UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from to
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | | (Commission File Number) | | (I.R.S.
Employer IdentificationNumber) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| Redeemable warrants, exercisable for common stock at an exercise price of $11.50 per share, subject to adjustment | CPTNW | The Nasdaq Capital Market |
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.
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).
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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
| ☒ | Smaller reporting company | ||||
| Emerging growth company |
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
As
of May 6, 2022,
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may be identified by the use of words such as “estimate,” “plan,” “project,” “forecast,” “intend,” “will,” “expect,” “anticipate,” “believe,” “seek,” “target,” “designed to” or other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The Company cautions readers of this Report that these forward-looking statements are subject to risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control, that could cause the actual results to differ materially from the expected results. These factors include the information set forth in Part II, Item 1A, of this Report under the heading “Risk Factors”, which we encourage you to carefully read. Forward-looking statements include, but are not limited to, statements regarding estimates and forecasts of financial and performance metrics, projections of market opportunity and market share, potential benefits and the commercial attractiveness to its customers of the Company’s products and services, the potential success of the Company’s marketing and expansion strategies, the potential for the Company to achieve design awards, and the potential benefits of the Business Combination (including with respect to shareholder value). These statements are based on various assumptions, whether or not identified in this Report, and on the current expectations of the Company’s management and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. You are therefore cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
i
Cepton, Inc.
Quarterly Report on Form 10-Q
Table of Contents
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEPTON, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively | ||||||||
| Inventories | ||||||||
| Right-of-use assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Operating lease liabilities | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Warrant liability | ||||||||
| Earnout liability | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 17) | ||||||||
| Convertible preferred stock: | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock – Par value $ | ||||||||
| Common stock – Par value $ | ||||||||
| Class F stock – Par value $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements
1
CEPTON, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Lidar Sensor and Prototype Revenue | $ | $ | ||||||
| Cost of Revenue | ||||||||
| Gross Profit (Loss) | ( | ) | ||||||
| Operating expenses: | ||||||||
| Research and development | ||||||||
| Selling, general and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expenses) | ||||||||
| Change in fair value of earnout liability | ||||||||
| Change in fair value of warrant liability | ||||||||
| Other income (expense), net | ||||||||
| Interest (expense) income, net | ( | ) | ||||||
| Income (loss) before income taxes | ( | ) | ||||||
| Provision for income taxes | ( | ) | ( | ) | ||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income (loss) per share, basic | $ | $ | ( | ) | ||||
| Net income (loss) per share, diluted | $ | $ | ( | ) | ||||
| Weighted-average common shares, basic | ||||||||
| Weighted-average common shares, diluted | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Other comprehensive loss, net of tax: | ||||||||
| Changes in unrealized loss on available-for-sale securities | ( | ) | ( | ) | ||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Total other comprehensive loss, net of tax | ( | ) | ( | ) | ||||
| Comprehensive income (loss) | $ | $ | ( | ) | ||||
See accompanying notes to the condensed consolidated financial statements
2
CEPTON, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except share and per share data)
(unaudited)
| Convertible Preferred Stock | Preferred
Stock | Common
Stock | Class
F Stock | Additional
Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Loss | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2020 (as previously reported) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
| Retroactive application of exchange ratio | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain/loss on available-for-sale securities, net of tax | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance — March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance—December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
| Retroactive application of exchange ratio | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible preferred stock to common stock | ( | ) | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class F stock to common stock | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Reverse recapitalization, net of transaction costs | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Exercise of Trinity warrants | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Exercise of SVB warrants | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to LPC as commitment shares | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale investments | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balance—March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements
3
CEPTON, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Amortization of right-of-use asset | ||||||||
| Amortization, other | ( | ) | ||||||
| Change in fair value of earnout liability | ( | ) | ||||||
| Change in fair value of warrant liability | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other long-term assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ||||||
| Other long-term liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Purchases of short-term investments | ( | ) | ( | ) | ||||
| Proceeds from sales of short-term investments | ||||||||
| Proceeds from maturities of short-term investments | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from business combination and private offering | ||||||||
| Payments of business combination and private offering transaction costs | ( | ) | ||||||
| Proceeds from issuance of debt and warrants, net of debt discount | ||||||||
| Proceeds from issuance of common stock options, net of repurchases | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Business Combination transaction costs, accrued but not paid | $ | $ | ||||||
| NON-CASH ACTIVITIES | ||||||||
| Vesting of early exercised stock options | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements
4
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Cepton, Inc., and its wholly owned subsidiaries, (collectively the “Company”) formerly known as Growth Capital Acquisition Corp. (“GCAC”), was originally incorporated in Delaware on January 4, 2010, as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On February 2, 2021, the Company consummated its initial public offering (the “IPO”), following which its shares began trading on the Nasdaq National Market (“Nasdaq”). On August 4, 2021, GCAC entered into a Business Combination Agreement (as amended, the “Merger Agreement”) with Cepton Technologies, Inc. (“Legacy Cepton”) and GCAC Merger Sub Inc., a wholly owned subsidiary of GCAC (“Merger Sub”). On February 10, 2022 (the “Closing Date”), the transactions contemplated by the Merger Agreement (the “Business Combination”) were consummated. In connection with the closing of the Business Combination, GCAC changed its name to Cepton, Inc. and its shares and public warrants began trading on the Nasdaq under the symbols “CPTN” and “CPTNW”, respectively. As a result of the Business Combination, Cepton, Inc. became the owner, directly or indirectly, of all of the equity interests of Legacy Cepton and its subsidiaries.
The Company provides state-of-the-art, intelligent, lidar-based solutions for a range of markets such as automotive, smart cities, smart spaces, and smart industrial applications. The Company’s patented Micro Motion Technology (“MMT®”)-based lidar technology enables reliable, scalable, and cost-effective solutions that deliver long range, high resolution 3D perception for smart applications. The Company is headquartered in San Jose, California, USA, with a presence in Germany, Canada, Japan, China, and India.
Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The condensed consolidated financial statements include the accounts of our wholly owned subsidiaries in Canada, Germany, and the United Kingdom. All intercompany balances and transactions have been eliminated in consolidation.
The
accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As
of March 31, 2022, the Company had cash and cash equivalents of $
The Company is subject to risks and uncertainties frequently encountered by early-stage companies including, but not limited to, the uncertainty of successfully developing its products, securing certain contracts, building its customer base, successfully executing its business and marketing strategy and hiring appropriate personnel.
To date, the Company has been funded primarily by equity financings, convertible promissory notes and other borrowings. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require the Company to modify, delay, or abandon some of its planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on the Company’s business, operating results, financial condition, and ability to achieve its intended business objectives.
Concentration of Risk
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and accounts receivable. The Company maintains a substantial portion of its cash and cash equivalents and short-term investments in money market funds, commercial paper, corporate debt securities, and asset backed securities. Management believes that the financial institutions that hold its cash, cash equivalents, and short-term investments are financially sound and, accordingly, represent minimal credit risk. Deposits held with banks may exceed the amount of federal insurance limits provided on such deposits.
5
As
of March 31, 2022 and December 31, 2021, three customers as of each period accounted for more than
Customers
with revenue equal to or greater than
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
| Customer D | % | % | ||||||
| Customer E | % | % | ||||||
| Customer F | % | % | ||||||
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are not limited to, estimating the stand-alone selling prices of performance obligations for revenue recognition, allowances for doubtful accounts, inventory valuation and reserves, valuation allowance for deferred tax assets, share-based compensation including the fair value of the Company's common stock, useful lives of property and equipment, income tax uncertainties, the valuation of certain derivative liabilities, and other loss contingencies. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates, and such differences could be material to the Company's condensed consolidated financial condition and results of operations.
Product Warranties
The Company typically provides a one-year warranty on its products. Estimated future warranty costs are accrued and charged to cost of goods sold in the period that the related revenue is recognized. These estimates are derived from historical data and trends of product reliability and costs of repairing and replacing defective products. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Through March 31, 2022, there were immaterial changes to the accrued warranty liability which was recorded in accrued expenses and other current liabilities on the consolidated balance sheet.
Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Topic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which clarifies existing guidance for freestanding written call options which are equity classified and remain so after they are modified or exchanged in order to reduce diversity in practice. The Company is required to apply the amendments within this ASU prospectively to modifications or exchanges occurring on or after the effective date of the amendment. The standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted this standard beginning on January 1, 2022, and the adoption did not have a material impact on its condensed consolidated financial statements.
6
In August 2020, the FASB issued ASU 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, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. As the Company expects to be an emerging growth company, ASU 2020-06 will be effective for interim and annual periods in fiscal years beginning after December 15, 2023, with earlier adoption permitted for fiscal years beginning after December 15, 2020. The Company early adopted this standard beginning January 1, 2022, and the adoption did not have a material impact on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 is effective for the Company beginning January 1, 2022, with early adoption permitted. The standard eliminates certain exceptions to the general principles in ASC 740 and makes amendments to other areas with a focus on simplification and consistent application of US GAAP. The Company adopted this standard beginning January 1, 2022, and the adoption did not have a material impact on its condensed consolidated financial statements.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842), which supersedes the previous accounting guidance for leases included within ASC 840. Under the new guidance, a lessee is required to recognize assets and liabilities for finance and operating leases. The ASU also requires disclosures on the amount, timing, and uncertainty of cash flows arising from leases. In transition, the Company recognized and measured leases at the beginning of the period of adoption, January 1, 2022, using a modified retrospective approach that included a number of optional practical expedients that the Company elected to apply. See Note 16 for disclosure on the impact of adopting this standard.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize credit losses and impairment of financial assets recorded at amortized cost. Currently, the credit loss and impairment model for loans and leases is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. Under the new current expected credit loss (“CECL”) model, the standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. As the Company expects to be an emerging growth company, the standard will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact on its condensed consolidated financial statements and related disclosures from the adoption of this update.
Note 2. Business Combination
The Business Combination was accounted for as a reverse recapitalization as Legacy Cepton was determined to be the accounting acquirer under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 805, Business Combinations (ASC 805). The determination is primarily based on the evaluation of the following facts and circumstances:
| ● | the equity holders of Legacy Cepton hold the majority of voting rights in the Company; |
7
| ● | the board of directors of Legacy Cepton represent a majority of the members of the board of directors of the Company or were appointed by Legacy Cepton; |
| ● | the senior management of Legacy Cepton became the senior management of the Company; and |
| ● | the operations of Legacy Cepton comprise the ongoing operations of the Company. |
In connection with the Business Combination, outstanding capital stock of Legacy Cepton was converted into common stock of Legacy Cepton and then subsequently converted into Class A common stock of the Company, representing a recapitalization, and the net assets of the Company were acquired at historical cost, with no goodwill or intangible assets recorded. Legacy Cepton was deemed to be the predecessor of the Company, and the consolidated assets and liabilities and results of operations prior to the Closing Date are those of Legacy Cepton. The shares and corresponding capital amounts and net loss per share available to common stockholders, prior to the Business Combination, have been retroactively restated as shares reflecting the Exchange Ratio (defined below). Operations prior to the Business Combination will be those of Legacy Cepton in future reports of the combined entity.
