AEye, Inc. 10-K

Item 8. Financial Statements and Supplementary Data AEye, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 55 Consolidated balance sheets 56 Consolidated statements of operations and comprehensive loss 57 Consolidated statements of stockholders’ equity (deficit) 58 Consolidated statements of cash flows 60 Notes to consolidated financial statements 61 54 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and Board of Directors of AEye, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of AEye, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ DELOITTE & TOUCHE LLP San Francisco, California March 28, 2022 We have served as the Company’s auditor since 2018. 55 AEYE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and par value) As of December 31, 2021 2020 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,183 $ 15,275 Marketable securities 149,824 — Accounts receivable, net 4,222 156 Inventories, net 4,085 2,655 Prepaid and other current assets 5,051 1,396 Total current assets 177,365 19,482 Property and equipment, net 5,129 4,865 Restricted cash 2,150 1,223 Other noncurrent assets 1,509 315 Total assets $ 186,153 $ 25,885 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 2,542 $ 1,807 Accrued expenses and other current liabilities 8,739 3,356 Contract liabilities 2,287 660 Convertible notes — 29,079 Borrowing - net of debt issuance costs, current — 2,693 Total current liabilities 13,568 37,595 Deferred rent, noncurrent 3,032 3,631 Borrowings - net of debt issuance costs, noncurrent — 2,884 Other noncurrent liabilities 786 — Total liabilities 17,386 44,110 COMMITMENTS AND CONTINGENCIES (Note 18) STOCKHOLDERS’ EQUITY (DEFICIT): Preferred stock—$ 0.0001 par value: 1,000,000 shares authorized; no shares issued and outstanding — — Common stock—$ 0.0001 par value: 300,000,000 shares authorized; 155,137,237 and 101,286,645 shares issued and outstanding at December 31, 2021 and 2020 16 10 Additional paid-in capital 320,937 68,549 Accumulated other comprehensive loss ( 391 ) — Accumulated deficit ( 151,795 ) ( 86,784 ) Total stockholders’ equity (deficit) 168,767 ( 18,225 ) Total liabilities and stockholders’ equity (deficit) $ 186,153 $ 25,885 The accompanying notes are an integral part of these consolidated financial statements. 56 AEYE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except share and per share data) Year ended December 31, 2021 2020 REVENUE: Prototype sales $ 1,004 $ 365 Development contracts 2,003 1,214 Total revenues 3,007 1,579 COST OF REVENUE 3,637 808 Gross profit (loss) ( 630 ) 771 OPERATING EXPENSES: Research and development 26,543 17,130 Sales and marketing 10,548 3,408 General and administrative 25,514 6,715 Total operating expenses 62,605 27,253 LOSS FROM OPERATIONS ( 63,235 ) ( 26,482 ) OTHER INCOME (EXPENSE): Change in fair value of embedded derivative liability and warrant liabilities 223 1,410 Gain on PPP loan forgiveness 2,297 — Interest income and other 561 23 Interest expense and other ( 4,857 ) ( 1,502 ) Total other income (expense), net ( 1,776 ) ( 69 ) Provision for income tax expense — — Net loss $ ( 65,011 ) $ ( 26,551 ) Net unrealized loss on available-for-sale debt securities ( 391 ) — Comprehensive loss $ ( 65,402 ) $ ( 26,551 ) PER SHARE DATA Net loss per common share (basic and diluted) $ ( 0.60 ) $ ( 0.26 ) Weighted average common shares outstanding (basic and diluted) 109,055,894 102,803,202 The accompanying notes are an integral part of these consolidated financial statements. 57 AEYE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) For the years ended December 31, 2021 and 2020 (In thousands, except share data) Preferred Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount BALANCE—December 31, 2020 (as previously reported) 16,383,725 $ 62,639 10,838,010 $ — $ 5,920 $ — $ ( 86,784 ) $ ( 18,225 ) Retroactive application of recapitalization (Note 2) ( 16,383,725 ) ( 62,639 ) 90,448,635 10 62,629 — — — Balance as of December 31, 2020, as adjusted (Note 2) — — 101,286,645 10 68,549 — ( 86,784 ) ( 18,225 ) Stock-based compensation — — — — 10,018 — — 10,018 Issuance of common stock upon exercise of stock options — — 312,037 — 150 — — 150 Conversion of convertible notes and accrued interest into Class A common stock — — 20,778,097 2 39,093 — — 39,095 Business Combination and PIPE financing — — 31,894,635 3 256,808 — — 256,811 Transaction costs related to Business Combination and PIPE financing — — — — ( 52,661 ) — — ( 52,661 ) Net settlement of common stock and Series A preferred stock warrants — — 240,806 — — — — — Assumption of the private placement warrant liability in connection with Business Combination — — — — ( 268 ) — — ( 268 ) Commitment shares for Common Stock Purchase Agreement — — 302,634 — 1,583 — — 1,583 Repurchase of stock options — — — — ( 1,500 ) — — ( 1,500 ) Issuance of common stock upon vesting of restricted stock units — — 448,604 1 — — — 1 Taxes related to net share settlement of equity awards — — ( 126,221 ) — ( 835 ) — — ( 835 ) Unrealized loss on available-for-sale debt securities — — — — — ( 391 ) — ( 391 ) Net loss — — — — — — ( 65,011 ) ( 65,011 ) BALANCE—December 31, 2021 — $ — 155,137,237 $ 16 $ 320,937 $ ( 391 ) $ ( 151,795 ) $ 168,767 58 Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount BALANCE—December 31, 2019 (as previously reported) 16,383,725 $ 62,639 11,283,838 $ — $ 3,305 $ ( 60,233 ) $ 5,711 Retroactive application of recapitalization (Note 2) ( 16,383,725 ) ( 62,639 ) 91,661,644 10 62,629 — — Balance as of December 31, 2019, as adjusted (Note 2) — — 102,945,482 10 65,934 ( 60,233 ) 5,711 Stock-based compensation — — — — 1,952 — 1,952 Issuance of common stock upon exercise of stock options — — 1,877,233 — 663 — 663 Repurchase of common stock — — ( 3,536,070 ) — — — — Net loss — — — — — ( 26,551 ) ( 26,551 ) BALANCE—December 31, 2020 — $ — 101,286,645 $ 10 $ 68,549 $ ( 86,784 ) $ ( 18,225 ) The accompanying notes are an integral part of these consolidated financial statements. 59 AEYE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended December 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 65,011 ) $ ( 26,551 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,014 922 Noncash common stock purchase agreement costs 1,583 — Inventory write-downs 1,203 72 Change in fair value of embedded derivative liability and warrant liabilities ( 223 ) ( 1,410 ) Noncash gain on PPP loan forgiveness ( 2,297 ) — Stock-based compensation 10,018 1,952 Amortization of debt issuance costs 725 97 Amortization of debt discount 752 830 Amortization of premiums on marketable securities, net of change in accrued interest 310 — Other 287 68 Changes in operating assets and liabilities: Accounts receivable, net ( 4,066 ) ( 13 ) Inventories, net ( 2,633 ) ( 309 ) Prepaid and other current assets ( 3,655 ) 3,811 Other noncurrent assets ( 1,483 ) ( 193 ) Accounts payable 557 484 Accrued expenses and other current liabilities 5,496 1,377 Deferred rent ( 538 ) ( 496 ) Contract liabilities 2,258 ( 290 ) Net cash used in operating activities ( 55,703 ) ( 19,689 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 1,021 ) ( 4,036 ) Purchase of available-for-sale debt securities ( 150,525 ) — Net cash used in investing activities ( 151,546 ) ( 4,036 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options 150 663 Proceeds from Business Combination and PIPE financing 256,811 — Transaction costs related to Business Combination and PIPE financing ( 52,372 ) — Proceeds from the issuance of convertible notes 8,045 29,990 Proceeds from bank loans 10,000 2,270 Principal payments on bank loans ( 13,333 ) ( 667 ) Payments of debt issuance costs ( 717 ) ( 238 ) Repurchase of stock options ( 1,500 ) — Net cash provided by financing activities 207,084 32,018 NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 165 ) 8,293 CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period 16,498 8,205 CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Ending $ 16,333 $ 16,498 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 358 $ 197 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchases of property and equipment included in accounts payable and accrued liabilities 270 13 Conversion of Series A and Series B preferred stock into Class A common stock 62,639 — Conversion of convertible notes and accrued interest into Class A common stock 39,095 — Assumption of the private placement warrant liability in connection with Business Combination 268 — Transaction costs paid in 2020, previously recorded to other non-current assets and reclassified to additional paid-in capital in 2021 289 — Taxes related to net share settlement of equity awards included in accrued liabilities 835 — The accompanying notes are an integral part of these consolidated financial statements. 60 AEYE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data or otherwise stated) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AEye, Inc. (the “Company” or “AEye”) is a provider of high-performance, active lidar systems for vehicle autonomy, advanced driver-assistance systems (ADAS), and robotic vision applications. AEye’s software-definable 4Sight TM Intelligent Sensing Platform combines solid-state active lidar, an optionally fused low-light HD camera, and integrated deterministic artificial intelligence to capture more intelligent information with less data, enabling faster, more accurate, and more reliable perception. On February 17, 2021, AEye Technologies, Inc., then known as AEye, Inc. (“AEye Technologies”), entered into the Agreement and Plan of Merger (the “Merger Agreement”) with CF Finance Acquisition Corp. III, a Delaware corporation (“CF III”), now known as AEye, Inc., and Meliora Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of CF III (“Merger Sub”). Based on CF III’s business activities, it was a “shell company” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On August 16, 2021 (the “Closing Date”), CF III closed the business combination (the “Business Combination,” and together with the other transactions contemplated by the Merger Agreement, the “Transactions”) pursuant to the Merger Agreement, and Merger Sub was merged with and into AEye Technologies with AEye Technologies surviving the merger as a wholly owned subsidiary of CF III. On the Closing Date, and in connection with the closing of the Transactions (the “Closing”), CF III changed its name to AEye, Inc. The Company’s common stock and public warrants are now listed on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbols “LIDR” and “LIDRW”, respectively. Unless otherwise