Item 1. Financial Statements
OUSTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 160,783 | | | $ | 182,644 | |
| Restricted cash, current | 977 | | | 977 | |
| Accounts receivable, net | 9,881 | | | 10,723 | |
| Inventory | 11,619 | | | 7,448 | |
| Prepaid expenses and other current assets | 3,006 | | | 5,566 | |
| Total current assets | 186,266 | | | 207,358 | |
| Property and equipment, net | 8,968 | | | 10,054 | |
| Operating lease, right-of-use assets | 14,582 | | | 15,156 | |
| Goodwill | 51,076 | | | 51,076 | |
| Intangible assets, net | 21,530 | | | 22,652 | |
| Restricted cash, non-current | 1,035 | | | 1,035 | |
| Other non-current assets | 452 | | | 371 | |
| Total assets | $ | 283,909 | | | $ | 307,702 | |
| Liabilities, redeemable convertible preferred stock and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 9,469 | | | $ | 4,863 | |
| Accrued and other current liabilities | 11,789 | | | 14,173 | |
| Operating lease liability, current portion | 2,888 | | | 3,067 | |
| Total current liabilities | 24,146 | | | 22,103 | |
| Operating lease liability, long-term portion | 15,685 | | | 16,208 | |
Warrant liabilities (At March 31, 2022 and December 31, 2021 related party $2,058 and $2,669, respectively) | 5,881 | | | 7,626 | |
| Other non-current liabilities | 1,018 | | | 1,065 | |
| Total liabilities | 46,730 | | | 47,002 | |
| Commitments and contingencies (Note 7) | | | |
Redeemable convertible preferred stock, $0.0001 par value per share; 100,000,000 shares authorized at March 31, 2022 and December 31, 2021; Nil shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively (aggregate liquidation preference of nil at March 31, 2022 and December 31, 2021, respectively) | — | | | — | |
| Stockholders’ equity: | | | |
Common stock, $0.0001 par value; 1,000,000,000 shares authorized at March 31, 2022 and December 31, 2021, respectively; 173,602,503 and 172,200,417 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 17 | | | 17 | |
| Additional paid-in capital | 572,933 | | | 564,045 | |
| Accumulated deficit | (335,753) | | | (303,356) | |
| Accumulated other comprehensive loss | (18) | | | (6) | |
| Total stockholders’ equity | 237,179 | | | 260,700 | |
| Total liabilities, redeemable convertible preferred stock, and stockholders’ equity | $ | 283,909 | | | $ | 307,702 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
OUSTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(in thousands, except share and per share data)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| | | |
| Product revenue | $ | 8,558 | | | $ | 6,611 | |
| | | |
| | | |
| Cost of product revenue | 5,967 | | | 4,868 | |
| | | |
| | | |
| | | |
| Gross profit | 2,591 | | | 1,743 | |
| Operating expenses: | | | |
| Research and development | 15,906 | | | 4,712 | |
| Sales and marketing | 7,090 | | | 3,426 | |
| General and administrative | 13,783 | | | 9,907 | |
| Total operating expenses | 36,779 | | | 18,045 | |
| Loss from operations | (34,188) | | | (16,302) | |
| Other (expense) income: | | | |
| Interest income | 154 | | | 1 | |
| Interest expense | — | | | (504) | |
| Other income (expense), net | 1,684 | | | (4,152) | |
| Total other expense, net | 1,838 | | | (4,655) | |
| Loss before income taxes | (32,350) | | | (20,957) | |
| Provision for income tax expense | 47 | | | — | |
| Net loss | $ | (32,397) | | | $ | (20,957) | |
| Other comprehensive loss | | | |
| Foreign currency translation adjustments | $ | (12) | | | — | |
| Total comprehensive loss | $ | (32,409) | | | $ | (20,957) | |
| Net loss per common share, basic and diluted | $ | (0.19) | | | $ | (0.38) | |
| Weighted-average shares used to compute basic and diluted net loss per share | 170,906,196 | | | 55,688,281 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
OUSTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Convertible
Preferred Stock | | Common Stock | | Additional
Paid-in-
Capital | | Accumulated
Deficit | | Accumulated other comprehensive loss | | Total
Stockholders’ Equity |
| Shares (1) | | Amount | | Shares (1) | | Amount | | | | |
| Balance — December 31, 2021 | — | | | $ | — | | | 172,200,417 | | | $ | 17 | | | $ | 564,045 | | | $ | (303,356) | | | $ | (6) | | | $ | 260,700 | |
| Issuance of common stock upon exercise of stock options | — | | | — | | | 822,702 | | | — | | | 209 | | | — | | | — | | | 209 | |
| Issuance of common stock upon exercise of restricted stock awards - net of tax withholding | — | | | — | | | 812,491 | | | — | | | (59) | | | — | | | — | | | (59) | |
| Repurchase of common stock | — | | | — | | | (233,107) | | | — | | | (31) | | | — | | | — | | | (31) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 8,750 | | | — | | | — | | | 8,750 | |
| Vesting of early exercised stock options | — | | | — | | | — | | | — | | | 19 | | | — | | | — | | | 19 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (32,397) | | | — | | | (32,397) | |
| Other Comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (12) | | | (12) | |
| Balance — March 31, 2022 | — | | | $ | — | | | 173,602,503 | | | $ | 17 | | | $ | 572,933 | | | $ | (335,753) | | | $ | (18) | | | $ | 237,179 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Redeemable Convertible
Preferred Stock | | Common Stock | | Additional
Paid-in-
Capital | | Accumulated
Deficit | | Accumulated other comprehensive loss | | Total
Stockholders’ Equity
(Deficit) |
| Shares (1) | | Amount | | Shares (1) | | Amount | | | | |
| Balance — December 31, 2020 | 88,434,754 | | | $ | 39,225 | | | 33,327,294 | | | $ | — | | | $ | 133,468 | | | $ | (209,375) | | | $ | — | | | $ | (75,907) | |
| Issuance of common stock upon exercise of stock options | — | | | — | | | 727,114 | | | 1 | | | 189 | | | — | | | — | | | 190 | |
| Repurchase of common stock | — | | | — | | | (220,561) | | | — | | | (43) | | | — | | | — | | | (43) | |
| Issuance of redeemable convertible preferred stock upon exercise of warrants | 4,232,947 | | | 58,097 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Conversion of redeemable convertible preferred stock to common stock | (92,667,701) | | | (97,322) | | | 92,667,701 | | | 12 | | | 97,322 | | | — | | | — | | | 97,334 | |
Issuance of common stock upon merger and private offering, net of acquired private placement warrants of $19,377 | — | | | — | | | 34,947,657 | | | 3 | | | 272,061 | | | — | | | — | | | 272,064 | |
| Offering costs in connection with the merger | — | | | — | | | — | | | — | | | (26,620) | | | — | | | — | | | (26,620) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 5,256 | | | — | | | — | | | 5,256 | |
| Vesting of early exercised stock options | — | | | — | | | — | | | — | | | 438 | | | — | | | — | | | 438 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (20,957) | | | — | | | (20,957) | |
| Balance — March 31, 2021 | — | | | $ | — | | | 161,449,205 | | | $ | 16 | | | $ | 482,071 | | | $ | (230,332) | | | $ | — | | | $ | 251,755 | |
(1) The shares of the Company’s common and redeemable convertible preferred stock, prior to the Merger (as defined in Note 1), have been retroactively restated as shares reflecting the exchange ratio of approximately 0.703 established in the Merger as described in Note 1.
The accompanying notes are an integral part of these condensed consolidated financial statements.
OUSTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net loss | $ | (32,397) | | | $ | (20,957) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 2,385 | | | 1,095 | |
| Stock-based compensation | 8,750 | | | 5,256 | |
| | | |
| Change in right-of-use asset | 644 | | | 520 | |
| Interest expense on notes and convertible debt | — | | | 36 | |
| Amortization of debt issuance costs and debt discount | — | | | 250 | |
| Change in fair value of warrant liabilities | (1,745) | | | 4,152 | |
| | | |
| | | |
| Inventory write down | 203 | | | — | |
| Gain from disposal of property and equipment | (100) | | | — | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 842 | | | (140) | |
| Inventory | (4,373) | | | (476) | |
| Prepaid expenses and other assets | 2,480 | | | (1,202) | |
| Accounts payable | 4,807 | | | (1) | |
| Accrued and other liabilities | (2,551) | | | (254) | |
| Operating lease liability | (772) | | | (678) | |
| Net cash used in operating activities | (21,827) | | | (12,399) | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Proceeds from sale of property and equipment | 275 | | | — | |
| Purchases of property and equipment | (416) | | | (597) | |
| Net cash used in investing activities | (141) | | | (597) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Proceeds from the merger and private offering | — | | | 291,454 | |
| Payment of offering costs | — | | | (26,116) | |
| | | |
| Repayment of debt | — | | | (7,000) | |
| Proceeds from issuance of promissory notes to related parties | — | | | 5,000 | |
| Repayment of promissory notes to related parties | — | | | (5,000) | |
| Repurchase of common stock | (31) | | | (43) | |
| Proceeds from exercise of stock options | 209 | | | 504 | |
| Taxes paid related to net share settlement of equity awards | (59) | | | — | |
| Net cash provided by financing activities | 119 | | | 258,799 | |
| Effect of exchange rates on cash and cash equivalents | (12) | | | — | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (21,861) | | | 245,803 | |
| Cash, cash equivalents and restricted cash at beginning of period | 184,656 | | | 12,642 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 162,795 | | | $ | 258,445 | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
| Cash paid for interest | $ | — | | | $ | 635 | |
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: | | | |
| Property and equipment purchases included in accounts payable and accrued liabilities | $ | 377 | | | $ | 100 | |
| Private placement warrants acquired as part of the merger | $ | — | | | $ | 19,377 | |
| Issuance of redeemable convertible preferred stock upon exercise of warrants | $ | — | | | $ | 58,097 | |
| Conversion of redeemable convertible preferred stock to common stock | $ | — | | | $ | 97,322 | |
| Offering costs not yet paid | $ | — | | | $ | 504 | |
| | | |
| | | |
| | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
OUSTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Description of Business and Basis of Presentation
Description of Business
Ouster, Inc. was incorporated in the state of Delaware on June 4, 2020. The Company’s operating subsidiary, Ouster Technologies, Inc. (“OTI” and prior to the Merger (as defined below), named Ouster, Inc.), was incorporated in the state of Delaware on June 30, 2015. The Company is a leading provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, allowing each to understand and visualize the surrounding world and ultimately enabling safe operation and ubiquitous autonomy. Unless the context otherwise requires, references in this subsection to “the Company” refer to the business and operations of OTI (formerly known as Ouster, Inc.) and its consolidated subsidiaries prior to the Merger (as defined below) and to Ouster, Inc. (formerly known as Colonnade Acquisition Corp.) and its consolidated subsidiaries following the consummation of the Merger.
Colonnade Acquisition Corp. (“CLA”), the Company’s legal predecessor, was originally a blank check company incorporated as a Cayman Islands exempted company on June 4, 2020. CLA was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. On March 11, 2021, CLA consummated a merger with the Company pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of December 21, 2020, details of which are included below.
Basis of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries (all of which are wholly owned) and have been prepared in conformity with U.S. generally accepted accounting principles (“US GAAP”) applicable to interim periods. The functional currency for the Company is the United States dollar. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the results of operations for the periods shown. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021 and the notes related thereto, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. Certain information and note disclosures normally included in the audited financial statements prepared in accordance with US GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. The results of operations for any interim period are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other future years or interim periods.