Recapitalization
In connection with the Business Combination, the following occurred to recapitalize the Company:
| ● | Shares of Legacy Cepton convertible preferred stock, Class F stock, and common stock issued and outstanding, were converted into common stock of Legacy Cepton and such shares of Legacy Cepton common stock were subsequently converted into the Company’s Class A common stock, par value $0.0001 per share, at a rate of approximately 2.449 (the “Exchange Ratio”); |
| ● | Vested stock options to purchase or receive shares of Legacy Cepton common stock (see Note 12) converted into options to purchase or receive shares of the Company’s Class A common stock, par value $0.0001 per share, in accordance with the Exchange Ratio; |
| ● | Outstanding warrants, whether vested or unvested, to purchase shares of Legacy Cepton common stock (see Note 14) converted into shares of the Company’s Class A common stock, par value $0.0001 per share, in accordance with the Exchange Ratio; |
| ● | Outstanding unvested stock options to purchase or receive shares of Legacy Cepton common stock (see Note 12) converted into stock options to purchase or receive shares of the Company’s Class A common stock upon the same terms and conditions that were in effect with respect to such stock options and restricted stock units immediately prior to the Business Combination, after giving effect to the Exchange Ratio; |
| ● | The Company’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 355,000,000 shares, of which 350,000,000 shares were designated common stock, $0.00001 par value per share, and of which 5,000,000 shares were designated preferred stock, $0.00001 par value per share and to reclassify each share of Class A common stock and Class B common stock into one share of common stock. |
PIPE Investment
Contemporaneously
with the execution of the Merger Agreement, GCAC entered into subscription agreements (the “Subscription Agreements”) with
certain investors (the “PIPE Investors”), pursuant to which the PIPE Investors agreed to purchase an aggregate of
Redemption
Prior
to the closing of the Business Combination, certain GCAC public shareholders exercised their right to redeem certain of their outstanding
shares for cash, resulting in the redemption of
8
Public and Private Placement Warrants
GCAC
warrants issued in connection with the IPO (“Public Warrants”) and in connection with the private placement units held by
the Sponsor (“Private Placement Warrants”) remained outstanding after the closing of the Business Combination. The warrants
became exercisable to purchase shares of the Company’s common stock at an exercise price of $
Transaction Costs
The
Company incurred direct and incremental costs of approximately $
Transaction Proceeds
Upon
closing of the Business Combination, the Company received gross proceeds of $
| Cash – Trust and cash, net of redemptions | $ | |||
| Cash – PIPE Investment | ||||
| Gross Proceeds from the Business Combination | ||||
| Less: transaction costs and advisory fees, paid | ( | ) | ||
| Net proceeds from the Business Combination | ||||
| Less: transaction costs and advisory fees, accrued | ( | ) | ||
| Less: Private Placement Warrants assumed | ( | ) | ||
| Less: Earnout liability assumed | ( | ) | ||
| Reverse recapitalization, net | $ | ( | ) | |
| Add: Private Placement Warrants assumed | ||||
| Add: Earnout liability assumed | ||||
| Add: Transaction costs recorded to general and administrative expense | ||||
| Add: Transaction costs accrued | ||||
| Business Combination proceeds, net |
The number of shares of common stock issued immediately following the consummation of the Business Combination were:
| GCAC Class A common stock, outstanding prior to Business Combination | ||||
| Less: Redemption of GCAC Class A common stock | ( | ) | ||
| Class A common stock of GCAC | ||||
| GCAC founder shares | ||||
| GCAC shares issued in PIPE Investment | ||||
| Business Combination and PIPE shares | ||||
| Legacy Cepton shares | ||||
| Class A common stock immediately after Business Combination |
9
The number of Legacy Cepton shares was determined as follows:
| Legacy Cepton shares | Legacy Cepton shares, after Exchange Ratio | |||||||
| Balance at December 31, 2021 | ||||||||
| Convertible preferred stock | ||||||||
| Class F stock | ||||||||
| Option exercises1 | ||||||||
| Warrants exercises2 | ||||||||
| Total | ||||||||
| 1 |
| 2 |
Note 3. Revenue
The Company disaggregates its revenue from contracts with customers by country of domicile based on the shipping location of the customer. Total revenue disaggregated by country of domicile is as follows (dollars in thousands):
| Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Revenue | % of Revenue | Revenue | % of Revenue | |||||||||||||
| Revenue by country of domicile: | ||||||||||||||||
| United States | $ | % | $ | % | ||||||||||||
| Japan | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
As
of March 31, 2022 and December 31, 2021, the Company had $
Note 4. Fair Value Measurement
The following table summarize our assets and liabilities measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands):
| March 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market fund | $ | $ | $ | $ | ||||||||||||
| Corporate debt securities | — | — | ||||||||||||||
| Total cash equivalents | $ | $ | $ | $ | ||||||||||||
| Short-term investments: | ||||||||||||||||
| Commercial paper | $ | $ | $ | $ | ||||||||||||
| U.S. treasury securities | ||||||||||||||||
| U.S. government agency securities | ||||||||||||||||
| Corporate debt securities | — | — | ||||||||||||||
| Asset backed securities | ||||||||||||||||
| Total short-term investments | ||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Private Placement Warrants | $ | $ | $ | $ | ||||||||||||
| Earnout liability | ||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | ||||||||||||
10
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market fund | $ | $ | $ | $ | ||||||||||||
| Total cash equivalents | $ | $ | $ | $ | ||||||||||||
| Short-term investments: | ||||||||||||||||
| Corporate debt securities | $ | — | $ | $ | — | $ | ||||||||||
| Total short-term investments | ||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | ||||||||||||
Cash equivalents consist primarily of money market fund with original maturities of three months or less at the time of purchase, and the carrying amount is a reasonable estimate of fair value. Short-term investments consist of investment securities with original maturities greater than three months but less than twelve months and are included as current assets in the condensed consolidated balance sheets. For corporate debt securities, the fair value as of March 31, 2022 and December 31, 2021 approximates amortized cost basis.
Because the transfer of Private Placement Warrants to non-permitted transferees would result in the Private Placement Warrants having substantially the same terms as the Public Warrants, the Company determined that the fair value of each Private Placement Warrant is consistent with that of a Public Warrant. Accordingly, the Private Placement Warrants are classified as Level 2 financial instruments.
The value of the earnout liability is classified as Level 3 under the fair value hierarchy because it has been valued based on significant inputs not observable in the market.
Note 5. Inventories
Inventories consist of the following as of March 31, 2022 and December 31, 2021 (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
Inventories
are carried and depicted above at the lower of cost or net realizable value. Write-downs were immaterial for the three months ended March
31, 2022 and were $
11
Note 6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Deferred transaction costs | $ | $ | ||||||
| Other prepaid expenses | ||||||||
| Payroll tax receivable | ||||||||
| Prepaid insurance | ||||||||
| Prepaid rent | ||||||||
| Other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
Note 7. Property and Equipment, Net
Property and equipment, net, consists of the following as of March 31, 2022 and December 31, 2021 (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Automobiles | ||||||||
| Leasehold improvements | ||||||||
| Computer and equipment | ||||||||
| Total property, and equipment | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
The aggregate depreciation and amortization related to property and equipment was immaterial for the three months ended March 31, 2022 and 2021, respectively.
Note 8. Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued expenses and taxes | $ | $ | ||||||
| Accrued unvested option liability | ||||||||
| Deferred revenue | ||||||||
| Deferred rent | ||||||||
| Warranty reserve | ||||||||
| Total accrued expenses | $ | $ | ||||||
12
Note 9. Debt
Trinity Loan Agreement
On
January 4, 2022, Legacy Cepton entered into a loan and security agreement (“Trinity Loan Agreement”) with
Trinity Capital Inc. (“Trinity”) to borrow up to $
For
the three months ended March 31, 2022, the Company recognized $
Note 10. Convertible Preferred Stock
As discussed in Note 2, the Company has retroactively adjusted the shares issued and outstanding prior to February 10, 2022 to give effect to the Exchange Ratio to determine the number of shares of common stock into which they were converted.
Prior
to the Business Combination, Legacy Cepton had shares of $
The authorized, issued, and outstanding shares of Convertible Preferred Stock, and liquidation preferences prior to February 10, 2022 were as follows:
| Issuance Date | Shares Authorized | Shares Issued and Outstanding | Original Issue Price per Share | Aggregate Liquidation Preference | ||||||||||||||
| Series A | $ | $ | ||||||||||||||||
| Series B | ||||||||||||||||||
| Series B-1 | ||||||||||||||||||
| Series C | ||||||||||||||||||
| $ | ||||||||||||||||||
Upon
the closing of the Business Combination, the
13
Note 11. Stockholders’ Equity (Deficit)
Common Stock
Holders
of common stock were entitled to
Upon
the closing of the Business Combination, the
As
of March 31, 2022, the Company had authorized
Lincoln Park Transaction
On
November 24, 2021, Legacy Cepton entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park” or
“LPC”), pursuant to which Lincoln Park has agreed to purchase up to $
As of March 31, 2022, no shares of Class A common stock were sold to Lincoln Park under the Purchase Agreement.
Class F Stock
Holders of Legacy Cepton’s Class F stock were entitled to the same voting rights as the equivalent number of common stock on an as-converted basis, and to receive dividends when, as and if declared by the board of directors. The holders had conversion rights for conversion into shares of common stock and preferred stock. The holders were subject to vesting terms wherein each holder acquired a vested interest in the stock over a service period of four years
Upon
the closing of the Business Combination, the
14
Note 12. Stock-Based Compensation
Equity Incentive Plans
On
July 5, 2016, Legacy Cepton adopted the 2016 Stock Plan (the “2016 Plan”) under which
As a result of the Business Combination, the Company will no longer grant new incentive awards under the 2016 Plan. Incentive awards existing under the 2016 Plan immediately prior to the Business Combination were converted into options to receive shares of Class A common stock through application of the Exchange Ratio (“Post Conversion Awards”).
On
February 10, 2022, the Company adopted the 2022 Stock Plan (the “2022 Plan”) under which
Restricted Common Stock Awards
Unvested early exercise options or SARs are considered restricted shares and are subject to repurchase by the Company in the event the shareholders’ employment is terminated. The Company may, at its option, repurchase said shares at the lesser of (i) the price paid by the shareholder to exercise the award or (ii) the fair market value of the Company’s common stock determined on the date of the repurchase. During the vesting term, holders of restricted stock awards are deemed to be a common stock shareholder and have dividend and voting rights.
On
August 20, 2020, Legacy Cepton granted
As
of March 31, 2022, the Company had not repurchased any of the unvested restricted shares. The fair value of Legacy Cepton’s common
stock on the date the early exercise options were granted was $
15
Incentive Stock Options and Nonqualified Stock Options
A summary of the Company’s employee and nonemployee stock option activity for the three months ended March 31, 2022 and 2021 is presented below:
| Options Outstanding | ||||||||||||||||
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Options outstanding as of December 31, 2021 | $ | $ | ||||||||||||||
| Retroactive application of Exchange Ratio | ( | ) | ||||||||||||||
| Options outstanding as of December 31, 2021 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired/Forfeited | ( | ) | ||||||||||||||
| Options outstanding as of March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable, March 31, 2022 | $ | $ | ||||||||||||||
| Vested and expected to vest as of March 31, 2022 | $ | $ | ||||||||||||||
During
the three months ended March 31, 2022 and 2021, the estimated weighted-average grant-date fair value of options granted was $
Stock-Based Compensation
For the three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense related to options granted to employees and nonemployees as follows (in thousands):
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cost of revenue | $ | $ | ||||||
| Research and development expense | ||||||||
| Selling, general and administrative expense | ||||||||
| Total stock-based compensation expense | $ | $ | ||||||
For
the three months ended March 31, 2022 and 2021, the Company capitalized $
16
Note 13. Earnout Liability
In addition to the shares issued upon closing of the Business Combination (see Note 2), additional contingent shares (“Earnout Shares”) are payable to each holder of common stock and/or options receiving consideration in the Business Combination, in the amounts set forth below:
| (a) | If the closing share price of Class A common stock equals or exceeds $ |
| (b) | If the closing share price of Class A common stock equals or exceeds $ |
The Company concluded the Earnout Shares meet the criteria for liability classification due to the existence of contingent settlement provisions that could result in holders receiving differing amounts of shares depending on the Company’s stock price or the price paid in a change of control. Because the settlement is not solely determined by the share price of the Company (that is, the share price observed in or implied by a qualifying change-in-control event), but also by the occurrence of a qualifying change-in-control event, this causes the Earnout Shares to not be indexed to the Company’s own shares, resulting in liability classification. Upon the closing of the Business Combination, the Company recorded these instruments as liabilities on the condensed consolidated balance sheet at fair value and will recognize subsequent changes in fair value in earnings at each reporting date.
