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(Exact name of registrant as specified in its charter)
_______________________
iDelaware
i86-2528989
(State
or other jurisdiction
of incorporation)
(I.R.S. Employer
Identification No.)
i350 Treat Avenue
iSan
Francisco, iCaliforniai94110
(Address of principal executive offices) (Zip Code)
(i415)
i949-0108
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
_______________________
Title
of each class
Trading
Symbol(s)
Name of each exchange
on which registered
iCommon stock, $0.0001 par value per share
iOUST
iNew
York Stock Exchange
iWarrants to purchase common stock
iOUST WS
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☒
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
As
of November 7, 2022, the registrant had i184,531,202 shares of common stock, $0.0001 par value per share, outstanding.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Ouster, Inc. (the “Company”, “Ouster,” or “we”) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding Ouster’s future operating results and financial position, its business strategy and plans, including new products, the
expected timing of the closing of the Velodyne Merger (as defined herein); the ability of the parties to complete the Velodyne Merger considering the various closing conditions; the Company’s ability to continue as a going concern; the availability of cash or additional financing to fund our operations; future cost savings measures; market growth and trends, and the Company’s objectives for future operations, are forward-looking statements. The words “believe,”“may,”“will,”“estimate,”“continue,”“anticipate,”“intend,”“expect,”“could,”“would,”“project,”“plan,”“potentially,”“preliminary,”“likely,”“aim,”“forecast,”“should,”“can have,”“likely,”
and similar expressions are intended to identify forward-looking statements. The Company has based these forward-looking statements largely on its current expectations and projections about future events and trends that it believes may affect its financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including Ouster’s limited operating history and history of losses; the negotiating power and product standards of its customers; fluctuations in its operating results; supply chain constraints and challenges; cancellation or postponement of contracts or unsuccessful implementations; the adoption of its products
and the growth of the lidar market generally; the risk that the Velodyne Merger may not be completed in a timely manner or at all; uncertainties as to the timing of the consummation of the Velodyne Merger and the potential failure to satisfy the conditions to the consummation of the Velodyne Merger, including obtaining stockholder and regulatory approvals; the risk that the Velodyne Merger may involve unexpected costs, liabilities or delays; the risk that the Company may not recognize the anticipated benefits of the Velodyne Merger;its ability to grow its sales and marketing organization; substantial research and development costs needed to develop and commercialize new products; the competitive environment in which it operates; selection of its products for inclusion in target markets; its future capital needs and ability to secure additional capital on favorable terms or at all;
its ability to use tax attributes; its dependence on key third party suppliers, in particular Benchmark Electronics, Inc., and manufacturers; its ability to maintain inventory and the risk of inventory write-downs; inaccurate forecasts of market growth; its ability to manage growth; the creditworthiness of its customers; risks related to acquisitions; risks related to international operations; risks of product delivery problems or defects; costs associated with product warranties; its ability to maintain competitive average selling prices or high sales volumes or reduce product costs; conditions in its customers’ industries; its ability to recruit and retain key personnel; its use of professional employer organizations; its ability to adequately protect and enforce its intellectual property rights; its ability to effectively respond to evolving regulations and standards; risks related to operating as a public company; risks related to the COVID-19 pandemic; and risks
related to certain of its warrants being accounted for as liabilities. Other risk factors include the important factors described in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2022, as may be updated from time to time in the Company’s other filings with the SEC, that may cause its actual results, performance or achievements to differ materially and adversely from those expressed or implied by the forward-looking statements.
Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or achievements reflected in the forward-looking statements will be achieved or occur. Except as required by applicable law, we undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.
Unless the context otherwise indicates, references in this Quarterly Report on Form 10-Q to the terms “Ouster,”“the Company,”“we,”“our” and “us” refer to Ouster, Inc.
We may announce material business and financial information to our investors using our investor relations website at https://investors.ouster.com/overview. We therefore encourage investors and others interested in Ouster to review the information that we make available on our
website, in addition to following our SEC filings, webcasts, press releases and conference calls. Information contained on our website is not part of this Quarterly Report on Form 10-Q.
As of June 30, 2022, the Company determined that it qualified as a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act. Consistent with Section 5120.1(d) of the Financial Reporting Manual, the
Company has elected to reflect this status immediately. As a result, for the year ending December 31, 2023 and the remainder of the year ending December 31, 2022, we expect that we will be exempt from certain disclosure requirements and permitted to rely on certain reduced disclosure requirements. For instance, smaller reporting companies are not required to obtain an auditor attestation report regarding management’s assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; and may present only two years of audited financial statements and related MD&A disclosure.
(1)
The shares of the Company’s common and redeemable convertible preferred stock, prior to the Merger (as defined in Note 1), have been retroactively restated as shares reflecting the exchange ratio of approximately iiii0.703///
established in the Merger as described in Note 1.
The accompanying notes are an integral part of these condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – iDescription
of Business and Basis of Presentation
Description of Business
Ouster, Inc. was incorporated in the Cayman Islands on June 4, 2020 as “Colonnade Acquisition Corp”. Following the closing of the business combination in March 2021, the Company domesticated as a Delaware corporation and changed its name to “Ouster, Inc.”The Company’s prior operating subsidiary, Ouster Technologies, Inc. (“OTI” and prior to the Merger (as defined below)), was incorporated in the state of Delaware on June 30, 2015. The Company
is a leading provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, allowing each to understand and visualize the surrounding world and ultimately enabling safe operation and ubiquitous autonomy. Unless the context otherwise requires, references in this subsection to “the Company” refer to the business and operations of OTI (formerly known as Ouster, Inc.) and its consolidated subsidiaries prior to the Merger (as defined below) and to Ouster, Inc. (formerly known as Colonnade Acquisition Corp.) and its consolidated subsidiaries following the consummation of the Merger.
Colonnade
Acquisition Corp. (“CLA”), the Company’s legal predecessor, was originally a blank check company incorporated as a Cayman Islands exempted company on June 4, 2020. CLA was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. On March 11, 2021, CLA consummated a merger with the Company pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of December 21, 2020, details of which are included below.
i
Basis
of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries (all of which are wholly owned) and have been prepared in conformity with U.S. generally accepted accounting principles (“US GAAP”) applicable to interim periods. The functional currency for the Company is the United States dollar. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments)
necessary for a fair statement of the results of operations for the periods shown. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021 and the notes related thereto, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. Certain information and note disclosures normally included in the audited financial statements prepared in accordance
with US GAAP have been condensed or omitted from this report, as is permitted by applicable rules and regulations. The results of operations for any interim period are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other future years or interim periods.
Liquidity
The Company has experienced recurring losses from operations, and negative cash flows from operations. As of September 30, 2022, the Company had an accumulated deficit of approximately $i399.7 million.
The Company has historically financed its operations primarily through the Merger and related transactions, the sale of convertible notes and equity securities, proceeds from debt and, to a lesser extent, cash received from sales. Management expects significant operating losses and negative cash flows from operations to continue for the foreseeable future. The Company expects to continue investing in product development and sales and marketing activities. The long-term continuation of the Company’s business plan is dependent upon the generation of sufficient revenues from its products to offset expenses and its ability to raise more capital. In the event that the
Company does not generate sufficient cash flows from operations and is unable to obtain funding on acceptable terms or at all, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to continue operations.
The FASB Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) requires the Company to make certain disclosures if it concludes that there is substantial doubt about the entity’s ability to continue as a going concern
within one year from the date of the issuance of these condensed consolidated financial statements.
Management has determined that the Company has funds that are sufficient to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis.
In evaluating the Company’s ability to continue as a going concern, the
Company considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following November 8, 2022, the date the Company’s condensed financial statements were issued. Management considered the Company’s current financial condition and liquidity sources, including current funds and available working capital, forecasted future cash flows and the Company’s obligations due before November 8, 2023. As discussed in Note 14 the
Company intends to execute the merger transaction with Velodyne Lidar, Inc. (which is subject to usual and customary closing conditions beyond our control). Although there is no assurance that the merger transaction will be successfully completed, the Company believes it can successfully complete the acquisition, enabling it to continue as a going concern. Also, the Company will evaluate whether it can meet its future obligations through the issuance of additional shares. If neither of these occur, the Company would expect to execute plans to reduce operating costs.
Impact of the COVID-19 Pandemic
Ouster
has been actively monitoring the COVID-19 pandemic on a global scale and continues to evaluate the long-term impacts on the business while keeping abreast of the latest developments, particularly the variants of the virus, to ensure preparedness for Ouster’s employees and its business. We maintain our commitment to protecting the health and safety of our employees and customers. We continue to adapt and enhance our safety protocols as we follow the guidance from local authorities. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, research and development costs and employee-related amounts, will depend on future events that are uncertain, including as a result of new information that continues to emerge concerning the
virus, its variants, the deployment and effectiveness of vaccination roll-outs, vaccination hesitancy, therapeutics, and the actions taken to contain the virus or treat it, as well as the economic impact on local, regional, national and international customers and markets. Thus, the Company is not able to estimate the future consequences on its operations, its financial condition, or its liquidity.
Merger Agreement with Colonnade Acquisition Corp. and Beam Merger Sub, Inc.
On December 21, 2020, OTI entered into the Merger Agreement with CLA and Beam Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and subsidiary of CLA. OTI’s board of directors unanimously approved OTI’s entry into the Merger Agreement, and on March
11, 2021, the transactions contemplated by the Merger Agreement were consummated. Pursuant to the terms of the Merger Agreement, (i) CLA domesticated as a corporation incorporated under the laws of the State of Delaware and changed its name to “Ouster, Inc.” and (ii) Merger Sub merged with and into OTI (such transactions contemplated by the Merger Agreement, the “Colonnade Merger”), with OTI surviving the Colonnade Merger.
As a result of the Merger, among other things, (1) each of the then issued and outstanding ii5,000,000/
CLA Class B ordinary shares, par value $i0.0001 per share, of CLA (the “CLA Class B ordinary shares”) converted automatically, on a one-for-one basis, into a CLA Class A ordinary share (as defined below), (2) immediately following the conversion described in clause (1), each of the then issued and outstanding ii25,000,000/
Class A ordinary shares, par value $i0.0001 per share, of CLA (the “CLA Class A ordinary shares”), converted automatically, on a ione-for-one basis,
into a share of common stock, par value $i0.0001 per share, of Ouster (the “Ouster common stock”), (3) each of the then issued and outstanding i10,000,000 redeemable
warrants of CLA (the “CLA warrants”) converted automatically into a redeemable warrant to purchase ione share of Ouster common stock (the “Public warrants”) pursuant to the Warrant Agreement, dated August 20, 2020 (the “Warrant Agreement”), between CLA and Continental Stock Transfer & Trust Company (“Continental”), as warrant agent, and (4) each of the then issued and outstanding units of CLA that had not been previously separated into the underlying CLA Class A ordinary
shares and underlying CLA warrants upon the request of the holder thereof (the “CLA units”), were cancelled and entitled the holder thereof to ione share of Ouster common stock and one-half of one Public warrant, and (5) each of the then issued and outstanding i6,000,000
private placement warrants of CLA (the “Private Placement warrants”) converted automatically into a Public warrant pursuant to the Warrant Agreement. No fractional Public warrants were issued upon separation of the CLA units.
Immediately prior to the effective time of the Colonnade Merger, (1) each share of OTI’s Series B Preferred Stock, par value $i0.00001 per share (the “OTI Preferred Stock”), converted into ione
share of common stock, par value $i0.00001 per share, of OTI (the “OTI common stock” and, together with OTI Preferred Stock, the “OTI Capital Stock”) (such conversion, the “OTI Preferred Conversion”) and (2) all of the outstanding warrants to purchase shares of OTI Capital Stock were exercised in full or terminated in accordance with their respective terms (the “OTI Warrant Settlement”).