specified, “we,” “us,” “our,” “AEye,” and the “Company” refers to AEye, Inc., the combined entity following the Business Combination. Refer to Note 2 for further discussion of the Business Combination. Principle of Consolidation and Liquidity The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company has funded its operations primarily through the Business Combination and issuances of stock. As of December 31, 2021, the Company’s existing sources of liquidity included cash, cash equivalents and marketable securities of $ 164,007 . The Company has incurred losses and negative cash flows from operations. If the Company incurs additional losses in the future, it may need to raise additional capital through issuances of equity and debt. However, management believes that the Company’s existing sources of liquidity are adequate to fund its operations for at least one year from the date the audited consolidated financial statements were available for issuance. Reclassification of Prior Year Presentation Certain prior year amounts have been reclassified for consistency with the current year presentation. Specifically, restricted cash is now presented as a separate line item on the consolidated balance sheets and was previously included within other noncurrent assets. Inventory write-downs is now presented as a separate line item on the consolidated statements of cash flows and was previously included within changes in inventories, net. Amortization of debt issuance costs is now presented as amortization of debt discounts on the consolidated statements of cash flows. Noncash interest expense related to bank loans is now presented as amortization of debt issuance costs on the consolidated statements of cash flows. Emerging Growth Company The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. 61 Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. This may make it difficult or impossible to compare the Company’s financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include investments, embedded derivative and warrant liabilities (See Note 3), fair value of common stock, and stock-based compensation. Segment Reporting We manage our business on the basis of one reportable and operating segment. Operating segments are defined as components of an enterprise with separate financial information, and are evaluated regularly by the chief operating decision maker, which is our Chief Executive Officer (“CEO”). The CEO decides how to allocate resources and assesses the Company’s performance based upon consolidated financial information. All of our sales were made to customers (in USD) located in the United States, Europe, and Asia through AEye, Inc., and all property and equipment is located in the United States. Cash, Cash Equivalents, and Marketable Securities The Company considers all highly liquid investments, such as treasury bills, commercial paper, certificates of deposit, and money market instruments with maturities of three months or less at the time of acquisition to be cash equivalents. Cash equivalents primarily consist of amounts held in interest-bearing money market accounts that are readily convertible to cash. Cash equivalents are stated at cost, which approximates fair market value. Marketable securities have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Unrealized gains and losses in fair value of the available-for-sale (“AFS”) debt securities are reported in other comprehensive income (loss). When the AFS debt securities are sold, cost is based on the specific identification method, and the realized gains and losses are included in other income (expense), net in the consolidated statements of operations and comprehensive loss. The Company determines the appropriate classification of its investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company considers all AFS debt securities as available for use to support current operations, including those with maturity dates beyond one year and are classified as current assets under marketable securities in the accompanying consolidated balance sheets. AFS debt securities included in marketable securities on the consolidated balance sheets consist of securities with original maturities greater than three months at the time of purchase. Interest on marketable securities is included within interest income. 62 Restricted Cash Restricted cash of $ 2,150 and $ 1,223 as of December 31, 2021 and 2020, respectively consists of funds that are contractually restricted as to usage or withdrawal due to a contractual agreement. The Company has a letter of credit to the amount of $ 2,150 with Silicon Valley Bank as security for the payment of rent on its headquarters in Dublin, CA which require lease payments through 2026. During the year ended December 31, 2020, as a result of COVID-19, the Company agreed to a rent payment restructuring arrangement with the landlord, whereby restricted cash under the letter of credit was released and $ 928 was used to fund rental payments during the period from May 1, 2020 through December 31, 2020. At December 31, 2020, the Company had an available letter of credit of $ 1,223 . As part of the restructuring arrangement, the Company replenished the letter of credit back by paying $ 928 in January 2021. The Company determines current or non-current classification of restricted cash based on the expected duration of the restriction. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, and marketable securities, and accounts receivable. The Company places its cash and cash equivalents with major financial institutions, which management assesses to be of high credit quality, to limit the exposure of each investment. The Company’s marketable securities have investment grade ratings when purchased which mitigates risk. The Company’s accounts receivables are derived from customers located in the U.S., Europe, and Asia. The Company mitigates its credit risks by performing ongoing credit evaluations of its customers’ financial conditions. The Company generally does not require collateral. The Company’s concentration of risk related to accounts receivable and accounts payable was determined by evaluating the number of customers and vendors accounting for 10% or more of accounts receivable (“AR”) and accounts payable (“AP”). As of December 31, 2021, AEye had one customer accounting for 10 % or more of AR and two vendors accounting for 10 % or more of AP. As of December 31, 2020, AEye had four customers accounting for 10 % or more of AR and three vendors accounting for 10 % or more of AP. For the years ended December 31, 2021 and 2020, revenue from the Company’s major customers representing 10% or more of total revenue was as follows: Year ended December 31, 2021 2020 Customer A * 66 % Customer B 55 % * *Customer accounted for less than 10% of total revenue in the period. Fair Value of Financial Instruments The Company defines fair value as an exit price, representing the amount 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. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. For additional discussion on fair value of financial instruments, see Note 3. Derivatives The Company accounts for derivative instruments in accordance with Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging (“ASC 815”). The Company’s objectives and strategies for using derivative instruments, and how the derivative instruments and related hedged items are accounted for affect the financial statements. 63 The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risk. Terms of convertible debt instruments are reviewed to determine whether they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract and recorded on the consolidated balance sheets at fair value. An evaluation of specifically identified conditions is made to determine whether the fair value of the derivative issued is required to be classified as equity or as a derivative liability. The fair value of derivative liabilities is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. For additional discussion of derivatives, see Note 3. Accounts Receivable, net Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. If necessary, accounts receivable are reduced by an allowance for doubtful accounts, which is the Company’s best estimate of the amount of credit losses inherent in its existing accounts receivable. The Company reviews the need for an allowance for doubtful accounts quarterly based on historical experience with each customer and the specifics of each arrangement. During the years ended December 31, 2021 and 2020, the Company did not have any write-offs and at December 31, 2021 and 2020 did not record an allowance for doubtful accounts as all accounts receivable amounts are expected to be collected. Inventories, net Inventories consist of raw materials, work in progress, and finished goods. Inventories are stated at the lower of cost and net realizable value and costs are computed under the standard cost method. Prototype inventory cost consists of the associated raw material, direct labor, and indirect labor. The Company evaluates the need for inventory write-downs associated with obsolete, slow moving, and non-sellable inventory by reviewing estimated net realizable values on a periodic basis and records a provision for excess and obsolete inventory to adjust the carrying value of inventory as needed. The Company's inventory as of December 31, 2021 and 2020 was written down by $ 1,122 and $ 298 , respectively, in order to reduce inventory to the lower of cost or to its net realizable value. Deferred Transaction Costs The Company capitalized qualified legal, accounting, and other direct costs related to the Business Combination which were deferred until completion of the Business Combination. In August 2021, upon the completion of the Business Combination, all deferred costs were offset against proceeds from the Business Combination and the private investment in public equity (“PIPE”) financing. Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 7 years. Leasehold improvements are amortized over the shorter of the lease term or expected useful life of the improvements. Impairment of Long-Lived Assets The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. There are no impairment charges recorded in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2021 and 2020. 