The following table summarizes the assumptions used in estimating the fair value of the earnout liability at each of the relevant periods:
| March 31, 2022 | February 10, 2022 (Closing Date) | |||||||
| Current stock price | $ | $ | ||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected term | ||||||||
| Expected dividend yield | % | % | ||||||
Current stock price: the stock price was based on the closing price as of the valuation date.
Expected volatility: the volatility rate was determined using a mix of historical and implied volatilities of selected industry peers deemed to be comparable to Cepton’s business, corresponding to the expected term of the awards.
Risk-free interest rate: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of issuance for zero-coupon U.S. Treasury notes with maturities corresponding to the expected three-year term of the earnout period.
Expected term: The expected term is the remaining term of the three-year earnout period.
Expected dividend yield: The expected dividend rate is as the Company currently has no history or expectation of declaring dividends in the foreseeable future.
At
March 31, 2022, the balance of the earnout liability was approximately $
Note 14. Warrants
Common Stock Warrants Assumed in Business Combination
As part of GCAC’s initial public offering,
The Company may redeem the Public Warrants when
exercisable, in whole and not in part, at a price of $
Simultaneously with GCAC’s initial public
offering, GCAC consummated a private placement of
17
The
Company concluded the Private Placement Warrants meet the criteria for liability classification due to the existence of a settlement
provision that adjusts the settlement amount based on who the holder of the warrant is (i.e., permitted vs. non-permitted transferees).
This provision causes the Private Placement Warrants to not be indexed to the Company’s own shares, resulting in liability classification.
Upon consummation of the Business Combination, the fair value of the Private Placement Warrants was recorded at a value of approximately
$
Common Stock Warrants Issued with Borrowings
In August 2019, Legacy Cepton entered into a loan
and security agreement (“2019 Loan Agreement”) with Silicon Valley Bank (“SVB”) that allowed for borrowings of
up to $
The
warrant was recorded to additional paid-in capital at an estimated fair value of $
On January 4, 2022, in connection with the Trinity
Loan Agreement, the Legacy Cepton issued a warrant to purchase
Note 15. Income Taxes
The Company’s provision for income taxes was
$
The Company conducts its business globally and its operating income is subject to varying rates of tax in the U.S., Canada, Germany, Hong Kong, and the U.K. Consequently, the Company’s effective tax rate is dependent upon the geographic distribution of its earnings or losses and the tax laws and regulations in each geographical region.
Due to historical losses in the U.S., the Company has a full valuation allowance on its U.S. federal and state deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and the related valuation allowance. If management’s assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.
18
The Company is subject to income taxes in the U.S. federal, state, and various foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. All of the Company’s tax years will remain open for examination by the federal and state tax authorities for three and four years, respectively, from the date of utilization of the net operating loss or R&D Credits. The Company does not have any tax audits or other issues pending.
Note 16. Leases
The Company leases office and manufacturing facilities under non-cancelable operating leases expiring in January 2023. The Company’s lease agreements do not contain any material terms and conditions of residual value guarantees or material restrictive covenants.
The
Company adopted ASC 842 using the modified retrospective method on January 1, 2022. The most significant impact of the adoption of ASC
842 was the recognition of right-of-use, or ROU, assets and lease liabilities for operating leases of $
The Company determines if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of use assets and operating lease liabilities in the Company’s condensed consolidated balance sheets.
Right-of-use
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s
obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the commencement
date based on an amount equal to the present value of lease payments over the lease term. The Company’s leases do not provide an
implicit rate; therefore, the Company uses an incremental borrowing rate based on the information available at the commencement date
in determining the present value of lease payments. The Company uses the implicit rate when it is readily determinable. The Company elected
the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed
it to carry forward existing lease classification and to exclude leases with original terms of
The components of lease expense for the three months ended March 31, 2022 were as follows (in thousands):
| Amount | ||||
| Operating lease cost | $ | |||
| Variable lease cost | ||||
| Total operating lease cost | $ | |||
19
Supplemental cash flow information for the three months ended March 31, 2022 related to leases was as follows (in thousands):
| Amount | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Cash paid for operating leases included in operating activities | $ | |||
| Right of use assets obtained in exchange for lease obligations: | ||||
| Operating leases | $ | |||
Supplemental balance sheet information related to leases was as follows (in thousands):
| Amount | ||||
| Operating lease right-of-use assets | $ | |||
| Operating lease liabilities: | ||||
| Operating lease liabilities, current | ||||
| Operating lease liabilities, non-current | ||||
| Total operating lease liabilities | $ | |||
Weighted average remaining term and discount rates were as follows (term in years):
| Amount | ||||
| Weighted average remaining lease term | ||||
| Weighted average discount rate | % | |||
Maturities of lease liabilities were as follows (in thousands)
| Year Ending December 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| Total undiscounted lease payments | $ | |||
| Present value adjustment for minimum lease commitments | ||||
| Net Lease Liabilities | $ | |||
Note 17. Commitments and Contingencies
Legal Proceedings
From time to time, the Company may be involved in various legal claims and litigation that arise in the normal course of its operations. The Company is defending all current litigation matters. Although there can be no assurances and the outcome of these matters is currently not determinable, the Company currently believes that none of these claims or proceedings are likely to have a material adverse effect on the Company's financial position.
20
The Company records accruals for our outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company evaluated developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would result in a loss contingency to become both probable and reasonably estimable. The Company has not recorded any accrual for loss contingencies associated with such legal claims or litigation discussed above.
Note 18. Related Party Transactions
Revenue
generated from a customer and investor was $
Note 19. Basic and Diluted Net Income (Loss) Per Share
The Company follows the two-class method when computing net income (loss) per common share when shares are issued that meet the definition of participating securities. The Company was in a net income position for the three-months ended March 31, 2022 and a net loss position for the three-months ended March 31, 2021. The Company considers its convertible preferred stock to be participating as holders of such securities have non-forfeitable dividend rights in the event of the declaration of a dividend for shares of common stock. When the Company is in a net loss position, the net loss attributable to common stockholders is not allocated to the convertible preferred stock under the two-class method as these securities do not have a contractual obligation to share in losses. Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of the Company’s common stock outstanding. During the periods when there is a net loss attributable to common stockholders, potentially dilutive common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive. Net income (loss) per share calculations for all periods prior to the Business Combination have been retroactively restated to the equivalent number of shares reflecting the Exchange Ratio.
The following tables present reconciliations denominators of basic and diluted net income (loss) per share:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Denominator: | ||||||||
| Weighted-average common shares outstanding – Basic 1 | ||||||||
| Stock options to purchase common stock 2 | ||||||||
| Weighted-average common shares outstanding - Diluted | ||||||||
| 1 | –
Includes |
| 2 | –
Includes the weighted-average unvested shares subject to repurchase of |
21
The following common stock equivalents were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have been antidilutive:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Stock options to purchase common stock | ||||||||
| Unvested restricted stock | ||||||||
| Preferred shares on an as-converted basis | ||||||||
| Class F shares an as-converted basis | ||||||||
| Shares issuable upon exercise of warrants | ||||||||
| Total | ||||||||
As of March 31, 2022,
Note 20. Segments
The
Company conducts its business in one operating segment that develops and produces LiDAR sensors for use in automotive and smart infrastructure
industries. The Company’s Chief Executive Officer is the chief operating decision maker (“CODM”). The CODM allocates
resources and makes operating decisions based on financial information presented on a consolidated basis, accompanied by disaggregated
information about sales and gross margin by product group. The profitability of the Company’s product group is not a determining
factor in allocating resources and the CODM does not evaluate profitability below the level of the consolidated company. Long-lived assets
of the Company located in its country of domicile, the United States, are approximately
Note 21. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through May 13, 2022, the issuance date of the condensed consolidated financial statements, and determined there are no other transactions that require additional accounting or disclosure.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References in this section to “we,” “our,” “us,” and “Cepton” generally refer to Cepton Technologies, Inc. and its consolidated subsidiaries prior to the Business Combination and to Cepton and its consolidated subsidiaries after giving effect to the Business Combination. The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the unaudited condensed consolidated financial statements included in this Report. This discussion contains forward-looking statements based upon our current expectations, estimates and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to, among other considerations, the matters discussed under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”.
Certain amounts that appear in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) may not sum due to rounding. Percentage amounts included in this MD&A have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this MD&A may vary from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements included elsewhere in this Report. Terms used but not defined in this MD&A shall have the meanings ascribed to such terms in this Report.
Business Overview
Cepton is focused on the deployment of high performance, mass-market lidars to deliver safety and autonomy across the Automotive and Smart Infrastructure markets. By adopting our solutions, our customers can enable safety and autonomy applications across a broad range of end-markets including our primary market, advanced driver assistance systems (“ADAS”) in consumer and commercial vehicles, which we believe represents not just the largest market opportunity for lidar applications over the next decade, but also the market with the best potential for near term mass-market commercialization.
Since the inception of our company in 2016, building lidars for broad market adoption has been our guiding principle. Mass-market deployment guided not just our end-market focus, but also our product design choices, our areas of technological innovation, and our approach to manufacturing, and our go-to-market strategy and partnerships. To pursue mass-market adoption, our value proposition has focused on developing a lidar that achieves high performance with automotive grade reliability at competitive prices. Our thesis was that lidar would gain broad based adoption only when solutions strike the right balance across three key facets of performance, cost and reliability.
Based on this approach, we have gained acceptance for our technology in the automotive market. In 2019, following approximately three years of rigorous engagement and working alongside our automotive Tier 1 partner, Koito Manufacturing, Ltd. (“Koito”), we were awarded the largest known ADAS lidar series production award in the industry to date by General Motors (“OEM-B”). This award includes multiple platforms and vehicle models, with an estimated production start in 2023.
As a Silicon Valley-based company led by recognized technical experts in the optical field, technology innovation is at the core of our company. We developed a comprehensive lidar platform consisting of proprietary components including our breakthrough MMT® imaging technology and our system-on-a-chip (“SoC”) lidar engine application-specific integrated circuit (“ASIC”), a portfolio of automotive-grade and industrial-grade long-range and near-range lidars, a software layer enabling the integration of automotive functions, and feature rich perception software capabilities.
23
Business Combination
On February 10, 2022, the Business Combination was consummated and as a result, a subsidiary of Growth Capital Acquisition Corp. (“GCAC”), GCAC Merger Sub Inc., merged with and into Cepton Technologies, Inc. (“Legacy Cepton”). GCAC changed its name to Cepton, Inc., and the Company is now listed on the Nasdaq under the symbol “CPTN”. Legacy Cepton is deemed the accounting predecessor and Cepton, Inc. is the successor Securities and Exchange Commission (“SEC”) registrant, which means that Legacy Cepton’s financial statements for previous periods will be disclosed in Cepton, Inc.’s future periodic reports filed with the SEC.
The Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, GCAC is treated as the acquired company for financial statement reporting purposes. This determination is primarily based on Legacy Cepton stockholders comprising a majority of the voting power of the combined entity and having the ability to nominate the majority of the governing body of the combined entity, Legacy Cepton’s senior management comprising the senior management of the combined entity, and Legacy Cepton’s operations comprising the ongoing operations of the combined entity. For accounting purposes, the combined entity represents a continuation of the financial statements of Legacy Cepton and the Business Combination is treated as the equivalent of Legacy Cepton issuing stock for the net assets of GCAC, accompanied by a recapitalization.