As a result of and upon the closing of the Colonnade Merger, among other things, all shares of OTI Capital Stock (after giving effect to the OTI Warrant Settlement) outstanding immediately prior to the closing of the Colonnade Merger together with shares of OTI common stock reserved in respect of options to purchase shares of OTI common stock and restricted shares of OTI common stock (together, the “OTI Awards”) outstanding immediately prior to the closing of the Colonnade Merger that were converted into awards based on Ouster common stock, were cancelled in exchange for the right to receive, or the reservation of, an aggregate of i150,000,000
shares of Ouster common stock (at a deemed value of $i10.00 per share), which, in the case of OTI Awards, were shares underlying awards based on Ouster common stock, representing a fully-diluted pre-transaction. Upon closing of the Colonnade Merger, the Company received gross proceeds of $i299.9 million
from the Colonnade Merger and private offering, offset by $i8.5 million of pre-merger costs relating to CLA and offerings costs of $i26.6 million.
iThe
Colonnade Merger was accounted for as a reverse recapitalization under US GAAP. Under this method of accounting, CLA is treated as the “acquired” company for financial reporting purposes. This determination is primarily based on OTI stockholders comprising a relative majority of the voting power of the Company and having the ability to nominate the members of the board of directors of the Company after the Colonnade Merger, OTI’s operations prior to the Colonnade Merger comprising the only ongoing operations of the Company following the Colonnade Merger, and OTI’s senior management prior to the Colonnade Merger comprising a majority of the senior management of the
Company following the Colonnade Merger. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of OTI with the Colonnade Merger being treated as the equivalent of OTI issuing stock for the net assets of CLA, accompanied by a recapitalization whereby no goodwill or other intangible assets are recorded. Transactions and balances prior to the Colonnade Merger are those of OTI. The shares and net loss per share available to holders of OTI’s common stock prior to the Colonnade Merger have been retroactively restated as shares reflecting the exchange ratio established in the Colonnade Merger Agreement.
PIPE Investment
On December 21, 2020, concurrently with the execution
of the Colonnade Merger Agreement, CLA entered into subscription agreements with certain institutional and accredited investors (collectively, the “PIPE Investors”), pursuant to which the PIPE Investors agreed to purchase, in the aggregate, i10,000,000 shares of Ouster common stock at $i10.00
per share for an aggregate commitment amount of $i100,000,000 (the “PIPE Investment”), a portion of which was funded by certain affiliates of Colonnade Sponsor LLC, CLA’s sponsor (the “Sponsor”). The PIPE Investment was consummated substantially concurrently with the closing of the Colonnade Merger.
At the Market Issuance Sales Agreement
On April 29, 2022, the
Company entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with B. Riley Securities, Inc., Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc., pursuant to which the Company may offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock having an aggregate offering price of up to $i150 million under
the Company’s Form S-3 registration statement. From the date of the ATM Agreement through September 30, 2022, the Company sold i7,833,709 shares at a weighted-average sales price of $i2.08
per share, resulting in cumulative gross proceeds to the Company totaling approximately $i16.8 million before deducting offering costs, sales commissions and fees.
Loan and Security Agreement
On April 29, 2022, the Company entered into a loan
and security agreement (the “Loan Agreement”) with Hercules. The Loan Agreement provides with the term loan of up to $i50.0 million, subject to terms and conditions. The Company borrowed the initial tranche of $i20.0 million
on April 29, 2022. The Company may borrow an additional $i20.0 million on or before March 15, 2023, subject satisfying certain conditions. An additional $i10.0 million
may be drawn on or before June 15, 2023, subject to satisfying certain conditions relating to the achievement of trailing itwelve-month revenue and profit milestones.
For additional information, see Note 5, Debt.
Note 2 – iSummary
of Significant Accounting Policies
During the nine months ended September 30, 2022, there were no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2022, except for the changes described below. The Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
Financing costs incurred in connection with a loan and security agreement with Hercules Capital, Inc. (“Hercules”) are deferred and amortized using the effective interest rate method over the life of the respective agreement. Any discount or premium on the issuance of any debt is amortized using the effective interest method over the life of the respective debt security.
The
Company presents deferred debt financing costs on the balance sheet as a contra-liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
i
Recently Issued and Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06: Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity
(Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU also simplify the guidance in ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the
guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The new standard became effective for the Company for annual periods beginning December 15, 2021. The Company adopted this ASU as of January 1, 2022 using a modified retrospective method of transition, which did not have an impact on its condensed consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
The
Company considers the applicability and impact of all ASUs. ASUs not referenced below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to add contract assets and contract
liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company is currently
evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.
i
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. Cash, cash equivalents, and restricted
cash are deposited with federally insured commercial banks in the United States; and at times, cash balances may be in excess of federal insurance limits. The Company generally does not require collateral or other security deposits for accounts receivable.
To reduce credit risk, the Company considers customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms when determining the collectability of specific customer accounts. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. Based on management’s assessment, the Company provides
for estimated uncollectible amounts through a charge to earnings and a credit to valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
i
Accounts receivable from the Company’s
major customer representing 10% or more of total accounts receivable was as follows:
The Company applies the fair value measurement accounting standard whenever other accounting pronouncements require or permit fair value measurements. Fair value is defined in the accounting standard as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is based on inputs to valuation
techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 - Instruments whose significant
value drivers are unobservable.
As of September 30, 2022 and December 31, 2021, the Company’s Level 3 liabilities consisted of the Private Placement warrant liability. The determination of the fair value of warrant liability is discussed in Note 6.
i
The
following table provides information by level for the Company’s assets and liabilities that were measured at fair value on a recurring basis (in thousands):
Money
market funds are included within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The fair value of the redeemable convertible preferred stock warrant, redeemable convertible preferred stock tranche and Private Placement warrant liabilities is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the warrant liabilities, the Company used the Black-Scholes option pricing model to estimate the fair value using unobservable inputs, including the expected term, expected volatility, risk-free interest rate and dividend yield (see Note 6).
i
The
following table presents a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):
Financial instruments that are not re-measured at fair value include accounts receivable, accounts payable, accrued and other current liabilities and debt. The carrying values of these financial instruments approximate their fair values.
Note 4. iBalance Sheet Components
Cash and Cash Equivalents
i
The Company’s cash and cash equivalents consist of the following (in thousands):
(1)The
Company maintains a cash sweep account, which is included in money market funds as of September 30, 2022. Cash is invested in short-term money market funds that earn interest.
Restricted cash consists of certificates of deposit held by a bank as security for outstanding letters of credit. In September 2022, the
Company received $i0.7 million of restricted cash balance that was related to a deposit in connection with the execution of a respective lease contract at 2741 16th Street. The Company had a restricted cash balance of $i1.3
million and $i2.0 million as of September 30, 2022 and December 31, 2021, respectively, which has been excluded from the Company’s cash and cash equivalents balances. The Company presented $i0.3
million and $i1.0 million of the total amount of restricted cash within current assets on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively. The remaining restricted cash balance of $i1.1
million and $i1.0 million is included in non-current assets on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
Reconciliation of cash, cash equivalents and restricted cash as shown in the condensed consolidated statement of cash flows to the respective accounts within the condensed consolidated balance sheet is as follows (in thousands):
Total
inventory balance as of September 30, 2022 and December 31, 2021 includes a write down of $i2.2 million and $i1.7
million, respectively, for obsolete, scrap, or returned inventory. During the three months ended September 30, 2022 and 2021, $i0.5 million and $i0.7
million of inventory write offs were charged to cost of revenue. During the nine months ended September 30, 2022 and 2021, respectively, $i0.9 million and $i0.9 million
of inventory write offs were charged to cost of revenue. During the three and nine months ended September 30, 2022, $ii0.3/
million of inventory write offs were charged to research and development.
Prepaid Expenses and Other Current Assets
i
Prepaid expenses and other current assets consist of the following (in thousands):
Depreciation
expense associated with property and equipment was $i3.7 million and $i2.3 million in the nine months ended September 30, 2022 and 2021,
respectively.
Goodwill and Acquired Intangible Assets, Net
In the fourth quarter of 2021, the Company completed the acquisition of Sense Photonics Inc. (“Sense”), a privately held lidar technology company for autonomous vehicles. The transaction has been accounted for as a business combination. The Company purchased all of the outstanding shares of the capital stock of Sense and settled all Sense debt for total consideration of $i72.8 million.
Goodwill represents the excess of the purchase price over the preliminary estimated fair values of the identifiable assets and assumed liabilities acquired and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. Goodwill is not deductible for tax purposes.
The Company assesses goodwill for impairment during the fourth quarter of each year or more often if deemed necessary. As of September 30, 2022, the Company with the assistance of third-party valuation specialist performed an interim impairment test of its goodwill as a result of the decline in market conditions and updated outlook as a result of the impact of market uncertainties
that prolonged sales cycle. The Company’s reporting unit fair value was determined based on a discounted future cash flow model (income approach). The estimated fair value of the reporting unit exceeded its carrying value by approximately i4% as of September 30, 2022. Accordingly, the Company determined that goodwill
was not impaired as of September 30, 2022.
Given this level of fair value, in the event the financial performance of the Company does not meet management’s current expectations in the future or the Company experiences prolonged market downturns or persistent declines in the Company’s stock price, worsening trends from the COVID-19 pandemic, or there are other negative revisions to key assumptions, the Company may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill
impairment charge. As of September 30, 2022, goodwill was $i51.2 million.
Measurement period adjustments recognized during 2022 related primarily to updated estimated fair values for assumed employer withholding tax liabilities, royalty liability and a net working capital adjustment. iA
reconciliation of preliminary total consideration as of December 31, 2021, and total consideration as of September 30, 2022, are presented below (in thousands):
As Reported
Measurement Period Adjustment
As Adjusted Value
Fair
value of common stock issued at closing
$
i60,024
$
(i358)
$
i59,666
Fully
vested replacement equity awards
i1,081
—
i1,081
Cash
paid at closing to settle Sense pre-existing debt and transaction costs incurred by Sense
On November 27, 2018, the Company entered into a Loan and Security Agreement with Runway Growth Credit Fund Inc. (“Runway Loan and Security Agreement”). The Runway Loan and Security Agreement provided for loans in an aggregate principal amount up to $i10.0 million
with a loan maturity date of November 15, 2021. The loan carried an interest rate equal to LIBOR plus i8.5%, unless LIBOR was no longer attainable or ceased to fairly reflect the costs of the lender, in which case the applicable interest rate would have been Prime Rate plus i6.0%.
In an event of default, annual interest would have been increased by i5.0% above the otherwise applicable rate.
In conjunction with the Runway Loan and Security Agreement, OTI issued a warrant to purchase i35,348
shares of Series A redeemable convertible preferred stock (the “Series A Preferred Stock”) of OTI (i4.0% of original principal amount of $i10.0 million,
divided by the exercise price), with an exercise price of $i11.3518 per share. The fair value of this warrant was estimated to be $i0.1 million
and accounted for as a debt discount. On August 5, 2019, in connection with the second amendment to the Runway Loan and Security Agreement, OTI amended the warrant issued to Runway Growth to increase the number of shares available to purchase to i53,023 shares of Series A Preferred Stock of OTI. The aggregate value of the warrants increased by $i0.1 million
after the warrant modification.
The warrants were exercised on March 11, 2021 and the warrant liability was remeasured to fair value with the increase recognized as a loss of $i0.6 million for the three months ended March 31, 2021 within other income (expense), net in the consolidated statements of operations and comprehensive loss. The warrant liability was remeasured to fair value as of March
31, 2021 and the reduction was recognized as a gain of $i0.2 million.
On March 26, 2021, the Company terminated the Runway Loan and Security Agreement and repaid the $i7.0 million
principal amount outstanding as well as interest and fees amounting to $i0.4 million. The Company incurred no prepayment fees in connection with the termination and all liens and security interests securing the loan made pursuant to the Runway Loan and Security Agreement were released upon termination. As of September 30, 2022 and December 31,
2021, the outstanding principal balance of the loan was iinil/,
respectively.
The Company issued a $i5 million promissory note in January 2021 to certain current investors of the
Company (or their respective affiliates) to help continue to fund the Company’s ongoing operations through the consummation of the Colonnade Merger. The note accrued interest at a rate equal to LIBOR plus i8.5% per annum and was repaid on March 11, 2021 in accordance with its terms in connection with the consummation of the Colonnade Merger.
Loan
and Security Agreement
On April 29, 2022, the Company entered into the Loan Agreement with Hercules. The Loan Agreement provides the Company with a term loan of up to $i50.0 million, subject to terms and conditions. The
Company borrowed the initial tranche of $i20.0 million on April 29, 2022. The Company may borrow an additional $i20.0 million
on or before March 15, 2023, subject satisfying certain conditions. An additional $i10.0 million may be drawn on or before June 15, 2023, subject to satisfying certain conditions relating to the achievement of trailing twelve-month revenue and profit milestones.
Advances under the Loan Agreement bear interest at the rate of interest equal to greater of either (i) (x)
the prime rate as reported in The Wall Street Journal plus (y) i6.15%, and (ii) i9.40%, subject to compliance with financial covenants and other conditions. The Loan Agreement
includes covenants, limitations, and events of default customary for similar facilities. The Loan Agreement matures on May 1, 2026.
Interest on amounts borrowed under the Loan Agreement is payable on a monthly basis until June 1, 2025. After June 1, 2025, payments consist of equal monthly installments of principal and interest payable until the secured obligations are repaid in full. However, if the Company achieves certain equity proceeds, revenue or profit targets for the twelve-month period ending December 31, 2023, then the interest-only payments will continue and the
Company will be obligated to repay the aggregate principal amount on May 1, 2026. The entire principal balance and all accrued but unpaid interest shall be due and payable on May 1, 2026. On the earliest to occur of May 1, 2026, the date on which the obligations under the Loan Agreement are paid and the date on which such obligations become due and payable, the Company is also required to pay Hercules an end of term charge from $i1.5 million
to $i3.7 million, depending on the amount borrowed.