64 Leases The Company rents office space under long-term leases that are accounted for as operating leases following FASB ASC Topic 840, Leases (“ASC 840”). Rent expense is recognized on a straight-line basis over the expected lease term. The difference between straight-line rent expense and amounts paid are recorded as a deferred rent liability. Lease incentives, including tenant improvement allowances, are also recorded as a deferred rent liability and amortized as a reduction of rent expense on a straight-line basis over the expected term of the lease. Revenue Recognition The Company generates revenues from the sale of prototypes and from development arrangements with automakers and suppliers to automakers. Under FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company accounts for such arrangements as contracts with customers and accordingly recognizes revenue by applying the following steps: • Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, the Company satisfies a performance obligation See Note 16, Revenue, for additional information related to the application of ASC 606 to the Company’s primary revenue streams. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations and comprehensive loss. Arrangements with Multiple Performance Obligations When a contract involves multiple performance obligations, the Company accounts for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service is separately identifiable from other promises in the arrangement. The consideration is allocated between separate performance obligations in proportion to their estimated standalone selling price (SSP). The SSP reflects the price the Company would charge for a specific product or service if it were sold separately in similar circumstances and to similar customers. If the selling price is not directly observable, the Company determines SSP using information that may include other observable inputs, such as the Company generally uses the cost plus margin approach to estimate SSP. In instances where SSP is not directly observable, the Company determines SSP using information that may include other observable inputs such as expected costs plus margin, or uses the residual approach for performance obligations whose SSP is highly variable or uncertain. The Company provides standard product warranties for a term of typically one year to ensure that its products comply with agreed-upon specifications. Standard warranties are considered to be assurance type warranties and are not accounted for as separate performance obligations. Estimated future warranty costs are accrued and charged to cost of sales in the period that the related revenue is recognized. These estimates are based on historical warranty experience and any known or expected changes in warranty exposure, such as trends of product reliability and costs of repairing and replacing defective products. The Company assesses the adequacy of its recorded warranty liabilities on a quarterly basis and adjusts the amounts as necessary. Warranty costs are included within accrued expenses and other liabilities on the consolidated balance sheets. Refer to Note 8 for further information on warranty reserve amounts. Collaboration and Development Agreements The Company considers whether an arrangement qualifies as a collaborative arrangement under FASB ASC Topic 808, Collaborative Arrangements (“ASC 808”) , by assessing whether the arrangement between the parties have joint operating activities where both are (i) active participants in the activity; and (ii) have exposure to significant risks and rewards dependent on the commercial success of the activity. When both criteria are met, the arrangement is considered a collaborative arrangement and accounted for under ASC 808. 65 To qualify and present consideration as revenue within the scope of ASC 606, consideration exchanged in a collaborative arrangement must originate from a customer. The Company refers to ASU 2018-18, Clarifying the Interaction between Topic 808 and Topic 606 , which clarifies when participants of a collaborative arrangement are within the scope of ASC 606 (and a customer relationship exists in the context of a unit of account). The Company evaluates the unit of account for each arrangement and determines if the collaboration partner is considered a customer (defined as a party contracted with the entity to obtain goods and services which are outputs from the entity’s ordinary course of business, in exchange for consideration). When this definition is met, the Company applies the ASC 606 guidance, including recognition, measurement, presentation, and disclosure requirements to the unit of account. When a portion of a bundle unit of account (i.e., multiple promises which are not individually distinct) is not with a customer, the entire unit of account is not accounted for under the scope of ASC 606. For such arrangements, the Company may choose to analogize to the recognition and measurement guidance of ASC 606 whereby the consideration associated with revenue from non-ASC 606 elements are recognized together with revenue to be recognized under ASC 606, as appropriate. Other Policies, Judgments and Practical Expedients Contract assets and liabilities. Contract assets primarily represent revenues recognized for performance obligations that have been satisfied but for which amounts have not been billed. The Company did no t have any contract assets as of December 31, 2021. Contract liabilities relate to deferred revenue. Deferred revenue consists of amounts that have been invoiced and/or cash received but for which revenue has not been earned. This generally includes unrecognized revenue balances for development arrangements. Deferred revenue that will be realized during the succeeding 12-month period is recorded within current liabilities and the remaining deferred revenue is recorded as noncurrent liabilities. Right of return. The Company’s general terms and conditions for its contracts do not contain a right of return that allows the customer to return products and receive a credit. Therefore, the Company does not estimate returns and generally recognizes revenue at contract price upon product shipment or delivery. Significant financing component. In certain arrangements, the Company receives payment from a customer either before or after the performance obligation has been satisfied. The expected timing difference between the payment and satisfaction of performance obligations for all of the Company’s contracts is one year or less; therefore, the Company applies a practical expedient and does not consider the effects of the time value of money on transaction price. The Company’s contracts with customer prepayment terms do not include a significant financing component because the primary purpose is not to receive financing from the customers. Contract modifications. The Company may modify contracts to offer customers additional products or services. Each of the additional products and services are generally considered distinct from those products or services transferred to the customer before the modification. The Company evaluates whether the contract price for the additional products and services reflects the standalone selling price as adjusted for facts and circumstances applicable to that contract. In these cases, the Company accounts for the additional products or services as a separate contract. In other cases where the pricing in the modification does not reflect the standalone selling price as adjusted for facts and circumstances applicable to that contract, the Company accounts for the additional products or services as part of the existing contract primarily on a prospective basis. Judgments and estimates. Accounting for contracts recognized over time under ASC 606 involves the use of various techniques to estimate total contract revenue and costs. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a contract will be revised in the near-term. The Company reviews and updates its contract-related estimates quarterly, and records adjustments as needed. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized in the period in which the revisions to the estimates are made. 66 Cost of Revenue Cost of revenue primarily consists of costs directly associated with the production of those prototypes that are held for sale and certain costs associated with development arrangements. Such costs for prototypes are direct materials, direct labor, indirect labor, warranty expense, and allocation of overhead. Direct and indirect labor includes personnel-related costs and packaging and procurement respectively associated with the production of prototypes. Other costs such as indirect manufacturing costs are recognized in research and development and general and administrative expenses on the consolidated statements of operations and comprehensive loss. Costs associated with development arrangements include the direct costs and allocation of overhead costs involved in the execution of the contract. Research and Development Expenses Research and development expenses include personnel costs (including salaries, benefits, bonuses, and stock-based compensation), new hardware and software materials to the extent no future economic benefits are expected, other related expenses such as lab equipment, third party development-related contractors, and allocated overhead expenses. Substantially all the R&D expenses are related to the development of new products and services, including contract development expenses. They are expensed as incurred and included in the consolidated statements of operation and comprehensive loss. Stock-Based Compensation The Company accounts for stock-based compensation by measuring and recognizing compensation expense for all share-based awards based on estimated grant-date fair values. The Company uses the straight-line attribution method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period, and estimates the fair value of share-based awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the option’s expected term and the price volatility of the underlying stock. The Company’s policy is to recognize stock-based compensation net of estimated forfeitures, based on historical forfeiture rates. The Company measures nonemployee awards at the date of grant, which generally is the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. The fair value of the restricted stock units, or “RSUs,” is equal to the fair market value of the Company’s common stock on the grant date. The fair value of the stock-based compensation is recognized on a straightline basis over the requisite service period, which is generally the vesting period of the award. Stock options and RSUs for all periods prior to the Business Combination have been retroactively restated to give effect to the recapitalization. Refer to Note 2 for further discussion of the equity recapitalization resulting from the Business Combination. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance would be made to reduce the provision for income taxes. 67 The Company records uncertain tax positions in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”) on the basis of a two-step process in which determinations are made (1) whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statements of operations and comprehensive loss. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets. As of and for the year ended December 31, 2021 and 2020 there were no interest or penalties recorded. Net Loss per Share Basic net loss per share is computed using net loss available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the dilutive effects of stock options, restricted stock units, preferred stock, convertible notes, and public and private placement warrants outstanding during the period to the extent such securities would not be anti-dilutive and is determined using the if-converted and treasury stock methods. The Company calculates weighted average number of common shares outstanding during the period using the Company’s Class A common stock outstanding. As the merger has been accounted for as a reverse capitalization, the consolidated financial statements of the merged entity reflects the continuation of the pre-merger AEye Technologies financial statements, which has been retroactively adjusted to the earliest period presented to reflect the legal capital of the legal acquirer, CF III. As a result, net loss per share was also restated for periods ended prior to the Business Combination. See Note 2 for details on this recapitalization and Note 14 for the retroactive restatement of net loss per share. Basic and diluted net loss per share attributable to common stockholders was the same for all periods presented as the inclusion of all potentially dilutive securities outstanding was anti-dilutive, as AEye is currently operating in a net loss position. Comprehensive Loss Comprehensive loss includes all changes in equity (net assets) from non-owner sources during a period and net unrealized gains (losses) on available-for-sale debt securities. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments , which has subsequently been amended by ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, and ASU No. 2019-11. The objective of the guidance in ASU 2016-13 is to allow entities to recognize estimated credit losses in the period that the change in valuation occurs. ASU 2016-13 requires an entity to present financial assets measured on an amortized cost basis on the balance sheet net of an allowance for credit losses. Available-for-sale and held to maturity debt securities are also required to be held net of an allowance for credit losses. For public business entities, this standard is effective for fiscal years beginning after December 15, 2019. For smaller reporting companies, the standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements and related disclosures and will adopt the guidance on January 1, 2023 as permitted for smaller reporting companies. 68 Recently Adopted Accounting Guidance In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02. FASB ASC Topic 842, Leases (“ASC 842”) supersedes the previous accounting guidance for leases included within ASC 840. The new guidance generally requires an entity to recognize operating and financing lease liabilities and corresponding right-of-use assets on its balance sheet, as well as recognize the associated lease expenses on its statements of operations in a manner similar to that required under current accounting rules. The guidance requires a modified retrospective transition approach with application in all comparative periods presented (the “Comparative Method”), or alternatively, as of the effective date as the date of initial application without restating comparative period financial statements (the “Effective Date Method”). The new standard is effective for the Company on January 1, 2022. We adopted the new standard on January 1, 2022 using the Effective Date Method. The Company has completed a substantial portion of its evaluation of the effect of adopting ASC 842 on its financial statements. Upon adoption on January 1, 2022, the Company expects to recognize estimated right-of-use assets and lease liabilities totaling approximately $ 16,050 and $ 19,692 , respectively, to reflect the present value of remaining lease payments under existing lease arrangements. The new guidance also provides several practical expedients and policies that companies may elect upon transition. The Company plans to elect the transition practical expedient package, which among other things, allows the carryforward of historical lease classifications. The Company will continue to apply Topic 840 prior to January 1, 2022, including Topic 840 disclosure requirements, in the comparative periods presented. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This standard simplifies the accounting for income taxes by, among other things, eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2021. We have adopted ASU 2019-12 as of January 1, 2022, and our adoption did not have a material impact on the consolidated financial statements. 2. RECAPITALIZATION As discussed in Note 1, on August 16, 2021, AEye Technologies and CF III closed the Business Combination, with AEye Technologies surviving the Business Combination as a wholly owned subsidiary of CF III. As part of the closing of the Business Combination, CF III changed its name to AEye, Inc. (the “combined entity”). Immediately prior to the closing of the Business Combination, the Company’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 301,000,000 shares, of which 300,000,000 shares were designated common stock, $ 0.0001 par value per share, and of which 1,000,000 shares were designated preferred stock, $ 0.0001 par value per share. The Business Combination is accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with US GAAP. Under this method of accounting, AEye Technologies was treated as the accounting acquirer and CF III was treated as the acquired company for financial reporting purposes under FASB ASC Topic 805, Business Combinations (“ASC 805”). This determination is primarily based on AEye Technologies’ stockholders comprising a relative majority of the voting power of the combined entity, and having the ability to nominate the majority of the governing body of the combined entity, AEye Technologies’ senior management comprising the senior management of the combined entity and AEye Technologies’ operations comprising the ongoing operations of the combined entity. Accordingly, for accounting purposes, the financial statements of the combined entity represented a continuation of the financial statements of AEye Technologies and the Business Combination was treated as the equivalent of AEye Technologies issuing stock for the net assets of CF III, accompanied by a recapitalization. The net assets of CF III are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of AEye Technologies in future reports of the combined entity. Loss per share and stockholders’ equity (deficit), prior to the Business Combination, have been retroactively converted into 3.7208 shares (the “Exchange Ratio”). 69 Immediately prior to the closing of the Business Combination, all outstanding principal and unpaid accrued interest of the 2020 Notes were ultimately converted into 5,584,308 shares of AEye Technologies’ common stock and subsequently converted to Class A common stock of the Company (see Note 11). Separately, each issued and outstanding share of AEye Technologies’ 16,383,725 redeemable convertible preferred stock was converted into shares of AEye Technologies’ common stock based on a one -to-one ratio. The consolidated financial statements are accounted for with a retrospective application of the Business Combination that results in 16,383,725 shares of redeemable convertible preferred stock converting into common stock of the Company. Upon the closing of the Business Combination, each share of AEye Technologies common stock issued and outstanding was canceled and converted into the right to receive 3.7208 shares of CF III’s common stock (the “Per Share Merger Consideration”). Immediately prior to the closing of the Business Combination, the Board approved the Net-Exercise of common stock warrants and Series A preferred warrants which provides for the cashless exercise of 61,612 common stock warrants into 57,770 shares of AEye Technologies common stock and 7,353 Series A preferred warrants into 6,949 shares of AEye Technologies common stock at the Transaction Price of $ 37.21 per share. Upon the Closing, the combined 64,719 shares were cancelled and exchanged for 240,806 shares of the Company’s Class A common stock, after giving effect to the Exchange Ratio. Immediately prior to the closing of the Business Combination, CF III’s amended and restated certificate of incorporation, dated November 12, 2020 (the “Charter”), was further amended and restated to eliminate the Class B common stock (after giving effect to the conversion of each outstanding share of Class B common stock immediately prior to the closing of the Business Combination into one share of Class A common stock). PIPE Subscription Agreement Contemporaneously with the execution of the Merger Agreement, CF III entered into separate PIPE Subscription Agreements in a private placement with a number of PIPE investors, pursuant to which the PIPE Investors agreed to purchase, and CF III agreed to sell to the PIPE Investors, an aggregate of 22,000,000 shares of common stock, for a purchase price of $ 10.00 per share and an aggregate purchase price of $ 220,000 . CF III also entered into a PIPE Subscription Agreement for 500,000 shares of common stock, for a purchase price of $ 10.00 per share and an aggregate purchase price of $ 5,000 with an investor who defaulted on the Closing under the PIPE Subscription Agreement. The Company plans to pursue its available remedies with respect to such investor. Redemption Certain CF III shareholders exercised their right to redeem certain of their outstanding shares for cash, resulting in the redemption of 19,355,365 shares of CF III Class A common stock for an aggregate payment of $ 195,498 , at a redemption price of $ 10.10 per share based on the Trust Account balance as of August 11, 2021. Public and Private Placement Warrants CF III Warrants issued in connection with the IPO (“Public warrants”) and in connection with the private placement units held by the Sponsor (“Private Placement warrants”) to purchase shares of the Company’s common stock, at an exercise price of $ 11.50 per share, remained outstanding after the closing of the Business Combination. The warrants became exercisable 30 days after the completion of the Business Combination, subject to other conditions, including with respect to the effectiveness of a registration statement covering the shares of common stock underlying such warrants, and will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation. The Public warrants are classified as equity and valued based on the instrument’s publicly listed trading price. The Private Placement warrants are classified as liabilities and measured at fair value, with changes in fair value each period reported in the consolidated statements of operations and comprehensive loss. The Company uses the Public warrants listed trading price to value the private placement warrants each reporting period. 