Impact of the COVID-19 Pandemic
Ouster has been actively monitoring the COVID-19 pandemic on a global scale and continues to evaluate the long-term impacts on the business while keeping abreast of the latest developments, particularly the variants of the virus, to ensure preparedness for Ouster’s employees and its business. We maintain our commitment to protect the health and safety of our employees and customers. We continue to adapt and enhance our safety protocols as we follow the guidance from local authorities. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, research and development costs and employee-related amounts, will depend on future events that are by nature uncertain, including as a result of new information that continues to emerge concerning the virus, its variants, the deployment and effectiveness of vaccination roll-outs, vaccination hesitancy, and the actions taken to contain the virus or treat it, as well as the economic impact on local, regional, national and international customers and markets. Thus, the Company is not able to estimate the future consequences on its operations, its financial condition, or its liquidity.
Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis. The Company has experienced recurring losses from operations, and negative cash flows from operations. As of March 31, 2022, the Company had an accumulated deficit of approximately $335.8 million. The Company has historically financed its operations primarily through the Merger and related transactions, the sale of convertible notes, equity securities, proceeds from debt and, to a lesser extent, cash received from sales. Management expects significant operating losses and negative cash flows from operations to continue for the foreseeable future. The Company expects to continue investing in product development and sales and marketing activities. The long-term continuation of the Company’s business plan is dependent upon the generation of sufficient revenues from its products to offset expenses. In the event that the Company does not generate sufficient cash flows from operations and is unable to obtain funding, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to continue operations. The Company has concluded that its cash and cash equivalents as of March 31, 2022 are sufficient for the Company to continue as a going concern for at least one year from the date these unaudited condensed consolidated financial statements are available for issuance.
Merger Agreement with Colonnade Acquisition Corp. and Beam Merger Sub, Inc.
On December 21, 2020, OTI entered into the Merger Agreement with CLA and Beam Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and subsidiary of CLA. OTI’s board of directors unanimously approved OTI’s entry into the Merger Agreement, and on March 11, 2021, the transactions contemplated by the Merger Agreement were consummated. Pursuant to the terms of the Merger Agreement, (i) CLA domesticated as a corporation incorporated under the laws of the State of Delaware and changed its name to “Ouster, Inc.” and (ii) Merger Sub merged with and into OTI (such transactions contemplated by the Merger Agreement, the “Merger”), with OTI surviving the Merger.
As a result of the Merger, among other things, (1) each of the then issued and outstanding 5,000,000 CLA Class B ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class B ordinary shares”) converted automatically, on a one-for-one basis, into a CLA Class A ordinary share (as defined below), (2) immediately following the conversion described in clause (1), each of the then issued and outstanding 25,000,000 Class A ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class A ordinary shares”), converted automatically, on a one-for-one basis, into a share of common stock, par value $0.0001 per share, of Ouster (the “Ouster common stock”), (3) each of the then issued and outstanding 10,000,000 redeemable warrants of CLA (the “CLA warrants”) converted automatically into a redeemable warrant to purchase one share of Ouster common stock (the “Public warrants”) pursuant to the Warrant Agreement, dated August 20, 2020 (the “Warrant Agreement”), between CLA and Continental Stock Transfer & Trust Company (“Continental”), as warrant agent, and (4) each of the then issued and outstanding units of CLA that had not been previously separated into the underlying CLA Class A ordinary shares and underlying CLA warrants upon the request of the holder thereof (the “CLA units”), were cancelled and entitled the holder thereof to one share of Ouster common stock and one-half of one Public warrant, and (5) each of the then issued and outstanding 6,000,000 private placement warrants of CLA (the “Private Placement warrants”) converted automatically into a Public warrant pursuant to the Warrant Agreement. No fractional Public warrants were issued upon separation of the CLA units.
Immediately prior to the effective time of the Merger, (1) each share of OTI’s Series B Preferred Stock, par value $0.00001 per share (the “OTI Preferred Stock”), converted into one share of common stock, par value $0.00001 per share, of OTI (the “OTI common stock” and, together with OTI Preferred Stock, the “OTI Capital Stock”) (such conversion, the “OTI Preferred Conversion”) and (2) all of the outstanding warrants to purchase shares of OTI Capital Stock were exercised in full or terminated in accordance with their respective terms (the “OTI Warrant Settlement”).
As a result of and upon the closing of the Merger, among other things, all shares of OTI Capital Stock (after giving effect to the OTI Warrant Settlement) outstanding immediately prior to the closing of the Merger together with shares of OTI common stock reserved in respect of options to purchase shares of OTI common stock and restricted shares of OTI common stock (together, the “OTI Awards”) outstanding immediately prior to the closing of the Merger that were converted into awards based on Ouster common stock, were cancelled in exchange for the right to receive, or the reservation of, an aggregate of 150,000,000 shares of Ouster common stock (at a deemed value of $10.00 per share), which, in the case of OTI Awards, were shares underlying awards based on Ouster common stock, representing a fully-diluted pre-transaction. Upon closing of the Merger, the Company received gross proceeds of $299.9 million from the Merger and private offering, offset by $8.5 million of pre-merger costs relating to CLA and offerings costs of $26.6 million.
The Merger was accounted for as a reverse recapitalization under US GAAP. Under this method of accounting, CLA is treated as the “acquired” company for financial reporting purposes. This determination is primarily based on OTI stockholders comprising a relative majority of the voting power of the Company and having the ability to nominate the members of the board
of directors of the Company after the Merger, OTI’s operations prior to the Merger comprising the only ongoing operations of the Company following the Merger, and OTI’s senior management prior to the Merger comprising a majority of the senior management of the Company following the Merger. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of OTI with the Merger being treated as the equivalent of OTI issuing stock for the net assets of CLA, accompanied by a recapitalization whereby no goodwill or other intangible assets are recorded. Transactions and balances prior to the Merger are those of OTI. The shares and net loss per share available to holders of OTI’s common stock prior to the Merger have been retroactively restated as shares reflecting the exchange ratio established in the Merger Agreement.
PIPE Investment
On December 21, 2020, concurrently with the execution of the Merger Agreement, CLA entered into subscription agreements with certain institutional and accredited investors (collectively, the “PIPE Investors”), pursuant to which the PIPE Investors agreed to purchase, in the aggregate, 10,000,000 shares of Ouster common stock at $10.00 per share for an aggregate commitment amount of $100,000,000 (the “PIPE Investment”), a portion of which was funded by certain affiliates of Colonnade Sponsor LLC, CLA’s sponsor (the “Sponsor”). The PIPE Investment was consummated substantially concurrently with the closing of the Merger.
Note 2 – Summary of Significant Accounting Policies
During the three months ended March 31, 2022, there were no significant changes made to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06). ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU also simplify the guidance in ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The new standard is effective for the Company for annual periods beginning December 15, 2021. The Company adopted this ASU as of January 1, 2022 using a modified retrospective method of transition, which did not have an impact on its condensed consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements not yet adopted
The Company considers the applicability and impact of all ASUs. ASUs not referenced below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.
Concentrations of credit risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash, cash equivalents, and restricted cash, and accounts receivable. Cash, cash equivalents and restricted cash are deposited with federally insured commercial banks in the United States and at times cash balances may be in excess of federal insurance limits. The Company generally does not require collateral or other security deposits for accounts receivable.
To reduce credit risk, the Company considers customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms when determining the collectability of specific customer accounts. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
Accounts receivable from the Company’s major customers representing 10% or more of total accounts receivable was as follows:
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Customer A | * | | 11 | % |
| | | |
| | | |
* Customer accounted for less than 10% of total accounts receivable in the period.
Revenue from the Company’s major customers representing 10% or more of total revenue was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Customer B | * | | 28 | % |
| | | |
* Customer accounted for less than 10% of total revenue in the period.
Concentrations of supplier risk
One supplier accounted for approximately 31% of total purchases during the three months ended March 31, 2022 and accounted for 52% of total accounts payable as of March 31, 2022. One supplier accounted for approximately 17% of total purchases during the three months ended March 31, 2021 and accounted for 55% of total accounts payable balance as of December 31, 2021.
Note 3. Fair Value of Financial Instruments
The Company applies the fair value measurement accounting standard whenever other accounting pronouncements require or permit fair value measurements. Fair value is defined in the accounting standard as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 - Instruments whose significant value drivers are unobservable.
On March 31, 2022, the Company’s Level 3 liabilities consisted of the Private Placement warrant liability. The determination of the fair value of warrant liability is discussed in Note 6.
On December 31, 2021, the Company’s Level 3 liabilities consisted of the redeemable convertible preferred stock warrant liability. The determination of the fair value of warrant liability is discussed in Note 6.
The following table provides information by level for the Company’s assets and liabilities that were measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Money market funds | $ | 152,984 | | | $ | — | | | $ | — | | | $ | 152,984 | |
| Total financial assets | $ | 152,984 | | | $ | — | | | $ | — | | | $ | 152,984 | |
| Liabilities | | | | | | | |
| Warrant liabilities | $ | — | | | $ | — | | | $ | 5,881 | | | $ | 5,881 | |
| Total financial liabilities | $ | — | | | $ | — | | | $ | 5,881 | | | $ | 5,881 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | |
| Money market funds | $ | 177,513 | | | $ | — | | | $ | — | | | $ | 177,513 | |
| Total financial assets | $ | 177,513 | | | $ | — | | | $ | — | | | $ | 177,513 | |
| Liabilities | | | | | | | |
| Warrant liabilities | $ | — | | | $ | — | | | $ | 7,626 | | | $ | 7,626 | |
| Total financial liabilities | $ | — | | | $ | — | | | $ | 7,626 | | | $ | 7,626 | |
Money market funds are included within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The fair value of the Private Placement warrant liabilities is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the warrant liabilities, the Company used the Black-Scholes option pricing model to estimate the fair value using unobservable inputs including the expected term, expected volatility, risk-free interest rate and dividend yield (see Note 6).
The following table presents a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):
| | | | | | | | | | | |
| Redeemable
Convertible
Preferred Stock
Warrant Liability | | Private Placement Warrant Liability |
| Fair value as of December 31, 2021 | $ | — | | | $ | (7,626) | |
| Change in the fair value included in other income (expense), net | — | | | 1,745 | |
| Fair value as of March 31, 2022 | $ | — | | | $ | (5,881) | |
| | | |
| Redeemable
Convertible
Preferred Stock
Warrant Liability | | Private Placement Warrant Liability |
| Fair value as of December 31, 2020 | (49,293) | | | — | |
| Private placement warrant liability acquired as part of the merger | — | | | (19,377) | |
| Change in the fair value included in other income (expense), net | (8,804) | | | 4,652 | |
| Issuance of preferred stock upon exercise of warrants | 58,097 | | | — | |
| Fair value as of March 31, 2021 | $ | — | | | $ | (14,725) | |
Disclosure of Fair Values
Our financial instruments that are not re-measured at fair value include accounts receivable, accounts payable, accrued and other current liabilities, convertible notes and debt. The carrying values of these financial instruments approximate their fair values.
