandemic. For more
information on our operations and risks related to COVID-19, please see the
section of this Quarterly Report on Form 10-Q entitled "Risk Factors."
The current conflict betweenRussia andUkraine and the related sanctions and other penalties imposed by countries across the globe againstRussia are creating substantial uncertainty in the global economy. While we do not have operations inRussia orUkraine and do not have significant direct exposure to customers and vendors in those countries, we are unable to predict the impact that these actions will have on the global economy or on our financial condition, results of operations, and cash flows as of the date of these financial statements. Recent Developments Ouster Merger Agreement OnNovember 4, 2022 , Velodyne, Ouster, Inc. ("Ouster"),Oban Merger Sub, Inc. , aDelaware corporation and a direct, wholly owned subsidiary of Ouster ("Merger Sub I"), andOban Merger Sub II LLC , aDelaware limited liability company and a direct, wholly owned subsidiary of Ouster ("Merger Sub II"), entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, Merger Sub I will be merged with and into Velodyne (the "First Merger"), with Velodyne surviving the First Merger as a direct, wholly owned subsidiary of Ouster (the "Surviving Corporation"), and as soon as practicable following the First Merger, theSurviving Corporation will be merged with and into Merger Sub II with Merger Sub II surviving as a direct, wholly owned subsidiary of Ouster (the "Second Merger", and together with the First Merger, the "Mergers"). Upon the consummation of the First Merger, each share of the Company's common stock issued and outstanding immediately prior to the effective time of the First Merger will be converted into and represent the right to receive 0.8204 validly issued, fully paid and non-assessable shares of Ouster common stock, par value$0.0001 per share. Consummation of the Mergers is subject to customary closing conditions, including, among others, the approval by the Company's stockholders of the Merger, approval by Ouster's stockholders of the issuance of shares of Ouster common stock in connection with the First Merger, and certain regulatory approvals.
Acquisition of Bluecity
OnOctober 3, 2022 , we completed the acquisition ofBluecity Technology, Inc. , an AI software company ("Bluecity"). Bluecity offers solutions that combine artificial intelligence and lidar to provide real-time multimodal traffic analytics. By acquiring Bluecity, we have secured the offering of the intelligent infrastructure solution to customers in the infrastructure space. The addition of Bluecity's technology also expands our software product portfolio that can provide more robust solutions to customers. We issued approximately 1.1 million shares of our common stock to Bluecity stockholders, and reserved approximately 10.9 million shares of our common stock for issuance upon exchange, at the holder's option on a one-for-one basis, of non-voting exchangeable shares of our Canadian subsidiary issued to Bluecity stockholders (collectively "Merger Shares"), including approximately 0.7 million shares of our common stock held back for a period of 12 months to satisfy potential indemnification obligations. The acquisition will be accounted for as a business combination. We are currently in the process of evaluating the impact of the business combination on our consolidated financial statements. 33
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ATM Offering
OnJune 15, 2022 , we entered into an Equity Distribution Agreement, or ATM Agreement, with Oppenheimer, pursuant to which, from time to time, we may raise up to$100 million by selling shares of our common stock. The ATM Shares will be issued pursuant to our shelf registration statement on Form S-3 that became effective onMay 11, 2022 . Subject to the terms and conditions of the ATM Agreement, Oppenheimer will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon our instructions, and is entitled to a commission at a rate equal to 2.5% of the gross price of any ATM Shares sold through Oppenheimer. The ATM offering will terminate upon the earlier of (i) the sale of all common stock subject to the ATM Agreement or (ii) termination of the ATM Agreement in accordance with its terms. We are not required to sell any shares at any time during the term of the ATM Agreement. Net proceeds from the sale of ATM Shares will be used for our general corporate purposes. We record the sale of our ATM Shares on a settlement date basis. For the three and nine months endedSeptember 30, 2022 , we received net proceeds of approximately$19.1 million and$25.9 million (after deducting$0.6 million and$1.3 million in commissions and expenses), respectively. For the three and nine months endedSeptember 30, 2022 , we sold 16,907,260 and 23,378,308 shares at an average price of$1.16 and$1.17 per share, respectively, pursuant to the ATM Agreement. Amazon Warrant Agreement InFebruary 2022 , we entered into a warrant agreement and a transaction agreement with Amazon.com ("Amazon"), pursuant to which we agreed to issue toAmazon.com NV Investment Holdings LLC , a wholly-owned subsidiary of Amazon, a warrant ("Amazon Warrant") to acquire up to an aggregate of 39,594,032 shares of Velodyne's common stock at an exercise price of$4.18 per share. The exercise price and the warrant shares issuable upon exercise of the warrant are subject to customary antidilution adjustments. Following stock sales under our ATM offering, as ofSeptember 30, 2022 , the antidilution adjustments provided Amazon with warrants to acquire an additional 190,181 shares, for an aggregate of 39,784,213 shares. The right to exercise the warrants and receive the warrant shares that have vested expiresFebruary 4, 2030 . The warrant agreement also contains customary change-in-control provisions. The Amazon Warrant shares vest in multiple tranches over time based on payments of up to$200.0 million by Amazon or its affiliates (directly or indirectly through third parties) to Velodyne in connection with Amazon's purchase of goods and services from us. Upon entry into a certain additional commercial agreement, certain warrant shares will vest, and the number of shares that vest in connection with future payments by Amazon to Velodyne will be reduced pro rata. As ofSeptember 30, 2022 , none of the Amazon Warrant shares are vested.