As a result of becoming a publicly traded company, we will need to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.
Impact of COVID-19
The extensive impact of the pandemic caused by COVID-19 has resulted in significant disruptions to the global economy as well as businesses and capital markets around the world. We believe the ongoing COVID-19 pandemic will act as a long-term catalyst for our vehicle sales and wider adoption of ADAS programs, and our overall growth rate during 2021 and 2022 has been impacted.
The pandemic continues to evolve, and the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, supply chain, manufacturing, research and development costs and personnel-related costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, any resurgence of the pandemic in areas where we or our suppliers operate, and the economic impact on local, regional, national and international customers and markets.
For more information on our operations and risks related to health epidemics, including the COVID-19 pandemic, please see the section entitled “Risk Factors.”
24
Key Factors Affecting Cepton’s Operating Results
We believe that our future performance and success depends, to a substantial extent, on our ability to capitalize on the following opportunities, which in turn is subject to significant risks and challenges, including those discussed below and in the section entitled “Risk Factors.”
Series production awards in the Automotive market
An important part of our mission is to deploy high performance, mass-market lidar in the automotive market. Within the automotive market, we believe that passenger car ADAS applications represent the largest opportunity but also have the most stringent requirements for reliability, cost, and performance. Major automotive OEMs typically undergo several years of planning, technology selection, and vehicle integration work before introducing new and important technologies in their vehicle offerings. We anticipate that lidar, as a new sensor that improves safety and enhances autonomy, will undergo the same technology introduction and validation process as similar technologies in the past, such as anti-lock braking systems or stability control systems. The number of vehicle platforms and vehicle models that will be equipped with lidar will depend on OEM product planning, vehicle integration, and marketing schedules. Once a lidar supplier is chosen, the number of awarded vehicle platforms and vehicle models is likely to increase over time. This is because the development efforts of integrating lidar into the OEM’s product offerings is leveraged across multiple vehicle classes and platforms to maximize the OEM’s return on investment.
For example, our series production award from OEM-B initially included four vehicle models and was subsequently updated to include nine vehicle models spanning different classes of vehicles from luxury sedans to mid-level passenger cars to SUVs and trucks. These vehicles include traditional internal combustion engine types as well as electric drive train types. We expect additional vehicle models to be added to this series production award over time, with an anticipated start of production in 2023 and significant volume increase anticipated in the following years. However, if the targets of this series production award are not realized, or if OEM-B were to terminate or significantly alter or delay its OEM-B series production award and/or alter its relationship with Cepton or with Koito in a manner that is adverse to Cepton or OEM-B would delay the introduction of the vehicle models that are part of the series production award, Cepton’s business would be materially adversely affected. Similarly, if Cepton is unable to maintain its relationship with Koito, or the terms of Cepton’s arrangement with Koito with respect to the OEM-B program differs from Cepton’s expectations, including with respect to volume, pricing, and timing, then Cepton’s business and prospects would be materially adversely affected.
Adoption of lidar solutions in Automotive and Smart Infrastructure markets
In an endless pursuit of safety and product differentiation, many leading automotive OEMs have decided to include lidar in their next generation of vehicles for increased safety and higher levels of autonomy. The speed of lidar adoption depends on many factors, including sensor performance, reliability, and cost, as well as the time it takes to win large series production awards. Large automotive series production awards usually take a number of years to secure but once awarded, the production award typically covers the entire duration of a typical vehicle model period of five to seven years for consumer vehicles. In the case of trucking applications, the production period of a typical model may exceed seven years in many cases. We are currently engaged in discussions with all of the top 10 global automotive OEMs (by ADAS and AV program volumes). We believe that our current series production award from OEM-B is a validation of our technology leadership, product maturity, and potential for scalability that favorably positions us for additional series production awards at other large global OEMs.
While lidar adoption in the automotive market may take multiple years to materialize, smart infrastructure end markets could adopt lidar solutions at a more rapid pace. Applications within smart infrastructure vary widely from tolling to security, to delivery and logistics. These applications are typically project based and require certain levels of customization to deliver an end-to-end solution. To address opportunities in the smart infrastructure space, we partner with system integrators who leverage our lidar hardware as well as our Helius perception software to provide solutions unique to each opportunity. We expect to grow our system integrator partnership network to further drive the adoption of lidar in smart infrastructure applications.
25
We expect our revenue to increase as adoption increases in the automotive and smart infrastructure markets, however, the rate of deployment may vary and our revenue will fluctuate as a result.
Product Cost and Margins
To drive mass-market adoption of lidar in automotive applications, product cost must be controlled. As such, cost is one of the primary design criteria that we focused on from the very beginning. Design choices were carefully evaluated to create products with the best overall balance between performance, reliability, and cost. Working with our partners, we expect to continue driving costs down as volumes increase and we achieve higher margin unit economics in the future.
In the case of our series production award from OEM-B, we are working with our Tier 1 partner, Koito, on manufacturing in order to effectively manage supply chain, component costs, and manufacturing costs to meet margin expectations at scale. Pursuant to our arrangement with Koito, we license our technology and sell components to Koito, who can manufacture and sell lidars using our technology. We expect our gross margin to rapidly increase as material costs decrease and fixed manufacturing overhead costs are absorbed over larger production volumes and as other economies of scale are achieved.
In the smart infrastructure space, average selling price (“ASP”) of a lidar solution may be higher than that in the automotive space due to a number of reasons, such as unit volume, level of customization, and additional software content. At the same time, the cost of production is also higher due to lower levels of economies of scale and higher levels of system integration requirements.
If we cannot generate our expected revenues, margins or income from operations, we may be required to raise additional debt or equity capital, which may not be available or may only be available on terms that are onerous to our stockholders.
End Market Concentration
We believe that the automotive market represents a large portion of the total addressable market and large global automotive OEMs represent the majority of unit volume demand as well as leaders in active safety and autonomy. To drive mass-market commercialization of our lidar solutions, we have focused on top automotive OEMs and are currently engaged with all of the top 10 global automotive OEMs based on vehicle production volume rankings for 2019. Series production awards from top OEMs tend to be large and long-term in nature. While we continue to expand our system integrator partnership network to address opportunities in the smart infrastructure markets, program awards tend to be smaller and short-term in nature as compared to those in the automotive end-markets. As such, we expect a large portion of our future revenue to come from the automotive end-market.
Components of Results of Operations
Revenue
Revenue is primarily derived from the sale of components and license of technologies to Tier 1 suppliers for mass market ADAS applications in the automotive market and the sale of lidar sensors directly to end-user customers in the Smart Infrastructure markets. Our lidar sensors are used in applications such as advanced driver assistance systems, autonomous vehicles, and intelligent transportation systems. Our customers include leading original equipment manufacturers and suppliers within the automotive and smart infrastructure industries. We anticipate strong revenue growth in the foreseeable future as we continue to form strategic partnerships and as the primary source of revenue shifts from prototype sales to sales of commercialized production-ready lidar sensors.
26
Cost of Revenue
Cost of revenue includes the manufacturing cost of our lidar sensors and components, which primarily consists of personnel-related costs directly associated with our manufacturing organization, and amounts paid to our third-party contract manufacturers and vendors. Our cost of revenue also includes cost of component inventory, product testing costs, an allocated portion of overhead costs, warranty expense, excess and obsolete inventory, and shipping costs. We expect cost of revenue to increase in absolute dollars in future periods.
Gross Margin
Our gross margin in future periods will depend on a variety of factors including market conditions that may impact our pricing; product mix changes between established products and new products; excess and obsolete inventories; our cost structure for manufacturing operations, including third-party manufacturers, relative to volume. Our gross margin varies by product. We expect our gross margins to fluctuate over time, depending on the factors described above.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of personnel-related costs, material expenses, permits, licenses, and professional services directly associated with our research and development activities. The remainder primarily relates to the allocated portion of overhead costs. Our research and development efforts are focused on enhancing and developing additional functionality for our existing products and on new product development, including new releases and upgrades to our lidar sensors. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we increase our investment in software development to broaden the capabilities of our solutions and introduce new products and features.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of personnel-related costs, professional services, and advertising expenses directly associated with our sales and general and administrative activities. The remainder primarily relates to the allocated portion of overhead costs. We expect our selling expenses will increase in absolute dollars over time as we hire additional sales personnel, increase our marketing activities, grow our domestic and international operations, and build brand awareness. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and stock exchange listing standards, additional insurance expenses (including directors’ and officers’ insurance), investor relations activities, and other administrative and professional services. We also expect to increase the size of our general and administrative function to support the growth of our business.
Change in Fair Value of Earnout and Warrant Liabilities
The change in fair value of earnout and warrant liabilities consists of the change in fair value of earnout and warrant liabilities assumed in connection with the Business Combination as well as the change in fair value of other warrant liability. We expect continued financial statement impacts from the fair value adjustments at the end of each reporting period or until the Earnout Shares are issued upon the attainment of common share price milestones or through the exercise of the warrants.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency transaction gains and losses related to the impact of transactions denominated in a foreign currency other than the U.S. dollar and gains or losses related to the extinguishment of debt.
27
Interest Income (Expense), Net
Interest income (expense), net consists primarily of interest earned on our cash equivalents and short-term investments in commercial paper, corporate debt securities, and available-for-sale securities. These amounts will vary based on our cash, cash equivalents and short-term investment balances, and also with market rates. Our interest income is partially offset by interest expense from our debt financings as well as accretion expense from our short-term investments.
Provision for Income Taxes
Our provision for income taxes consists of federal, state, and foreign current and deferred income taxes. As we expand the scale and scope of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future.
We have a full valuation allowance for net deferred tax assets, including federal and state net operating loss carryforwards and research and development credit carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets are realizable by way of expected future taxable income.
We believe that we have adequately reserved for our uncertain tax positions, although we can provide no assurance that the final outcome of these matters will not be materially different. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.
Results of Operations for the three months ended March 31, 2022 and 2021
The results of operations presented below should be reviewed in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere in this Report. The following table sets forth our unaudited condensed consolidated results of operations data for the periods presented:
| Three Months Ended March 31, | Change | Change | ||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenue | $ | 1,485 | $ | 438 | $ | 1,047 | 239 | % | ||||||||
| Cost of Revenue | 1,252 | 1,119 | 133 | 12 | % | |||||||||||
| Gross Margin (Loss) | 233 | (681 | ) | 914 | NM | |||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 7,754 | 4,880 | 2,874 | 59 | % | |||||||||||
| Sales, general, and administrative | 8,043 | 2,803 | 5,240 | 187 | % | |||||||||||
| Total operating expenses | 15,797 | 7,683 | 8,114 | 106 | % | |||||||||||
| Operating loss | (15,564 | ) | (8,364 | ) | (7,200 | ) | 86 | % | ||||||||
| Change in fair value of earnout liability | 56,678 | — | 56,678 | NA | ||||||||||||
| Change in fair value of warrant liability | 780 | — | 780 | NA | ||||||||||||
| Other income (expense), net | 2 | 2 | — | 0 | % | |||||||||||
| Interest income (expense), net | (694 | ) | 12 | (706 | ) | NM | ||||||||||
| Income (loss) before income taxes | 41,202 | (8,350 | ) | 49,552 | NM | |||||||||||
| Provision for income taxes | (4 | ) | (9 | ) | 5 | (56 | )% | |||||||||
| Net Income (Loss) | $ | 41,198 | $ | (8,359 | ) | $ | 49,557 | NM | ||||||||
28
Comparison of the three months ended March 31, 2022 and 2021
Revenue
Revenue increased by approximately $1.1 million, or 239%, to $1.5 million for the three months ended March 31, 2022, from $0.4 million for the three months ended March 31, 2021. The increase primarily resulted from a $0.9 million increase in product sales, which mainly consisted of an increase in sales volume of lidar sensors and other related products.