Note 4. Balance Sheet Components
Cash and Cash Equivalents
The Company’s cash and cash equivalents consist of the following (in thousands):
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Cash | $ | 7,799 | | | $ | 5,131 | |
| Cash equivalents: | | | |
Money market funds(1) | 152,984 | | | 177,513 | |
| | | |
| Total cash and cash equivalents | $ | 160,783 | | | $ | 182,644 | |
(1)The Company maintains a cash sweep account which is included in money market funds as of March 31, 2022. Cash is invested in the short-term money market funds, which is a cash sweep for uninvested cash that earns interest.
Restricted Cash
Restricted cash consists of certificates of deposit held by a bank as security for outstanding letters of credit. The Company had a restricted cash balance of $2.0 million as of March 31, 2022 and December 31, 2021, respectively, which has been excluded from the Company’s cash and cash equivalents balances. The Company presented $1.0 million and $0.3 million of the total amount of restricted cash within current assets on the condensed consolidated balance sheets as of March 31, 2022 and March 31, 2021, respectively. The remaining restricted cash balance of $1.0 million was included in non-current assets on the condensed consolidated balance sheets as of March 31, 2022 and March 31, 2021, respectively.
Reconciliation of cash, cash equivalents and restricted cash as shown in the condensed consolidated statement of cash flows to the respective accounts within the condensed consolidated balance sheet is as follows (in thousands):
| | | | | | | | | | | |
| As of March 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 160,783 | | | $ | 257,165 | |
| Restricted cash, current | 977 | | | 276 | |
| Restricted cash, non-current | 1,035 | | | 1,004 | |
| Total cash, cash equivalents and restricted cash | $ | 162,795 | | | $ | 258,445 | |
Inventory
Inventory, consisting of material, direct and indirect labor, and manufacturing overhead, consists of the following (in thousands):
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Raw materials | $ | 3,288 | | | $ | 2,401 | |
| Work in process | 2,280 | | | 1,951 | |
| Finished goods | 6,051 | | | 3,096 | |
| Total inventory | $ | 11,619 | | | $ | 7,448 | |
Total inventory balance as of March 31, 2022 and December 31, 2021 includes a write down of $1.8 million and $1.7 million, respectively, for obsolete, scrap, or returned inventory. During the three months ended March 31, 2022 and 2021, $0.2 million and nil of inventory write downs were charged to cost of revenue, respectively.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following (in thousands):
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Prepaid expenses | $ | 1,408 | | | $ | 1,970 | |
| Prepaid insurance | 108 | | | 1,355 | |
| Receivable from contract manufacturer | 1,343 | | | 1,344 | |
| Grant receivable | — | | | 779 | |
| Security deposit | 76 | | | 118 | |
| Value-added tax (VAT) receivable | 71 | | | — | |
| Total prepaid and other current assets | $ | 3,006 | | | $ | 5,566 | |
Property and Equipment, net
Property and equipment consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Estimated Useful Life
(in years) | | March 31,
2022 | | December 31,
2021 |
| Machinery and equipment | 3 | | $ | 8,593 | | | $ | 8,404 | |
| Computer equipment | 3 | | 504 | | | 498 | |
| Automotive and vehicle hardware | 5 | | 93 | | | 93 | |
| Software | 3 | | 104 | | | 104 | |
| Furniture and fixtures | 7 | | 730 | | | 730 | |
| Construction in progress | | | 1,923 | | | 1,700 | |
| Leasehold improvements | Shorter of useful life or lease term | | 9,310 | | | 9,265 | |
| | | 21,257 | | | 20,794 | |
| Less: Accumulated depreciation | | | (12,289) | | | (10,740) | |
| Property and equipment, net | | | $ | 8,968 | | | $ | 10,054 | |
Depreciation expense associated with property and equipment was $1.3 million and $1.1 million in the three months ended March 31, 2022 and 2021, respectively.
Goodwill and Acquired Intangible Assets, Net
In the fourth quarter of 2021, the Company completed the acquisition of Sense Photonics Inc. (“Sense”), a privately held lidar technology company for autonomous vehicles. The transaction has been accounted for as a business combination. The Company purchased all of the outstanding shares of the capital stock of Sense and settled all Sense debt for total consideration of $72.8 million. Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and assumed liabilities acquired and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. Goodwill is not deductible for tax purposes. Sense’s revenue and pretax loss for the period from the acquisition date of October 22, 2021 to December 31, 2021 and March 31, 2022 were not material. In the three-month period ended March 31, 2022, the Company did not adjust the preliminary fair values of acquired assets that were recognized as of December 31, 2021.
The following tables present acquired intangible assets, net as of March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 |
| | Estimated Useful Life
(in years) | | Gross Carrying amount | | Accumulated Amortization | | Net Book Value |
| Developed technology | 8 | | $ | 15,900 | | | $ | (828) | | | $ | 15,072 | |
| Vendor relationship | 3 | | 6,600 | | | (917) | | | 5,683 | |
| Customer relationships | 3 | | 900 | | | (125) | | | 775 | |
| Intangible assets, net | | | $ | 23,400 | | | $ | (1,870) | | | $ | 21,530 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | Estimated Useful Life
(in years) | | Gross Carrying amount | | Accumulated Amortization | | Net Book Value |
| Developed technology | 8 | | $ | 15,900 | | | $ | (331) | | | $ | 15,569 | |
| Vendor relationship | 3 | | 6,600 | | | (367) | | | 6,233 | |
| Customer relationships | 3 | | 900 | | | (50) | | | 850 | |
| Intangible assets, net | | | $ | 23,400 | | | $ | (748) | | | $ | 22,652 | |
Amortization expense was $1.1 million during the three months ended March 31, 2022.
The following table summarizes estimated future amortization expense of finite-lived intangible assets-net (in thousands):
| | | | | |
| Years: | Amount |
| 2022 (the remainder of 2022) | $ | 3,366 | |
| 2023 | 4,488 | |
| 2024 | 4,071 | |
| 2025 | 1,988 | |
| 2026 | 1,988 | |
| Thereafter | 5,629 | |
| Total | $ | 21,530 | |
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following (in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Accrued compensation | $ | 3,487 | | | $ | 3,229 | |
| Uninvoiced receipts | 7,182 | | | 9,835 | |
| Other | 1,120 | | | 1,109 | |
| Total accrued and other current liabilities | $ | 11,789 | | | $ | 14,173 | |
Note 5. Debt
Runway Growth Loan Agreement
On November 27, 2018, the Company entered into a Loan and Security Agreement with Runway Growth Credit Fund Inc. (“Runway Loan and Security Agreement”). The Runway Loan and Security Agreement provided for loans in an aggregate principal amount up to $10.0 million with a loan maturity date of November 15, 2021. The loan carried an interest rate equal to LIBOR plus 8.5%, unless LIBOR no longer was attainable or ceased to fairly reflect the costs of the lender, in which case the applicable interest rate would be Prime Rate plus 6.0%. In an event of default, annual interest was increased by 5.0% above the otherwise applicable rate. The loan’s annual effective interest rate was approximately 16.4% for the three months ended March 31, 2021.
In conjunction with the Runway Loan and Security Agreement, OTI issued a warrant to purchase 35,348 shares of Series A redeemable convertible preferred stock (the “Series A Preferred Stock”) of OTI (4.0% of original principal amount of $10.0 million, divided by the exercise price), with an exercise price of $11.3518 per share. The fair value of this warrant was estimated to be $0.1 million and accounted for as a debt discount. On August 5, 2019, in connection with the second amendment to the Runway Loan and Security Agreement, the Company amended the warrant issued to Runway Growth to increase the number of shares available to purchase to 53,023 shares of Series A Preferred Stock of OTI. The aggregate value of the warrants increased by $0.1 million after the warrant modification.
The warrants were exercised on March 11, 2021 and the warrant liability was remeasured to fair value with the increase recognized as a loss of $0.6 million for the three months ended March 31, 2021 within other income (expense), net in the consolidated statements of operations and comprehensive loss. The warrant liability was remeasured to fair value as of March 31, 2021 and the reduction was recognized as a gain of $0.2 million.
On March 26, 2021, the Company terminated the Runway Loan and Security Agreement and repaid the $7.0 million principal amount outstanding as well as interest and fees amounting to $0.4 million. The Company incurred no prepayment fees in connection with the termination and all liens and security interests securing the loan made pursuant to the Runway Loan and Security Agreement were released upon termination. As of March 31, 2022 and December 31, 2021, the outstanding principal balance of the loan was nil, respectively.
Promissory notes
The Company issued a $5 million promissory note in January 2021 to certain current investors of the Company (or their respective affiliates) to help continue to fund the Company’s ongoing operations through the consummation of the Merger. The note accrued interest at a rate equal to LIBOR plus 8.5% per annum and was repaid on March 11, 2021 in accordance with its terms in connection with the consummation of the Merger.
Note 6. Warrants
Series A and B Redeemable Convertible Preferred Stock Warrants
On November 27, 2018, in connection with the execution of the Runway Loan and Security Agreement, OTI issued a warrant to purchase 35,348 shares of Series A Preferred Stock of OTI at an exercise price of $11.3518 per share (the “Runway warrant”). On August 5, 2019, in connection with the second amendment to the Runway Loan and Security Agreement, OTI amended the Runway warrant to increase the number of shares available to purchase to 53,023 shares of Series A Preferred Stock of OTI at an exercise price of $11.3518 per share.
The Runway warrants included a cashless exercise provision under which their holders could, in lieu of payment of the exercise price in cash, surrender the Runway warrant and receive a net amount of shares based on the fair market value of OTI’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Runway warrants contained provisions for adjustment of the exercise price and number of shares issuable upon the exercise of the Runway warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations.
The fair value of the warrants issued was recorded as of the date of initial issuance in the amount of $0.1 million. The subsequent issuance of warrants pursuant to the August 5, 2019 amendment to the Runway Loan and Security Agreement was recorded in the amount of $0.1 million. Immediately prior to the Merger, the warrants were exercised in full in accordance with their terms.
On April 3, 2020, in connection with the closing of the Series B redeemable convertible preferred stock, OTI issued a warrant to purchase 4,513,993 shares of Series B redeemable convertible preferred stock of the Company at an exercise price of $0.3323 per share (the “Series B warrants”). The Series B warrants could be exercised prior to the earliest to occur of (i) the
10-year anniversary of the date of issuance, (ii) the consummation of a liquidation transaction, or (iii) the consummation of an initial public offering. The Series B warrants included a cashless exercise provision under which their holders may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Series B warrants contained provisions for adjustment of the exercise price and number of shares issuable upon the exercise of the Series B warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations.
The Series B warrants were initially recognized as a liability at a fair value of $0.7 million. The Series B warrants were exercised on February 11, 2021 and the warrant liability was remeasured to fair value as of that date, resulting in a loss of $8.3 million for the three months ended March 31, 2021, classified within other income (expense), net in the consolidated statements of operations and comprehensive loss. Upon exercise redeemable convertible preferred stock converted into common stock pursuant to the conversion rate effective immediately prior to the Merger.
Historically, value was assigned to each class of equity securities using an option pricing model method (“OPM”). In September 2020, OTI began allocating the equity value using a hybrid method that utilizes a combination of the OPM and the probability weighted expected return method (“PWERM”). The PWERM is a scenario-based methodology that estimates the fair value of equity securities based upon an analysis of future values for OTI, assuming various outcomes. As the probability of a transaction with a special purpose acquisition company (“SPAC”) increased, the fair value of the redeemable convertible preferred stock warrant liability increased as of the date of the exercise.