For the nine months ended
Factors Affecting Our Performance
Design wins. We are developing our smart vision solutions as a key enabling
technology for OEMs in a wide range of industries, including robotics,
industrial, intelligent infrastructure, autonomous vehicles and ADAS. Because
our solutions must be integrated into a broader platform by the OEM, it is
critical that we achieve design wins with these customers. The time necessary to
achieve design wins varies based on the market and application. The design cycle
in the automotive market tends to be substantially longer and more onerous than
in other markets. Even within the automotive market, achieving a design win with
an automotive OEM takes considerably longer than a design cycle for an
aftermarket application. We consider design wins to be critical to our future
success, although the revenue generated by each design win and the time
necessary to achieve such a win can vary significantly, making it difficult to
predict our future financial performance.
Pricing, product cost and margins. Our pricing and margins will depend on the
volumes and the features of the solutions we provide to our customers. In
general, solutions incorporated into development-phase products require more
complex configurations, have higher prices and higher gross margins. As our
markets reach maturity and commercialization, we expect prices and margins will
generally decrease. Our commercial-stage customers will require that our smart
vision solutions be manufactured and sold at per-unit prices that enable mass
market adoption. To meet the technological and pricing needs of customers
reaching commercial scale, we are making significant investments in new
solutions for both cost improvements and new features. In addition, we are
working on redesigning our sensors to help alleviate supply chain shortages. Our
ability to compete in key markets will depend on the success of these
investments and our efforts to efficiently
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--------------------------------------------------------------------------------and reliably produce cost-effective smart vision solutions for our commercial-stage customers. We have customers with technologies in various stages of development. We anticipate that our prices will vary by market and application due to market-specific supply and demand dynamics and product lifecycles.
Commercialization of lidar-based applications. Our revenue has been subject to significant fluctuations. Our customers in the pre-commercial development phase may have purchased their requirements of our products in earlier periods and we do not expect them to begin purchasing again in volume unless and until they reach commercial deployments. As a number of our target markets reach commercialization, we expect there to be a shift towards higher unit volume at lower per-unit prices, with more predictable customer demand. We expect that our results of operations, including revenue and gross margins, will continue to fluctuate on a quarterly basis for the foreseeable future as our customers continue research and development projects and begin to commercialize autonomous solutions that rely on lidar technology. As more customers reach the commercialization phase and as the market for lidar solutions matures, these fluctuations in our operating results may become less pronounced. However, in the near term, our revenue may not grow as we expect until more customers commercialize their products. End market demand. We sell our products to customers in a number of end markets. We believe our entry into new markets will continue to facilitate revenue growth and customer diversification. While we will continue to expand the end markets we serve, we anticipate that sales to a limited number of end markets will continue to account for a significant portion of our total revenue for the foreseeable future. Success in an end market, or commercialization, is uncertain and may develop differently in each case, with unique pricing, volume and cost dynamics. Additionally, as production scales in order to meet the demands of commercialization, pricing pressure increases and the amount of that pressure is expected to vary by market. Sales volume. A typical design win can generate a wide range of sales volumes for our solutions, depending on the end market demand for our customers' products. This can depend on several factors, including the reputation of the end customer, market penetration, product capabilities, size of the end market that the product addresses and our end customers' ability to sell their products. In addition to end market demand, sales volumes also depend on whether our customer is in the development, commercialization or production phase. In certain cases, we may provide volume discounts on sales of our solutions, which may or may not be offset by lower manufacturing costs related to higher volumes. Continued investment and innovation. We believe that we are an industry-leading lidar provider with proven designs, extensive product offerings and advanced manufacturing capabilities. Our financial performance is significantly dependent on our ability to maintain this leading position. This is further dependent on the investments we make in research and development. We must continually identify and respond to rapidly evolving customer requirements, develop and introduce innovative new products, enhance and service existing products and generate active market demand for our products. If we fail to do this, our leading market position and revenue may be adversely affected, and our investments in that area will not be recovered.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance withU.S. generally accepted accounting principles ("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 estimates discussed below are critical to understanding our historical and future performance as these estimates involve a greater degree of judgment and complexity.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products and to a
small extent services to customers in an amount that reflects the consideration
that we expect to receive in exchange for those products and services.