In connection with the Loan Agreement, the Company paid the lender a cash facility and legal fees of $i0.6 million
and incurred debt issuance costs to third parties that were directly related to issuing debt in the amount of $i0.3 million. The effective interest rate on this debt is i14.3% after
giving effect to the debt discount, debt issuance costs and the end of term charge. Amortization expense included in the interest expense related to debt discount and debt issuance costs of the Loan Agreement was not material for the three and nine months ended September 30, 2022.
The Company may prepay the principal of any advance made pursuant to the terms of the Term Loan Facility at any time subject to a prepayment charge equal to: i2.50%,
if such advance is prepaid in any of the first 12 months following the Closing Date, i1.50%, if such advance is prepaid after 12 months but prior to 24 months following the Closing Date, and i1.0%, if
such advance is prepaid anytime thereafter.
If the Company failed to maintain an unrestricted cash balance of $i60.0 million, it would then be subject to a financial covenant that requires the Company to achieve certain trailing twelve-month revenue targets tested quarterly as set
forth in the Loan Agreement and commencing with the quarter ending on June 30, 2023. All obligations under the Loan Agreement are unconditionally guaranteed by the Company’s subsidiary Sense Photonics, Inc. The Term Loan Facility is secured by substantially all of the Company’s and the guarantors’ existing and after-acquired assets, including all intellectual property, all securities in existing and future domestic subsidiaries and i65.0%
of the securities in foreign subsidiaries, subject to certain exceptions and exclusions.
The Loan Agreement contains customary covenants for transactions of this type and other covenants agreed to by the parties, including, among others, (i) the provision of annual, quarterly and monthly financial statements, management rights and insurance policies and (ii) restrictions on incurring debt, granting liens, making acquisitions, making loans, paying dividends, dissolving, and entering into leases and asset sales. The Loan Agreement also provides for customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control, judgment and material adverse effect defaults.
The unamortized debt discount and debt issuance costs are amortized to interest expense over the life of the instrument using the effective interest rate method.
Note 6. iWarrants
Series A and B Redeemable Convertible Preferred Stock Warrants
On November 27, 2018, in connection with the execution of the prior Loan and Security Agreement (the “Runway Loan and Security Agreement”), OTI issued a warrant to purchase i35,348
shares of Series A Preferred Stock of OTI at an exercise price of $i11.3518 per share (the “Runway warrant”). On August 5, 2019, in connection with the second amendment to the Runway Loan and Security Agreement, OTI amended the Runway warrant to increase the number of shares available to purchase to i53,023
shares of Series A Preferred Stock of OTI at an exercise price of $i11.3518 per share.
The Runway warrants included a cashless exercise provision under which their holders could, in lieu of payment of the exercise price in cash, surrender the Runway warrant and receive a net amount of shares based on the fair market value of OTI’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Runway warrants contained provisions for adjustment of the exercise
price and number of shares issuable upon the exercise of the Runway warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations.
The fair value of the warrants issued was recorded as of the date of initial issuance in the amount of $i0.1 million. The subsequent issuance of warrants pursuant to the August 5, 2019 amendment to the Runway Loan and Security Agreement was recorded in the amount of $i0.1 million.
Immediately prior to the Colonnade Merger, the warrants were exercised in full in accordance with their terms.
On April 3, 2020, in connection with the closing of the Series B redeemable convertible preferred stock, OTI issued a warrant to purchase i4,513,993 shares of Series B redeemable convertible preferred stock of the
Company at an exercise price of $i0.3323 per share (the “Series B warrants”). The Series B warrants could be exercised prior to the earliest to occur of (i) the i10-year anniversary of the date of
issuance, (ii) the consummation of a liquidation transaction, or (iii) the consummation of an initial public offering. The Series B warrants included a cashless exercise provision under which their holders may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Series B warrants contained provisions for adjustment of the exercise price and number of shares issuable upon the exercise of the Series B warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations.
The Series B warrants were initially recognized as a liability at a fair value of $i0.7
million. The Series B warrants were exercised on February 11, 2021 and the warrant liability was remeasured to fair value as of that date, resulting in a loss of $i8.3 million for the nine months ended September 30, 2021, classified within other income (expense), net in the consolidated statements of operations and comprehensive loss. Upon exercise, redeemable convertible preferred stock converted into common stock pursuant to the conversion rate effective immediately
prior to the Colonnade Merger.
Historically, value was assigned to each class of equity securities using an option pricing model method (“OPM”). In September 2020, OTI began allocating the equity value using a hybrid method that utilizes a combination of the OPM and the probability weighted expected return method (“PWERM”). The PWERM is a scenario-based methodology that estimates the fair value of equity securities based upon an analysis of future values for OTI, assuming various outcomes. As the probability of a transaction with a special purpose acquisition company (“SPAC”) increased, the fair value of the redeemable convertible preferred stock warrant liability increased as of the date of the exercise.
Simultaneously with the closing of the Company’s initial public offering (the “IPO”) in August 2020, the sponsor of CLA, Colonnade Sponsor LLC, purchased an aggregate of i6,000,000 Private Placement warrants at a price of $i1.00
per warrant, for an aggregate purchase price of $i6,000,000. The Private Placement warrants became exercisable i12 months following the closing of the
Company’s IPO, and will expire ifive years from the completion of the Colonnade Merger, or earlier upon redemption or liquidation. On March 11, 2021, each outstanding Private Placement warrant automatically converted into a warrant to purchase ione
share of Ouster common stock pursuant to the Warrant Agreement, at an exercise price of $i11.50 per share.
The private placement warrant liability was remeasured to fair value as of September 30, 2022, resulting in a gain of $i0.2
million and $i7.4 million for the three and nine months ended September 30, 2022, respectively, classified within other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The private placement warrant liability was remeasured to fair value as of September 30, 2021 resulting in a loss of $i14.5
million and $i8.4 million for the three and nine months ended September 30, 2021, respectively, classified within other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.
The Private Placement warrants were valued using the following assumptions under the Black-Scholes option-pricing model:
CLA, in its IPO in August 2020, issued i20,000,000 units that each consisted of one Class A ordinary share and one-half warrant to purchase a Class A ordinary share, which the Company refers to as CLA warrants before the Colonnade Merger and Public warrants after the Colonnade Merger. These warrants may only be exercised for a whole number of
shares, and no fractional warrants were issued or issuable upon separation of the units and only whole warrants will trade. The warrants became exercisable i12 months following the closing of the Company’s IPO, and will expire ifive
years from the completion of the Colonnade Merger, or earlier upon redemption or liquidation. Each Public warrant is exercisable at a price of $i11.50 per share. On March 11, 2021, upon the closing of the Colonnade Merger pursuant to the Colonnade Merger Agreement (Note 1), each of the i9,999,996
outstanding warrants, as adjusted for any fractional warrants that were not issued upon separation, was converted automatically into a redeemable Public warrant to purchase ione share of the Company’s common stock. The Public warrants were recognized as equity upon the Colonnade Merger in the amount of $i17.9 million.
Prior
to their expiration, the Company may redeem the Public warrants at a price of $i0.01 per warrant, provided that the closing price of the Company’s common stock equals or exceeds $i18.00
per share for any i20 trading days within a i30 trading-day period ending on the third trading day prior to the date on which the
Company gives proper notice of such redemption to the warrants holders.
In connection with certain office leasehold interests in real property located in San Francisco (350 Treat Ave and, 2741 16th Street) and in Paris (5, rue Coq Héron), the Company obtained letters of credit from certain banks as required by the lease agreements. If the Company defaults under the terms of the applicable lease, the lessor will be entitled to draw upon the letters of credit in the amount necessary to cure the default. The amounts covered by the letters of credit are collateralized by certificates of deposit, which are included in restricted cash on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021.
The outstanding amount of the letters of credit was $i1.3 million and $i2.0 million as of September 30, 2022
and December 31, 2021, respectively.
Non-Cancelable Purchase Commitments
As of September 30, 2022, the Company had non-cancelable purchase commitments to a third-party contract manufacturer for approximately $i26.0
million and other vendors for approximately $i7.5 million.
Litigation
The Company is involved in various legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount
can be reasonably estimated. Legal fees are expensed as incurred. The Company has identified certain claims as a result of which a loss may be incurred, but in the aggregate any loss is expected to be immaterial. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Actual outcomes of these legal and regulatory proceedings may materially differ from our current estimates.
The company has made no accruals with respect to the following:
On
June 10, 2021, the Company received a letter from the SEC notifying us of an investigation and document subpoena. The subpoena seeks documents regarding projected financial information in CLA’s Form S-4 registration statement filed on December 22, 2020. The Company has complied with the SEC’s requests to date; however, the SEC may request additional documents or information.
On June 14, 2022, Velodyne Lidar USA, Inc. (“Velodyne”) filed a lawsuit against the Company relating to two patents and requested
an International Trade Commission proceeding with respect to the same two patents. On July 8, 2022, the Company filed a complaint against Velodyne, alleging multiple claims including intellectual property misappropriation and false advertising. While the cases remain pending, the Company and Velodyne have agreed that no later than seven days after the execution of the merger agreement with Velodyne (the “Velodyne Merger Agreement”), each will cooperate to take certain actions in connection with dismissing these pending litigation matters between the Company and Velodyne and moving to terminate United States International Trade Commission Investigation No.
337-TA-1332. There can be no assurances that such matters will ultimately be dismissed.
Other than as set forth above, as of September 30, 2022 and December 31, 2021 there were no material updates and no other material litigation matters.
Indemnification
From time to time, the Company enters into agreements in the ordinary course of business that include indemnification provisions. Generally, in these provisions the Company agrees to defend, indemnify, and hold harmless the indemnified parties for claims and losses suffered or incurred by such indemnified
parties for which the Company is responsible under the applicable indemnification provisions. The terms of the indemnification provisions vary depending upon negotiations between the Company and its counterpart; however, typically, these indemnification obligations survive the term of the contract and the maximum potential amount of future payments the Company could be required to make pursuant to these provisions are uncapped. To date, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnification
provisions.
The Company has also entered into indemnity agreements pursuant to which it has indemnified its directors and officers, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer, other than liabilities arising from
willful misconduct of the individual. To date, the
Company has never incurred costs to defend lawsuits or settle claims related to these indemnity agreements. The unaudited condensed consolidated financial statements do not include a liability for any potential obligations under the indemnification agreements at September 30, 2022 and December 31, 2021.
Note 8. iRedeemable Convertible
Preferred and Common Stock
The Company’s common stock and warrants trade on the New York Stock Exchange under the symbol “OUST” and “OUSTWS”, respectively. Pursuant to the terms of the Second Amended and Restated Certificate of Incorporation, the Company is authorized to issue the following shares and classes of capital stock, each with a par value of $ii0.0001/
per share: (i) i1,000,000,000 shares of common stock; (ii) i100,000,000 shares of preferred stock. Immediately following the Colonnade Merger, there were i161,449,205
shares of common stock with a par value of $i0.0001, and i15,999,996 warrants outstanding. The holder of each share of common stock is entitled to ione
vote.
The Company has retroactively adjusted the shares issued and outstanding prior to March 11, 2021 to give effect to the exchange ratio established in the Colonnade Merger Agreement to determine the number of shares of common stock into which they were converted.
Immediately prior to the Colonnade Merger, OTI’s certificate of incorporation, as amended, authorized it to issue i342,367,887
shares of $i0.00001 par value, with i210,956,516 shares designated as common stock and i131,411,372
shares of redeemable convertible preferred stock.
On March 11, 2021, upon the closing of the Transaction pursuant to the Colonnade Merger Agreement (Note 1), all of the outstanding redeemable convertible preferred stock was converted to the Company’s common stock pursuant to the conversion rate effective immediately prior to the Transaction and the remaining amount was reclassified to additional paid-in capital. As of September 30, 2022 and December 31, 2021, the Company does not have any redeemable convertible preferred stock outstanding.
On April
29, 2022, the Company entered into an At-Market-Issuance Sales Agreement (the “ATM Agreement”) pursuant to which the Company may, subject to the terms and conditions set forth in the agreement offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock, par value $i0.0001
per share, having an aggregate offering price of up to $i150.0 million.