Cost of Revenue
Cost of Revenue increased by $0.1 million, or 12%, to $1.2 million for the three months ended March 31, 2022, from $1.1 million for the three months ended March 31, 2021. The increase in cost of revenue resulted primarily from an increase in sales volume of $0.6 million. This was partially offset by a decrease in scrap expense of $0.5 million.
Operating Expense
Research and development expense increased by $2.9 million, or 59%, to $7.8 million for the three months ended March 31, 2022, from $4.9 million for three months ended March 31, 2021, resulting primarily from a $1.7 million increase in personnel related costs and a $1.4 million increase in materials costs, which were partially offset by a decrease in professional services of $0.3 million.
Sales, general and administrative expense increased by $5.2 million, or 187%, to $8.0 million for the three months ended March 31, 2022, from $2.8 million for the three months ended March 31, 2021, resulting primarily from a $2.7 million increase in transaction costs related to the Business Combination, a $1.9 million increase in personnel related costs, and a $0.6 million increase in other general and administrative costs.
Change in Fair Value of Earnout and Warrant Liabilities
The earnout liability was assumed in connection with the Business Combination. The fair value of the earnout liability decreased by $56.7 million resulting in the recognition of an unrealized gain as of March 31, 2022. This is primarily due to a decrease in the Company’s common share price from February 10, 2022 to March 31, 2022.
The fair value of the warrant liability decreased by $0.8 million resulting from a $0.7 million realized gain due to the exercise of certain liability classified warrants in connection with the Business Combination, and a $0.1 unrealized gain due to the mark-to-market adjustment on private placement warrants as of March 31, 2022.
Interest Income (Expense)
Interest income decreased by $0.7 million resulting primarily from an increase in interest expense of $0.6 million from the Trinity Loan Agreement entered into on January 4, 2022. The remaining $0.1 million relates to a decrease in interest income from short-term investments.
Income Taxes
We provided a full valuation allowance on our net U.S. federal and state deferred tax assets for three months ended March 31, 2022 and 2021. As for the three months ended March 31, 2022, we had U.S. federal and state tax-effected net operating loss carryforwards available to reduce future taxable income, of which post-2017 Federal net operating loss will be carried forward indefinitely and post-2017 Federal net operating loss carryover and state net operating loss carryover and state net operating loss carryover will expire on varying dates.
29
Liquidity and Capital Resources
Sources of Liquidity
As of March 31, 2022, we had cash, cash equivalents, and short-term investments totaling $44.8 million, which were held for working capital purposes. Our cash, cash equivalents, and short-term investments of $44.8 million are comprised of money market funds, commercial paper, corporate debt securities, and available-for-sale securities.
On November 24, 2021, the Company entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC, pursuant to which Lincoln Park has agreed to purchase up to $100.0 million of common stock (subject to certain limitations contained in the Purchase Agreement) from time to time over a 36-month period (the “Purchase Agreement”) after the consummation of the Business Combination and certain other conditions set forth in the Purchase Agreement. On February 11, 2022, Cepton filed an S-1 registration statement related to the Lincoln Park Purchase Agreement and upon its effectiveness and the satisfaction of the other terms and conditions of the Purchase Agreement, Cepton will be able to sell up to $100.0 million of common stock to Lincoln Park as a source of funds.
On January 4, 2022, the Company entered into the Loan Agreement with Trinity Capital Inc. to borrow up to $25.0 million at a rate of 10.75%. In connection with the Loan Agreement, the Company issued a warrant to purchase 96,998 shares of common stock with an exercise price of $16.89 per share. On January 4, 2022, the Company borrowed $10.0 million (the “Initial Advance”) under the terms of the Loan Agreement. In 2021, the Company incurred approximately $0.2 million of issuance costs related to the Loan Agreement. Immediately prior to the consummation of the Business Combination, the 96,988 warrants were net exercised and subsequently converted into 73,741 shares of Class A common stock.
Following the approval of the Business Combination, on February 10, 2022, the Company received net cash proceeds of $48.1 million from the Business Combination and PIPE, net of certain transaction costs.
We have incurred negative cash flows from operating activities and significant losses from operations in the past as reflected in our accumulated deficit of $54.2 million as of March 31, 2022. During the three months ended March 31, 2022, we had negative cash flows from operating activities of $19.5 million. Although much of the negative cash flow resulted from an increase in engineering services and expensed materials for research and development, and administrative expenses related to becoming a publicly traded company, we expect to continue to invest in research and development and generate operating losses in the future. In addition, our future capital requirements will depend on many factors, including our lidar sales volume, the timing and extent of spending to support our research and development efforts in smart vision technology, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features. If we are required to raise additional funds by issuing equity securities, dilution to stockholders would result. Any equity securities issued may also provide for rights, preferences, or privileges senior to those of common stockholders. If we raise funds by issuing debt securities, these debt securities would have rights, preferences, and privileges senior to those of common stockholders. For information regarding our cash requirements from lease obligations and contractual obligations, see Note 16 and 17 in the unaudited condensed consolidated financial statements included in this Report.
We are subject to risks and uncertainties frequently encountered by early-stage companies including, but not limited to, the uncertainty of successfully developing products, securing certain contracts, building a customer base, successfully executing business and marketing strategies, and hiring appropriate personnel.
To date, we have been funded primarily by equity financings, convertible promissory notes, and the net proceeds we received through the Business Combination, PIPE offering, and private placements of the Legacy Cepton convertible preferred stock. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on our business, operating results, financial condition, and ability to achieve our intended business objectives.
30
Cash Flow Summary — Three Months Ended March 31, 2022 and 2021
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands) | ||||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (19,487 | ) | $ | (9,394 | ) | ||
| Investing activities | (17,598 | ) | 13,259 | |||||
| Financing activities | 58,028 | 254 | ||||||
Operating Activities
During the three months ended March 31, 2022, our operating activities used $19.5 million in cash. We recorded net income of $41.2 million; however, this was offset by $56.1 million of non-cash income and expenses consisting primarily of gains from the change in fair value of earnout and warrant liabilities of $57.5 million and amortization of commitment fee asset of $0.4 million. These non-cash income items were partially offset by stock-based compensation expense of $1.4 million, depreciation and amortization of $0.1 million, and amortization of right-of-use assets of $0.3 million. During the three months ended March 31, 2022, we used net cash of $4.6 million from changes in our operating assets and liabilities resulting primarily from a $1.9 million increase in other long-term assets related to prepaid director and officer insurance, a $0.5 million increase in accounts receivable, a $0.7 million decrease in accrued expenses and other current liabilities due to timing of payments, a $0.4 million decrease in operating lease liabilities, a $0.3 million increase in inventories, a $0.7 million increase in prepaid expenses and other current assets due to increases in prepaid insurance offset by decreases in deferred transaction costs in connection with the closing of the Business Combination, and a $0.1 million decrease in accounts payable due to timing of payments.
During the three months ended March 31, 2021, our operating activities used $9.4 million in cash resulting primarily from our net loss of $8.4 million, which was partially offset by $0.4 million of non-cash expenses consisting primarily of $0.3 million of stock-based compensation expense and $0.1 million of amortization and accretion of short-term investments. During the three months ended March 31, 2021, we used $1.4 million net cash from changes in our operating assets and liabilities resulting primarily from an increase in prepaid expenses and other current assets of $2.5 million due to transaction costs incurred in anticipation of a business combination, and a decrease in accounts payable of $0.1 million due to timing of payments. This was partially offset by an increase of $0.8 million in accrued expenses and other current liabilities and a decrease of $0.4 million in inventories.
31
Investing Activities
During the three months ended March 31, 2022, our investing activities used $17.6 million of cash, resulting primarily from purchases of short-term investments of $20.2 million and purchases of property and equipment of $0.1 million, partially offset by proceeds from the sales and maturities of short-term investments of $2.7 million.
During the three months ended March 31, 2021, our investing activities provided $13.3 million of cash, resulting primarily from the sales and maturities of short-term investments of $14.3 million, partially offset by $1.0 million of purchases of short-term investments.
Financing Activities
During the three months ended March 31, 2022, our financing activities provided $58.0 million of cash consisting primarily of $48.1 million of net proceeds from the Business Combination and PIPE investment, $9.7 million of proceeds from the issuance of debt and warrants, and $0.2 million from proceeds from common stock option exercises.
During the three months ended March 31, 2021, our financing activities provided $0.3 million of cash consisting of proceeds from common stock option exercises.
Off-Balance Sheet Arrangement
We did not have any off-balance sheet arrangements as of March 31, 2022 and March 31, 2021.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, assumptions and judgments that can significantly impact the amounts we report as assets, liabilities, revenue, costs and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates under different assumptions and conditions.
Revenue
We primarily recognize revenues from the sale of lidar sensors and prototypes. Revenue represents the amount of expected consideration we are entitled to receive upon the transfer of promised goods or services in the ordinary course of business and is recorded net of sales taxes. We recognize revenue when performance obligations are satisfied by transferring control of a promised good or service to a customer. For performance obligations satisfied at a point in time, we consider the following indicators to assess whether control of a promised good or service is transferred to the customer: (i) right of payment, (ii) legal title, (iii) physical possession, (iv) significant risks and rewards of ownership, and (v) acceptance of the good or service. For performance obligations satisfied over time, we recognize revenue over time by measuring the progress toward complete satisfaction of a performance obligation.
The application of various accounting principles related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require relevant contract interpretation to determine the appropriate accounting treatment, including whether the promised goods and services specified in a multiple element arrangement should be treated as separate performance obligations. When a contract involves multiple performance obligations, the Company accounts for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service is separately identifiable from other promises in the arrangement.
Transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. Judgment is required to determine SSP for each distinct performance obligation. We use a range of amounts to estimate SSP when products and services are sold separately. In instances where SSP is not directly observable, we determine SSP using information that may include other observable inputs available to us.
Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition.
32
Stock-Based Compensation
We recognize stock-based awards granted to our employees and directors based on the estimated grant-date fair value of the awards. Compensation expense is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. We estimate the fair value of options using the Black-Scholes option-pricing model, which requires objective and subjective assumptions such as the option’s expected term, fair value of underlying share, risk-free interest rate, expected dividend yield, expected term, and expected volatility of our ordinary shares. Our assumptions may differ from those used in prior periods. Changes to the estimates we make from time to time may have a significant impact on our stock-based compensation expense and could materially impact our results of operations.
The grant date fair value of our common stock, prior to the closing of the Business Combination was determined using valuation methodologies that utilize certain assumptions, including probability weighting of events, volatility, time to liquidation, risk-free interest rate, and an assumption for a discount for lack of marketability. Subsequent to the Business Combination, the valuation of our common stock is determined using the publicly traded closing price as reported on Nasdaq.
Change in Fair Value of Earnout Liability
The Company concluded the Earnout Shares meet the criteria for liability classification due to the existence of contingent settlement provisions that could result in holders receiving differing amounts of shares depending on the Company’s stock price or the price paid in a change of control. Because the settlement is not solely determined by the share price of the Company (that is, the share price observed in or implied by a qualifying change-in-control event), but also by the occurrence of a qualifying change-in-control event, this causes the Earnout Shares to not be indexed to the Company’s own shares, resulting in liability classification. The fair value of the earnout liability was determined using a Monte Carlo valuation model that utilizes significant assumptions, including expected volatility, expected term, and risk-free rate, to determine the probability of achieving the common share price milestones.