We enter into contracts that can include various combinations of products and
services, which are generally capable of being distinct and accounted for as
separate performance obligations; however, determining whether products or
services are
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--------------------------------------------------------------------------------considered distinct performance obligations that should be accounted for separately versus together may sometimes require significant judgment.
Transaction price is allocated to each performance obligation on a relative standalone selling price (SSP) basis. Judgment is required to determine SSP for each distinct performance obligation. We use a range of amounts to estimate SSP when products and services are sold separately. In instances where SSP is not directly observable, we determine SSP using information that may include other observable inputs available to us. Accounting for contracts recognized over time involves the use of various techniques to estimate total contract revenue and costs. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. We review and update our contract-related estimates regularly, and record adjustments as needed. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized in the period in which the revisions to the estimates are made.
Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition.
The reductions of revenue associated with Amazon Warrant are determined based on the grant date fair value of the award and recognized as the customer makes payments and vesting conditions become probable of being achieved. The grant date fair value of the Amazon Warrant was determined using a Black-Scholes option pricing model, which is based in part on assumptions that require management to use significant judgment. See Note 9 to our Condensed Consolidated Financial Statements in Item 1 of Part I of this Report for additional information.
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, component cost trends, demand forecasts, historical
revenue, 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 writedowns. A change
in our estimates could have a significant impact on the value of our inventory
and our results of operations.
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Results of Operations
The results of operations presented below should be reviewed in conjunction with
the consolidated financial statements and notes included elsewhere in this
Quarterly Report on Form 10-Q. The following table sets forth our consolidated
results of operations data for the periods presented (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue:
Product(1) $ 7,442 $ 11,782 $ 21,456 $ 34,345
License and services 2,199 1,278 5,872 10,037
Total revenue 9,641 13,060 27,328 44,382
Cost of revenue:
Product(2) 20,353 17,716 53,896 52,555
License and services 165 84 689 433
Total cost of revenue(2) 20,518 17,800 54,585 52,988
Gross loss (10,877) (4,740) (27,257) (8,606)
Operating expenses(2):
Research and Development 16,918 20,221 56,972 55,608
Sales and Marketing 4,878 6,547 16,223 60,798
General and administrative 9,583 23,271 35,330 59,440
Total operating expenses 31,379 50,039 108,525 175,846
Operating loss (42,256) (54,779) (135,782) (184,452)
Interest income 732 109 1,253 321
Interest expense - (6) (3) (83)
Other income (expense), net 2 (22) (104) 10,097
Loss before income taxes (41,522) (54,698) (134,636) (174,117)
Provision for income taxes 41 14 347 649
Net loss $ (41,563) $ (54,712) $ (134,983) $ (174,766)
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The following table sets forth the components of our consolidated statements of
operations data as a percentage of total revenue for the periods presented (the
table may not foot due to rounding difference):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue:
Product(1) 77 % 90 % 79 % 77 %
License and services 23 10 21 23
Total revenue 100 100 100 100
Cost of revenue:
Product(2) 211 136 197 118
License and services 2 1 3 1
Total cost of revenue(2) 213 136 200 119
Gross loss (113) (36) (100) (19)
Operating expenses:(2)
Research and Development 175 155 208 125
Sales and Marketing 51 50 59 137
General and administrative 99 178 129 134
Gain on sale of assets held-for-sale - - - -
Total operating expenses 325 383 397 396
Operating loss (438) (419) (497) (416)
Interest income 8 1 5 1
Interest expense - - - -
Other income (expense), net - - - 23
Loss before income taxes (430) (419) (493) (392)
Provision for income taxes - - 1 1
Net loss (430) % (419) % (494) % (393) %
_______________________
(1) Includes non-cash reductions of revenue of $2.8 million and $9.1 million ,
respectively, for the three and nine months ended September 30, 2022 associated
with the Amazon Warrant agreement entered into in February 2022 . See Note 9 to
our Condensed Consolidated Financial Statements for more information.