From the date of the ATM Agreement through September 30, 2022, the Company sold i7,833,709
shares at a weighted-average sales price of $i2.08 per share, resulting in cumulative gross proceeds to the Company totaling approximately $i16.8
million before deducting offering costs, sales commissions and fees. Cumulative net proceeds to the Company totaled approximately $i15.8 million after deducting offering costs, sales commissions and fees. The Company plans to use the net proceeds from this offering for working capital and general corporate purposes.
In
September 2022, the Company suspended sales of common stock through its ATM Agreement. The remaining availability under the ATM Agreement as of September 30, 2022 is approximately $i133.2 million.
Note 9. iStock-based
Compensation
As of September 30, 2022, the Company has ifour equity incentive plans, the 2015 Stock Plan (the “2015 Plan”), the Sense 2017 Equity Incentive Plan (the “Sense Plan”), the 2021 Incentive Award Plan (the “2021 Plan”) and 2022 Employee Stock Purchase Plan (the “2022 ESPP” and, collectively
with the 2015 Plan, the Sense Plan and the 2021 Plan, together the “Plans”).
The Plans provide for the grant of stock options, stock appreciation rights, restricted stock awards (“RSA”), restricted stock units (“RSUs”), performance stock unit awards and other forms of equity compensation (collectively, “equity awards”). In addition, the 2021 Plan provides for the grant of performance bonus awards. All awards under the Plans may be granted to employees, including officers, and awards under the 2015 Plan, Sense Plan and 2021 Plan also may be granted to directors and consultants, in each case, within the limits defined in the Plans.
The Company’s 2022 ESPP has been offered to all eligible employees since August 2022 and generally permits
certain employees to purchase shares of our common stock through payroll deductions of up to i15% of their compensation of each offering period, subject to certain limitations. Under the 2022 ESPP, the purchase price of a share under the ESPP equals i85%
of the lesser of the fair market value of a share of common stock on either the first or last day of each offering period, but no less than the par value per share of common stock. As of September 30, 2022, i6.9 million shares of our common stock were available for issuance under the 2022 ESPP. The stock-based compensation expense is calculated as of the beginning of the
offering period as the fair value of the 2022 ESPP shares utilizing the Black-Scholes option valuation model and is recognized over the offering period. The first offering period under the 2022 ESPP commenced on September 6, 2022.As of September 30, 2022, the maximum number of shares that may be issued under the first offering period was i349,630
shares of our common stock, but ino shares were issued under the 2022 ESPP.
Certain employees have the right to early exercise unvested stock options, subject to rights held by the Company to repurchase unvested shares in the event of voluntary or involuntary termination. The
Company accounts for cash received in consideration for the early exercise of unvested stock options as a non-current liability, included as a component of other liabilities in the Company’s condensed consolidated balance sheets.
On October 12, 2020, certain executives and employees issued the Company partial recourse promissory notes with an aggregate principal of $i1.1 million.
The promissory notes carried a i0.38% annual interest rate and were due on the earliest of the ninth anniversary of the date of issuance of the notes, the termination of employment of the executive/employee, the filing by the Company of a registration statement under the Securities Act of 1933, the promissory notes being prohibited under Section 13(k) of the Securities Exchange Act of 1934 or, the closing of a change in control of the
Company. The promissory notes were issued by the executives and employees in satisfaction of the exercise price of vested options to purchase i2,883,672 shares of common stock and unvested options to purchase i4,603,833
shares of common stock. No cash was exchanged as part of the exercises. In March 2021, in connection with the close of the Colonnade Merger, the Company forgave half of the respective obligations under the promissory notes for certain executives and required such noteholders to repay the remaining balance of $i0.3 million under their respective notes. Additional compensation expense of $i0.3 million
was recognized in general and administrative expenses for the nine months ended September 30, 2021 for the value of the loans forgiven. No obligations under the promissory notes for non-executive noteholders were outstanding as of September 30, 2022 and December 31, 2021.
i
Stock option activity for the nine months ended September 30,
2022 is as follows:
Number of Shares Underlying Outstanding Options
Weighted- Average Exercise Price per Share
Weighted- Average Remaining Contractual Term (in years)
The
following table summarizes information about stock options outstanding and exercisable at September 30, 2022.
Options Outstanding
Options
Exercisable
Exercise Price
Options Outstanding
Weighted Average Remaining Contractual Life (Years)
Weighted Average Exercise Price
Options Exercisable
Weighted Average Exercise Price
$
ii0.18/
i4,088,911
i7.73
$
i0.18
i3,027,603
$
i0.18
$
ii0.21/
i8,909,207
i7.98
$
i0.21
i4,415,060
$
i0.21
$
ii1.42/
i7,524,114
i8.00
$
i1.42
i3,605,304
$
i1.42
$
ii1.49/
i34,036
i0.18
$
i1.49
i34,036
$
i1.49
$
ii5.24/
i316,111
i6.25
$
i5.24
i234,893
$
i5.24
$
ii10.26/
i645,797
i8.60
$
i10.26
i228,719
$
i10.26
i21,518,176
i11,545,615
/
As
of September 30, 2022, there was approximately $i15.7 million of unamortized stock-based compensation expense related to unvested stock options that is expected to be recognized over a weighted average period of i1.9
years.
Stock
compensation expense is recognized on a straight-line basis over the vesting period of each RSU. As of September 30, 2022, total compensation expense related to unvested RSUs granted to employees, but not yet recognized, was $i72.3 million, with a weighted-average remaining vesting period of i2.9
years.
RSUs settle into shares of common stock upon vesting.
Stock-Based Compensation Expense
i
The Company recognized stock-based compensation expense for all stock options in the condensed consolidated statements of operations and comprehensive
loss as follows (in thousands):
The following table sets forth the computation of basic and diluted
net loss per common share attributable to common stockholders (in thousands, except share and per share data):
Weighted
average shares used to compute basic and diluted net loss per share
ii181,361,354/
ii156,647,259/
ii175,795,093/
ii123,175,390/
Net
loss per common share—basic and diluted
$
(ii0.20/)
$
(ii0.08/)
$
(ii0.55/)
$
(ii0.53/)
The
shares and net loss per common share, prior to the Colonnade Merger, have been retroactively restated as shares reflecting the exchange ratio of approximately i0.703 shares of the Company per one share of OTI as established in the Colonnade Merger Agreement.
The weighted average number of shares used to compute basic and diluted net loss per share excludes unvested early exercised common stock options subject to repurchase.
/i
The
following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
Vested
and early exercised options subject to nonrecourse notes
i—
i2,172,238
Total
i57,223,717
i49,694,372
/
Note
11. iIncome Taxes
The Company’s income tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in the quarter. The Company’s effective tax rate differs from the U.S. statutory tax rate primarily due
to valuation allowances on the deferred tax assets as it is more likely than not that some, or all, of the Company’s deferred tax assets will not be realized. The Company continues to maintain a full valuation allowance against its net deferred tax assets. Due to tax losses and the offsetting valuation allowance, the income tax provision for the three and nine months ended September 30, 2022 and 2021 was not material to the Company’s condensed consolidated financial statements.
Revenue from the sale of lidar sensor kits, which is recognized at a point in time, was $i11.2
million and $i7.8 million in the three months ended September 30, 2022 and 2021, respectively, and $i30.1
million and $i21.7 million in the nine months ended September 30, 2022 and 2021, respectively.
i
The
following table presents total revenues by geographic area based on the location products were shipped to and services provided (in thousands):
See Note 5, Debt for details of promissory notes issued by the Company to certain investors of the Company (or an affiliate thereof).
SeeNote 9, Stock-based compensation for details of partial recourse promissory notes
issued by the Company to certain executives and employees.
Note 14. iSubsequent events
Velodyne Merger
On November 4, 2022, the
Company, Velodyne Lidar, Inc., a Delaware corporation (“Velodyne”), Oban Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of the Company (“Merger Sub I”) and Oban Merger Sub II LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of the Company (“Merger Sub II”), entered into an Agreement and Plan of Merger (the “Velodyne Merger Agreement”). Pursuant to the Velodyne Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, Merger Sub I shall be merged with and into Velodyne (the “Velodyne First Merger”), with Velodyne surviving as a wholly owned subsidiary of the
Company (the “Surviving Corporation”) and as soon as practicable following the First Merger, the Surviving Corporation will be merged with and into Merger Sub II with Merger Sub II surviving as a wholly owned subsidiary of the Company (the “Velodyne Second Merger”, and together with the First Merger, the “Velodyne Mergers”).
The board of directors of each of the Company and Velodyne has unanimously approved the Velodyne Merger Agreement and the transactions contemplated thereby. The Velodyne Mergers are subject to customary closing conditions including stockholder approval by both companies. Both companies will continue to operate their businesses independently until the close of the Velodyne Merger. The Velodyne Mergers are expected
to be completed in the first half of 2023.
Merger Consideration
At the effective time of the Velodyne Mergers (the “Effective Time”), (i) each share of common stock, par value $i0.0001 per share, of Velodyne (“Velodyne Common Stock”) issued and outstanding immediately prior to the Effective Time (other than the shares that are owned by Velodyne, Ouster, Merger Sub I or Merger Sub II or any wholly owned subsidiary of Velodyne, Ouster, Merger Sub I or Merger Sub II) will be converted
into the right to receive i0.8204 (the “Exchange Ratio”) validly issued, fully paid and non-assessable shares of common stock of the Company (such shares the “Velodyne Common Stock Merger Consideration”) and (ii) each share of preferred stock, par value $i0.0001
per share, of Velodyne (“Velodyne Preferred Stock”) issued and outstanding immediately prior to the Effective Time (other than the shares that are owned by Velodyne, Ouster, Merger Sub I or Merger Sub II or any wholly owned subsidiary of Velodyne, Ouster, Merger Sub I or Merger Sub II) will be cancelled for ino consideration. iNo
fractional shares of the Company’s common stock will be issued in the Velodyne Mergers, and Velodyne stockholders will receive cash in lieu of any fractional shares as part of the Velodyne Common Stock Merger Consideration, as specified in the Velodyne Merger Agreement.
The Exchange Ratio will result in Velodyne common stockholders and the Company’s common stockholders owning approximately i50%
and i50%, respectively, of the outstanding shares of Ouster Common Stock following the Effective Time, based on shares outstanding as of the date of the Velodyne Merger Agreement.
Voting Agreements
Simultaneously with the execution of the Velodyne Merger Agreement, Velodyne entered into Voting and Support Agreements (the “Velodyne Voting and Support Agreement”) with its directors and officers,
and Ouster entered into voting and support agreements with Banyan Venture Holdings and its directors and officers (the “Ouster Voting and Support Agreements”).
Pursuant to the Ouster Voting and Support Agreements, Banyan Venture Holdings and Ouster’s directors and officers have agreed, among other things, to vote their respective shares in favor of the adoption of the Velodyne Merger Agreement. Pursuant to the Velodyne Voting and Support Agreements, Velodyne’s directors and officers have agreed, among other things, to vote their respective shares in favor of the adoption of the Velodyne Merger Agreement.
Loan and Security Agreement
On October 17, the Company drew down $i20.0 million
available under the Loan and Security Agreement, dated April 29, 2022, by and between Ouster, Sense Photonics, Inc. and Hercules Capital, Inc. (as amended from time to time, the “Hercules Loan Agreement”).
In contemplation of entry into the Velodyne Merger Agreement, on November 1, 2022, the Company entered into the Consent and Second Amendment to Loan and Security Agreement (the “Hercules Amendment”), amending the Hercules Loan Agreement. Pursuant to the terms of the Hercules Amendment, the financial covenant requiring Ouster to achieve certain trailing itwelve
month revenue thresholds commencing with the quarter ending June 30, 2023 will be eliminated and replaced, contingent upon and effective as of the closing of the Velodyne Mergers, with a minimum liquidity financial covenant whereby the Company must maintain at least $i60.0 million of cash in deposit accounts that are subject to an account control agreement in
favor of Hercules.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the results of operations and financial condition of Ouster, Inc. (“we,”“us,”“our,” the “Company,”“Ouster”) should be read in conjunction with the information set forth in our condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q, as well as our audited consolidated financial
statements and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ouster’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Ouster’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in Ouster’s Annual Report on Form 10-K dated and filed with the SEC on February 28, 2022, as may be updated from time to time in the Company’s other filings with the SEC.
On
December 21, 2020, Ouster Technologies, Inc. (“OTI”, and prior to the Colonnade Merger defined below, named Ouster, Inc.) entered into an Agreement and Plan of Merger (the “Colonnade Merger Agreement”) with Colonnade Acquisition Corp., a Cayman Islands exempted company (“CLA” with CLA after the transactions pursuant to the Colonnade Merger Agreement being referred to as the “Company”), and Beam Merger Sub, Inc. (“Beam Merger Sub”), a Delaware corporation and subsidiary of CLA. OTI’s and CLA’s board of directors unanimously approved OTI’s entry into the Colonnade Merger Agreement, and on March 11, 2021, the transactions contemplated by the Colonnade Merger Agreement were consummated (all such transactions, the “Colonnade Merger”), as further
described below.