70 Transaction Costs In connection with the Business Combination, the Company incurred direct and incremental costs of approximately $ 52,661 related to the equity issuance, consisting primarily of investment banking, legal, accounting, and other professional fees, which were recorded to additional paid-in capital as a reduction of proceeds upon the closing of the Business Combination. Transaction costs that were not directly related to the Business Combination of approximately $ 2,198 were expensed. Transaction Proceeds Upon closing of the Business Combination, the Company received gross proceeds of $ 256,811 from the Business Combination and PIPE financing, offset by offerings costs of $ 52,661 . The following table reconciles the elements of the Business Combination to the consolidated statements of cash flows and the consolidated statements of changes in stockholders’ deficit for period ended December 31, 2021 (in thousands, except share data): Cash - CF III’s trust and cash (net of redemption) $ 36,811 Cash - Private offering 220,000 Less: transaction costs and advisory fees paid ( 52,661 ) Net Business Combination and private offering $ 204,150 The number of shares of common stock issued immediately following the closing of the Business Combination were: CF III Class A common stock, outstanding prior to Business Combination 23,000,000 Less: redemption of CF III Class A common stock 19,355,365 Class A common stock of CF III 3,644,635 CF III founder shares 5,750,000 CF III Private Placement shares 500,000 CF III Shares issued in PIPE 22,000,000 Business Combination and PIPE shares 31,894,635 Legacy AEye shares 122,509,667 August 16, 2021 154,404,302 The number of Legacy AEye shares was determined as follows: AEye shares AEye shares, effected for Exchange Ratio Balance at December 31, 2019 11,283,838 41,984,908 Recapitalization applied to Redeemable Convertible preferred stock outstanding at December 31, 2019 16,383,725 60,960,574 Exercise of common stock options - 2020 504,524 1,877,233 Repurchase of common stock - 2020 ( 950,352 ) ( 3,536,070 ) Exercise of common stock options - 2021 (pre-Closing) 54,859 204,119 Conversion of Convertible Notes and Accrued Interest – 2021 5,584,308 20,778,097 Exercise of common stock and Series A preferred stock warrants - 2021 64,719 240,806 Total 122,509,667 71 3. FAIR VALUE MEASUREMENTS The fair value of the Company’s financial assets and liabilities is determined in accordance with the fair value hierarchy established in FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy of ASC 820 requires an entity to maximize the use of observable inputs when measuring fair value and classifies those inputs into three levels: Level 1 —Observable inputs, such as quoted prices in active markets for identical assets or liabilities. Level 2 —Observable inputs, other than Level 1 inputs, which are observable either directly or indirectly or can be corroborated by observable market data using quoted prices for similar assets or liabilities. Level 3 —Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Our financial instruments that are not re-measured at fair value include accounts receivable, prepaid and other current assets, accounts payable, accrued expenses and other current liabilities, convertible notes, and long-term debt. The carrying values of these financial instruments approximate their fair values. The Company’s financial assets and liabilities measured at fair value on a recurring basis and the level of inputs used for such measurements were as follows (in thousands): Fair Value (in thousands) Measured as of December 31, 2021 Using: Adjusted Cost Unrealized losses Fair Value Cash and Cash Equivalent Marketable Securities Assets Level 1 Money market funds $ 4,863 $ — $ 4,863 $ 4,863 $ — Level 2 Asset-backed securities $ 26,491 $ ( 68 ) $ 26,423 $ — $ 26,423 Corporate bonds 48,643 ( 150 ) 48,493 — 48,493 Commercial paper 45,145 — 45,145 — 45,145 U.S. Government securities 29,936 ( 173 ) 29,763 — 29,763 Total financial assets $ 155,078 $ ( 391 ) $ 154,687 $ 4,863 $ 149,824 Liabilities Level 2 Private placement warrant liability $ — $ — $ 155 $ — $ — Total financial liabilities $ — $ — $ 155 $ — $ — 72 Fair Value (in thousands) Measured as of December 31, 2020 Using: Adjusted Cost Unrealized losses Fair Value Cash and Cash Equivalent Marketable Securities Liabilities Level 3 Common stock and series A preferred stock warrant liability $ — $ — $ 93 $ — $ — Embedded derivative liability — — 17 — — Total financial liabilities $ — $ — $ 110 $ — $ — As of December 31, 2021, the Company’s financial assets and liabilities subject to fair value procedures were comprised of the following: Money Market Funds: The Company holds financial assets consisting of money market funds. These securities are valued using observable inputs, such as quoted prices in active markets for identical assets or liabilities. Marketable Securities : The Company holds financial assets consisting of fixed-income U.S. government agency securities, corporate bonds, commercial paper and asset-backed securities. The securities are valued using prices from independent pricing services based on quoted prices of identical instruments in less active or inactive markets. Additionally, quoted prices of similar instruments in active market or industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets are used to value marketable securities. Private Placement Warrant Liability : As of December 31, 2021 Level 2 fair value measurements were used for private placement warrant liabilities. Any changes in the fair value of the liability are reflected in other income (expense), net, on the consolidated statements of operations and comprehensive loss. Private placement warrant liability is included within other noncurrent liabilities on the consolidated balance sheets. As of December 31, 2020, the Company’s financial liabilities subject to fair value procedures were comprised of the following: Common Stock and Series A Preferred Stock Warrant Liability: The fair value of the redeemable convertible preferred stock warrant liability is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the redeemable convertible preferred stock warrant liability, 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 expected dividend yield. Changes in fair value measurement are reflected in other income (expense), net, on the consolidated statements of operations and comprehensive loss. See Black-Scholes table below for quantitative information on the unobservable inputs used in the valuation of common stock and series A preferred stock warrant liabilities. Upon the closing of the Business Combination, the common stock and series A preferred stock warrant liability were net settled and converted to the Class A common stock equity. The financial liability was retroactively restated as equity resulting from the recapitalization as part of the Business Combination. Embedded Derivative Liability: During 2020, the Company entered into a convertible note agreement under which the Company may issue convertible equity instruments (“2020 Notes”). The 2020 Notes contain an embedded redemption feature, which is considered to be a derivative that is required to be separately accounted for at fair value and subsequently remeasured to fair value at each reporting date. The fair value of the embedded derivative liability was estimated using a with and without method, and changes in fair value are recognized in other income (expense), net, on the consolidated statements of operations and comprehensive loss. This method isolates the value of the embedded derivative liability by measuring the difference in the host contract’s value with and without the isolated feature. The resulting cash flows are discounted at the Company’s borrowing rate, as adjusted for fluctuations in the market interest rate from the inception of the Company’s comparative borrowings to the reporting date, to measure the fair value of the embedded derivative. The valuation for the conversion portion of the derivative factors in the expected timing and probability of a financing that would result in the conversion of the underlying, plus accrued interest 73 discounted to the financing price per share. The probability and timing of a financing are estimated at each reporting date. Upon the closing of the Business Combination the embedded derivative was settled as the 2020 Notes and accrued interest were converted into the Company’s Class A common stock (see Note 2 Recapitalization). For the year ended December 31, 2021 and 2020, there were no transfers between Level 1 and Level 2 inputs. The private placement warrant liability transferred from Level 3 into Level 2 during the year ended December 31, 2021 as a result of the Business Combination which introduced Level 2 inputs into the valuation of the private placement warrant liability, specifically the observable input of AEye public warrants (LIDRW). There were no issuances, purchases, sales, or settlements of Level 3 inputs, other than as disclosed below. The following table presents a summary of the changes in fair value of the Company’s Level 3 financial instruments for the year ended December 31, 2021 (in thousands): Embedded Derivative Common Stock and Series A Preferred Stock Warrant Liability Total Balance at December 31, 2020 $ 17 $ 93 $ 110 (Gain) loss in fair value included in other income (expense, net) ( 17 ) ( 93 ) ( 110 ) Balance at December 31, 2021 $ — $ — $ — Embedded Derivative Common Stock and Series A Preferred Stock Warrant Liability Total Balance at December 31, 2019 $ — $ — $ — Initial fair value of embedded derivative 1,520 — 1,520 (Gain)/loss in fair value included in other income (expense, net) ( 1,503 ) 93 ( 1,410 ) Balance at December 31, 2020 $ 17 $ 93 $ 110 The key inputs into the Black-Scholes option-pricing model for the common stock and series A preferred stock warrant liability valued at December 31, 2020 are as follows: December 31, 2020 Expected term (years) 5.8 Expected volatility 45.6 % Risk-free interest rate 0.4 % Dividend yield — % Exercise price $ 15.03 If factors or assumptions change, the estimated fair values could be materially different. The value of the Company’s common stock and series A preferred stock warrant liability would increase if a higher risk-free interest rate was used, and would decrease if a lower risk-free interest rate was used. Similarly, a higher volatility assumption would increase the value of the stock warrants, and a lower volatility assumption would decrease the value of the stock warrants. 