The following table summarizes the assumptions used in estimating the fair value of the earnout liability at each of the relevant periods:
| March 31, 2022 | February 10, 2022 (Closing Date) | |||||||
| Current stock price | $ | 3.88 | $ | 7.99 | ||||
| Expected volatility | 70.0 | % | 77.5 | % | ||||
| Risk-free interest rate | 2.44 | % | 1.80 | % | ||||
| Expected term | 2.9 years | 3.0 years | ||||||
| Expected dividend yield | 0 | % | 0 | % | ||||
Emerging Growth Company Status
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.
Cepton is an “emerging growth company” as defined in Section 2(a) of the Securities Act and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. Following the consummation of the Business Combination, Cepton expects to remain an emerging growth company at least through the end of the 2022 fiscal year and to continue to take advantage of the benefits of the extended transition period, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare Cepton’s financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
Subject to certain conditions set forth in the JOBS Act, if, as an emerging growth company, we intend to rely on such exemptions, we are not required to, among other things: (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.
We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) ending December 31, 2026, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the prior fiscal year’s second fiscal quarter; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.
Recent Accounting Pronouncements
See Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Report.
33
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 rates and prices. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rates and interest 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.
Interest Rate Risk
As of March 31, 2022, we had cash, cash equivalents and short-term investments of $44.8 million, which consisted of commercial paper, U.S. Treasury securities, U.S. government agency securities, corporate debt securities, and asset-backed securities. The short-term investments carry 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.
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 Canada and Germany. 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 condensed 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Report, our management concluded that our disclosure controls and procedures were not effective as of such date because of the material weaknesses in our internal control over financial reporting identified as of December 31, 2021. Prior to the consummation of the Business Combination as of February 10, 2022, we were a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with the audit of our condensed consolidated financial statements for the year ended December 31, 2021, we identified a material weakness in our internal control over financial reporting:
| ● | we did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge and experience commensurate with the financial reporting requirements for a public company, in particular with respect to technical accounting knowledge regarding the accounting for certain non-standard transactions. |
34
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.
Remediation Plan and Status
We recently hired a new Director of Finance and Accounting, and we will continue to evaluate our accounting and financial needs in light of the material weakness described above.
While we have made progress to enhance our internal control over financial reporting and will continue to devote effort in control remediation, additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. Accordingly, the material weakness cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Other than the remediation steps taken above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, Cepton may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Cepton is not currently a party to any legal proceedings, the outcome of which, if determined adversely to Cepton, would individually or in the aggregate have a material adverse effect on its business, financial condition or results of operations.
Item 1A. Risk Factors.
Risk Factors Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors,” that represent challenges that we face in connection with the successful implementation of our strategy and growth of our business. The occurrence of one or more of the events or circumstances described in the section titled “Risk Factors,” alone or in combination with other events or circumstances may have an adverse effect on our business, financial condition, results of operations, and prospects. Such risks include, but are not limited to:
Risks Related to Our Business and Industry
| ● | We are an early stage company with a history of losses and expect to incur significant expenses and continuing losses for the foreseeable future. |
| ● | Our limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter. |
| ● | Our forecasts and projections are based upon assumptions, analyses and internal estimates developed by our management. If these assumptions, analyses or estimates prove to be incorrect or inaccurate, our actual operating results may differ materially from those forecasted or projected. |
| ● | We continue to implement strategic initiatives designed to grow our business. These initiatives may prove more costly than we currently anticipate and we may not succeed in increasing our revenue in an amount sufficient to offset the costs of these initiatives and to achieve and maintain profitability. |
| ● | If our lidar products are not selected for inclusion in ADAS and autonomous driving systems by automotive OEMs, automotive Tier 1 suppliers, mobility or technology companies or their respective suppliers, our business will be materially and adversely affected. |
| ● | Continued pricing pressures, automotive OEM cost reduction initiatives and the ability of automotive OEMs to re-source or cancel vehicle or technology programs may result in losses or lower than anticipated margins, which will adversely affect our results of operations and financial condition. |
| ● | Although we believe that lidar is likely to become an essential sensor for autonomous vehicles and other emerging markets, market adoption of lidar is uncertain. If market adoption of lidar does not continue to develop, or develops more slowly than we expect, our business will be adversely affected. |
| ● | We are substantially dependent on our series production award from OEM-B and our relationship with Koito, and our business and prospects will be materially and adversely affected if OEM-B’s development or launch plans for the multiple vehicle models in which our products are expected to be deployed are significantly scaled back or terminated. |
| ● | We rely on third-party suppliers and because some of the raw materials and key components in our products come from limited or single-source suppliers, we are susceptible to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain and could delay deliveries of our products to customers. |
| ● | Because our sales have been primarily to customers engaged in development of ADAS deployments in consumer vehicles and pilot projects in the Smart Infrastructure segment and our orders are project-based, we expect our results of operations to fluctuate on a quarterly and annual basis. |
36
| ● | Even though many of the components in our lidars are modular and can be built using readily available materials, we, our outsourcing partners and our suppliers may rely on complex machinery for our production, which involves a significant degree of risk and uncertainty in terms of operational performance and costs. We, our outsourcing partners and our suppliers may also rely on highly-skilled labor for our production, and if such highly-skilled labor is unavailable, our business could be adversely affected. |
| ● | The average selling prices of our products could decrease rapidly over the life of the product, which may negatively affect our revenue and gross margin. In addition, the selling prices we are able to ultimately charge in the future for the products we are currently developing or commercializing may be less than what we currently project, which may cause our actual operating results to differ materially from our projections. |
| ● | The discontinuation, lack of commercial success, or loss of business with respect to a particular vehicle model or other customer solution for which we are a significant supplier to, could reduce our sales and adversely affect our profitability. |
| ● | We have identified a material weakness in our internal control over financial reporting. If our remediation of this material weakness is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. |
| ● | We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine. Our business, financial condition and results of operations could be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions. |
Legal and Regulatory Risks Related to Our Business
| ● | We are subject to governmental export and import control laws and regulations. Our failure to comply with these laws and regulations could have an adverse effect on our business, prospects, financial condition and results of operations. |
| ● | We are subject to, and must remain in compliance with, numerous laws and governmental regulations across various jurisdictions concerning the manufacturing, use, distribution and sale of our products. Some of our customers also require that we comply with their own unique requirements relating to these matters. These could impose substantial costs upon us and materially impact our ability to fulfill certain business opportunities. |
Risks Related to Our Intellectual Property
| ● | Despite the actions we are taking to defend and protect our intellectual property, we may not be able to adequately protect or enforce our intellectual property rights or prevent unauthorized parties from copying or reverse engineering our solutions. Our efforts to protect and enforce our intellectual property rights and prevent third parties from violating our rights may be costly. |
Risks Related to Ownership of Our Shares and Warrants
| ● | The Amended and Restated Charter requires, to the fullest extent permitted by law, that derivative actions brought in our name against our respective directors, officers, other employees or stockholders for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware, which may have the effect of discouraging lawsuits against our directors, officers, other employees or stockholders. |
| ● | Anti-takeover provisions contained in the Amended and Restated Charter and the Bylaws, as well as provisions of Delaware law, could impair a takeover attempt. |
| ● | Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us. |
| ● | Future sales, or the perception of future sales, by us or our stockholders in the public market could cause the market price for the common stock to decline. |
37
Risks Related to Our Business and Industry
We are an early stage company with a history of losses and expects to incur significant expenses and continuing losses for the foreseeable future.
We have incurred net losses on an annual basis since our inception. We incurred a net loss of approximately $19.6 million and $37.2 million for the years ended December 31, 2020 and December 31, 2021, respectively. We believe that we will continue to incur operating and net losses each quarter until at least the first quarter of 2024. Even if we are able to successfully develop and sell our lidar solutions, there can be no assurance that we will be commercially successful. Our potential profitability is dependent upon the successful development and successful commercial introduction and acceptance of our lidar solutions, which may not occur.
We expect the rate at which we will incur losses to be significantly higher in future periods as we:
| ● | expand our production capabilities to produce our lidar solutions, including costs associated with outsourcing the production of our lidar solutions; |
| ● | expand our design, development, installation and servicing capabilities; |
| ● | build up inventories of parts and components for our lidar solutions; |
| ● | produce an inventory of our lidar solutions; |
| ● | increase our sales and marketing activities and develop our distribution infrastructure; and |
| ● | continue to utilize our third-party partners for manufacturing, testing and commercialization. |
Because we will incur the costs and expenses from these efforts before we receive incremental revenues with respect thereto, our losses in future periods will be significant. In addition, we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in revenues, which would further increase our losses.
Our limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter.
We have been focused on developing lidar products and perception software for mass-market ADAS and autonomous driving systems and Smart Infrastructure since 2016. This relatively limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter. Risks and challenges we have faced or expect to face include, but are not limited to, our ability to:
| ● | develop and commercialize our products; |
| ● | produce and deliver lidar and software products of acceptable performance; |
| ● | forecast our revenue and budget for and manage our expenses; |
| ● | attract new customers, retain existing customers and expand existing commercial relationships; |
| ● | comply with existing and new or modified laws and regulations applicable to our business; |
| ● | plan for and manage capital expenditures for our current and future products, and manage our supply chain and supplier relationships related to our current and future products; |
| ● | anticipate and respond to macroeconomic changes and changes in the markets in which we operate; |
| ● | maintain and enhance the value of our reputation and brand; |
| ● | effectively manage our growth and business operations, including the impacts of the COVID-19 pandemic on our business; |
| ● | develop and protect intellectual property; |
38
| ● | hire, integrate and retain talented people at all levels of our organization; and |
| ● | successfully develop new solutions to enhance the experience of customers. |
If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere in this “Risk Factors” section, our business, financial condition and results of operations could be adversely affected. Further, because we have limited historical financial data and operate in a rapidly evolving market, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition and results of operations could be adversely affected.
Our forecasts and projections are based upon assumptions, analyses and internal estimates developed by our management. If these assumptions, analyses or estimates prove to be incorrect or inaccurate, our actual operating results may differ materially from those forecasted or projected.
Our forecasts and projections included in this report are subject to significant uncertainty and are based on assumptions, analyses and internal estimates developed by our management, any or all of which may not prove to be correct or accurate. If these assumptions, analyses or estimates prove to be incorrect or inaccurate, our actual operating results may differ materially from those forecasted or projected.
The forecasts and projections in this report include forecasts and estimates relating to the expected size and growth of the markets for which we operate or seek to enter. Such markets may not develop or grow, or may develop and grow at a lower rate than expected, and even if these markets experience the forecasted growth described in this report, we may not grow our business at similar rates, or at all. Our future growth is subject to many factors, including, among others, our ability to develop and commercialize our products and the market’s adoption of our products, both of which are subject to risks and uncertainties, many of which are beyond our control. Accordingly, the forecasts and estimates of market size and growth described in this report should not be taken as indicative of our future growth. In addition, these forecasts do not take into account the impact of the current COVID-19 pandemic, and we cannot assure you that these forecasts will not be materially and adversely affected as a result of the COVID-19 pandemic.
We continue to implement strategic initiatives designed to grow our business. These initiatives may prove more costly than we currently anticipate and we may not succeed in increasing our revenue in an amount sufficient to offset the costs of these initiatives and to achieve and maintain profitability.