(2) Includes stock-based compensation expense as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Cost of revenue $ 561 $ 541 $ 1,841 $ 1,508
Research and development 2,336 2,794 7,523 10,458
Sales and marketing 366 1,177 2,225 44,779
General and administrative 1,646 12,135 4,566 24,637
Total stock-based compensation expense $ 4,909
Prior to the Business Combination, compensation expense related to RSAs and RSUs granted under the pre-combination Velodyne's stock incentive plans remained unrecognized because the performance vesting condition, which is (i) an initial public offering, or (ii) a Company sale event, was not probable of being met. In connection with the Business Combination, the Board waived the liquidity event vesting condition applicable to the pre-combination Velodyne's RSUs and RSAs onOctober 30, 2020 andMay 18, 2021 , respectively. As such, the outstanding RSUs and RSAs vested to the extent the applicable service condition was satisfied as of such dates. The vesting of the RSAs resulted in approximately$45.1 million of incremental stock-based compensation expense in the second quarter of 2021. 38 --------------------------------------------------------------------------------
Comparison of the Three and Nine Months Ended
Revenue
The majority of our revenue comes from the sale of our lidar sensors directly to end users and through our network ofU.S. and international distributors. Product revenue is recognized when control of the products is transferred to the customer, which is generally upon shipment. For custom products that require engineering and development based on customer requirements, revenue is recognized over time using an output method based on units of product shipped to date relative to total production units under the contract. Our customers in the pre-commercial development phase may have purchased their requirements of our products in earlier periods and are not expected to begin purchasing again in volume unless and until they reach commercial deployments. As our target markets reach commercialization, we expect there to be a shift towards higher unit volume at lower per-unit prices, with more predictable customer demand. We also generate a portion of our revenue from intellectual property licensing, royalties and the sale of services related to product development, validation, extended warranty and product repair services. License revenue is recognized upon delivery of the intellectual property if there are no substantive future obligations to perform under the arrangement. Royalties are recognized at the later of the period the sales occur or the satisfaction of the performance obligation to which some or all of the royalties have been allocated. As our manufacturing partners to whom we have licensed our technology start selling to customers, we expect royalty revenue to increase. Service revenue is recognized as the services are performed. Three Months Ended September 30, ($ in thousands) 2022 2021 $ Change % Change Revenue: Products $ 7,442$ 11,782 $ (4,340) (37) % License and services 2,199 1,278 921 72 Total $ 9,641$ 13,060 $ (3,419) (26) Revenue by geographic location: North America $ 1,992$ 5,526 $ (3,534) (64) % Asia and Pacific 4,062 3,813 249 7 Europe, Middle East and Africa 3,587 3,721 (134) (4) Total $ 9,641$ 13,060 $ (3,419) (26) Nine Months Ended September 30, ($ in thousands) 2022 2021 $ Change % Change Revenue: Products $ 21,456$ 34,345 $ (12,889) (38) % License and services 5,872 10,037 (4,165) (41) Total $ 27,328$ 44,382 $ (17,054) (38) Revenue by geographic location: North America $ 4,980$ 15,841 $ (10,861) (69) % Asia and Pacific 12,613 18,574 (5,961) (32) Europe, Middle East and Africa 9,735 9,967 (232) (2) Total $ 27,328$ 44,382 $ (17,054) (38) Product Revenue Product revenue decreased by$4.3 million , or 37%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease in product revenue reflected a$2.8 million non-cash contra revenue associated with our warrant agreement with Amazon and a decrease in the sales volume of our established products due primarily to supply chain 39 --------------------------------------------------------------------------------
constraints, partially offset by increases in the average selling price for lidar sensors sold. We expect these supply chain constraints to persist for the next several quarters.
Product revenue decreased by$12.9 million , or 38%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease in product revenue reflected a$9.1 million non-cash contra revenue associated with our warrant agreement with Amazon and a decrease in the sales volume of our established products due primarily to supply chain constraints, partially offset by increases in the average selling price for lidar sensors sold.