74 4. CASH, CASH EQUIVALENTS, AND RESTRICTED CASH Cash, cash equivalents (which consists entirely of money market funds) and restricted cash as of December 31, 2021 and 2020 were as follows (in thousands): As of December 31, 2021 2020 Cash and cash equivalents $ 14,183 $ 15,275 Restricted cash 2,150 1,223 Total cash, cash equivalents, and restricted cash $ 16,333 $ 16,498 5. INVENTORIES Inventory, net of write-downs, as of December 31, 2021 and 2020 were as follows (in thousands): As of December 31, 2021 2020 Raw materials $ 1,544 $ 1,123 Work in-process 2,447 1,337 Finished goods 94 195 Total inventory, net $ 4,085 $ 2,655 The Company's inventory write-down to reduce inventories to net realizable value was $ 1,203 and $ 72 during the years ended December 31, 2021 and 2020, respectively. 6. PREPAID AND OTHER CURRENT ASSETS Prepaid and other current assets as of December 31, 2021 and 2020 were as follows (in thousands): As of December 31, 2021 2020 Prepaid expenses $ 3,980 $ 549 Demonstration units 224 — Other 847 847 Total prepaid and other current assets $ 5,051 $ 1,396 7. OTHER NONCURRENT ASSETS Other noncurrent assets as of December 31, 2021 and 2020 were as follows (in thousands): As of December 31, 2021 2020 Deferred financing costs $ — $ 288 Security deposits 133 27 Long-term prepaid expenses 1,376 — Total other noncurrent assets $ 1,509 $ 315 75 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities as of December 31, 2021 and 2020 were as follows (in thousands): As of December 31, 2021 2020 Accrued payroll $ 957 $ 741 Accrued bonuses 3,408 — Accrued payroll taxes 1,547 273 Accrued interest — 391 Accrued purchases and other 1,947 1,406 Warranty reserve 275 — Deferred rent - current 605 545 Accrued expenses and other current liabilities $ 8,739 $ 3,356 9. PROPERTY AND EQUIPMENT, NET Property and equipment, net as of December 31, 2021 and 2020 consists of the following (in thousands): As of December 31, 2021 2020 Machinery and equipment $ 1,444 $ 625 Computers, software and related equipment 268 218 Office furniture and equipment 341 338 Vehicles 342 165 Leasehold improvements 4,725 4,709 Construction in progress 213 — Total property and equipment 7,333 6,055 Less accumulated depreciation and amortization ( 2,204 ) ( 1,190 ) Property and equipment, net $ 5,129 $ 4,865 Depreciation and amortization expense related to property and equipment amounted to $ 1,014 and $ 922 recognized within research and development, sales and marketing, and general and administrative expenses within the consolidated statements of operations and comprehensive loss for the years ended December 31, 2021 and 2020. Disposals of property and equipment were not material for the years ended December 31, 2021 and 2020. 10. BORROWINGS Silicon Valley Bank Financing Facility On April 26, 2021, the Company entered into a loan and security agreement (the “Agreement”) with an affiliate of Silicon Valley Bank (“SVB” or the “Lender”) in connection with the non-binding term sheet for a financing facility of up to $ 10,000 entered into on March 18, 2021. Under the Agreement, the Lender shall make a term loan advance to the Company of $ 4,000 . Subject to the terms and conditions of the Agreement, and upon the Company’s request, the Lender shall make one term loan advance to the Company of $ 6,000 . The interest rate on the term loan advance is calculated at 8 % per annum and payable monthly, in arrears. Upon entering the agreement, the $ 4,000 was drawn. On May 13, 2021, the additional $ 6,000 was drawn. The 76 balance of $ 10,540 for the financing facility, including interest, was repaid on August 20, 2021. Silicon Valley Bank Credit Facility On August 16, 2019, the Company entered into a loan and security agreement with SVB. Borrowings under this facility are secured by substantially all the Company’s assets, excluding intellectual property. The term loan’s borrowings are subject to certain financial covenants and restrictions. The Company complied with all financial covenants and restrictions as of December 31, 2021 and 2020. The growth capital term loan facility is made up of a $ 4,000 loan amount, which was drawn in December 2019. The Company began repaying the term loan under this facility beginning January 1, 2020 in equal monthly payments of principal, plus accrued interest. The interest rate on the term loan is the greater of (a) the prime rate plus 0.75 % and (b) 5.5 %. On April 20, 2020, the Company entered into a deferral agreement with SVB, whereby the payment dates for all monthly principal payments on the term loan falling due after the deferred agreement’s effective date was extended by six months . Therefore, the Company did not make any principal payments for any term loans for the period from May 31, 2020 to December 31, 2020. The Company accounted for this as a debt modification. The balance of $ 2,333 for the term loan was repaid on September 7, 2021. Paycheck Protection Program (PPP) Loan On June 19, 2021, the Company received notice of the Paycheck Protection Program (PPP) forgiveness payment made to SVB by the Small Business Administration in the amount of $ 2,270 in principal and $ 27 in interest. This amount represents the forgiveness of the total PPP loan the Company received in 2020 under the PPP Loan provisions of the CARES act. As of December 31, 2021, there were no borrowings outstanding. As of December 31, 2020, the Company’s borrowings consisted of the following (in thousands): December 31, 2020 Silicon Valley Bank credit facility $ 3,333 Payroll Protection Program (PPP) Loan 2,270 Unamortized debt issuance costs - SVB financing and credit facility ( 26 ) Total borrowings, net of debt issuance costs $ 5,577 Borrowings - net of debt issuance costs, current $ 2,693 Borrowings - net of debt issuance costs, noncurrent 2,884 Total borrowings, net of debt issuance costs $ 5,577 11. CONVERTIBLE NOTES During 2020, the Company entered into various convertible note agreements (“2020 Notes”) under which the Company may issue convertible equity instruments having an aggregate principal amount of up to $ 40,000 , a 3 % accruing dividend (“accrued interest”) and a maturity date, extended in July 2021, of October 31, 2021. During 2020 the Company received $ 30,000 in proceeds related to the 2020 Notes. During 2021, the Company issued an additional $ 8,045 of convertible notes. Pursuant to the terms of the 2020 Notes, upon the closing by the Company of a financing, all outstanding principal and unpaid accrued interest of the 2020 Notes will automatically convert into Company preferred stock sold (the “Next Financing Stock”) at a “conversion price” equal to the lesser of: (i) the original issue price per share paid in the Next Financing Stock multiplied by 90 %; and (ii) the price obtained by dividing $ 250,000 by the number of outstanding shares of common stock of the Company immediately prior to the Next Financing, as applicable. 77 In connection with the Business Combination on August 16, 2021, all outstanding principal and unpaid accrued interest of the 2020 Notes were converted into AEye Technologies’ preferred stock and subsequently were converted into 20,778,097 shares of the Company’s Class A common stock. Accordingly, at December 31, 2021, the convertible notes balance was $ 0 . December 31, 2020 Convertible notes - face value $ 29,990 Unamortized debt issuance costs ( 175 ) Unamortized debt discount ( 753 ) Embedded derivative liability 17 Convertible notes - current $ 29,079 Embedded Derivative Liability As outlined in the indenture governing the 2020 Notes, the 2020 Notes are automatically convertible, contingent upon the occurrence of certain events, most notably a financing (a “Next Financing”), defined as the issuance and sale of additional preferred stock (“Financing Stock”). The redemption price is defined as a price per share equal to 90 % of the price per share paid by the other purchasers of the Financing Stock sold in the Next Financing. The 2020 Notes are redeemable into the number of shares of Next Financing Stock needed to settle all of the aggregate amount of principal and unpaid interest owed to the holder of such notes, which is based on the ultimate price per share associated with the Financing Stock. Consequently, the 2020 Notes are considered stock settled debt. This redemption feature embedded in the 2020 Notes is considered to be a derivative that is required to be separately accounted for at fair value and subsequently remeasured to fair value at each reporting date. Accordingly, upon issuance of the 2020 Notes, the Company recognized the fair value associated with the embedded derivative which resulted in an embedded derivative liability of approximately $ 1,520 , with an equal and offsetting debt discount. Upon the closing of the Business Combination on August 16, 2021, the embedded derivative was settled. Accordingly, at December 31, 2021, the fair value of the embedded derivative liability wa s $ 0 . The value of the embedded derivative liability at December 31, 2020 is presented together with the associated convertible notes on the consolidated balance sheets. See Note 3 for additional discussion of derivatives. 