The redeemable convertible preferred stock warrants were valued using the following assumptions under the Black-Scholes option-pricing model:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Initial Issuance
Date | | Subsequent
Issuance Date | | December 31,
2020 | | February 11,
2021 | | March 11,
2021 |
| Stock price | $ | 5.80 | | | $ | 5.80 | | | $ | 7.11 | | | $ | 10.27 | | | $ | 8.44 | |
| Expected term (years) | 10.00 | | 9.31 | | 2.00 | | 2.00 | | 2.00 |
| Expected volatility | 57.81 | % | | 57.35 | % | | 76.00 | % | | 76.00 | % | | 76.00 | % |
| Risk-free interest rate | 3.06 | % | | 1.75 | % | | 0.13 | % | | 0.13 | % | | 0.13 | % |
| Dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Private Placement Warrants
Simultaneously with the closing of the Company’s initial public offering (the “IPO”) in August 2020, the sponsor of CLA, Colonnade Sponsor LLC, purchased an aggregate of 6,000,000 Private Placement warrants at a price of $1.00 per warrant, for an aggregate purchase price of $6,000,000. The Private Placement warrants became exercisable 12 months following the closing of the Company’s IPO, and will expire five years from the completion of the Merger, or earlier upon redemption or liquidation. Each Private Placement warrant is exercisable for one Class A ordinary share at a price of $11.50 per share. On March 11, 2021, each outstanding Private Placement warrant automatically converted into a warrant to purchase one share of Ouster common stock pursuant to the Warrant Agreement.
The Private Placement warrants were initially recognized as a liability at a fair value of $19.4 million and the Private Placement warrant liability was remeasured to fair value as of March 31, 2022 and 2021, resulting in a gain of $1.7 million and $4.6 million for the three months ended March 31, 2022 and 2021, respectively, classified within other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.
The Private Placement warrants were valued using the following assumptions under the Black-Scholes option-pricing model:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 11, 2021 | | March 31,
2021 | | December 31,
2021 | | March 31,
2022 |
| Stock price | $ | 12.00 | | | $ | 8.50 | | | $ | 5.20 | | | $ | 4.60 | |
| Exercise price of warrant | $ | 11.50 | | | $ | 11.50 | | | $ | 11.50 | | | $ | 11.50 | |
| Expected term (years) | 5.00 | | | 4.95 | | | 4.19 | | | 3.95 | |
| Expected volatility | 27.00 | % | | 43.00 | % | | 57.00 | % | | 56.81 | % |
| Risk-free interest rate | 0.78 | % | | 0.92 | % | | 1.14 | % | | 2.55 | % |
| | | | | | | |
Public Warrants
CLA, in its IPO in August 2020, issued 20,000,000 units that each consisted one Class A ordinary share and one half warrant to purchase a Class A ordinary share, which the Company refers to as CLA warrants before the Merger and Public warrants after the Merger. These warrants may only be exercised for a whole number of shares, and no fractional warrants were issued or issuable upon separation of the units and only whole warrants will trade. The warrants became exercisable 12 months following the closing of the Company’s IPO, and will expire five years from the completion of the Merger, or earlier upon redemption or liquidation. Each Public warrant is exercisable at a price of $11.50 per share. On March 11, 2021, upon the closing of the Merger pursuant to the Merger Agreement (Note 1), each of the 9,999,996 outstanding warrants, as adjusted for any fractional warrants that were not issued upon separation, was converted automatically into a redeemable Public warrant to purchase one share of the Company’s common stock. The Public warrants were recognized as equity upon the Merger in the amount of $17.9 million.
Prior to their expiration, the Company may redeem the Public warrants at a price of $0.01 per warrant, provided that the closing price of the Company’s common stock equals or exceeds $18.00 per share for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date on which the Company gives proper notice of such redemption to the warrants holders.
Note 7. Commitments and Contingencies
Letters of credit
In connection with the lease agreements (collectively the “350 Treat Building Lease” and the “2741 16th Street Lease”), the Company obtained letters of credit from certain banks as required by the lease agreements. If the Company defaults under the terms of the applicable lease, the lessor will be entitled to draw upon the letters of credit in the amount necessary to cure the default. The amounts covered by the letters of credit are collateralized by certificates of deposit, which are included in restricted cash on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021. The outstanding amount of the letters of credit was $2.0 million as of March 31, 2022 and December 31, 2021.
Non-cancelable purchase commitments
As of March 31, 2022, the Company had non-cancelable purchase commitments to a third-party contract manufacturer for approximately $21.3 million and to other vendors for approximately $9.1 million.
Litigation
On June 10, 2021, the Company received a letter from the SEC notifying us of an investigation and document subpoena. The subpoena seeks documents regarding projected financial information in CLA’s Form S-4 registration statement filed on December 22, 2020. The Company has complied with the SEC’s requests to date; however, the SEC may request additional documents or information. Should the SEC pursue this matter further, it could have a material impact on our business and operations. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter.
The Company is involved in various legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. Based on the opinion of legal counsel and other factors, management believes that the final disposition of these existing matters will not have a material adverse effect on the business, results of operations, financial condition, or cash flows of the Company. The Company has identified certain claims as a result of which a loss may be incurred, but in the aggregate any loss is expected to be immaterial. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Actual outcomes of these legal and regulatory proceedings may materially differ from our current estimates. For other claims regarding proceedings that are in an initial phase, the Company is unable to estimate the range of possible loss, if any, but at this time believes that any loss related to such claims will not be material.
As of March 31, 2022 and December 31, 2021 there were no material litigation matters.
Indemnification
From time to time, the Company enters into agreements in the ordinary course of business that include indemnification provisions. Generally, in these provisions the Company agrees to defend, indemnify, and hold harmless the indemnified parties for claims and losses suffered or incurred by such indemnified parties for which the Company is responsible under the applicable indemnification provisions. The terms of the indemnification provisions vary depending upon negotiations between the Company and its counterpart; however, typically, these indemnification obligations survive the term of the contract and the maximum potential amount of future payments the Company could be required to make pursuant to these provisions are uncapped. To date, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnification provisions.
The Company has also entered into indemnity agreements pursuant to which it has indemnified its directors and officers, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer, other than liabilities arising from willful misconduct of the individual. To date, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnity agreements. The unaudited condensed consolidated financial statements do not include a liability for any potential obligations under the indemnification agreements at March 31, 2022 and December 31, 2021.
Note 8. Redeemable Convertible Preferred and Common Stock
The Company’s common stock and warrants trade on the New York Stock Exchange under the symbol “OUST” and “OUSTWS”, respectively. Pursuant to the terms of the Second Amended and Restated Certificate of Incorporation, the Company is authorized and has available for issuance the following shares and classes of capital stock, each with a par value of $0.0001 per share: (i) 1,000,000,000 shares of common stock; (ii) 100,000,000 shares of preferred stock. Immediately following the Merger, there were 161,449,205 shares of common stock with a par value of $0.0001, and 15,999,996 warrants outstanding. The holder of each share of common stock is entitled to one vote.
The Company has retroactively adjusted the shares issued and outstanding prior to March 11, 2021 to give effect to the exchange ratio established in the Merger Agreement to determine the number of shares of common stock into which they were converted.
Immediately prior to the Merger, OTI’s certificate of incorporation, as amended, authorized it to issue 342,367,887 shares of $0.00001 par value, with 210,956,516 shares designated as common stock and 131,411,372 shares of redeemable convertible preferred stock.
On March 11, 2021, upon the closing of the Transaction pursuant to the Merger Agreement (Note 1), all of the outstanding redeemable convertible preferred stock was converted to the Company’s common stock pursuant to the conversion rate effective immediately prior to the Transaction and the remaining amount was reclassified to additional paid-in capital. As of March 31, 2022 and December 31, 2021, the Company does not have any redeemable convertible preferred stock outstanding.
Note 9. Stock-based compensation
As of March 31, 2022, the Company has three equity incentive plans, the 2015 Stock Plan (the “2015 Plan”), the 2021 Incentive Award Plan (the “2021 Plan”) and the Sense 2017 Equity Incentive Plan (the “Sense Plan” and together the “Plans”).
The Plans provide for the grant of stock options, stock appreciation rights, restricted stock awards (“RSA”), restricted stock units (“RSU”), performance stock unit awards and other forms of equity compensation (collectively, “equity awards”). In addition, the 2021 Plan provides for the grant of performance bonus awards. All awards within the Plans may be granted to employees, including officers, as well as directors and consultants, within the limits defined in the Plans.
Certain employees have the right to early exercise unvested stock options, subject to rights held by the Company to repurchase unvested shares in the event of voluntary or involuntary termination. The Company accounts for cash received in consideration for the early exercise of unvested stock options as a non-current liability, included as a component of other liabilities in the Company’s condensed consolidated balance sheets.
On October 12, 2020, the Company issued $1.1 million partial recourse promissory notes to certain executives and employees. The promissory notes carried 0.38% annual cash interest and were due on the earliest of 9th anniversary of the date of issuance of the notes, or termination of employment of the executive/employee, or filing by the Company of a registration statement under the Securities Act of 1933, or promissory notes being prohibited under Section 13(k) of the Securities Exchange Act of 1934 or closing of change a in control of the Company. At issuance, the promissory notes were used to settle certain executives’ and employees’ obligations for 2,883,672 vested and 4,603,833 unvested ISOs that were exercised and no cash was exchanged. In March 2021, in connection with the close of the Merger, the Company forgave half of the respective obligations under the promissory notes for certain executives and required such noteholders to repay the remaining balance of $0.3 million under each of their respective notes. Additional compensation expense of $0.3 million was recognized in general and administrative expenses for the three months ended March 31, 2021 for the value of the loans forgiven. No obligations under the promissory notes for non-executive noteholders were outstanding as of March 31, 2022 and December 31, 2021.
Stock Options
Stock option activity for the three months ended March 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
Shares
Underlying
Outstanding
Options | | Weighted-
Average Exercise
Price per Share | | Weighted-
Average
Remaining
Contractual
Term (in years) | | Aggregate
Intrinsic
Value |
| Outstanding—December 31, 2021 | | | 24,129,096 | | | $ | 1.01 | | | 8.6 | | $ | 100,992 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Options exercised | | | (797,380) | | | 0.20 | | | | | |
| Options cancelled | | | (77,753) | | | 4.21 | | | | | $ | — | |
| Outstanding—March 31, 2022 | | | 23,253,963 | | | $ | 1.03 | | | 8.3 | | $ | 84,888 | |
| Vested and expected to vest—March 31, 2022 | | | 23,253,963 | | | $ | 1.03 | | | 8.3 | | $ | 84,888 | |
| Exercisable—March 31, 2022 | | | 9,954,974 | | | $ | 0.80 | | | 8.1 | | $ | 37,186 | |
The following table summarizes information about stock options outstanding and exercisable at March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Exercise
Price | | Options
Outstanding | | Weighted
Average
Remaining
Contractual
Life (Years) | | Weighted
Average
Exercise
Price | | Options
Exercisable | | Weighted
Average
Exercise
Price |
| $ | 0.18 | | | 5,037,657 | | | 8.3 | | $ | 0.18 | | | 3,256,438 | | | $ | 0.18 | |
| $ | 0.21 | | | 9,300,668 | | | 8.5 | | $ | 0.21 | | | 3,454,922 | | | $ | 0.21 | |
| $ | 1.42 | | | 7,524,114 | | | 8.5 | | $ | 1.42 | | | 2,664,790 | | | $ | 1.42 | |
| $ | 1.49 | | | 40,581 | | | 5.8 | | $ | 1.49 | | | 40,418 | | | $ | 1.49 | |
| $ | 5.24 | | | 705,146 | | | 4.0 | | $ | 5.24 | | | 538,406 | | | $ | 5.24 | |
| $ | 10.26 | | | 645,797 | | | 9.1 | | $ | 10.26 | | | — | | | $ | — | |
| | 23,253,963 | | | | | | | 9,954,974 | | | |
As of March 31, 2022, there was approximately $21.2 million of unamortized stock-based compensation expense related to unvested stock options that is expected to be recognized over a weighted average period of 2.4 years.