License and Services Revenue
License and services revenue increased by
License and services revenue decreased by$4.2 million , or 41%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to a reduction in license revenues associated with our patent cross license agreements.
Revenue by Geographic Location
OurNorth America revenue decreased by$3.5 million and$10.9 million , respectively, for the three and nine months endedSeptember 30, 2022 compared to the same periods in 2021. The decreases were due primarily to non-cash contra revenue of$2.8 million for the three months endedSeptember 30, 2022 , associated with our warrant agreement with Amazon, and supply chain constraints. The decrease in ourNorth America revenue for the nine months endedSeptember 30, 2022 was primarily due to non-cash contra revenue of$9.1 million , associated with our warrant agreement with Amazon and supply chain constraints. OurAsia-Pacific revenue increased by$0.2 million and decreased by$6.0 million , respectively, for the three and nine months endedSeptember 30, 2022 compared to the same periods in 2021. The decrease in ourAsia-Pacific revenue for the nine months endedSeptember 30, 2022 was due to a$4.7 million decrease in license revenue from our patent cross license agreements and a reduction in the sales volume of our established products due primarily to supply chain constraints, partially offset by increases in average selling price for our lidar sensors sold. OurEurope ,Middle East andAfrica revenue decreased by$0.1 million and$0.2 million for the three and nine months endedSeptember 30, 2022 compared to the same period in 2021.
Cost of Revenue and Gross Margin
Cost of revenue includes the manufacturing cost of our lidar sensors, which
primarily consists of personnel-related costs directly associated with our
manufacturing organization and amounts paid to our third-party contract
manufacturers and vendors. Our cost of revenue also includes depreciation, cost
of component inventory, product testing costs, outside services, an allocated
portion of overhead, facility and IT costs, warranty costs, excess and obsolete
inventory and shipping costs. We are transitioning to outsourcing our production
to contract manufacturing partners with the objective of reducing manufacturing
labor and overhead costs and the per unit cost of goods sold.
Our gross margin varies by product and depends on a variety of factors,
including market conditions that may impact our pricing, including our desire to
broaden customer adoption of lidar across multiple industries and markets;
product mix changes between established products and new products and licenses;
excess and obsolete inventories; our cost structure for manufacturing
operations, including supply constraints for certain components, third-party
manufacturers, relative to volume; and product support obligations. We are
transitioning to an outsourced manufacturing model and believe that the use of
third-party manufacturers will favorably impact our gross margin over time. But
in the near term, while we are beginning manufacturing with new partners and
consolidating our contract manufacturing, we may incur increased costs that
result in lower gross margin.
Our license revenue has lower cost, and therefore it contributes to higher gross
margin. We expect our gross margins to fluctuate over time, depending on the
factors described above.
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Three Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Cost of revenue:
Product $ 20,353 $ 17,716 $ 2,637 15 %
License and services 165 84 81 96
Total cost of revenue $ 20,518 $ 17,800 $ 2,718 15
Gross margin (113) % (36) %
Nine Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Cost of revenue:
Product $ 53,896 $ 52,555 $ 1,341 3 %
License and services 689 433 256 59
Total cost of revenue $ 54,585 $ 52,988 $ 1,597 3
Gross margin (100) % (19) %
Cost of product revenue increased by $2.6 million , or 15%, for the three months
ended September 30, 2022 compared to the same period in 2021. The product cost
increase was primarily driven by a $4.6 million one-time charge related to a
excess inventory reserve and losses on product transition, $2.5 million of
termination of contract manufacturer fees and $2.0 million cost increase
resulting from component price increases driven by supply constraints, offset by
a decrease of $3.6 million cost related to volume and mix of units sold, $2.1
million in warranty reserve, and $0.8 million in other cost reduction.
Cost of product revenue increased by $1.3 million , or 3%, for the nine months
ended September 30, 2022 compared to the same period in 2021. The product cost
increase was primarily driven by a $8.4 million cost increase resulting from
component price increases driven by supply constraints, $6.8 million one-time
charge related to a discontinued product line, excess inventory reserve and
losses on product transition, and $2.5 million of termination of contract
manufacturer fees, partially offset by a decrease of $9.3 million in cost due to
decreased product sales volume, $6.0 million of reduction in manufacturing cost,
$1.1 million in related to reduction in warranty reserve.