12. INTEREST EXPENSE AND OTHER Interest expense and other for the years ended December 31, 2021 and 2020 consisted of the following (in thousands): Year ended December 31, 2021 2020 Interest on term loan debt $ 630 $ 200 Interest on PPP loan 11 16 Interest on convertible note 700 359 Amortization of debt issuance costs 725 97 Amortization of debt discount 752 830 Amortization of premiums on marketable securities, net 456 — Common stock purchase agreement costs 1,583 — Interest expense and other $ 4,857 $ 1,502 13. STOCKHOLDERS’ EQUITY The Company is authorized to issue 300,000,000 shares of common stock, par value $ 0.0001 per share, and 1,000,000 shares of preferred stock, par value $ 0.0001 per share. As of December 31, 2021, the Company had 155,137,237 and 0 shares of common stock and preferred stock issued and outstanding, respectively. 78 Class A Common Stock — Class A common stock has the following rights: Voting rights: Each holder of Class A common stock will be entitled to one ( 1 ) vote in person or by proxy for each share of the Class A common stock held of record by such holder. The holders of shares of the Class A common stock will not have cumulative voting rights. Except as otherwise required in the Amended Charter or by applicable law, the holders of the Class A common stock vote together as a single class on all matters on which stockholders are generally entitled to vote. Dividend rights: Subject to any other provisions of the Amended Charter, each holder of Class A common stock will be entitled to receive, in proportion to the number of shares of the Class A common stock held, such dividends and other distributions in cash, stock or property of the Company when, as and if declared thereon by the Board from time to time out of assets or funds of the Company legally available therefor. Rights upon liquidation: In the event of any liquidation, dissolution or winding up (either voluntary or involuntary) of the Company, after payments to creditors of the Company that may at the time be outstanding, and subject to the rights of any holders of the Company preferred stock that may then be outstanding, holders of shares of the Class A common stock will be entitled to receive ratably, in proportion to the number of shares of the Class A common stock held by them, all remaining assets of the Company available for distribution. Preferred Stock — The Company has the authority, without stockholder approval, to issue shares of preferred stock from time to time on terms it may determine, to divide shares of preferred stock into one or more class or series and to fix for each such class or series the designations, preferences, privileges, and restrictions of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, and the number of shares constituting any series or the designation of any series to the fullest extent permitted by the Delaware General Corporation Law. The issuance of the Company’s preferred stock could have the effect of decreasing the trading price of the Class A common stock, restricting dividends on the capital stock of the Company, diluting the voting power of the Class A common stock, impairing the liquidation rights of the capital stock of the Company, or delaying or preventing a change in control of the Company. Although the Company does not currently intend to issue any shares of preferred stock, the Company may choose to do so in the future. As discussed in Note 2, Recapitalization, the Company has retroactively adjusted the preferred shares issued and outstanding prior to August 16, 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. Upon the Closing, all of the outstanding shares of preferred stock were cancelled and exchanged for shares of the surviving Company’s Class A common stock at the Exchange Ratio of 3.7208 , the exchange rate established in the Merger Agreement. August 16, 2021 (Closing) Preferred stock shares Exchange ratio Common stock shares Series A Convertible preferred stock (pre-combination) 9,226,734 3.7208 34,330,838 Series B Convertible preferred stock (pre-combination) 7,156,991 3.7208 26,629,736 Total 16,383,725 60,960,574 The Company is authorized to issue up to 1,000,000 shares of preferred stock, each with a par value of $ 0.0001 per share. As of December 31, 2021, no shares of preferred stock were issued and outstanding. Private and Public Warrants — As of December 31, 2021, the Company had 166,666 Private Placement warrants and 7,666,666 Public warrants outstanding. Each warrant entitles the registered holder to purchase one share of Class A common stock at a price of $ 11.50 per share. 79 Tumim Stone Common Stock Purchase Agreement — On December 8, 2021, the Company entered into a Common Stock Purchase Agreement (the “CSPA”) and a Registration Rights Agreement with Tumim Stone Capital LLC (“Tumim Stone”). Under the terms and subject to the conditions of the CSPA, the Company has the right, but not the obligation, to sell to Tumim Stone, and Tumim Stone is obligated to purchase up to the lesser of (i) $ 125,000 of the Company’s common stock, and (ii) the Exchange Cap equal 19.99 % of the shares of the Company’s common stock outstanding immediately prior to the execution of the CSPA, unless the Company’s stockholders approve the issuance of shares in excess of the Exchange Cap, or the average price of all applicable sales of common stock to Tumim Stone under the CSPA equals or exceeds $ 4.9485 . Upon the satisfaction of various commencement conditions, such as the filing of the registration statement which provides for the resale of such shares pursuant to the Registration Rights Agreement, the Company has sole discretion to initiate such sales of common stock over the period of 36 months commencing December 8, 2021. In all instances, the Company may not sell shares of its common stock to Tumim Stone under the CSPA if doing so would result in Tumim Stone beneficially owning more than 9.99 % of its common stock. The purchase price per share to be purchased by Tumim shall equal the volume-weighted average price for common stock on the applicable purchase date multiplied by 0.9615 (to be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split, or similar transaction). The maximum number of shares the Company may sell to Tumim Stone on any single business day is the lesser of (i) $ 20,000 divided by the closing sale price of the common stock on the trading day immediately preceding the purchase date, and (ii) 0.15 multiplied by the average daily trading volume in common stock for the three trading days preceding the purchase date. In connection with the CSPA, the Company issued Tumim Stone commitment shares in the amount of 302,634 restricted common shares in the Company. At issuance, the 302,634 shares of common stock had a fair value of $ 1,583 and were recorded to Interest expense and other in the Company’s consolidated statements of operations and comprehensive loss. The Company determined that the right to sell additional shares represents a freestanding put option under ASC 815 Derivatives and Hedging , and as such, the financial instrument was classified as a derivative asset with a fair value of zero at inception of the CSPA on December 8, 2021. As of December 31, 2021 the Company had no t sold any shares to Tumim Stone under the CSPA nor filed any registration statement which allows for the sale of such shares. 14. NET LOSS PER SHARE The following table sets forth the basic and diluted net loss per share attributable to common stockholders for the periods presented (in thousands, except per share data): Year ended December 31, 2021 2020 Numerator: Net loss attributable to common stockholders $ ( 65,011 ) $ ( 26,551 ) Denominator: Weighted average common shares outstanding- Basic 109,055,894 102,803,202 Dilutive effect of potential common shares — — Weighted average common shares outstanding- Diluted 109,055,894 102,803,202 Net loss per share attributable to common stockholders - Basic and Diluted $ ( 0.60 ) $ ( 0.26 ) Due to net losses for the years ended December 31, 2021 and 2020, basic and diluted net loss per share were the same, as the effect of all potentially dilutive securities would have been anti-dilutive. The 80 following table sets forth the anti-dilutive common share equivalents for the periods listed: Year ended December 31, 2021 2020 Warrants 7,833,332 256,605 Common stock options issued and outstanding 29,238,432 31,618,135 Unvested restricted stock units 7,434,743 — Conversion of convertible notes — 16,317,560 Total 44,506,507 48,192,300 15. STOCK-BASED COMPENSATION The Company has three equity incentive plans, the 2014 US LADAR Inc. Equity Incentive Plan (the “2014 Plan”), the 2016 Stock Plan (the “2016 Plan”), and the 2021 Equity Incentive Plan (the “Incentive Plan”). On August 16, 2021, the Company’s 2014 Plan and 2016 Plan were terminated in connection with the closing of the Business Combination as defined in Note 1, but continue to govern the terms of outstanding equity awards that were granted prior to the termination of the plans. 2014 Plan and 2016 Plan The 2014 and 2016 Plan provide for the grant of incentive stock options to employees only and non-statutory stock options and RSUs to employees, directors, and consultants of the Company. As of August 16, 2021, the Company no longer grants equity awards pursuant to the 2014 Plan or 2016 Plan. On November 17, 2020, Robert Brown was granted the option to purchase 3,262,744 shares of AEye, Inc. common stock in accordance with the 2016 Plan subject to the vesting schedule set forth in the Notice of Grant of Stock Option (the “Brown Award”). The options granted contain a service-based and performance-based vesting condition. In regards to the service-based vesting condition, the options vest 25 % at the first anniversary of the grant date, with the remaining vesting ratably over the next three years . The performance condition states that 25 % of the options will vest immediately upon a Business Combination. In connection with the Business Combination on August 16, 2021, 25 % of the options vested. In January 2021, the Board approved an amendment and restatement of the 2016 Stock Plan to provide for the issuance of RSUs under the Plan and increase the number of shares of common stock of the Company reserved for issuance pursuant to the Plan by 1,153,448 shares to a new total of 33,121,391 . As of December 31, 2021, 1,741,689 RSUs were granted. The Board determines the terms of the awards, including the amount, fair market value, and vesting provisions. Under the 2016 Plan, options to purchase common stock generally vest over four years with 25 % vesting at the end of the first year and the rest vesting ratably over the next three years . RSUs generally vest 25 % at the end of the first year with the remaining RSUs vesting ratably over the next three years or they vest ratably over the four years . Under the 2014 Plan, the vesting period for options to purchase common stock range from immediate to four years . Under each plan, the options expire ten years from the date of grant. On June 28, 2021, the Company entered into an Option Repurchase and Release Agreement to purchase 542,615 vested options for $ 1,500 from an executive awarded with these options under the Company’s 2016 Plan. Based on the term of the agreement the consideration is transferred following the closing of the first “Exit Event,” defined as any of the following: (a) the Business Combination described in the Merger Agreement and preliminary S-4 registration statement filed with the Securities and Exchange Commission on May 13, 2021; (b) a transaction whereby a special purpose acquisition company acquires equity interests of the Company; (c) a Change in Control (as defined in the 2016 Plan); or (d) the first firm commitment underwritten public offering pursuant to an effective registration statement on an established national or foreign securities exchange covering the offer and sale by the Company. In connection with the Business Combination, the consideration of $ 1,500 was paid to the executive. 