Restricted Stock Unit (“RSU”) Awards
A summary of RSU activity is as follows:
| | | | | | | | | | | |
| Number of
Shares | | Weighted Average Grant Date Fair Value (per share) |
Unvested – December 31, 2021 | 9,326,572 | | | $ | 7.82 | |
| Granted during the period | 3,983,474 | | | 4.25 | |
| Canceled during the period | (1,559,964) | | | 6.44 | |
| Vested during the period | (828,921) | | | 7.46 | |
Unvested — March 31, 2022 | 10,921,161 | | | $ | 6.75 | |
Stock compensation expense is recognized on a straight-line basis over the vesting period of each RSU. As of March 31, 2022, total compensation expense related to unvested RSUs granted to employees, but not yet recognized, was $68.1 million, with a weighted-average remaining vesting period of 3.2 years.
RSUs settle into shares of common stock upon vesting.
Stock-Based compensation expense
Stock-based compensation expense is included in costs and expenses as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Cost of revenue | $ | 217 | | | $ | 118 | |
| Research and development | 3,761 | | | 921 | |
| Sales and marketing | 1,524 | | | 265 | |
| General and administrative | 3,248 | | | 3,952 | |
| Total stock-based compensation | $ | 8,750 | | | $ | 5,256 | |
The following table summarizes stock-based compensation expense by award type (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| RSUs | $ | 5,901 | | | $ | 313 | |
| Stock options | 2,840 | | | 4,937 | |
| RSAs | 9 | | | 6 | |
| Total stock-based compensation | $ | 8,750 | | | $ | 5,256 | |
Note 10. Net Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per common share attributable to common stockholders (in thousands, except share and per share data):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Numerator: | | | |
| Net loss | $ | (32,397) | | | $ | (20,957) | |
| Denominator: | | | |
| Weighted average shares used to compute basic and diluted net loss per share | 170,906,196 | | | 55,688,281 | |
| Net loss per common share—basic and diluted | $ | (0.19) | | | $ | (0.38) | |
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Options to purchase common stock | 25,577,679 | | | 24,626,748 | |
| Public and private common stock warrants | 15,999,900 | | | 15,999,996 | |
| Restricted Stock Units | 8,597,445 | | | 959,874 | |
| Unvested early exercised common stock options | 1,595,966 | | | 3,935,428 | |
| Unvested RSA | 11,645 | | | 34,932 | |
| Vested and early exercised options subject to nonrecourse notes | — | | | 1,761,436 | |
| Total | 51,782,635 | | | 47,318,414 | |
Note 11. Income taxes
The Company’s income tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in the quarter. The Company’s effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on the deferred tax assets as it is more likely than not that some, or all, of the Company’s deferred tax assets will not be realized. The Company continues to maintain a full valuation allowance against its net deferred tax assets. Due to tax losses and the offsetting valuation allowance, the income tax provision for the three months ended March 31, 2022 and 2021 was not material to the Company’s condensed consolidated financial statements.
Note 12. Revenue
Revenue from sale of lidar sensor kits, which are recognized at a point in time, was $8.6 million and $6.6 million in three months ended March 31, 2022 and 2021.
The following table presents total revenues by geographic area based on the location products were shipped to and services provided (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| United States | $ | 2,863 | | | $ | 1,858 | |
| North and South America, excluding United States | 456 | | | 366 | |
| Asia and Pacific | 2,356 | | | 1,254 | |
| Europe, Middle East and Africa | 2,883 | | | 3,133 | |
| Total | $ | 8,558 | | | $ | 6,611 | |
Note 13. Related Party Transactions
See Note 5, Debt for details of promissory notes issued by the Company to certain investors of the Company (or an affiliate thereof).
See Note 9, Stock-based compensation for details of partial recourse promissory notes issued by the Company to certain executives and employees.
Note 14. Subsequent Events
On April 29, 2022, the Company and its subsidiary, Sense, entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”) pursuant to which Hercules agreed to make available to the Company a secured term loan facility in the amount of up to $50.0 million, subject to certain terms and conditions. Advances under the loan and security agreement bear interest at the rate of interest equal to greater of either (i) (x) the prime rate as reported in The Wall Street Journal plus (y) 6.15%, and (ii) 9.40%, subject to compliance with financial covenants and other conditions. The loan and security agreement includes covenants, limitations, and events of default customary for similar facilities. The loan and security agreement matures on May 1, 2026.
In accordance with the terms of the loan and security agreement, $20.0 million was funded by Hercules on the closing date. The Company may borrow an additional $20.0 million on or before March 15, 2023, subject satisfying certain conditions. An additional $10.0 million may be drawn on or before June 15, 2023, subject to satisfying certain conditions relating to the achievement of trailing twelve month revenue and profit milestones.
On April 29, 2022, the Company entered into an At-Market-Issuance Sales Agreement pursuant to which the Company may, subject to the terms and conditions set forth in the agreement offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $150.0 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the results of operations and financial condition of Ouster, Inc. (“we,” “us,” “our,” the “Company,” “Ouster”) should be read in conjunction with the information set forth in our condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q, as well as our audited consolidated financial statements and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ouster’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Ouster’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in Ouster’s Annual Report on Form 10-K dated and filed with the SEC on February 28, 2022.
On December 21, 2020, Ouster Technologies, Inc. (“OTI”, prior to the Merger, named Ouster, Inc.) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Colonnade Acquisition Corp., a Cayman Islands exempted company (“CLA”), and Beam Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and subsidiary of CLA. OTI’s and CLA’s board of directors unanimously approved OTI’s entry into the Merger Agreement, and on March 11, 2021, the transactions contemplated by the Merger Agreement were consummated (all such transactions, the “Merger”), as further described below.
Unless the context otherwise requires, references in this subsection to “we”, “our” and “the Company” refer to the business and operations of OTI (formerly known as Ouster, Inc.) and its consolidated subsidiaries prior to the Merger and to Ouster, Inc. (formerly known as Colonnade Acquisition Corp.) and its consolidated subsidiaries following the consummation of the Merger.
Overview
We are a leading provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, allowing each to understand and visualize the surrounding world and ultimately enabling safe operation and autonomy. We design and manufacture digital lidar sensors that we believe are the highest-performing, lowest-cost lidar solutions available today across each of our four target markets: industrial automation; smart infrastructure; robotics; and automotive. We shipped sensors to over 650 customers in the twelve months ended March 31, 2022.
Our digital lidar sensors leverage a simplified architecture based on two semiconductor chips and are backed by a suite of patent-protected technology. We have invested heavily in patents since our inception, pursuing comprehensive coverage of invention families and use cases, with broad international coverage. We believe that our extensive patent coverage creates material barriers to entry for anyone aiming to compete in the digital lidar space.
Our product offering today includes our OS scanning product line and our DF solid-state product line. With our unique digital lidar technology, we offer numerous customization options across our products, all enabled by flexible technology and embedded software. Today we offer short, medium, and long-range lidar products at varying price points and with tailored capabilities to meet the different needs of our diverse customer base.
We believe the simplicity of our digital lidar design gives us a meaningful advantage in costs related to manufacturing, supply chain and production yields. The same digital lidar components underpin our entire product portfolio which drives economies of scale in our supply chains. With virtually unlimited software-defined products driving low-cost customization, we are able to increase stock keeping units (“SKUs”) for industry-specific applications, expanding our product offering with minimal manufacturing or inventory changes. We currently offer many different software-defined product SKUs, all based on this common architecture and shared core componentry. Additionally, we are successfully expanding our manufacturing capacity by outsourcing to our manufacturing partner, Benchmark Electronics, Inc. (“Benchmark”). Benchmark manufactures our products at its facility in Thailand, which we expect will reduce our product costs and allow us to rapidly scale production to meet our anticipated product demand. Based on cost quotes for our products in mass production, we believe our manufacturing costs to be lower than certain of our competitors, and we expect our manufacturing costs per unit to decrease further with higher volumes.
We have won and are actively negotiating several multi-year sales contracts, including certain Strategic Customer Agreements (“SCAs”), which establish a multi-year purchase and supply framework for Ouster and the customer, and include details about customer programs and applications where the customer intends to use Ouster products. SCAs also include multi-year non-binding customer forecasts (typically of three to five years in length) giving Ouster visibility to the customer's long-term purchasing requirements, mutually agreed upon pricing over the duration of the agreement, and, in certain cases, include multi-year binding purchase commitments.
We founded Ouster in 2015 with the invention of our high-performance digital lidar. Since then, we have grown to approximately 280 employees serving over 650 customers globally in the twelve months ended March 31, 2022. To continue to grow our business in the coming years, we have expanded and plan to continue to expand our sales and marketing efforts and our software development capabilities, and to accelerate sensor development efforts. We are headquartered in San Francisco, CA.
Merger Agreement with Colonnade Acquisition Corp. and Beam Merger Sub, Inc.
On December 21, 2020, OTI entered into the Merger Agreement with CLA, and Merger Sub, a subsidiary of CLA. OTI’s and CLA’s board of directors unanimously approved OTI’s entry into the Merger Agreement, and on March 11, 2021, the transactions contemplated by the Merger Agreement were consummated. Pursuant to the terms of the Merger Agreement, (i) CLA domesticated as a corporation incorporated under the laws of the State of Delaware (the “Domestication”) and changed its name to “Ouster, Inc.” (with CLA after such domestication and the other transactions pursuant to the Merger Agreement being referred to as the “Company”) and (ii) Merger Sub merged with and into OTI (the “Merger”), with OTI surviving the Merger.
As a result of and upon the effective time of the Domestication, among other things, (1) each of the then issued and outstanding 5,000,000 CLA Class B ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class B ordinary shares”) converted automatically, on a one-for-one basis, into a CLA Class A ordinary share (as defined below), (2) immediately following the conversion described in clause (1), each of the then issued and outstanding 25,000,000 Class A ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class A ordinary shares”), converted automatically, on a one-for-one basis, into a share of common stock, par value $0.0001 per share, of Ouster (the “Ouster common stock”), (3) each of the then issued and outstanding 10,000,000 redeemable warrants of CLA (the “CLA warrants”) converted automatically into a redeemable warrant to purchase one share of Ouster common stock (the “Public warrants”) pursuant to the Warrant Agreement, dated August 20, 2020 (the “Warrant Agreement”), between CLA and Continental Stock Transfer & Trust Company (“Continental”), as warrant agent, and (4) each of the then issued and outstanding units of CLA that had not been previously separated into the underlying CLA Class A ordinary shares and underlying CLA warrants upon the request of the holder thereof (the “CLA units”), were cancelled and entitled the holder thereof to one share of Ouster common stock and one-half of one Public warrant, and (5) each of the then issued and outstanding 6,000,000 private placement warrants of CLA (the “Private Placement warrants”) converted automatically into a Public warrant pursuant to the Warrant Agreement. No fractional Public warrants were issued upon separation of the CLA units.