Unless the context otherwise requires, references in this subsection to “we”, “our” and “the Company” refer to the business and operations of OTI (formerly known as Ouster, Inc.) and its consolidated subsidiaries prior to the Colonnade Merger and to Ouster, Inc. (formerly known as Colonnade Acquisition Corp.) and its consolidated subsidiaries following the consummation of the Colonnade Merger.
Overview
We are a leading
provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, allowing each to understand and visualize the surrounding world and ultimately enabling safe operation and autonomy. We design and manufacture digital lidar sensors that we believe are the highest-performing, lowest-cost lidar solutions available today across each of our four target markets: industrial automation; smart infrastructure; robotics; and automotive. We shipped sensors to approximately 680 customers in the twelve months ended September 30, 2022.
Our digital lidar sensors leverage a simplified architecture based on two semiconductor chips and are backed by a suite of patent-protected technology. We have heavily invested in patents since our inception, pursuing comprehensive coverage of invention families and use cases, with
broad international coverage. We believe that our extensive patent coverage creates material barriers to entry for anyone aiming to compete in the digital lidar space.
Our product offering today includes our OS scanning product line and our DF solid-state product line. With our unique digital lidar technology, we offer numerous customization options across our products, all enabled by flexible technology and embedded software. Today, we offer short, medium, and long-range lidar products at varying price points and with tailored capabilities to meet the different needs of our diverse customer base.
We believe the simplicity of our digital lidar design gives us a meaningful advantage in costs related to manufacturing, supply chain and production yields. The same digital lidar components underpin our entire product portfolio, which we believe drives economies of scale in our supply chains.
With virtually unlimited software-defined products driving low-cost customization, we are able to increase stock keeping units (“SKUs”) for industry-specific applications, expanding our product offering with minimal manufacturing or inventory changes. We currently offer many different software-defined product SKUs, all based on this common architecture and shared core componentry. Additionally, by outsourcing to our manufacturing partner, Benchmark Electronics, Inc. (“Benchmark”), we are able to successfully expand our manufacturing capacity. Benchmark manufactures our products at its facility in Thailand, which we expect will reduce our product costs and allow us to rapidly scale production to meet our anticipated product demand. Based on cost quotes for our products in mass production, we believe our manufacturing costs to be lower than certain of our competitors, and we expect our manufacturing costs per unit to decrease further with higher volumes.
We
have won and are actively negotiating several multi-year sales contracts, including certain Strategic Customer Agreements (“SCAs”), which establish a multi-year purchase and supply framework for Ouster and the customer, and include details about customer programs and applications where the customer intends to use Ouster products. SCAs also include multi-year non-binding customer forecasts (typically of three to five years in length) giving Ouster visibility to the customer's long-
term purchasing requirements, mutually agreed upon pricing over the duration of
the agreement, and, in certain cases, include multi-year binding purchase commitments.
We founded Ouster in 2015 with the invention of our high-performance digital lidar. Since then, we have grown to approximately 290 employees serving approximately 680 customers globally in the twelve months ended September 30, 2022. To continue to grow our business in the coming years, we have expanded and plan to continue to expand our sales and marketing efforts and our software development capabilities, and to accelerate sensor development efforts. We are headquartered in San Francisco, CA.
Merger with Velodyne Lidar, Inc.
On November 4, 2022, we, Velodyne Lidar, Inc. (“Velodyne”), Oban Merger Sub, Inc., and Oban Merger Sub II LLC entered into
an Agreement and Plan of Merger (the “Velodyne Merger Agreement”). Pursuant to the Velodyne Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, the parties have agreed that we will merge with Velodyne in an all-stock transaction (the “Velodyne Merger”). Under the terms of the agreement, each Velodyne share of common stock will be exchanged for 0.8204 shares of Ouster common stock at closing. The transaction will result in existing Velodyne and Ouster stockholders each owning approximately 50% of the combined company.
Simultaneously with the execution of the Velodyne Merger Agreement, Velodyne entered into a Voting and Support Agreement (the “Velodyne Voting and Support Agreement”) with its directors and officers, and we entered into a voting and support agreement with Banyan
Venture Holdings and our directors and officers (the “Ouster Voting and Support Agreement”).
Pursuant to the Ouster Voting and Support Agreement, Banyan Venture Holdings and our directors and officers have agreed, among other things, to vote their respective shares in favor of the adoption of the Velodyne Merger Agreement. Pursuant to the Velodyne Voting and Support Agreement, Velodyne’s directors and officers have agreed, among other things, to vote their respective shares in favor of the adoption of the Velodyne Merger Agreement.
The Velodyne Merger is subject to customary closing conditions including stockholder approval by both companies. Both companies will continue to operate their businesses independently until the close of the Velodyne Merger. The Velodyne Merger is expected to be completed in the first half of 2023.
For
additional information regarding the terms of the Velodyne Merger, see Note 14, Subsequent Events to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
REV7 Product Launch
On October 19, 2022, we announced the launch of our newest OS series scanning sensors, REV7, powered by our next-generation L3 chip. REV7 features the all-new OSDome sensor, as well as upgraded OS0, OS1, and OS2 sensors that deliver double the range, enhanced object detection, increased precision and accuracy, and greater reliability. The new REV7 sensors offer performance upgrades that we believe will enhance Ouster’s market opportunity, driven by new opportunities for longer-range and mapping applications.
Merger Agreement with Colonnade Acquisition Corp. and Beam
Merger Sub, Inc.
On December 21, 2020, OTI entered into the Colonnade Merger Agreement with CLA, and Beam Merger Sub, a subsidiary of CLA. OTI’s and CLA’s board of directors unanimously approved OTI’s entry into the Colonnade Merger Agreement, and on March 11, 2021, the transactions contemplated by the Colonnade Merger Agreement were consummated. Pursuant to the terms of the Colonnade Merger Agreement, (i) CLA domesticated as a corporation incorporated under the laws of the State of Delaware (the “Domestication”) and changed its name to “Ouster, Inc.” (with CLA after such domestication and the other transactions pursuant to the Colonnade Merger Agreement being referred to as the “Company”) and (ii) Beam Merger Sub merged with and into OTI (the “Colonnade Merger”), with OTI surviving the Colonnade
Merger.
As a result of and upon the effective time of the Domestication, among other things, (1) each of the then issued and outstanding 5,000,000 CLA Class B ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class B ordinary shares”) converted automatically, on a one-for-one basis, into a CLA Class A ordinary share (as defined below), (2) immediately following the conversion described in clause (1), each of the then issued and outstanding 25,000,000 Class A ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class A ordinary shares”), converted automatically, on a one-for-one basis, into a share of common stock, par value $0.0001 per share, of Ouster (the “Ouster common stock”), (3) each of the then issued and outstanding 10,000,000 redeemable warrants of CLA (the “CLA warrants”) converted automatically into a redeemable warrant
to purchase one share of Ouster common stock (the “Public warrants”) pursuant to the Warrant Agreement, dated August 20, 2020 (the “Warrant Agreement”), between CLA and Continental Stock Transfer & Trust Company (“Continental”), as warrant agent, and (4) each of the then issued and outstanding units of CLA that had not been previously separated into the underlying CLA Class A ordinary shares and underlying CLA warrants upon the request of the holder thereof (the “CLA units”), were cancelled and entitled the holder thereof to one share of Ouster common stock and one-half of one Public warrant, and (5) each of the then issued and outstanding 6,000,000 private placement warrants of CLA (the “Private Placement warrants”) converted automatically into a Public warrant pursuant to the Warrant Agreement. No fractional Public
warrants were issued upon separation of the CLA units.
Immediately prior to the effective time of the Colonnade Merger, (1) each share of OTI’s Series B Preferred Stock, par value $0.00001 per share (the “OTI Preferred Stock”), converted into one share of common stock, par value $0.00001 per share, of OTI (the “OTI common stock” and, together with OTI Preferred Stock, the “OTI Capital Stock”) (such conversion, the “OTI Preferred Conversion”) and (2) all of the outstanding warrants to purchase shares of OTI Capital Stock were exercised in full or terminated in accordance with their respective terms (the “OTI Warrant Settlement”).
As a result of and upon the closing of the Colonnade Merger, among other things, all shares of OTI Capital Stock (after giving effect to the OTI Warrant Settlement) outstanding immediately prior to
the closing of the Colonnade Merger together with shares of OTI common stock reserved in respect of options to purchase shares of OTI common stock and restricted shares of OTI common stock (together, the “OTI Awards”) outstanding immediately prior to the closing of the Colonnade Merger that were converted into awards based on Ouster common stock, were cancelled in exchange for the right to receive, or the reservation of, an aggregate of $1.5 billion of shares of Ouster common stock (at a deemed value of $10.00 per share), which, in the case of OTI Awards, were shares underlying awards based on Ouster common stock, representing a fully-diluted pre-transaction shares. Upon the closing of the Colonnade Merger, the Company received gross proceeds of $299.9 million from the Colonnade Merger and private offering, offset by $8.5 million of pre-merger costs relating to CLA and transaction
costs of $26.6 million.
Sense Acquisition
On October 22, 2021, we completed the acquisition of Sense Photonics, Inc. (“Sense”). Under the terms of the merger agreement, we acquired 100% of Sense and all of its property for approximately 10 million shares of Ouster common stock or approximately $63.0 million in equity value based on the closing price of $6.55 per share as of the day the transaction closed on October 22, 2021, inclusive of 0.8 million shares underlying assumed options, after closing adjustments. This acquisition is expected to help Ouster expand its presence in the automotive vertical by executing on our hiring goals and product roadmap on a faster timeline.
COVID-19
Impact
Our suppliers who are located worldwide, including some of our key suppliers, have been affected by the novel coronavirus (“COVID-19”) pandemic, resulting in persistent supply chain disruptions. We have been experiencing unfavorable purchase price variance and situational expedite fees in order to meet production and delivery timelines. While we may experience additional and new pressures on our supply chain that may or may not be related to the pandemic, we have been actively taking steps to mitigate the impact of the materials shortages on our business.
Some customers have delayed their orders and production schedules. In spite of what appears to be a “return-to-normal” in several regions, the pandemic continues to evolve, and the full extent to which it will directly or indirectly impact our business, results of operations and financial condition, including
sales, expenses, reserves and allowances, manufacturing, research and development costs and personnel-related costs, will depend on future developments that are uncertain, including new information that may emerge concerning COVID-19, the impact of new variants and sub-variants and the actions taken to contain, prevent or treat COVID-19, rate and success of vaccination efforts, vaccination reticence, resurgence of the pandemic in areas where we, Benchmark or our suppliers operate, and the economic impact on local, regional, national and international customers and markets.
Because the situation remains uncertain and hard to predict, the COVID-19 pandemic may have a material negative impact on our future results.
Supply Chain Continuity. Beginning in 2021, a surge in demand for electronics containing semiconductor chips and stockpiling of chips by certain companies created disruptions in the supply chain, which continue to persist and have resulted in a global chip shortage impacting our industry. Some chip manufacturers continue to estimate that this supply shortage may continue through the end of 2023. These chip manufacturers are working to increase capacity in the future, and we are managing our inventory and working closely with our regular suppliers and customers to minimize the potential impacts of any supply shortages including by securing additional inventory. While we do not expect the shortage to have a material near-term impact on our ability to meet existing demand for our current products, the shortage
adversely impacted our gross margins for the year ended December 31, 2021 and the nine months ended September 30, 2022 and may continue to do so. We anticipate fluctuation in our cost of goods sold over the next 12-15 months as a result of ongoing supply chain constraints. These constraints have caused and may in the future cause us to implement certain temporary price surcharges. Over time, we expect our overall average selling prices to decline as our volume increases. If our mitigating efforts are not successful or the shortage continues or worsens in ways we did not anticipate, our ability to supply or improve our current products as well as our development and rollout of future products could also be adversely affected.
Commercialization of Lidar Applications. We believe that lidar is approaching
its inflection point of adoption across our target end market applications, and that we are well-positioned to capitalize on this market adoption. However, as our customers continue research and development projects to commercialize semi-autonomous solutions that rely on lidar technology, it is difficult to estimate the timing of ultimate end market and customer adoption. As a result, we expect that our results of operations, including revenue and gross margins, will continue to fluctuate on a quarterly and annual basis for the foreseeable future. As the market for lidar solutions matures and more customers reach a commercialization phase with solutions that rely on our technology, the fluctuations in our operating results may become less pronounced. Nonetheless, our revenue may not grow as we expect unless and until more customers commercialize their products and lidar technology becomes more prevalent across our target end markets.