Gross margin decreased to (113)% and (100)%, respectively, for the three and
nine months ended September 30, 2022 from (36)% and (19)%, respectively, for the
same periods of 2021. The decreases primarily reflected the timing of high
margin license revenues, the impact of the contra revenue associated with the
Amazon warrant agreement, a one-time charge related to a discontinued product
line, and component price increases as a result of supply constraints, partially
offset by increased average selling price of our lidar sensors sold. We expect
higher component costs as a result of supply constraints to impact margins at
least through the fourth quarter of 2022.
Operating Expenses
Our research and development expenses consist primarily of personnel-related
costs directly associated with our research and development organization,
prototype expenses, third-party engineering and contractor costs, an allocated
portion of facility and IT costs and depreciation. Our research and development
efforts are focused on enhancing and developing additional functionality for our
existing products and on new product development, including new releases and
upgrades to our lidar sensors.
Our sales and marketing expenses consist primarily of personnel-related costs
directly associated with our sales and marketing organization, sales
commissions, marketing programs, trade shows, consulting services, promotional
materials, demonstration equipment, an allocated portion of facility and IT
costs and depreciation.
Our general and administrative expenses primarily consist of personnel-related
expenses associated with our general and administrative organization,
professional fees for legal, accounting, and other consulting services, public
company related expenses, insurances, an allocated portion of facility and IT
costs and depreciation.
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Three Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Operating Expenses:
Research and development $ 16,918 $ 20,221 $ (3,303) (16) %
Sales and marketing 4,878 6,547 (1,669) (25)
General and administrative 9,583 23,271 (13,688) (59)
Total operating expenses $ 31,379 $ 50,039 $ (18,660) (37)
Nine Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Operating Expenses:
Research and development $ 56,972 $ 55,608 $ 1,364 2 %
Sales and marketing 16,223 60,798 (44,575) (73)
General and administrative 35,330 59,440 (24,110) (41)
Total operating expenses $ 108,525 $ 175,846 $ (67,321) (38)
Research and Development
Research and development expenses decreased by $3.3 million , or 16%, for the
three months ended September 30, 2022 compared to the same period in 2021. The
decrease was primarily due to a decrease of $3.4 million in program spend on
discontinued product line and $0.6 million in stock-based compensation expense
and personnel related costs, partially offset by an increase of $0.7 million in
outside services.
Research and development expenses increased by $1.4 million , or 2%, for the nine
months ended September 30, 2022 compared to the same period in 2021. The
increase was primarily due to increases of $2.4 million in allocated facility
and IT expenses and $1.0 million of other services and expenses, $0.7 million in
stock-based compensation expense and personnel related costs, partially offset
by a decrease of $2.8 million in prototype expenses.
Sales and Marketing
Sales and marketing expenses decreased by$1.7 million , or 25%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily attributable to decreases of$0.7 million of trade show and travel expenses,$0.6 million in stock-based compensation expense and personnel related costs, and$0.4 million in outside services. Sales and marketing expenses decreased by$44.6 million , or 73%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily attributable to decreases of$42.6 million in stock-based compensation expense,$0.6 million in personnel related costs,$0.8 million in outside services and$0.6 million in trade show and travel expenses.
General and Administrative
General and administrative expenses decreased by$13.7 million , or 59%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily attributable to decreases of$10.5 million in stock-based compensation expense,$1.9 million in personnel related costs,$1.4 million in legal and professional fees and$0.7 million in outside services, partially offset by an increase of$0.8 million in insurance expense. General and administrative expenses decreased by$24.1 million , or 41%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily attributable to decreases of$20.1 million in stock-based compensation expense,$2.8 million in legal and professional fees,$2.3 million in bad debt reserves,$1.5 million in allocated facility and IT expenses and$1.0 million in personnel related costs, partially offset by an increase of$2.2 million in insurance expense,$0.8 million in property tax and$0.6 million in outside services and supplies. 42 --------------------------------------------------------------------------------
Interest Income, Interest Expense and Other Income (Expense), Net
Interest income consists primarily of income earned on our cash equivalents and investments in marketable securities. These amounts will vary based on our cash, cash equivalents and short-term investment balances, and also with market rates. Interest expense consists primarily of interest on our equipment financing leases and credit facility.
Other income (expense), net includes exchange gain or loss resulting from foreign currency exchange rate fluctuations.
Three Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Interest income $ 732 $ 109 $ 623 572 %
Interest expense - (6) 6 (100)
Other income (expense), net 2 (22) 24 (109)
Nine Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Interest income $ 1,253 $ 321 $ 932 290 %
Interest expense (3) (83) 80 (96)
Other income (expense), net (104) 10,097 (10,201) (101)
Interest income increased for the three and nine months ended September 30, 2022
compared to the same period in 2021 primarily due to higher interest rates on
our cash equivalent and short-term investment balances in 2022.