We continue to make investments and implement initiatives designed to grow our business, including:
| ● | expanding our sales and marketing efforts to attract new customers in our target end markets; |
| ● | investing in R&D; |
| ● | investing in new applications and markets for our products by expanding relationships with existing customers and creating opportunities for new customers; |
| ● | further enhancing our partnerships with third-parties to develop manufacturing processes; and |
| ● | investing in legal, accounting, and other administrative functions necessary to support our operations as a public company. |
These initiatives may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue, if at all, in an amount sufficient to offset these higher expenses and to achieve and maintain profitability. The market opportunities we are pursuing are at various stages of development, and it may be many years before the end markets we expect to serve in the Automotive market generate demand for our products at scale, if at all. In the Smart Infrastructure market, we have a number of active projects and multiple developing engagement opportunities, but some of these relationships and market opportunities are also still in the early stages of development. Our revenue may be adversely affected for a number of reasons, including, but not limited to (i) the development and/or market acceptance of new technology that competes with our lidar products and automotive software, (ii) if certain automotive OEMs, or other market participants change their autonomous vehicle technology, (iii) failure of our customers to commercialize autonomous systems that include our solutions, (iv) our inability to effectively manage our inventory or manufacture products at scale, (v) our inability to enter new markets or help our customers adapt our products for new applications or (vi) our failure to attract new customers or expand orders from existing customers or increasing competition. Furthermore, it is difficult to predict the size and growth rate of our target markets, customer demand for our products, commercialization timelines, developments in autonomous sensing and related technology, the entry of competitive products, or the success of existing competitive products and services. For these reasons, we do not expect to achieve profitability over the near term. If our revenue does not grow over the long term, our ability to achieve and maintain profitability may be adversely affected, and the value of our business may significantly decrease.
39
Our ability to effectively manage our anticipated growth and expansion of operations will also require us to enhance our operational, financial and management controls and infrastructure, human resources policies and reporting systems. These enhancements and improvements will require significant capital expenditures, investments in additional headcount and other operating expenditures and allocation of valuable management and employee resources. Our future financial performance and ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and expansion. There are no guarantees that we will be able to do so in an efficient or timely manner, or at all.
If our lidar products are not selected for inclusion in ADAS and autonomous driving systems by automotive OEMs, automotive Tier 1 companies, mobility or technology companies or their respective suppliers, our business will be materially and adversely affected.
Automotive OEMs, Tier 1 suppliers to automotive OEMs, mobility or technology companies, and their respective suppliers design and develop autonomous driving and ADAS technology over several years. These automotive OEMs, Tier 1 suppliers, mobility or technology companies, and their respective suppliers undertake extensive testing or qualification processes prior to selecting a product such as our lidar products for use in a particular system, product or vehicle model, because such products will function as part of a larger system or platform and must meet certain other specifications. We spend significant time and resources to have our products selected by our customers and their suppliers for use in a particular system, product or vehicle model, which is known as a “series production win” or a “series production award.” In the case of autonomous driving and ADAS technology, a series production award means our lidar product has been selected for use in a particular vehicle model. However, if we do not achieve a series production award with respect to a particular vehicle model, we may not have an opportunity to supply our products to the automotive OEM for that vehicle model for a period of many years. In many cases, this period can be as long as five to seven or more years. If our products are not selected by an automotive OEM or our suppliers for one vehicle model or if our products are not successful in that vehicle model, it is unlikely that our product will be deployed in other vehicle models of that OEM. If we fail to win a significant number of vehicle models from one or more of automotive OEMs or their suppliers, our business, results of operations and financial condition will be materially and adversely affected. For more information about certain risks related to product selection, please see the risk factor in this Report captioned “The period of time from engagement to a series production award and then to implementation is long, typically spanning over several years, especially in the Automotive market, and our customer arrangements are subject to cancellation or postponement of contracts or unsuccessful implementation.”
We are reliant on key inputs and our inability to reduce and control the cost of such inputs could negatively impact the adoption of our products and our profitability.
The production of our sensors is dependent on producing or sourcing certain key components and raw materials at acceptable price levels. If we are unable to adequately reduce and control the costs of such key components, we will be unable to realize manufacturing costs targets, which could reduce the market adoption of our products, damage our reputation with current or prospective customers, and harm our brand, business, prospects, financial condition and operating results.
40
Continued pricing pressures, automotive OEM cost reduction initiatives and the ability of automotive OEMs to re-source or cancel vehicle or technology programs may result in losses or lower than anticipated margins, which will adversely affect our results of operations and financial condition.
Cost-cutting initiatives adopted by our customers often result in increased downward pressure on pricing. We expect that over the course of the terms of our arrangements with automotive OEMs, our customers may require step-downs in pricing. Automotive OEMs possess significant leverage over their suppliers, including us, because the automotive component supply industry is highly competitive, serves a limited number of customers and has a high fixed cost base. For example, our long-range lidars are currently in the low $1,000s range and, over the next five to six years, we expect that these prices could drop to the $500-600 range. For near-range lidars, we expect high volume ADAS target pricing to be in the $100 range within a few years. Accordingly, we expect to be subject to substantial continuing pressure from automotive OEMs and Tier 1 suppliers to reduce the price of our products. It is possible that pricing pressures beyond our expectations could intensify as automotive OEMs pursue restructuring, consolidation and cost-cutting initiatives. If we are unable to generate sufficient production cost savings in the future to offset price reductions, our gross margin and profitability would be adversely affected.
We expect to incur substantial R&D costs and devote significant resources to identifying and commercializing new products, which could significantly reduce our profitability and may never result in revenue to us.
Our future growth depends on penetrating new markets, adapting existing products to new applications and customer requirements, and introducing new products that achieve market acceptance. Our plans to incur substantial, and potentially increasing, R&D costs as part of our efforts to design, develop, manufacture and commercialize new products and enhance existing products. Our R&D expenses were approximately $4.9 million and $7.8 million for the three months ended March 31, 2021 and 2022, respectively, and are likely to grow in the future. Because we account for R&D as an operating expense, these expenditures will adversely affect our results of operations in the future. Further, our R&D program may not produce successful results, and our new products may not achieve market acceptance, create additional revenue or become profitable.
Although we believe that lidar is likely to become an essential sensor for autonomous vehicles and other emerging markets, market adoption of lidar is uncertain. If market adoption of lidar does not continue to develop, or develops more slowly than we expect, our business will be adversely affected.
While our lidar solutions can be applied to different use cases across end markets, a significant portion of our revenue is currently primarily generated from product sales of lidar sensors to direct customers. Despite the fact that the automotive industry has engaged in considerable effort to research and test lidar products for ADAS and autonomous driving applications, the automotive industry may not introduce lidar products in commercially available vehicles. However, lidar products remain relatively new and it is possible that other sensing modalities, or a new disruptive modality based on new or existing technology, including a combination of technology, will achieve acceptance or leadership in the ADAS and autonomous driving industries. Even if lidar products are used in initial generations of autonomous driving technology and certain ADAS applications, we cannot guarantee that lidar products will be designed into or included in subsequent generations of such commercialized technology. In addition, we expect that initial generations of autonomous vehicles will be focused on limited applications, such as robotaxis and delivery vehicles, and that mass market adoption of autonomous technology may lag behind these initial applications significantly. The speed of market growth for ADAS or autonomous vehicles is difficult if not impossible to predict, and it is more difficult to predict this market’s future growth in light of the economic consequences of the COVID-19 pandemic. Although we currently believe we are a leader in lidar-based systems for the ADAS market, by the time mass market adoption of ADAS and autonomous vehicle technology is achieved, we expect competition among providers of sensing technology based on lidar and other modalities to increase substantially. If commercialization of lidar products is not successful, or not as successful as we or the market expects, or if other sensing modalities gain acceptance by developers of ADAS or autonomous driving systems, automotive OEMs, regulators and safety organizations or other market participants by the time autonomous vehicle technology achieves mass market adoption, our business, results of operations and financial condition will be materially and adversely affected.
We are investing in and pursuing market opportunities outside of the Automotive markets, including in the Smart Infrastructure market. We believe that our future revenue growth, if any, will depend in part on our ability to expand within new markets such as these and to enter new markets as they emerge. Each of these markets presents distinct risks and, in many cases, requires us to address the particular requirements of that market.
41
Addressing these requirements can be time-consuming and costly. The market for lidar technology outside of automotive applications is relatively new, rapidly developing and unproven in many markets or industries. Many of our customers outside of the automotive industry are still in the testing and development phases and we cannot be certain that they will commercialize products or systems with our lidar products or at all. We cannot be certain that lidar will be sold into these markets, or any market outside of the Automotive market, at scale. Adoption of lidar products, including our products, outside of the automotive industry will depend on numerous factors, including: whether the technological capabilities of lidar and lidar-based products meet users’ current or anticipated needs, whether the benefits of designing lidar into larger sensing systems outweigh the costs, complexity and time needed to deploy such technology or replace or modify existing systems that may have used other modalities such as cameras and radar, whether users in other applications can move beyond the testing and development phases and proceed to commercializing systems supported by lidar technology and whether lidar developers such as us can keep pace with rapid technological change in certain developing markets and the global response to the COVID-19 pandemic and the length of any associated work stoppages. If lidar technology does not achieve commercial success outside of the automotive industry, or if the market develops at a pace slower than we expect, our business, results of operation and financial condition will be materially and adversely affected.
We are substantially dependent on our series production award from OEM-B and our relationship with Koito, and our business and prospects will be materially and adversely affected if OEM-B’s development or launch plans for the multiple vehicle models in which our products are expected to be deployed are significantly scaled back or terminated.
Our growth plans are substantially dependent on our series production award from OEM-B. We are the supplier of lidar to OEM-B’s next generation ADAS program, through Koito. Sales to Koito accounted for over 30% of our total revenues for the three months ended March 31, 2022 and 30% for the three months ended March 31, 2021. There can be no assurance that we will be able to maintain our relationship with OEM-B or Koito and secure orders from Koito for OEM-B programs. If OEM-B terminates or significantly alters or delays its next generation ADAS program and/or alters its relationship with us or with Koito in a manner that is adverse to us, our business would be materially adversely affected. Similarly, if we are unable to maintain our relationship with Koito, or the terms of our arrangement with Koito with respect to the OEM-B series production award differ from our expectations, including with respect to volume, pricing and timing, then our business and prospects would be materially adversely affected.
The period of time from engagement to a series production award and then to implementation is long, typically spanning over several years, especially in the Automotive market, and our customer arrangements are subject to cancellation or postponement of contracts or unsuccessful implementation.
Our customers generally must make significant commitments of resources to test and validate our products and confirm that they can integrate with other technologies before including them in any particular system, product or vehicle model. We, in turn, spend significant time and resources to have our products selected by our customers and their suppliers for use in a particular system, product or vehicle model, which is known as a series production award. The development cycles of our products with new customers varies widely depending on the application, market, customer and the complexity of the product. In the Automotive market, this development cycle can be five to seven years, including the period from series production award to production, which can be three to four years. In the Smart Infrastructure market, this development cycle can be one to two years. Further, even after obtaining a series production award with a customer, we are subject to the risk that such customer cancels or postpones implementation of our technology, as well as that we will not be able to integrate our technology successfully into a larger system with other sensing modalities. Further, our revenue could be less than forecasted if the system, product or vehicle model that includes our lidar products is unsuccessful, including for reasons unrelated to our technology. Long development cycles and product cancellations or postponements may adversely affect our business, prospects, results of operations and financial condition.
We may experience difficulties in managing our growth and expanding our operations.
We expect to experience significant growth in the scope and nature of our operations. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial and management controls, compliance programs and reporting systems. We are currently in the process of strengthening our compliance programs, including our compliance programs related to export controls, privacy and cybersecurity and anti-corruption. We may not be able to implement improvements in an efficient or timely manner and may discover deficiencies in existing controls, programs, systems and procedures, which could have an adverse effect on our business, reputation and financial results.
42
We rely on third-party suppliers and, because some of the raw materials and key components in our products come from limited or single-source suppliers, we are susceptible to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain and could delay deliveries of our products to customers.