Number
of Customers in Production. For certain strategic customers and markets, our products must be integrated into a broader platform, which then must be tested, validated, and achieve system-level performance and reliability thresholds that enable commercial production and sales. The time necessary to reach commercial production varies from six months to seven years, based on the market and application. For example, the production cycle in the automotive market tends to be substantially longer than in our other target markets, including industrial automation, smart infrastructure and robotics. It is critical to our future success in each of our target end markets that our customers reach commercial production and sales and that they select our products in their commercial production applications. Because the timelines to reach production vary significantly and the revenue generated by each customer in connection with commercial production and sales
is unpredictable, it is difficult for us to reliably predict our financial performance.
Customers’ Sales Volumes. Our customer base is diversified and we intend to penetrate into diverse end markets to increase our sales volumes. Ultimately widespread adoption of our customers’ products that incorporate our lidar solutions will depend on many factors, including the size of our customers’ end markets, end market penetration of our customer’s products that incorporate our digital lidar solutions, our end customers’ ability to sell their products, and the financial stability and reputation of the customers. We believe our sales volume by customer depends on the end market demand for our customers’ products that incorporate our digital lidar solutions as well as our ability to grow our sales force.
Average Selling Prices (“ASPs”), Product Costs and Margins.
Our product costs and gross margins depend largely on the volumes of sensors sold and the number and variety of solutions we provide to our customers. We expect that our selling prices will vary by target end market and application due to market-specific supply and demand dynamics. We expect to continue to experience some downward pressure on margins from signing anticipated large multi-year agreements (including our SCAs) in the near term with multi-year negotiated pricing, as well as the supply chain constraints discussed above. We expect that these customer-specific selling price fluctuations combined with our volume-driven product costs may drive fluctuations in revenue and gross margins on a quarterly basis. However, notwithstanding any short-term price surcharges on our products, we expect that over time our volume-driven product costs will lead to gross margin improvement as our sales volume increases.
Competition.
Lidar is an emerging market, and there are competitors for the growing market. Competitors may offer lidar products at lower prices than ours, including pricing that may be below their cost, or may offer superior performing lidar products. These companies also compete with us indirectly by attempting to solve some of the same challenges with different technology. Established competitors in the market for lidar sensors have significantly greater resources and more experience than we do. These competitors have commercialized lidar technology that has achieved market adoption, strong brand recognition and may continue to improve in both anticipated and unanticipated ways. They may also enter, and have entered, into commercial relationships with key customers and potential customers and have built relationships and dependencies between themselves and those key customers and potential customers. This has created downward pressure on our ASPs,
particularly in the Asia and Pacific region. We expect this pressure to continue to push our ASPs lower in the coming years. However, we believe that because of our complementary metal-oxide-semiconductor (“CMOS”), digital lidar technology, we are in the position to scale more rapidly than our analog competitors and leverage our scale to deliver positive gross margins.
Continued Investment and Innovation. We believe that we are a leading digital lidar provider. Our financial performance is significantly dependent on our ability to maintain this leading position which is further dependent on the investments we make in research and development. We believe it is essential that we continue to identify and respond to rapidly evolving customer requirements, including successfully realizing our product roadmap.
If we fail to continue our innovation, our market position and revenue may be adversely affected, and our investments in that area will not be recovered.
Market Trends and Uncertainties. We anticipate robust demand for our digital lidar solution. We estimate a multibillion-dollar total addressable market (“TAM”) for our solutions in the near future. We define our TAM as automation applications in the industrial, smart infrastructure, robotics and automotive end markets where we actively engage and maintain customer relationships. Each of our target markets is potentially a significant global opportunity, and these markets have historically been underserved by limited or inferior technology or not served at all. We believe we are well positioned in our market as a leading provider of high-resolution digital lidar sensors.
Although increasing adoption
of semi-autonomous solutions that rely on lidar technology may generate higher demand, we may not be able to take advantage of demand if we are unable to anticipate regulatory changes and adapt quickly enough to meet such new regulatory standards or requirements applicable to us or to our customers’ products in which our digital lidar sensors are used. Market acceptance of semi-autonomous solutions and active safety technology depend upon many factors, including cost, performance, safety, regulatory requirements and international taxes or tariffs related to such technologies. These factors may impact the ultimate market acceptance of our lidar technology.
International Expansion. We view international expansion as an important element of our strategy to increase revenue and achieve profitability. We continue to position ourselves in geographic markets that we expect to serve as important sources of future
growth. We have an existing presence in three regions: North and South America; Asia and Pacific; and Europe, Middle East and Africa. We intend to expand our presence in these regions over time including through distribution partnerships. Expanded global reach will require continued investment and may expose us to additional foreign currency risk, international taxes and tariffs, legal obligations and additional operational costs, risks and challenges that may impact our ability to meet our projected sales volumes, revenue and gross margins.
Components of Results of Operations
Revenue
The majority of our revenue comes from the sale of our digital lidar sensors and accessories both directly to end users and through distributors
domestically and internationally. We recognize revenue from product sales when the performance obligation of transferring control of the product to the customer has been met, which is generally when the product is shipped. We also recognize revenue by performing services related to product development and validation, and shipping; however, we do not expect product development and validation and license and services to be material components of revenue, cost of revenue or gross margin in the foreseeable future. Performance obligations related to services are generally recognized over time, based on cost-to-cost input basis or straight-line over time. Amounts billed to customers related to shipping and handling are classified as product revenue, and we have elected to recognize the cost of shipping activities that occur after control has transferred to the customer as a fulfillment cost rather than a separate performance obligation. All related costs are accrued and recognized
within cost of revenue when the related revenue is recognized.
Most of our customers are currently in the evaluation or early research and development (“R&D”) stage with our products. Currently, our product revenue consists of both customers ordering small volumes of our products that are in an evaluation phase and customers that order larger volumes of our products and have more predictable long-term production schedules. However, we are still at the very beginning of the lidar adoption curve, and some customers are still learning their ramp rates which can impact the timing of purchase orders quarter to quarter. As we grow our business, we expect to improve predictability into our customers’ needs and timelines, and expect the timing of orders will have a less notable impact on our quarterly results. Over the coming years, as more of our customers move into their respective production phases, we expect the majority
of our product revenue to shift to larger volume orders based on predictable production schedules.
Cost of revenue consists of the manufacturing cost of our digital lidar sensors, which primarily consists of sensor components, personnel-related costs directly associated with our manufacturing organization, and amounts paid to our third-party contract manufacturer and vendors. Our cost of revenue also includes depreciation of manufacturing equipment, an allocated portion of overhead, facility and IT costs,
stock-based compensation for manufacturing personnel, reserves for estimated warranty expenses, excess and obsolete inventory and shipping costs.
Gross Profit and Gross Margin
Our gross profit equals total revenues less our total cost of revenues, and our gross margin is our gross profit expressed as a percentage of total revenue. Subject to quarterly fluctuations and volatility, we expect unit costs to improve as we manufacture higher unit volumes of sensors and a greater portion of our sensors are produced by our contract manufacturer in Thailand.
Operating Expenses
Research and Development Expenses
R&D activities are primarily conducted at our San
Francisco based headquarters and our additional R&D facility in Edinburgh, Scotland and consist of the following activities:
•Design, prototyping, and testing of proprietary electrical, optical, and mechanical subsystems for our digital lidar products;
•Robust testing for industrial and autonomous vehicle safety certifications;
•Development of new products and enhancements to existing products in response to customer requirements including firmware development and software development of lidar integration products;
•Custom system-on-a-chip (“SoC”) design for Ouster’s digital lidar products; and
•Development of custom manufacturing
equipment.
R&D expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly involved in R&D activities, third-party engineering and contractor costs, and prototype expenses.
R&D costs are expensed as they are incurred. We expect our investment in R&D will continue to grow as we invest in new lidar technology and related software; however, we expect R&D as a percentage of revenue to decrease annually as our business grows.
Sales and Marketing Expenses
Our business development, customer support and marketing teams are located in offices worldwide. Selling and marketing expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly
involved in business development, customer support, and marketing activities, and marketing expenses including trade shows, advertising, and demonstration equipment. We expect that our investment in sales and marketing will continue to grow as we continue to expand our sales team globally, and our absolute amount of sales and marketing expenses will grow over time. We expect sales and marketing spend as a percentage of revenue to decrease over time as our business grows.
General and Administrative Expenses
General and administrative expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, of our executives and members of the board of directors, finance, human resource, IT, and legal departments as well as fees related to legal fees, patent prosecution, accounting, finance and professional services, insurance, and bank fees. We expect
our absolute amount of general and administrative expense will grow over time; however, we expect the general and administrative spend as a percentage of revenue to decrease annually as our business grows. Near term increases in general and administrative expenses are expected to be related to hiring more personnel and consultants to support our growing international expansion and compliance with the applicable provisions of U.S. generally accepted accounting principles and other SEC rules and regulations.
We measure stock options granted based on the fair value on the date of the grant
and recognize compensation expense of those awards, over the requisite service period, which is the vesting period of the respective award. Forfeitures are accounted for as they occur. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The grant date fair value of restricted stock unit awards is based on the grant date share price.
Interest Income, Interest Expense, and Other Income (Expense), Net
Interest income consists primarily of income earned on our cash and cash equivalents. These amounts will vary based on our cash and cash equivalents balances and market rates. Interest expense consists primarily of interest on our debt and convertible notes and amortization of debt issuance costs and discount. Other income (expense), net consists primarily of realized and unrealized gains and losses on foreign currency
transactions and balances, the change in fair value of financial instruments, including warrants issued in connection with a debt agreement, and private placement warrants acquired as part of the Colonnade Merger.
Income Taxes
Our income tax provision consists of federal, state and foreign current and deferred income taxes. Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in the quarter. Our effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on its deferred tax assets as it is more likely than not that some, or all, of our deferred tax assets will not be realized. We continue to maintain a full valuation allowance against its net deferred tax assets. Income tax provision for the three and nine months ended September 30,
2022 and 2021, respectively, was not material to the Company’s condensed consolidated financial statements.
Results of Operations:
The following table sets forth our condensed consolidated results of operations data for the periods presented:
The following table sets forth the components of our condensed consolidated statements of operations and comprehensive loss data as a percentage of revenue for the periods presented:
Product revenue increased by $3.4 million, or 44%, to $11.2 million for the three months ended September 30, 2022 from $7.8 million for the comparable period in the prior year. The increase in product revenue was driven by a 31% increase in volume which we attribute primarily to the global expansion of our sales team and the increase of high volume, long-term agreements as some of our customers begin to move into a production stage with their autonomous products. Our average selling price increased by 11% when compared to the comparable period in the prior year.
Geographic Locations
Revenue increased across the geographic regions of North and South America, excluding the United States; Asia and Pacific; and Europe, Middle East and Africa as compared to the comparable period in the
prior year. The revenue increases in those geographic regions was primarily attributable to our continued focus and investment in our global sales team and an expansion in the demand of our existing customers as 13% of our revenue was from new customers during the three months ended September 30, 2022. We specifically saw large growth in the Europe, Middle East and Africa as several of our customers with whom we have strategic customer agreements (SCAs) made production buys in the three months ended September 30, 2022. The United States product revenue remained relatively flat period-over-period.
Cost of Product Revenue and Gross Margin
Three
Months Ended September 30,
Change
Change
2022
2021
$
%
(dollars in thousands)
Cost
of product revenue
$
7,488
$
5,879
$
1,609
27
%
Cost
of product revenue increased by $1.6 million, or 27%, to $7.5 million for the three months ended September 30, 2022 from $5.9 million for the comparable period in the prior year. The increase in cost of product revenue was primarily attributable to increases related to volume of $1.1 million in material, manufacturing, and freight costs, $1.7 million general increases per unit in material, manufacturing, and freight costs associated with rising prices from inflation and the ongoing global supply chain shortages. The increases were partially offset by a decrease of $1.2 million in purchase price variance as we invested in securing material in response to the global supply chain shortages in the previous periods.
Product gross margin increased from 24% for the three months ended September 30, 2021 to 33% for the three months ended
September 30, 2022. The increase in product gross margin was due to the 11% increase in average selling price and 3% favorable decrease in cost of product revenue per unit.
Research and development expenses increased by $8.8 million, or 105%, to $17.2 million for the three months ended September 30, 2022 from $8.4 million for the comparable period in the prior year. The increase was primarily attributable to an increase of $1.4 million in stock-based compensation expense, $3.4 million in payroll-related expenses, $0.6 million in depreciation and amortization expense, $2.7 million increase in contractor, prototype, and equipment costs related to product development, and $0.7 million in other materials and supplies, facilities, professional fees and other miscellaneous costs attributable to research and development functions. The increase in employee-related costs was mainly due to the higher headcount associated with the Sense Photonics, Inc. acquisition.