Interest expense was primarily related to our finance leases and was insignificant for all periods presented.
Other income (expense), net for the nine months endedSeptember 30, 2021 was primarily related to the$10.1 million gain from forgiveness of our PPP loan and related interest under the CARES Act. Other changes were primarily related to foreign exchange gain or loss resulting from foreign currency exchange rate fluctuations during the three and nine months endedSeptember 30, 2022 and 2021.
Income Taxes
Our provision for income taxes consists of federal, state and foreign current and deferred income taxes. As we expand the scale and scope of our international business activities, any changes inthe United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a full valuation allowance for our net deferred tax assets, including federal and state net operating loss carryforwards and research and development credit carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income. We believe that we have adequately reserved for our uncertain tax positions, although we can provide no assurance that the final outcome of these matters will not be materially different. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations. 43
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Three Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Income Taxes:
Loss before income taxes $ (41,522) $ (54,698) $ 13,176 (24) %
Provision for income taxes 41 14 27 193
Effective tax rate (0.1) % - %
Nine Months Ended September 30,
($ in thousands) 2022 2021 $ Change % Change
Income Taxes:
Loss before income taxes $ (134,636) $ (174,117) $ 39,481 (23) %
Provision for income taxes 347 649 (302) (47)
Effective tax rate (0.3) % (0.4) %
We are subject to income taxes in the United States , China , Germany and India .
The changes in income taxes for the three and nine months ended September 30,
2022 compared to the same periods in 2021 were primarily due to a combination of
permanent tax items, mainly related to the valuation allowance recorded on U.S.
deferred tax assets, foreign withholding taxes and state taxes.
The Inflation Reduction Act of 2022 (the "IRA") was enacted into U.S. law on
August 16, 2022 . The IRA includes various tax provisions, including an excise
tax on stock repurchases, expanded tax credits for clean energy incentives, and
a 15 percent corporate alternative minimum tax on profits that generally applies
to U.S. corporations with average adjusted financial statement income over a
three year period in excess of $1.0 billion . The Company is currently in the
process of evaluating the provisions of the IRA, but does not expect the IRA to
materially impact its financial statements.
Liquidity and Capital Resources
Sources of Liquidity
As ofSeptember 30, 2022 , we had cash, cash equivalents and short-term investments totaling$220.1 million , which were held for working capital purposes. Our cash equivalents and short-term investments are comprised of money market funds,U.S. government and agency securities, corporate debt securities and commercial paper. To date, our principal sources of liquidity have been payments received from sales to customers and the net proceeds we received through the completion of the Business Combination and issuances of stock. As ofSeptember 30, 2022 , we had received an aggregate of$225.5 million in net proceeds from the Business Combination and the related private placement pursuant to subscription agreements with certain investors, or PIPE offering, and an aggregate of$163.0 million in net proceeds from the exercises of our public warrants. OnJune 15, 2022 , we entered into an ATM Agreement with Oppenheimer, pursuant to which, from time to time, we may raise up to$100 million by selling shares of our common stock. Oppenheimer will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon our instructions, and is entitled to a commission at a rate equal to 2.5% of the gross price of any ATM Shares sold. Net proceeds from the sale of ATM Shares will be used for our general corporate purposes. For the nine months endedSeptember 30, 2022 , we received net proceeds of approximately$25.9 million (after deducting$1.3 million in commissions and expenses) from sales of 23,378,308 ATM Shares pursuant to the ATM Agreement. We have a loan and security agreement with a financial institution that expires onFebruary 24, 2023 . The credit agreement, which was entered into inSeptember 2020 and last amended inFebruary 2022 , provides a$25.0 million revolving line of credit, with a$5.0 million letter of credit sublimit. The advances under the credit facility bear interest at a rate per annum equal to the prime rate plus an applicable margin of 1.5% for prime rate advances, or the SOFR rate plus an applicable margin of 2.5% for SOFR advances. The revolving line of credit is secured by certain assets of the Company. As ofSeptember 30, 2022 , there were no amounts outstanding under this credit facility and we were in compliance with all associated covenants in the agreement. Also as ofSeptember 30, 2022 , the credit facility had$3.6 million available for borrowing. 44 -------------------------------------------------------------------------------- We have incurred negative cash flows from operating activities and significant losses from operations in the past as reflected in our accumulated deficit of$661.3 million as ofSeptember 30, 2022 . We expect to continue to incur operating losses at least for the next 12 months and may require additional capital resources to grow our business. We believe that current cash, cash equivalents, short-term investments and available borrowing capacity under the revolving credit facility will be sufficient to fund our operations, including capital expenditures and purchase commitments, for at least the next 12 months. For additional information regarding our cash requirements from lease obligations and contractual obligations, see Note 6. "Leases" and Note 14. "Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Our future capital requirements, however, will depend on many factors, including our lidar sales volume, the timing and extent of spending to support our research and development efforts in smart vision technology, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. From time to time, we may seek to raise additional funds through equity and debt. If we are unable to raise additional capital when desired and on reasonable terms, our business, results of operations, and financial condition may be adversely affected.