While the components that go into the manufacture of our solutions are generally built from modular, commonly available materials, they are sourced from third-party suppliers. To date, we have produced our products in relatively limited quantities. Although we have limited experience in managing our supply chain to manufacture and deliver our products at scale, our future success will depend on our ability to manage our supply chain to manufacture and deliver our products at scale. Some of the key components used to manufacture our products come from limited or single source suppliers. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. We have a global supply chain, and the COVID-19 pandemic and other health epidemics and outbreaks have adversely affected, and may in the future adversely affect our ability to source components in a timely or cost effective manner from our third-party suppliers due to, among other things, work stoppages or interruptions. Additionally, our MMT®-based lidar uses laser diodes. Any shortage of these laser diodes could materially and adversely affect our ability to manufacture our solutions. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. We may in the future experience component shortages and price fluctuations of certain key components and materials, and the predictability of the availability and pricing of these components may be limited. Component shortages or pricing fluctuations could be material in the future. In the event of a component shortage, supply interruption or material pricing change from suppliers of these components, we may not be able to develop alternate sources in a timely manner or at all in the case of sole or limited sources. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly and we may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our requirements or to fill customer orders in a timely manner. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would adversely affect our ability to meet our scheduled product deliveries to our customers. This could adversely affect our relationships with our customers and channel partners and could cause delays in shipment of our products and adversely affect our operating results. In addition, increased component costs could result in lower gross margins. Even where we are able to pass increased component costs along to our customers, there may be a lapse of time before we are able to do so such that we must absorb the increased cost. If we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver products to our customers, which may result in such customers using competitive products instead of ours.
Because our sales have been primarily to customers engaged in development of ADAS deployments in consumer vehicles and pilot projects in the Smart Infrastructure segment and our orders are project-based, we expect our results of operations to fluctuate on a quarterly and annual basis.
Our quarterly results of operations have fluctuated in the past and may vary significantly in the future. As such, historical comparisons of our operating results may not be meaningful. In particular, because our sales to date have primarily been to customers making purchases for development of ADAS deployments in consumer vehicles, sales in any given quarter can fluctuate based on the timing and success of our customers’ projects. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control and may not fully reflect the underlying performance of our business. These fluctuations could adversely affect our ability to meet our expectations or those of securities analysts, ratings agencies or investors. If we do not meet these expectations for any period, the value of our business and our securities could decline significantly. Factors that may cause these quarterly fluctuations include, but are not limited to, those listed below:
| ● | the timing and magnitude of orders and shipments of our products in any quarter; |
| ● | the timing and magnitude of sales returns and warranty claims of our products in any quarter; |
| ● | the timing and magnitude of non-recurring engineering services revenue in any quarter; |
| ● | pricing changes we may adopt to drive market adoption or in response to competitive pressure; |
43
| ● | the ability to retain our existing customers and attract new customers; |
| ● | the ability to develop, introduce, manufacture and ship in a timely manner products that meet customer requirements; |
| ● | disruptions in our sales channels or termination of our relationship with important channel partners; |
| ● | delays in customers’ purchasing cycles or deferments of customers’ purchases in anticipation of new products or updates from us or our competitors; |
| ● | fluctuations in demand pressures for our products; |
| ● | the mix of products sold in any quarter; |
| ● | the duration of COVID-19 and the time it takes for economic recovery; |
| ● | the timing and rate of broader market adoption of autonomous systems utilizing our solutions across the automotive and other market sectors; |
| ● | market acceptance of lidar and further technological advancements by our competitors and other market participants; |
| ● | the ability of our customers to commercialize systems that incorporate our products; |
| ● | any change in the competitive dynamics of our markets, including consolidation of competitors, regulatory developments and new market entrants; |
| ● | the ability to effectively manage our inventory; |
| ● | changes in the source, cost, availability of and regulations pertaining to materials we use; |
| ● | adverse litigation, judgments, settlements or other litigation-related costs, or claims that may give rise to such costs; and |
| ● | general economic, industry and market conditions, including trade disputes. |
Our transition to an outsourced manufacturing business model may not be successful, which could harm our ability to deliver products and recognize revenue.
We are transitioning from a manufacturing model in which we primarily manufactured and assembled our products at our San Jose, California location, to one where we rely on third-party manufacturers and tier 1 partners in Japan and potentially other foreign and domestic locations. We currently have an agreement with one such manufacturer of key components and are in negotiations with other third parties to provide contract manufacturing of certain of our products. As we transition manufacturing to third-party manufacturers and Tier 1 partners, we plan to maintain certain levels of in-house manufacturing capabilities for new product introduction, prototyping, and small quantity order fulfillment. We believe the use of third-party manufacturers and Tier 1 partners will have benefits, but in the near term, while we begin manufacturing with new partners, we may lose revenue, incur increased costs and potentially harm our customer relationships.
Reliance on third-party manufacturers reduces our control over the manufacturing process, including reduced control over quality, product costs and product supply and timing. We may experience delays in shipments or issues concerning product quality from our third-party manufacturers. If any of our third-party manufacturers experience interruptions, delays or disruptions in supplying our products, including by natural disasters, COVID-19, other health epidemics and outbreaks, or work stoppages or capacity constraints, our ability to ship products to distributors and customers would be delayed. In addition, unfavorable economic conditions could result in financial distress among third-party manufacturers upon which we rely, thereby increasing the risk of disruption of supplies necessary to fulfill our production requirements and meet customer demands. Additionally, if any of our third-party manufacturers experience quality control problems in their manufacturing operations and our products do not meet customer or regulatory requirements, we could be required to cover the cost of repair or replacement of any defective products. These delays or product quality issues could have an immediate and material adverse effect on our ability to fulfill orders and could have a negative effect on our operating results. In addition, such delays or issues with product quality could adversely affect our reputation and our relationship with our channel partners. If third-party manufacturers experience financial, operational, manufacturing capacity or other difficulties, or experience shortages in required components, or if they are otherwise unable or unwilling to continue to manufacture our products in required volumes or at all, our supply may be disrupted, we may be required to seek alternate manufacturers and we may be required to re-design our products. It would be time-consuming, and could be costly and impracticable, to begin to use new manufacturers and designs, and such changes could cause significant interruptions in supply and could have an adverse effect on our ability to meet our scheduled product deliveries and may subsequently lead to the loss of sales. While we take measures to protect our trade secrets, the use of third-party manufacturers may also risk disclosure of our innovative and proprietary manufacturing methodologies, which could adversely affect our business.
44
If we further expand our international manufacturing operations, we may face risks associated with manufacturing operations outside the United States.
We expect to maintain manufacturing at our headquarters in San Jose, California for product development and small amounts of fulfillment. If we were to begin manufacturing on our own outside the United States, such activity would be subject to several inherent risks, including:
| ● | foreign currency fluctuations; |
| ● | local economic conditions; |
| ● | political instability; |
| ● | import or export requirements; |
| ● | failure by us, our collaborators or our distributors to obtain regulatory clearance, authorization or approval for the use of our products and services in various countries; |
| ● | foreign government regulatory requirements; |
| ● | reduced protection for intellectual property rights in some countries; |
| ● | regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the Foreign Corrupt Practices Act of 1977 (the “FCPA”), our books and records provisions, or our anti-bribery provisions or laws similar to the FCPA in other jurisdictions in which we may in the future operate, such as the United Kingdom’s Bribery Act of 2010 and anti-bribery requirements of member states in the European Union; |
| ● | tariffs and other trade barriers and restrictions; and |
| ● | potentially adverse tax consequences. |
If we further expand our limited manufacturing operations outside the United States, we may be subject to these risks. Such risks could increase our costs and decrease our profit margins.
Even though many of the components in our lidars are modular and can be built using readily available materials, we, our outsourcing partners and our suppliers may rely on complex machinery for our production, which involves a significant degree of risk and uncertainty in terms of operational performance and costs. We, our outsourcing partners and our suppliers may also rely on highly-skilled labor for our production, and if such highly-skilled labor is unavailable, our business could be adversely affected.
We, our outsourcing partners and our suppliers may rely on complex machinery for the production, assembly and installation of our lidar solutions, which will involve a significant degree of uncertainty and risk in terms of operational performance and costs. Our production facilities and the facilities of our outsourcing partners and suppliers consist of large-scale machinery combining many components. These components may suffer unexpected malfunctions from time to time and will depend on repairs and spare parts to resume operations, which may not be available when needed. Unexpected malfunctions of these components may significantly affect the intended operational efficiency. In addition, we and our outsourcing partners and our suppliers may also rely on highly-skilled labor for our assembly and production. If such highly-skilled labor is unavailable, our business could be adversely affected. Operational performance and costs can be difficult to predict and are often influenced by factors outside of our control, such as, but not limited to, scarcity of natural resources, environmental hazards and remediation, costs associated with decommissioning of machines, labor disputes and strikes, difficulty or delays in obtaining governmental permits, damages or defects in electronic systems, industrial accidents, fire, seismic activity and natural disasters. Should operational risks materialize, it may result in the personal injury to or death of workers, the loss of production equipment, damage to production facilities, monetary losses, delays and unanticipated fluctuations in production, environmental damage, administrative fines, increased insurance costs and potential legal liabilities, all which could have a material adverse effect on our business, prospects, financial condition or operating results.
45
As part of growing our business, we may make acquisitions. If we fail to successfully select, execute or integrate our acquisitions, then our business, results of operations and financial condition could be materially adversely affected.
From time to time, we may undertake acquisitions to add new products and technologies, acquire talent, gain new sales channels or enter into new markets or sales territories. In addition to possible stockholder approval, we may need approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable laws and regulations, which could result in increased delay and costs, and may disrupt our business strategy if we fail to do so. Furthermore, acquisitions and the subsequent integration of new assets, businesses, key personnel, customers, vendors and suppliers require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant.
To date, we have no experience with acquisitions and the integration of acquired technology and personnel. Failure to successfully identify, complete, manage and integrate acquisitions could materially and adversely affect our business, financial condition and results of operations and could cause our stock price to decline.
Changes in our product mix may impact our financial performance.
Our financial performance can be affected by the mix of products we sell during a given period. If our sales include more of the lower gross margin products than higher gross margin products, our results of operations and financial condition may be adversely affected. There can be no guarantees that we will be able to successfully alter our product mix so that we are selling more of our high gross margin products. If actual results vary from this projected product mix of sales, our results of operations and financial condition could be adversely affected.
Our sales and operations in international markets expose us to operational, financial and regulatory risks.
International sales comprise a significant amount of our overall revenue. Sales to international customers accounted for 59% of our revenue for the three months ended March 31, 2022 and 52% of our revenue for the three months ended March 31, 2021. We are committed to growing our international sales, and while we have committed resources to expanding our international operations and sales channels, these efforts may not be successful. International operations are subject to a number of other risks, including, but not limited to:
| ● | exchange rate fluctuations; |
| ● | political and economic instability, international terrorism and anti-American sentiment, particularly in emerging markets; |
| ● | global or regional health crises, such as COVID-19 or other health epidemics and outbreaks; |
| ● | potential for violations of anti-corruption laws and regulations, such as those related to bribery and fraud; |
| ● | preference for locally branded products, and laws and business practices favoring local competition; |
| ● | increased difficulty in managing inventory; |
| ● | delayed revenue recognition; |
46
| ● | less effective protection of intellectual property; |
| ● | stringent regulation of the autonomous or other systems or products using our products and stringent consumer protection and product compliance regulations, including but not limited to General Data Protection Regulation in the European Union, European competition law, the Restriction of Hazardous Substances Directive, the Waste Electrical and Electronic Equipment Directive and the European Ecodesign Directive that are costly to comply with and may vary from country to country; |
| ● | difficulties and costs of staffing and managing foreign operations; |
| ● | import and export laws and the impact of tariffs; |