Sales and Marketing
Sales
and marketing expenses increased by $1.8 million, or 27%, to $8.5 million for the three months ended September 30, 2022 from $6.7 million for the comparable period in the prior year. The increase was primarily attributable to an increase of $1.1 million in payroll and personnel-related costs, $0.2 million in stock-based compensation expense driven by the addition of sales personnel in all our global regions and $0.5 million in professional, travel and other costs related to sales and marketing activities.
General and Administrative
General and administrative expenses decreased by $0.1 million, or 0.5%, to $14.0 million for the three months ended September 30, 2022 from $14.1 million for the comparable period in the prior year. The change was primarily attributable to an increase of
$0.5 million in payroll and personnel-related costs, $0.5 million in depreciation expenses and $0.6 million in office, facility and other expenses, $0.6 million in litigation costs, partially offset by a decrease of $0.5 million in stock-based compensation expenses, and $1.8 million in professional services fees.
Interest Income, Interest Expense and Other Income (Expense), Net
Three
Months Ended September 30,
Change
Change
2022
2021
$
%
(dollars in thousands)
Interest income
$
733
$
165
$
568
344
%
Interest
expense
(699)
—
(699)
*
Other income (expense), net
61
14,490
(14,429)
(100)
*Not meaningful
The
increase in interest income was primarily attributable to improved cash management activities to earn a higher yield on excess cash and cash equivalent balances.
Interest expense was $0.7 million for the three months ended September 30, 2022 relating to term loan borrowings and amortization of debt issuance costs and discount under our Loan Agreement (as defined below). There was no interest expense in the three months ended September 30, 2021 as we did not have outstanding debt in that period.
Other income (expense), net was $0.1 million for the three months ended September 30, 2022 compared to $14.5 million for the comparable period in the prior year. During the three months ended September
30, 2022, we recorded a gain of $0.2 million for the fair value change of the private placement warrant liability. During the comparable period in the prior year, we recorded a loss of $14.5 million for the fair value change of the private placement warrant liability.
We were subject to income taxes in the United States, California, and miscellaneous foreign jurisdictions for the three months ended September 30, 2022 and 2021. Our income tax expense for three months ended September
30, 2022 and 2021 was not material to our condensed consolidated financial statements.
Product revenue increased by $8.4 million, or 39%, to $30.1 million for the nine months ended September 30, 2022 from $21.7 million for the comparable period in the prior year. The increase in product revenue was driven by an increase in volume of 40%, which we attribute primarily to the global expansion of our sales team and the increase of high volume, long-term deals as some of our customers begin to move into a production stage with their autonomous products. Our average selling price declined by 1% when compared to the comparable period in the prior year.
Geographic Locations
Revenue increased across the geographic regions of the United States; North and South America, excluding the United States; Asia and Pacific; and Europe, Middle East and Africa by $1.4 million, $0.2
million, $2.1 million, and $4.7 million, respectively, as compared to the comparable period in the prior year. The revenue increases in those geographic regions were a result of our continued focus and investment in our global sales team and an expansion in the demand of our existing customers since only 22% of our revenue was from new customers during the nine months ended September 30, 2022.
Cost of Product Revenue and Gross Margin
Nine
Months Ended September 30,
Change
Change
2022
2021
$
%
(dollars in thousands)
Cost
of product revenue
$
21,002
$
16,212
$
4,790
30
%
Cost
of product revenue increased by $4.8 million, or 30%, to $21.0 million for the nine months ended September 30, 2022 from $16.2 million for the comparable period in the prior year. The increase in cost of product revenue was primarily due to an increase of $0.9 million in purchase price variance due to the supply chain shortage, increases related to volume of $2.4 million in material costs, $0.2 million in freight costs and $1.8 million in manufacturing overhead costs. The increases were partially offset by a decrease of $0.5 million in per unit costs of materials, labor and overhead and other costs related to product revenue.
Product gross margin increased from 25% for the nine months ended September 30, 2021 to 30% for the nine months ended September 30, 2022. The increase in
product gross margin was primarily due to the 8% decrease in cost per unit partially offset by the 1% decrease in average selling price.
Research and development expenses increased by $29.4 million, or 150%, to $49.0 million for the nine months ended September 30, 2022 from $19.6 million for the comparable period in the prior year. The increase was primarily attributable to an increase of $12.3 million in payroll and benefits related costs, $6.5 million in stock-based compensation expense, $6.8 million in contractor, prototype, and equipment costs related to product development, $1.9 million in depreciation and amortization expense, and $1.9 million in other materials and supplies, facilities, professional fees and other miscellaneous costs attributable to research and development functions. The increase in employee-related costs was mainly due to the higher headcount associated with the Sense Photonics, Inc. acquisition.
Sales and Marketing
Sales
and marketing expenses increased by $8.4 million, or 57%, to $23.2 million for the nine months ended September 30, 2022 from $14.8 million for the comparable period in the prior year. The increase was primarily attributable to an increase of $5.1 million in payroll and personnel-related costs, $2.6 million in stock-based compensation expense driven by the addition of sales personnel in all our global regions, as well as a $0.7 million increase in other expenses associated with our marketing and business development programs.
General and Administrative
General and administrative expenses increased by $4.1 million, or 11%, to $40.3 million for the nine months ended September 30, 2022 from $36.2 million for the comparable period in the prior year. The increase was primarily due to an
increase of $3.1 million in payroll and personnel-related costs, $1.2 million in insurance premiums, $1.6 million in depreciation expenses, $1.2 million in litigation costs and $2.2 million in office, facility and other expenses, partially offset by a decrease of $2.9 million in stock-based compensation expenses and $2.3 million in professional services fees.
Interest Income, Interest Expense and Other Income (Expense), Net
Nine
Months Ended September 30,
Change
Change
2022
2021
$
%
(dollars in thousands)
Interest income
$
1,231
$
305
$
926
304
%
Interest
expense
(1,143)
(504)
(639)
127
Other income (expense), net
7,071
(422)
7,493
(1,776)
Interest income
was $1.2 million for the nine months ended September 30, 2022 compared to $0.3 million for the comparable period in the prior year. The increase in interest income was primarily attributable to improved cash management activities to earn a higher yield on excess cash and cash equivalent balances.
Interest expense was $1.1 million for the nine months ended September 30, 2022 compared to $0.5 million for the comparable period in the prior year. We recorded interest expense on our debt and amortization of debt issuance costs and discount in the nine months ended September 30, 2022 relating to term loan borrowings and amortization of debt issuance costs and discount under our Loan and Security Agreement. Interest expense recorded in the nine months ended September
30, 2021 primarily consisted of interest and amortization of debt issuance cost and discount on the loan and security agreement with Runway Growth Credit and Fund Inc., which was terminated on March 26, 2021.
Other income (expense), net was $7.1 million of income for the nine months ended September 30, 2022 compared to $(0.4) million in expense for the comparable period in the prior year. During the nine months ended September 30, 2022, we recorded a gain of
$7.4 million for the fair value change of private placement warrant liability. During the nine months ended September 30, 2021, we recorded a loss of $8.8 million for the fair value change of redeemable convertible preferred stock warrant liability and a gain of $8.4 million for the fair value change of private placement warrant liability.
Income Taxes
We were subject to income taxes in the United States, California, and miscellaneous foreign jurisdictions for the nine months ended September 30, 2022 and 2021. Our income tax expense for nine months ended September 30, 2022 and 2021 was not material to the
Company’s condensed consolidated financial statements.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, cash generated from product revenues, sales of common stock under our at-the market equity offering program and our Loan Agreement with Hercules Capital, Inc.
Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we develop and grow our business. Prior to the Colonnade Merger, we primarily funded our operations from the net proceeds from sales of our preferred convertible stock and convertible notes, borrowing under
our loan and security agreement with Runway Growth Credit Fund, Inc. and product revenue. Upon closing of the Colonnade Merger, we received gross proceeds of $299.9 million from the Colonnade Merger and private offering, offset by $8.5 million of pre-merger costs relating to CLA and transactions cost of $26.6 million.
On April 29, 2022, we entered into an open market sale agreement with B. Riley Securities, Inc., Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc. (the “ATM Agreement”), pursuant to which we may offer and sell shares of our common stock with an aggregate offering price of up to $150.0 million under an “at the market” offering program. Subject to the terms and conditions of the agreement, we may sell the shares in amounts and at times to be determined by us but we are under no obligation to sell any of the shares. Actual sales, if any, will
depend on a variety of factors to be determined by us from time to time, including, among other things, market conditions, the trading price of our common stock, capital needs and determinations by us of the appropriate sources of its funding. During the nine months ended September 30, 2022, we sold 7,833,709 shares of common stock for net proceeds of $15.8 million under the ATM Agreement. We currently intend to use the net proceeds from the sale of shares pursuant to the ATM Agreement for working capital and general corporate purposes.
On April 29, 2022, we entered into a loan and security agreement (the “Loan Agreement”) with Hercules Capital, Inc. (“Hercules”). The Loan Agreement provides us with a term loan of up to $50.0 million, subject to terms and conditions. $20.0 million was drawn under the Loan Agreement
on April 29, 2022 and an additional $20.0 million was drawn on October 17, 2022. For additional information, see “Debt Arrangements” below.
As of September 30, 2022, we had an accumulated deficit of $399.7 million and cash and cash equivalents of $133.2 million. We have experienced recurring losses from operations, and negative cash flows from operations, and we expect to continue operating at a loss and to have negative cash flows from operations for the foreseeable future. Because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide. We are likely to require additional capital to respond to technological advancements, competitive
dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. In particular, the widespread COVID-19 pandemic and current macroeconomic conditions, including elevated inflation rates and high interest rates, have resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.
As described above, on April 29, 2022, we entered into the Loan Agreement with Hercules, which provides us with a term loan facility of up to $50.0 million, subject to terms and conditions (the “Term Loan Facility”). As of September 30, 2022, $20.0 million has been drawn to date under the Loan Agreement, and can be used for general working capital purposes subject to certain terms and conditions. Subsequent to September 30, 2022 we borrowed an additional $20.0 million. An additional $10.0 million may be drawn on or before June 15, 2023, subject to satisfying certain conditions relating to the achievement of trailing twelve-month revenue and profit
milestones.
In contemplation of entry into the Velodyne Merger Agreement, on November 1, 2022, we entered into a Consent and Second Amendment to Loan and Security Agreement (the “Hercules Amendment”), amending the Loan Agreement. Pursuant to the terms of the Hercules Amendment, the financial covenant requiring us to achieve certain trailing twelve month revenue thresholds commencing with the quarter ending June 30, 2023 will be eliminated and replaced, contingent upon and effective as of the closing of the Velodyne Mergers, with a minimum liquidity financial covenant whereby we must maintain at least $60 million of cash in deposit accounts that are subject to an account control agreement in favor of Hercules.
For additional information regarding the terms of the Loan Agreement,
see Note 5, Debt and Note 14, Subsequent Events.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the condensed consolidated balance sheet as of September 30, 2022, while others are considered future commitments. Our contractual obligations primarily consist of non-cancelable purchase commitments with various parties to purchase goods or services, primarily inventory, entered into in the normal course of business, operating leases and obligations related to the Loan Agreement with Hercules. For information regarding our other contractual obligations, refer to Note 7, Commitments and Contingencies and our Annual
Report on Form 10-K as filed with the SEC on February 28, 2022. If the Velodyne Merger is consummated, we will assume certain of Velodyne’s contractual obligations.
During the nine months ended September 30, 2022, operating activities used $83.3 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of $96.4 million, impacted by our non-cash charges of $28.3 million primarily consisting of stock-based compensation of $25.3 million, a $7.4 million change in fair value of warrant liabilities, depreciation and amortization of $7.1 million, change in right-of-use asset of $2.1 million, interest expense and amortization of debt issuance costs and debt discount of $0.4 million. The changes in our operating assets and liabilities of $15.2 million were primarily due to a decrease in operating lease liability of $2.4 million, an increase in accounts payable of $3.2 million, an increase in accounts receivable of $0.1 million and an increase in accrued and other liabilities of $0.2
million.
During the nine months ended September 30, 2021, operating activities used $45.1 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of $65.6 million, impacted by our non-cash charges of $24.8 million primarily consisting of inventory write down of $0.9 million, interest expense and amortization of debt issuance costs and debt discount of $0.3 million, depreciation and amortization of $3.4 million, change in right-of-use asset of $1.3 million, stock-based compensation of $18.6 million. The changes in our operating assets and liabilities of $4.3 million were primarily due to an increase in accounts receivable of $4.4 million, a decrease of accounts payable of $2.7 million, and an increase in accrued and other current liabilities of $7.1 million.