Cash Flow Summary
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
2022 2021
(In thousands)
Net cash provided by (used in):
Operating activities $ (95,679) $ (90,236)
Investing activities 98,020 (126,490)
Financing activities 25,267 69,228
Operating Activities
During the nine months ended September 30, 2022 , operating activities used
$95.7 million in cash. The primary factors affecting our operating cash flows
during this period were our net loss of $135.0 million , impacted by our non-cash
net adjustments of $33.7 million primarily consisting of stock-based
compensation of $16.2 million , provision for common stock warrants issued to a
customer of $9.1 million , depreciation and amortization of $6.1 million ,
reduction in carrying amount of the ROU assets of $2.1 million and net
amortization of investment premium or discount of $0.4 million . The cash used in
changes in our operating assets and liabilities of $8.7 million was primarily
due to a decrease of $3.8 million in contract liabilities due to the timing of
billings and cash received in advance of revenue, an increase of $2.2 million in
inventory primarily due to increases in inventory purchases, a decrease in
operating lease liabilities of $2.1 million and a decrease of $0.6 million in
accrued expenses and other liabilities due to timing of payments. These amounts
were partially offset by cash provided from changes in our operating assets and
liabilities of $14.3 million which primarily consists of a decrease of
$8.0 million in prepaid expenses, a decrease of $3.3 million in contract assets
and an increase of $0.3 million in accounts payable.
During the nine months ended September 30, 2021 , operating activities used $90.2
million in cash. The primary factors affecting our operating cash flows during
this period were our net loss of $174.8 million , impacted by our non-cash
charges of $82.9 million primarily consisting of stock-based compensation of
$81.4 million , depreciation and amortization of $6.2 million , provision for
doubtful accounts of $2.1 million , reduction in carrying amount of the ROU
assets of $2.3 million , gain on extinguishment of PPP loan of $10.1 million and
accretion on short-term investments of $1.1 million . The cash used in changes in
our operating assets and liabilities of $9.6 million was primarily due to an
increase of $2.2 million in contract assets, a decrease of $3.4 million in
accounts payable and a decrease of $2.3 million in accrued expenses and other
liabilities due to timing of payments, and a decrease of $1.7 million in
contract liabilities due to the timing of billings and cash received in advance
of revenue. These amounts were partially offset by cash provided from changes in
our operating assets and liabilities of $11.3 million which primarily consists
of a decrease of $2.9 million in prepaid expenses, a decrease of $6.3 million in
inventory primarily due to timing of inventories received and increased sales
volume of certain products, and a decrease of $2.1 million in accounts
receivable due to the timing of billings and cash received.
45
--------------------------------------------------------------------------------Investing Activities
During the nine months endedSeptember 30, 2022 , cash from investing activities was$98.0 million , which consisted primarily of$211.8 million proceeds from sales and maturities of short-term investments, partially offset by cash used to purchase short-term investments of$110.9 million and property, plant and equipment of$2.9 million . During the nine months endedSeptember 30, 2021 , cash used in investing activities was$126.5 million , which was primarily used to purchase short-term investments of$250.0 million , purchase property, plant and equipment of$3.2 million and invest in notes receivable of$0.8 million , partially offset by proceeds from sales and maturities of short-term investments of$127.4 million .
Financing Activities
During the nine months endedSeptember 30, 2022 , cash flow provided by financing activities was$25.3 million , which consisted primarily of net proceeds of$26.0 million and$0.8 million , respectively, from sales of our common stock under the ATM offering and ESPP and a$1.5 million payment of transaction costs related to the Business Combination.
During the nine months ended
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