Immediately prior to the effective time of the Merger, (1) each share of OTI’s Series B Preferred Stock, par value $0.00001 per share (the “OTI Preferred Stock”), converted into one share of common stock, par value $0.00001 per share, of OTI (the “OTI common stock” and, together with OTI Preferred Stock, the “OTI Capital Stock”) (such conversion, the “OTI Preferred Conversion”) and (2) all of the outstanding warrants to purchase shares of OTI Capital Stock were exercised in full or terminated in accordance with their respective terms (the “OTI Warrant Settlement”).
As a result of and upon the closing of the Merger, among other things, all shares of OTI Capital Stock (after giving effect to the OTI Warrant Settlement) outstanding immediately prior to the closing of the Merger together with shares of OTI common stock reserved in respect of options to purchase shares of OTI common stock and restricted shares of OTI common stock (together, the “OTI Awards”) outstanding immediately prior to the closing of the Merger that were converted into awards based on Ouster common stock, were cancelled in exchange for the right to receive, or the reservation of, an aggregate of $1.5 billion of shares of Ouster common stock (at a deemed value of $10.00 per share), which, in the case of OTI Awards, were shares underlying awards based on Ouster common stock, representing a fully-diluted pre-transaction shares. Upon the closing of the Merger, the Company received gross proceeds of $299.9 million from the Merger and private offering, offset by $8.5 million of pre-merger costs relating to CLA and transaction costs of $26.6 million.
Sense Acquisition
On October 22, 2021, we completed the acquisition of Sense Photonics, Inc. (“Sense”). Under the terms of the merger agreement, we acquired 100% of Sense and all of its property for approximately 10 million shares of Ouster common stock or approximately $63.0 million in equity value based on the closing price of $6.55 per share as of the day the transaction closed on October 22, 2021, inclusive of 0.8 million shares underlying assumed options, after closing adjustments. This acquisition is expected to help Ouster expand its presence in the automotive vertical by executing on our hiring goals and product roadmap on a faster timeline.
COVID-19 Impact
Beginning in 2020, the worldwide spread of the pandemic caused by the novel coronavirus (“COVID-19”), including its variants, and the measures intended to contain the spread of COVID-19, have resulted in a global slowdown of economic activity and caused disruptions to our business.
For example, our suppliers are located worldwide, and some of our key suppliers have been affected by the pandemic resulting in supply chain disruptions. We have experienced and continue to experience some unfavorable purchase price variance and situational expedite fees in order to meet production and delivery timelines. While we may see additional or new pressures on our supply chain both related and unrelated to the pandemic, we are actively taking steps to mitigate the impact of the materials shortages on our business.
At times during the pandemic, some customers have delayed orders and production schedules due to COVID-19. 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, manufacturing, research and development costs and personnel-related costs, will depend on future developments that are highly uncertain, including new information that may emerge concerning COVID-19, the impact of new variants of the disease and the actions taken to contain, prevent or treat COVID-19, rate and success of vaccination efforts, vaccination reticence, any resurgence of the pandemic in areas where we, Benchmark or our suppliers operate, and the economic impact on local, regional, national and international customers and markets.
Going forward, the situation remains uncertain, rapidly changing and hard to predict, and the COVID-19 pandemic may have a material negative impact on our future results.
Factors Affecting Our Performance
Supply Chain Continuity. Beginning in 2021, a surge in demand for electronics containing semiconductor chips and stockpiling of chips by certain companies created disruptions in the supply chain, which has resulted in a global chip shortage impacting our industry. Some chip manufacturers are estimating that this supply shortage may continue through mid-2023. These chip manufacturers are working to increase capacity in the future, and we are managing our inventory and working closely with our regular suppliers and customers to minimize the potential impacts of any supply shortages including by securing additional inventory. While we do not expect the shortage to have a material near-term impact on our ability to meet existing demand for our current products, the shortage adversely impacted our gross margins for the year ended December 31, 2021 and the three months ended March 31, 2022 and may continue to do so. We anticipate fluctuation in our cost of goods sold over the next 12-18 months as a result of ongoing supply chain constraints. These constraints have caused and may in the future cause us to implement certain temporary price surcharges. Over time, we expect our overall average selling prices to decline as our volume increases. If our mitigating efforts are not successful or the shortage continues or worsens in ways we did not anticipate, our ability to supply or improve our current products as well as our development and rollout of future products could also be adversely affected.
Commercialization of Lidar Applications. We believe that lidar is approaching its inflection point of adoption across our target end market applications, and that we are well-positioned to capitalize on this market adoption. However, as our customers continue research and development projects to commercialize semi-autonomous solutions that rely on lidar technology, it is difficult to estimate the timing of ultimate end market and customer adoption. As a result, we expect that our results of operations, including revenue and gross margins, will fluctuate on a quarterly and annual basis for the foreseeable future. As the market for lidar solutions matures and more customers reach a commercialization phase with solutions that rely on our technology, the fluctuations in our operating results may become less pronounced. Nonetheless, our revenue may not grow as we expect unless and until more customers commercialize their products and lidar technology becomes more prevalent across our target end markets.
Number of Customers in Production. For certain strategic customers and markets, our products must be integrated into a broader platform, which then must be tested, validated, and achieve system-level performance and reliability thresholds that enable commercial production and sales. The time necessary to reach commercial production varies from six months to seven years, based on the market and application. For example, the production cycle in the automotive market tends to be substantially longer than in our other target markets, including industrial automation, smart infrastructure and robotics. It is critical to our future success in each of our target end markets that our customers reach commercial production and sales and that they select our products in their commercial production applications. Because the timelines to reach production vary significantly and the revenue generated by each customer in connection with commercial production and sales is unpredictable, it is difficult for us to reliably predict our financial performance.
Customer’s Sales Volumes. Our customer base is diversified and we will continue to penetrate into diverse end markets to increase our sales volumes. Ultimately widespread adoption of our customers’ products that incorporate our lidar solutions will depend on many factors, including the size of our customers’ end markets, end market penetration of our customer’s products that incorporate our digital lidar solutions, our end customers’ ability to sell their products, and the financial stability and reputation of the customers. We believe our sales volume by customer depends on the end market demand for our customers’ products that incorporate our digital lidar solutions as well as our ability to grow our sales force.
Average Selling Prices (“ASPs”), Product Costs and Margins. Our product costs and gross margins depend largely on the volumes of sensors sold and the number and variety of solutions we provide to our customers. We expect that our selling prices will vary by target end market and application due to market-specific supply and demand dynamics. We expect to continue to experience some downward pressure on margins from signing anticipated large multi-year agreements (including our SCAs) in the near term with multi-year negotiated pricing, as well as supply chain constraints discussed above. We expect these customer-specific selling price fluctuations combined with our volume-driven product costs may drive fluctuations in revenue and gross margins on a quarterly basis. However, notwithstanding any short-term price surcharge on our products, we expect that over time our volume-driven product costs will lead to gross margin improvement as our sales volume increases.
Competition. Lidar is an emerging market, and there are competitors for the growing market. Competitors may offer lidar products at lower prices than ours, including pricing that may be below their cost, or may offer superior performing lidar products. These companies also compete with us indirectly by attempting to solve some of the same challenges with different technology. Established competitors in the market for lidar sensors have significantly greater resources and more experience than we do. These competitors have commercialized lidar technology that has achieved market adoption, strong brand recognition and may continue to improve in both anticipated and unanticipated ways. They may also enter, and have entered, into commercial relationships with key customers and potential customers and have built relationships and dependencies between themselves and those key customers and potential customers. This has created downward pressure on our ASPs, particularly in the Asia and Pacific region. We expect this pressure to continue to push our ASPs lower in the coming years. However, we believe that because of our complementary metal-oxide-semiconductor (“CMOS”), digital lidar technology, we are in the position to scale more rapidly than our analog competitors and leverage our scale to deliver positive gross margins.
Continued Investment and Innovation. We believe that we are a leading digital lidar provider. Our financial performance is significantly dependent on our ability to maintain this leading position which is further dependent on the investments we make in research and development. We believe it is essential that we continue to identify and respond to rapidly evolving customer requirements, including successfully realizing our product roadmap. If we fail to continue our innovation, our market position and revenue may be adversely affected, and our investments in that area will not be recovered.
Market Trends and Uncertainties. We anticipate robust demand for our digital lidar solution. We estimate a multibillion dollar total addressable market (“TAM”) for our solutions in the near future. We define our TAM as automation applications in the industrial, smart infrastructure, robotics and automotive end markets where we actively engage and maintain customer relationships. Each of our target markets is potentially a significant global opportunity, and these markets have historically been underserved by limited or inferior technology or not served at all. We believe we are well positioned in our market as a leading provider of high-resolution digital lidar sensors.
Although increasing adoption of semi-autonomous solutions that rely on lidar technology may generate higher demand, we may not be able to take advantage of demand if we are unable to anticipate regulatory changes and adapt quickly enough to meet such new regulatory standards or requirements applicable to us or to our customers’ products in which our digital lidar sensors are used. Market acceptance of semi-autonomous solutions and active safety technology depend upon many factors, including cost, performance, safety performance, regulatory requirements and international taxes or tariffs related to such technologies. These factors may impact the ultimate market acceptance of our lidar technology.
International Expansion. We view international expansion as an important element of our strategy to increase revenue and achieve profitability. We continue to position ourselves in geographic markets that we expect to serve as important sources of future growth. We have an existing presence in three regions: North and South America; Asia and Pacific; and Europe, Middle East and Africa. We intend to expand our presence in these regions over time including through distribution partnerships. Expanded global reach will require continued investment and may expose us to additional foreign currency risk, international taxes and tariffs, legal obligations and additional operational costs, risks and challenges that may impact our ability to meet our projected sales volumes, revenue and gross margins.
Components of Results of Operations
Revenue
The majority of our revenue comes from the sale of our digital lidar sensors and accessories both directly to end users and through distributors both domestically and internationally. We recognize revenue from product sales when the performance obligation of transferring control of the product to the customer has been met, generally when the product is shipped. We also recognize revenue by performing services related to product development and validation, and shipping; however, we do not expect product development and validation and license and services to be material components of revenue, cost of revenue or gross margin in the foreseeable future. Performance obligations related to services are generally recognized over time, based on cost-to-cost input basis or straight-line over time. Amounts billed to customers related to shipping and handling are classified as product revenue, and we have elected to recognize the cost of shipping activities that occur after control has transferred to the customer as a fulfillment cost rather than a separate performance obligation. All related costs are accrued and recognized within cost of revenue when the related revenue is recognized.
Most of our customers are currently in the evaluation or early R&D stage with our products. Currently, our product revenue consists of both customers ordering small volumes of our products that are in an evaluation phase and customers that order larger volumes of our products and have more predictable long-term production schedules. However, we are still at the very beginning of the lidar adoption curve, and some customers are still learning their ramp rates which can impact the timing of purchase orders quarter to quarter. As we grow our business we expect to improve predictability into our customers’ needs and timelines, and expect the timing of orders will have a less notable impact on our quarterly results. Over the coming years, as more of our customers move into their respective production phases, we expect the majority of our product revenue to shift to larger volume orders based on predictable production schedules.