During the nine months ended September 30, 2022, cash used in investing activities was $2.1 million, which was related to purchases of property, plant and equipment, partially offset by sales of property and equipment.
During the nine months ended September 30, 2021, cash used in investing activities was $1.8 million, which was related to purchases of property, plant and equipment.
Financing Activities
During the nine months ended September 30, 2022, cash provided by financing activities was $35.4 million, consisting primarily of $19.1 million of proceeds from
borrowings, net of debt discount and issuance costs, $16.3 million of proceeds from the issuance of common stock under the ATM Agreement, net of commissions and fees and proceeds from exercise of stock options of $0.4 million.
During the nine months ended September 30, 2021, cash provided by financing activities was $257.8 million, consisting primarily of $291.5 million of proceeds (net of $8.4 million of pre-Colonnade Merger costs relating to CLA) from the Colonnade Merger and PIPE Investment offset by offerings costs of $27.1 million, and proceeds from exercise of stock options of $0.5 million, partially offset by repayment of debt of $7.0 million. There were promissory notes to related parties of $5.0 million that were issued and repaid during the nine months ended September 30, 2021.
Critical
Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended December 31, 2021 except for the addition of deferred debt financing costs as a significant accounting policy, which is described inNote 2 – Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
The preparation of financial statements in conformity
with U.S. GAAP requires us to make estimates and assumptions. Certain of these policies require the application of subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that we believe to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely can result in a material impact on our financial condition and operating results in the current and future periods.
Goodwill Impairment. As of September 30, 2022, the Company with the assistance of third-party valuation specialist
performed an impairment test of goodwill as a result of the decline in market conditions and updated outlook as a result of the impact of market uncertainties that prolonged the sales cycle. The Company’s goodwill valuation was determined based on a discounted future cash flow model (income approach). The Company determined that goodwill was not impaired as of September 30, 2022, however the fair value was not substantially in excess of its carrying value. The estimated fair value of the reporting unit exceeded its carrying value by approximately 4% as of September 30, 2022.
Given this level of fair value, in the event the financial performance of the
Company does not meet expectations in the future or the Company experiences future prolonged market downturns or continued declines in our stock price, worsening trends from the COVID-19 pandemic, or there are other negative revisions to key assumptions, the Company may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. As of September 30, 2022, goodwill was $51.2 million.
Recent Accounting Pronouncements
Refer to Note 2 in our unaudited condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements
and recently issued accounting pronouncements not yet adopted as of the date of 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. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency
exchange rates.
We do not believe that inflation has had a material effect on our business, results of operations or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations or financial condition.
Inflation Risk
General inflation in the United States, Europe and other geographies has risen to levels not experienced in recent decades. General inflation, including rising prices for inputs and rising wages, as well as rising interest rates negatively impact our business by increasing our operating costs. General inflation also negatively impacts our business by decreasing the capital for our customers to deploy to purchase our products. Inflation may cause
our customers to reduce or delay orders for our products thereby causing a decrease in sales. Increased instability relating to this higher inflation as well as rising interest rates may enhance volatility in currency exchange rates, limit our suppliers’ and customers’ access to credit and limit our ability to access debt and equity financing. These uncertainties may make it difficult for us and our suppliers and customers to accurately plan future business activities and materially adversely impact our operating results and financial condition. While we adjust our prices to try to offset rising operating costs, we may not be able to fully offset such higher costs or demand may decline. Our inability to offset costs or consequential decline in demand could harm our business, results of operations or financial condition.
Interest Rate Risk
As of September 30,
2022, we had cash and cash equivalents of approximately $133.2 million, out of which $129.9 million consisted of institutional money market funds, which carries a degree of interest rate risk. A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our investment portfolio.
In addition, our operating results are subject to risk from interest rate fluctuations on borrowings under our Loan Agreement, which carry variable interest rates. Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. Because our borrowings under our Loan Agreement bear interest at variable rates, we are exposed to market risks relating to changes in interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax
policies, U.S. and international economic factors and other factors beyond our control. As of September 30, 2022, we had $19.2 million of variable rate debt outstanding under our Loan Agreement. Based upon a sensitivity analysis of our debt levels on September 30, 2022, an increase or decrease of 1% point in the effective interest rate would cause an increase or decrease in interest expense of approximately $0.2 million over the next 12 months. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Substantially all of
our revenue is generated in U.S. dollars. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the U.S. and to a lesser extent in Asia and Europe. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates.
Limitations on Effectiveness of Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s 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 disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well-designed and operated, can
provide only reasonable 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 judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30,
2022 due to the material weaknesses in our internal control over financial reporting described below.
We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We did not design and maintain an effective control
environment commensurate with our financial reporting requirements. Specifically, we did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience, and training commensurate with our accounting and reporting requirements. This material weakness contributed to the following additional material weaknesses:
•We did not design and maintain effective controls over the period-end financial reporting process to achieve complete, accurate and timely financial accounting, reporting and disclosures, including segregation of duties and adequate controls related to journal entries and certain other business processes, and verifying transactions are properly classified in the financial statements. This material weakness resulted in adjustments to several account balances and disclosures in the consolidated financial statements for the years
ended December 31, 2019 and 2018, and adjustments to the equity and warrant liabilities accounts and related disclosures in the condensed consolidated financial statements for the three months ended March 31, 2021.
•We did not design and maintain effective controls over certain information technology (“IT”) general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain (i) program change management controls to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately and (ii) user access controls to ensure appropriate
segregation of duties and that adequately restrict user and privileged access to our financial applications, programs and data to appropriate personnel. This material weakness did not result in a material misstatement to the consolidated financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected.
Additionally, each of these material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement
to the annual or interim consolidated financial statements that would not be prevented or detected.
We have taken several measures to remediate the foregoing material weaknesses. To date, our efforts have included the following:
•Recruiting additional personnel with appropriate internal controls and accounting knowledge and experience commensurate with our accounting and reporting requirements, in addition to engaging and utilizing third party consultants and specialists.
•Enhancing entity level controls (ELCs) including increasing Board and Audit Committee oversight, expanding senior management review of financial and business performance, creating an internal audit function and charter, and providing code of conduct trainings.
•Strengthening
IT governance and designing IT general controls including restricted user access to our internal systems for financial reporting, change management, program development and computer operations.
•Designing additional controls for financial close and reporting including review of accounting policies, journal entry review controls, review of significant or non-routine transactions, period end close procedures, financial statement preparation, review, and reporting.
While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period, we are committed to continuous improvement and will continue to diligently review our internal control over financial reporting.
Changes in Internal
Control over Financial Reporting
Other than execution of the material weakness remediation plan activities described above, there has been no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On June 10, 2021, the Company received a letter from the SEC notifying us of an investigation and document subpoena. The subpoena sought documents regarding projected financial information in CLA’s Form S-4 registration statement filed on December 22, 2020. To date, the Company has complied with all SEC requests and produced all requested documents; however, the SEC may request additional documents or information.
On
June 14, 2022, Velodyne Lidar USA, Inc. (“Velodyne”) filed a lawsuit against the Company relating to two patents and requested an International Trade Commission proceeding with respect to the same two patents. On July 8, 2022, the Company filed a complaint against Velodyne, alleging multiple claims including intellectual property misappropriation and false advertising. While the cases remain pending, the Company and Velodyne have agreed that no later than seven days after the execution of the merger agreement with Velodyne (the “Velodyne Merger Agreement”), each will cooperate to take certain actions
in connection with dismissing these pending litigation matters between the Company and Velodyne and moving to terminate United States International Trade Commission Investigation No. 337-TA-1332. There can be no assurances that such matters will ultimately be dismissed.
From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. There is no material litigation, arbitration or governmental proceeding currently pending or to Ouster’s knowledge, threatened against us or any members of Ouster’s management team in their capacity as such. See Part I, Item 1 “Financial Statements (Unaudited) - Note 7. Commitments and Contingencies”.
Item
1A. Risk Factors
There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2022, as updated in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 5, 2022, other than the following:
We are subject to various risks related to the proposed merger with Velodyne.
We have entered into the Velodyne Merger Agreement pursuant to which we have agreed to merge with Velodyne (the “Velodyne Merger”). The risks, contingencies and other uncertainties that could result
in the failure of the proposed merger to be completed or, if completed, that could have a material adverse effect on our business, financial condition or results of operations following the proposed transaction, and any anticipated benefits of the proposed merger, include:
•the failure to obtain necessary stockholder approvals for the share issuance and the adoption of the Velodyne Merger Agreement;
•the failure to satisfy required closing conditions, including regulatory approvals, or complete the proposed merger in a timely manner or at all;
•the effect of the announcement of the proposed merger on each company’s ability to retain and hire key personnel, maintain business relationships, and on operating results and the businesses generally;
•the
diversion of our management’s attention from our core business as we work to take all steps necessary to close the transaction and realize expected synergies and cost-savings from a combined company;
•any inability to achieve the anticipated synergies and our incurrence of significant transaction-related costs in connection with the proposed merger that are, and will be, incurred regardless of whether the proposed transaction is completed;
•the potential loss of customers, distributors, suppliers, vendors, landlords and other business partners or the termination of existing contracts in response to the proposed transaction; and
•the occurrence of any event giving rise to the
right to terminate the Velodyne Merger Agreement.
Moreover, we have incurred and expect to incur a number of non-recurring costs associated with the proposed merger. These costs include financial advisory, legal, accounting, consulting and other advisory fees, severance/employee benefit-related costs, financing-related fees and costs, public company filing fees and other regulatory fees, printing costs and other related costs. Many of these costs are payable by us regardless of whether or not the proposed merger is completed.
Failure
to complete the proposed merger may negatively impact our share price, the future business and our financial results.
If the proposed merger is not completed on a timely basis, our and Velodyne ongoing businesses may be adversely affected. If the proposed merger is not completed at all, we will be subject to a number of risks, including the following:
•being required to pay costs and expenses relating to the merger, such as legal, accounting, financial advisory and printing fees; and
•time and resources committed by our management to matters relating to the proposed merger could otherwise have been devoted to pursuing other beneficial opportunities.
If the proposed merger is not completed, the price of our common stock may decline to the extent that
the current market price reflects a market assumption that the proposed merger will be completed and that the related benefits will be realized, or a market perception that the proposed merger was not completed due to an adverse change in our business.
We may be targets of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Velodyne Merger from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition. Additionally, if a plaintiff is successful in
obtaining an injunction prohibiting completion of the proposed merger, then that injunction may delay or prevent the proposed transaction from being completed, which may adversely affect our business, financial position and results of operation.
Adverse conditions in the industries we target or the global economy more generally could have adverse effects on our results of operations.
While we make our strategic planning decisions based on the assumption that the markets we are targeting will grow, our business is dependent, in large part on, and directly affected by, business cycles and other factors affecting the robotics, industrial automation, smart infrastructure, and transportation industries and global economy generally. Our target markets are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences, changes in
interest rates and credit availability, consumer confidence, inflation, environmental impact, governmental incentives and regulatory requirements, political volatility, labor relations issues, trade agreements and other factors.
For example, general inflation in the United States, Europe and other geographies has risen to levels not experienced in recent decades. General inflation, including rising prices for inputs and rising wages, as well as rising interest rates negatively impact our business by increasing our operating costs. General inflation also negatively impacts our business by decreasing the capital for our customers to deploy to purchase our products. Inflation may cause our customers to reduce or delay orders for our products thereby causing a decrease in sales. Increased instability relating to this higher inflation as well as rising interest rates may enhance volatility in currency exchange rates, limit our
suppliers’ and customers’ access to credit and limit our ability to access debt and equity financing. These uncertainties may make it difficult for us and our suppliers and customers to accurately plan future business activities and materially adversely impact our operating results and financial condition.
There can be no assurance that we will be able to comply with the continued listing standards of the New York Stock Exchange (“NYSE”).
If we fail to satisfy the continued listing requirements of NYSE, such as the corporate governance requirements or the minimum share price requirement, NYSE may take steps to delist our securities. Such a delisting would likely have a negative effect on the price of the securities and would impair stockholders’ ability to sell or purchase the securities when they wish to do so. In the event of a delisting, we can provide no assurance that
any action taken by us to restore compliance with listing requirements would allow our securities to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our securities from dropping below the NYSE minimum share price requirement or prevent future non-compliance with NYSE’s listing requirements. Additionally, if our securities are not listed on, or become delisted from the NYSE, for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on the NYSE or another national securities exchange. Stockholders may be unable to sell their securities unless a market can be established or sustained.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
We did not sell any securities during the three months ended September 30, 2022 that were not registered under the Securities Act.
Issuer Purchases of Equity Securities
We did not purchase any of our equity securities that are registered under Section 12(b) of the Exchange Act during the three months ended September 30, 2022.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