Cost of Revenue
Cost of revenue consists of the manufacturing cost of our digital lidar sensors, which primarily consists of sensor components, personnel-related costs directly associated with our manufacturing organization, and amounts paid to our third-party contract manufacturer and vendors. Our cost of revenue also includes depreciation of manufacturing equipment, an allocated portion of overhead, facility and IT costs, stock-based compensation for manufacturing personnel, reserves for estimated warranty expenses, excess and obsolete inventory and shipping costs.
Gross Profit and Gross Margin
Our gross profit equals total revenues less our total cost of revenues, and our gross margin is our gross profit expressed as a percentage of total revenue. Subject to quarterly fluctuations and volatility, we expect unit costs to improve as we manufacture higher unit volumes of sensors and a greater portion of our sensors are produced by our contract manufacturer in Thailand.
Operating Expenses
Research and Development Expenses
Research and development (“R&D”) activities are primarily conducted at our San Francisco based headquarters and our additional R&D facility in Edinburgh, Scotland and consist of the following activities:
•Design, prototyping, and testing of proprietary electrical, optical, and mechanical subsystems for our digital lidar products;
•Robust testing for industrial and autonomous vehicle safety certifications;
•Development of new products and enhancements to existing products in response to customer requirements including firmware development and software development of lidar integration products;
•Custom system-on-a-chip (“SoC”) design for Ouster’s digital lidar products; and
•Development of custom manufacturing equipment.
R&D expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly involved in R&D activities, third-party engineering and contractor costs, and prototype expenses.
R&D costs are expensed as they are incurred. Our investment in R&D will continue to grow as we invest in new lidar technology and related software. Our absolute amount of R&D expense will grow over time; however, we expect R&D as a percentage of revenue to decrease annually as our business grows.
Sales and Marketing Expenses
Our business development, customer support and marketing teams are located in offices worldwide. Selling and marketing expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly involved in business development, customer support, and marketing activities, and marketing expenses including trade shows, advertising, and demonstration equipment. Our investment in sales and marketing will continue to grow as we continue to expand our sales team globally, and our absolute amount of sales and marketing expenses will grow over time. We expect sales and marketing spend as a percentage of revenue to decrease over time as our business grows.
General and Administrative Expenses
General and administrative expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, of our executives and members of the board of directors, finance, human resource, IT, and legal departments as well as fees related to legal fees, patent prosecution, accounting, finance and professional services as well as insurance, and bank fees. Our absolute amount of general and administrative expense will grow over time; however, we expect the general and administrative spend as a percentage of revenue to decrease annually as our business grows. Near term increases in general and administrative expenses are expected to be related to hiring more personnel and consultants to support our growing international expansion and compliance with the applicable provisions of the Sarbanes-Oxley Act (“SOX”) and other U.S. Securities and Exchange Commission (“SEC”) rules and regulations.
Stock-Based Compensation
We measure and recognize stock-based compensation expense for stock-based awards over the requisite service periods based on the estimated grant date fair value using the Black-Scholes-Merton option pricing model.
Interest Income, Interest Expense, and Other Income (Expense), Net
Interest income consists primarily of income earned on our cash and cash equivalents. These amounts will vary based on our cash and cash equivalents balances and market rates. Interest expense consists primarily of interest on our debt and convertible notes and amortization of debt issuance costs and discount. Other income (expense), net consists primarily of realized and unrealized gains and losses on foreign currency transactions and balances, the change in fair value of financial instruments, including warrants issued in connection with a debt agreement, and Private Placement warrants acquired as part of the Merger.
Income Taxes
Our income tax provision consists of federal, state and foreign current and deferred income taxes. Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in the quarter. Our effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on its deferred tax assets as it is more likely than not that some, or all, of our deferred tax assets will not be realized. We continue to maintain a full valuation allowance against its net deferred tax assets. Income tax provision for the three months ended March 31, 2022 and 2021, respectively, was not material to the Company’s condensed consolidated financial statements.
Results of Operations:
The following table sets forth our condensed consolidated results of operations data for the periods presented:
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| | | |
| Product revenue | $ | 8,558 | | | $ | 6,611 | |
| | | |
| | | |
| | | |
Cost of product revenue (1) | 5,967 | | | 4,868 | |
| | | |
| | | |
| Gross profit | 2,591 | | | 1,743 | |
Operating expenses (1): | | | |
| Research and development | 15,906 | | | 4,712 | |
| Sales and marketing | 7,090 | | | 3,426 | |
| General and administrative | 13,783 | | | 9,907 | |
| Total operating expenses | 36,779 | | | 18,045 | |
| Loss from operations | (34,188) | | | (16,302) | |
| Other (expense) income: | | | |
| Interest income | 154 | | | 1 | |
| Interest expense | — | | | (504) | |
| Other income (expense), net | 1,684 | | | (4,152) | |
| Total other expense, net | 1,838 | | | (4,655) | |
| Loss before income taxes | (32,350) | | | (20,957) | |
| Provision for income tax expense | 47 | | | — | |
| Net loss | $ | (32,397) | | | $ | (20,957) | |
The following table sets forth the components of our condensed consolidated statements of operations and comprehensive loss data as a percentage of revenue for the periods presented:
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | (% of total revenue) |
| | | |
| Product revenue | 100 | % | | 100 | % |
| | | |
| | | |
| | | |
Cost of product revenue (1) | 70 | | | 74 | |
| | | |
| | | |
| Gross profit | 30 | | | 26 | |
Operating expenses (1): | | | |
| Research and development | 186 | | | 71 | |
| Sales and marketing | 83 | | | 52 | |
| General and administrative | 161 | | | 150 | |
| Total operating expenses | 430 | | | 273 | |
| Loss from operations | (400) | | | (247) | |
| Other (expense) income: | | | |
| Interest income | 2 | | | — | |
| Interest expense | — | | | (8) | |
| Other income (expense), net | 20 | | | (63) | |
| Total other expense, net | 22 | | | (71) | |
| Loss before income taxes | (378) | | | (318) | |
| Provision for income tax expense | 1 | | | — | |
| Net loss | (379) | % | | (318) | % |
(1)Includes stock-based compensation expense as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Cost of revenue | $ | 217 | | | $ | 118 | |
| Research and development | 3,761 | | | 921 | |
| Sales and marketing | 1,524 | | | 265 | |
| General and administrative | 3,248 | | | 3,952 | |
| Total stock-based compensation | $ | 8,750 | | | $ | 5,256 | |
Comparison of the three months ended March 31, 2022 and 2021
Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | Change |
| | 2022 | | 2021 | | $ | | % |
| | (dollars in thousands) |
| | | | | | | |
| Product revenue | $ | 8,558 | | | $ | 6,611 | | | $ | 1,947 | | | 29 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Revenue by geographic location: | | | | | | | |
| United States | $ | 2,863 | | | $ | 1,858 | | | $ | 1,005 | | | 54 | % |
| North and South America, excluding United States | 456 | | | 366 | | | 90 | | | 25 | |
| Asia and Pacific | 2,356 | | | 1,254 | | | 1,102 | | | 88 | |
| Europe, Middle East and Africa | 2,883 | | | 3,133 | | | (250) | | | (8) | |
| Total | $ | 8,558 | | | $ | 6,611 | | | $ | 1,947 | | | 29 | % |
Product Revenue
Product revenue increased by $1.9 million, or 29%, to $8.6 million for the three months ended March 31, 2022 from $6.6 million for the comparable period in the prior year. The increase in product revenue was driven by an increase in volume of 58%, which we attribute primarily to the expansion of our sales team into new geographic regions and the increase of high volume, long-term deals as some of our customers begin to move into a production stage with their autonomous products. Our average selling price declined by 20% as we moved towards negotiated customer pricing with customers reaching the production stage with their autonomous products and we expect reductions in the cost of goods sold as we grow our volumes.
Geographic Locations
Revenue increased across the geographic regions of United States; North and South America, excluding United States; and Asia and Pacific; by $1.0 million, $0.1 million, and $1.1 million, respectively. The revenue increases in those geographic regions were a result of recent sales expansion. Revenue decreased in Europe, Middle East and Africa due to a large one time contract which was fulfilled during the three months ended March 31, 2021 and represented 57% of the revenue from Europe, Middle East and Africa in the first quarter of 2021.
Cost of Product Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | Change |
| | 2022 | | 2021 | | $ | | % |
| | (dollars in thousands) |
| | | | | | | |
| Cost of product revenue | $ | 5,967 | | | $ | 4,868 | | | $ | 1,099 | | | 23 | % |
| | | | | | | |
| | | | | | | |
Cost of Product Revenue and Gross Margin
Cost of product revenue increased by $1.1 million, or 23%, to $6.0 million for the three months ended March 31, 2022 from $4.9 million for the comparable period in the prior year and cost per unit decreased by 23%. The increase in cost of product revenue was primarily due to an increase of $0.5 million purchase price variance due to the supply chain shortage, increases related to volume of $1.0 million in material costs, $0.1 million in freight costs and $1.1 million in manufacturing overhead costs and an increase of $0.1 million in cost per unit in freight. The increases were partially offset by a decrease of $1.7 million in per unit costs of materials, labor and overhead and other costs related to product revenue.
Gross margin increased from 26% for the three months ended March 31, 2021 to 30% for the three months ended March 31, 2022. The increase in product gross margin is due to the 23% decrease in cost per unit partially offset by the 20% decrease in average selling price.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | Change |
| | 2022 | | 2021 | | $ | | % |
| | (dollars in thousands) |
| Operating expenses: | | | | | | | |
| Research and development | $ | 15,906 | | | $ | 4,712 | | | $ | 11,194 | | | 238 | % |
| Sales and marketing | 7,090 | | | 3,426 | | | 3,664 | | | 107 | |
| General and administrative | 13,783 | | | 9,907 | | | 3,876 | | | 39 | |
| Total operating expenses: | $ | 36,779 | | | $ | 18,045 | | | $ | 18,734 | | | 104 | % |
Research and Development
Research and development expenses increased by $11.2 million, or 238%, to $15.9 million for the three months ended March 31, 2022 from $4.7 million for the comparable period in the prior year. The increase was primarily attributable to a $4.6 million increase in payroll and benefits related costs, a $2.9 million increase in stock-based compensation expense, a $2.4 million increase in contractor, prototype, and equipment costs related to product development, a $0.7 million in depreciation and amortization expense, and a $0.6 million increase in other materials and supplies, facilities, professional fees and other miscellaneous costs attributable to research and development functions.
Sales and Marketing
Sales and marketing expenses increased by $3.7 million, or 107%, to $7.1 million for the three months ended March 31, 2022 from $3.4 million for the comparable period in the prior year. The increase was primarily attributable to an increase of $2.1 million in payroll and personnel-related costs and $1.3 million in stock-based compensation expense driven by the addition of sales personnel in all our global regions, as well as a $0.3 million increase in other expenses associated with our marketing and business development programs.
General and Administrative
General and administrative expenses increased by $3.9 million, or 39%, to $13.8 million for the three months ended March 31, 2022 from $9.9 million for the comparable period in the prior year. The increase was primarily due to an increase of $1.4 million in payroll and personnel-related costs, an increase of $1.3 million in insurance premiums, an increase of $0.6 million in depreciation expenses, an increase of $0.5 million in professional services fees, and an increase of $0.8 million in office, facility and other expenses, partially offset by a decrease of $0.7 million in stock based compensation expenses.
Interest Income, Interest Expense and Other Income (Expense), Net
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | Change |
| | 2022 | | 2021 | | $ | | % |
| | (dollars in thousands) |
| Interest income | $ | 154 | | | $ | 1 | | | $ | 153 | | | * |
| Interest expense | — | | | (504) | | | 504 | | | (100) | |
| Other income (expense), net | 1,684 | | | (4,152) | | | 5,836 | | | (141) | |
*Not meaningful
Interest income was $0.2 million for the three months ended March 31, 2022 compared to $0.001 million for the comparable period in the prior year. This increase in interest income was primarily related to an increase in our cash and cash equivalent balances.
Interest expense was nil for the three months ended March 31, 2022 compared to $0.5 million for the comparable period in the prior year. The decrease was primarily because we recorded interest expense on our debt and convertible notes and amortization of debt issuance costs and discount for the comparable period in the prior year.
Other income (expense), net was $1.7 million for the three months ended March 31, 2022 compared to $4.2 million for the comparable period in the prior year. During the three months ended March 31, 2022, we recorded a gain of $1.7 million for the fair value change of Private Placement warrant liability which was offset by $0.1 million gain from disposal of property and equipment. During the three months ended March 31, 2021, we recorded a loss of $8.8 million for the fair value change of redeemable convertible preferred stock warrant liability, partially offset by a gain of $4.7 million for the fair value change of Private Placement warrant liability which was recorded as other income.
Income Taxes
We were subject to income tax in the United States, California, and miscellaneous foreign jurisdictions for the three months ended March 31, 2022 and 2021. Our income tax expense for three months ended March 31, 2022 and 2021 was not material to the Company’s condensed consolidated financial statements.
Liquidity and Capital Resources
Sources of Liquidity
Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we develop and grow our business. Prior to the Merger, we primarily funded our operations from the net proceeds from sales of our preferred convertible stock and convertible notes, borrowing under our loan and security agreement with Runway Growth Credit Fund, Inc. and product revenue. Upon closing of the Merger, we received gross proceeds of $299.9 million from the Merger and private offering, offset by $8.5 million of pre-merger costs relating to CLA and transactions costs of $26.6 million.
On April 29, 2022, we entered into an open market sale agreement with B. Riley Securities, Inc., Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc., pursuant to which we may offer and sell shares of our common stock with an aggregate offering price of up to $150.0 million under an “at the market” offering program (the “ATM Offering”). Subject to the terms and conditions of the agreement, we may sell the shares in amounts and at times to be determined by us but we have no obligation to sell any of the shares. Actual sales, if any, will depend on a variety of factors to be determined by us from time to time, including, among other things, market conditions, the trading price of our common stock, capital needs and determinations by us of the appropriate sources of its funding. We currently intend to use the net proceeds from any sale of shares pursuant to the ATM Offering for working capital and general corporate purposes.
On April 29, 2022, we entered into a loan and security agreement (the “Loan Agreement”) with Hercules Capital, Inc. (“Hercules”). The Loan Agreement provides us with the term loan of up to $50.0 million, subject to terms and conditions. $20.0 million has been drawn to date under the Loan Agreement, and can be used for general working capital purposes. For additional information, see “Debt Arrangements” below.
Our principal sources of liquidity are expected to be our cash and cash equivalents, cash generated from product revenues, sales of common stock under our at-the market equity offering program and our loan agreement executed with Hercules.
As of March 31, 2022, we had an accumulated deficit of $335.8 million and cash and cash equivalents of $160.8 million. We have experienced recurring losses from operations, and negative cash flows from operations, and we expect to continue operating at a loss and to have negative cash flows from operations for the foreseeable future. We believe our cash and cash equivalents on hand, together with cash we expect to generate from future operations, will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Quarterly Report on Form 10-Q. However, because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide. We are likely to require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. In particular, the widespread COVID-19 pandemic, including variants, has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.
PIPE Investment
On December 21, 2020, concurrently with the execution of the Merger Agreement, CLA entered into subscription agreements with certain institutional and accredited investors (collectively, the “PIPE Investors”), pursuant to which the PIPE Investors agreed to purchase, in the aggregate, 10,000,000 shares of Ouster common stock at $10.00 per share for an aggregate commitment amount of $100,000,000 (the “PIPE Investment”), a portion of which was funded by certain affiliates of Colonnade Sponsor LLC, CLA’s sponsor (the “Sponsor”). The PIPE Investment was consummated substantially concurrently with the closing of the Merger.
Debt Arrangements
On November 27, 2018, we entered into a Loan and Security Agreement with Runway Growth Credit Fund, Inc. (“Runway Loan and Security Agreement”) and borrowed $10.0 million per the terms of that agreement with a loan maturity date of November 15, 2021. The loan carried an interest rate equal to LIBOR plus 8.50%. We repaid $3.0 million of the loan in August 2020. On March 26, 2021 we terminated the Runway Loan and Security Agreement and repaid the $7.0 million principal amount outstanding as well as interest and fees amounting to $0.4 million. We incurred no prepayment fees in connection with the termination and all liens and security interests securing the loan made pursuant to the Runway Loan and Security Agreement were released upon termination. As of March 31, 2022 and December 31, 2021, the outstanding principal balance of the loan was nil.
As described above, on April 29, 2022, we entered into the Loan Agreement with Hercules. The Loan Agreement provides us with a term loan facility of up to $50.0 million, subject to terms and conditions (the “Term Loan Facility”). $20.0 million has been drawn to date under the Loan Agreement, and can be used for general working capital purposes. We may borrow an additional $20.0 million on or before March 15, 2023, subject satisfying certain conditions. An additional $10.0 million may be drawn on or before June 15, 2023, subject to satisfying certain conditions relating to the achievement of trailing twelve month revenue and profit milestones.
Advances under the Term Loan Facility bear interest at the rate of interest equal to greater of either (i) (x) the prime rate as reported in The Wall Street Journal plus (y) 6.15%, and (ii) 9.40%, subject to compliance with financial covenants and other conditions. The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. The Loan Agreement matures on May 1, 2026.
Interest on amounts borrowed under the Loan Agreement is payable on a monthly basis until June 1, 2025. After June 1, 2025, payments consist of equal monthly installments of principal and interest payable until the secured obligations are repaid in full. However, if the Company achieves certain equity proceed, revenue or profit targets for the twelve-month period ending December 31, 2023, then the interest-only payments will continue and the Company will be obligated to repay the aggregate principal amount on May 1, 2026. The entire principal balance and all accrued but unpaid interest hereunder, shall be due and payable on May 1, 2026. On the earliest to occur of May 1, 2026, the date on which the obligations under the Loan Agreement are paid and the date on which such obligations become due and payable, the Company is also required to pay Hercules an end of term charge from $1.5 million to $3.7 million, depending on the amount borrowed.
The Company may prepay the principal of any advance made pursuant to the terms of the Term Loan Facility at any time subject to a prepayment charge equal to: 2.50%, if such advance is prepaid in any of the first 12 months following the Closing Date, 1.50%, if such advance is prepaid after 12 months but prior to 24 months following the Closing Date, and 1.0%, if such advance is prepaid anytime thereafter.
If the Company fails to maintain an unrestricted cash balance of $60 million, the Loan Agreement has a revenue financial covenant that requires the Company to achieve certain trailing twelve-month revenue targets tested quarterly.
All obligations under the Loan Agreement are unconditionally guaranteed by the Company’s subsidiary Sense Photonics, Inc. The Term Loan Facility is secured by substantially all of the Company’s and the guarantors’ existing and after-acquired assets, including all intellectual property, all securities in existing and future domestic subsidiaries and 65.0% of the securities in foreign subsidiaries, subject to certain exceptions and exclusions.
The Loan Agreement contains customary covenants for transactions of this type and other covenants agreed to by the parties, including, among others, (i) the provision of annual, quarterly and monthly financial statements, management rights and insurance policies and (ii) restrictions on incurring debt, granting liens, making acquisitions, making loans, paying dividends, dissolving, and entering into leases and asset sales. The Loan Agreement also provides for customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control, judgment and material adverse effect defaults.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the condensed consolidated balance sheet as of March 31, 2022, while others are considered future commitments. Our contractual obligations primarily consist of non-cancelable purchase commitments with various parties to purchase goods or services, primarily inventory, entered into in the normal course of business and operating leases. For information regarding our other contractual obligations, refer to Note 7, Commitments and Contingencies and our Annual Report on Form 10-K as filed with the SEC on February 28, 2022.
Cash Flow Summary
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| | (dollars in thousands) |
| Net cash provided by (used in): | | | |
| Operating activities | $ | (21,827) | | | $ | (12,399) | |
| Investing activities | (141) | | | (597) | |
| Financing activities | 119 | | | 258,799 | |
Operating Activities
During the three months ended March 31, 2022, operating activities used $21.8 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of $32.4 million, impacted by our non-cash charges of $10.1 million primarily consisting of stock-based compensation of $8.8 million, a $1.7 million change in fair value of warrant liabilities, depreciation and amortization of $2.4 million, change in right-of-use asset of $0.6 million, inventory write down of $0.2 million and gain from disposal of property and equipment of $0.1 million. The changes in our operating assets and liabilities of $0.4 million were primarily due to a decrease in prepaid expenses and other assets of $2.5 million, a decrease in operating lease liability of $0.8 million, an increase in inventories of $4.4 million, an increase in accounts payable and accrued and other liabilities of $2.3 million, and a decrease in accounts receivable of $0.8 million.
During the three months ended March 31, 2021, operating activities used $12.4 million in cash. Non-cash charges of 11.3 million primarily consisting of stock-based compensation of $5.3 million, a $4.1 million change in fair value of warrant liabilities, depreciation and amortization of $1.1 million, change in right-of-use asset of $0.5 million, interest expense and amortization of debt issuance costs and debt discount of $0.3 million. The changes in our operating assets and liabilities of $2.8 million were primarily due to an increase in prepaid expenses and other assets of $1.2 million, a decrease in operating lease liability of $0.7 million, an increase in inventories of $0.5 million, a decrease in accounts payable and accrued and other liabilities of $0.3 million, and an increase in accounts receivable of $0.1 million.
Investing Activities
During the three months ended March 31, 2022, cash used in investing activities was $0.1 million, which was related to purchases of property and equipment, partially offset by sales of property and equipment.
During the three months ended March 31, 2021, cash used in investing activities was $0.6 million, which was related to purchases of property and equipment.
Financing Activities
During the three months ended March 31, 2022, cash provided by financing activities was $0.1 million, consisting primarily of proceeds from exercise of stock options of $0.2 million, partially offset by repurchase of shares of common stock and taxes paid related to net share settlement of equity awards of $0.1 million.
During the three months ended March 31, 2021, cash provided by financing activities was $258.8 million consisting primarily of $291.5 million proceeds (net of $8.4 million of pre-Merger costs relating to CLA) from the Merger and PIPE Investment offset by offerings costs of $26.1 million, and proceeds from exercise of stock options of $0.5 million, partially offset by repayment of debt of $7.0 million. There were promissory notes to related parties of $5.0 million that were issued and repaid during the three months ended March 31, 2021.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
Please refer to Note 2 in our unaudited condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.