81 2021 Equity Incentive Plan As previously reported in the Current Report on Form 8-K filed with the SEC on August 16, 2021, at the special meeting of stockholders held in connection with the Business Combination, the CF III stockholders considered and approved the CF III 2021 Equity Incentive Plan and reserved 15,440,430 shares of common stock for issuance thereunder. The Incentive Plan was previously approved, subject to stockholder approval, by the board of directors of CF III on February 17, 2021. The Incentive Plan became effective immediately upon the closing of the Business Combination. The purpose of the Incentive Plan is to attract, retain, and motivate persons who make (or are expected to make) important contributions to the Company by providing these individuals with equity ownership opportunities, and to promote the success of the Company’s business. The Company’s 2021 Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock units, performance stock unit awards, and other forms of equity compensation (collectively, “equity awards”). All awards within the Incentive Plan may be granted to employees, including officers, as well as directors and consultants, within the limit defined in the Incentive Plan. The Incentive Plan includes an evergreen provision that provides for an annual increase in the number of shares of common stock available for issuance thereunder beginning on January 1, 2022 and ending on January 1, 2032, equal to 5 % of the shares of the Company’s common stock outstanding on December 31, 2021 for the first year and by 3 % of the total number of shares of common stock outstanding on December 31 of the preceding calendar year for each year thereafter, or a lesser number of shares as determined by the Board of Directors. Under the 2021 plan, RSU’s vest depending on their vesting schedule. Primarily for newly hired employees, these RSU’s vest 25 % during the month following the recipient’s one year anniversary of their start date or from receiving the awards. The remaining amounts vest ratably over the next three years . The fair value of the RSU is equal to the fair value of the Company’s common stock on the date of grant. As of December 31, 2021, 6,172,071 RSUs were granted to certain individuals under the 2021 Equity Incentive Plan. A summary of stock option activity related to the Plans as of December 31, 2021 is as follows: Outstanding Stock Options Weighted Average Exercise Price Weighted Average Contractual Life (Years) Aggregate Intrinsic Value Balance at December 31, 2020 31,618,135 $ 0.48 8.3 $ 112,548 Granted — — Exercised ( 312,037 ) 0.48 Forfeited ( 1,026,950 ) 0.65 Expired ( 498,101 ) 0.19 Repurchased ( 542,615 ) 0.17 Balance at December 31, 2021 29,238,432 $ 0.48 7.4 $ 127,345 Vested and expected to vest as of December 31, 2021 27,555,673 $ 0.48 7.3 $ 120,250 Vested and exercisable as of December 31, 2021 18,615,254 $ 0.41 6.7 $ 82,475 The aggregate intrinsic value is the difference between the current fair value of the underlying common stock and the exercise price for in-the-money stock options. 82 The following table summarizes the RSU award activity under the Plans: Shares Weighted Average Grant date Fair Value per Share Unvested at December 31, 2020 — — Granted 7,913,760 $ 5.91 Forfeited ( 30,413 ) 7.60 Vested ( 448,604 ) 7.54 Unvested at December 31, 2021 7,434,743 $ 5.80 The total fair value of RSUs that vested during the year ended December 31, 2021 was $ 3,014 . Stock-Based Compensation Expense — The following table summarizes stock-based compensation expense recorded in each component of operating expenses in the Company’s consolidated statements of operations and comprehensive loss for the year ended December 31, 2021 and 2020 (in thousands): Year ended December 31, 2021 2020 Research and development $ 2,175 $ 702 Sales and marketing 1,381 249 General and administrative 6,462 1,001 Total stock-based compensation $ 10,018 $ 1,952 The weighted-average grant date fair value of options granted during the year ended December 31, 2021 and 2020 was $ 0 and $ 0.95 respectively. As of December 31, 2021, the Company had $ 7,637 of unrecognized compensation expense for related stock option grants, including $ 3,376 related to the Brown Award. This cost is expected to be recognized over an estimated weighted average period of 2.12 years. The total unrecognized compensation expense for RSUs, net of estimated forfeitures, was $ 28,059 as of December 31, 2021 which is expected to be recognized over an estimated weighted average period of 3.45 years. The Company estimates the fair value of its options on grant date using the Black-Scholes option-pricing model, which requires the input of subjective assumptions as discussed below, including the expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award, and expected dividends. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group. Each of these inputs are based on highly subjective assumptions and require significant judgment. For the year ended December 31, 2021, the Company granted no new options. Expected Term —The expected term of options granted to employees is based on the expected life of the stock options, giving consideration to the contractual terms and vesting schedules. Expected Volatility —Expected volatility was estimated based on the average historical volatility of comparable companies’ stock, as the Company does not have a sufficient trading history to determine historical volatility. Risk-Free Interest Rate —The risk-free interest rates are based on US Treasury yields in effect at the grant date for notes with comparable terms as the awards. Dividend Yield —The expected dividend-yield assumption is based on the Company’s current expectations about its anticipated dividend policy. 83 The weighted average assumptions used in the Black-Scholes option-pricing model for stock options for the year ended December 31, 2020, was as follows: December 31, 2020 Expected term (in years) 5.8 Risk-free interest rate 0.4 % Expected volatility 45.6 % Expected dividend yield — % 16. REVENUE Sale of Prototypes The Company recorded revenue for prototype sales of $ 1,004 and $ 365 in 2021 and 2020 respectively. These arrangements typically have one performance obligation which is satisfied at the point of delivery or shipment to the customer. The Company does not incur significant contract costs in fulfilling or obtaining their contracts with customers. Collaboration and Development Agreements In 2021 and 2020, the Company entered into collaborative research and development agreements with companies primarily in the auto, transportation and electronic display industry. Revenue from these arrangements is recognized when we satisfy performance obligations in the contract, which can result in recognition at either a point in time or over time. The Company assessed the number of performance obligations associated with the promises under each agreement, primarily the delivery of customized iDAR perception-related goods and services, and recognized $ 2,003 and $ 1,214 in revenue for performance obligations satisfied during 2021 and 2020 respectively, in the consolidated statements of operations and comprehensive loss. For Revenue with related parties, refer to Note 19. Disaggregation of Revenue The Company recognized the following revenues by geographic area based on the primary billing address of the customer and timing of transfer of goods or services to customers (point in time or over time), as it believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors. Total revenue based on the disaggregation criteria described above are as follows (in thousands): Year ended December 31, 2021 2020 Revenue by primary geographical market: United States $ 2,215 $ 330 Germany 536 25 Other European countries 111 110 Asia 145 1,114 Total $ 3,007 $ 1,579 Revenue by timing of recognition: Recognized at a point in time $ 2,991 $ 1,515 Recognized over time 16 64 Total $ 3,007 $ 1,579 84 Contract Liabilities Contract liabilities consisted of the following as of December 31, 2021 (in thousands): As of December 31, 2021 Contract liabilities, current $ 2,287 Contract liabilities, noncurrent 631 Total $ 2,918 Contract liabilities, noncurrent are included in other noncurrent liabilities on the consolidated balance sheet. The following table shows the significant changes in contract liabilities balance as of December 31, 2021 and 2020 (in thousands): Year ended December 31, 2021 2020 Beginning balance $ 660 $ 950 Revenue recognized that was included in the contract liabilities beginning balance ( 570 ) ( 450 ) Increase due to invoices issued on performance obligations not yet satisfied during the period 2,828 160 Ending balance $ 2,918 $ 660 Remaining Performance Obligations Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied. It includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods and does not include contracts where the customer is not committed. The customer is not considered committed where they are able to terminate for convenience without payment of a substantive penalty under the contract. Additionally, as a practical expedient, the Company has not disclosed the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The contract liabilities balance represents the remaining performance obligations for contracts with an original duration of greater than one year. The current contract liabilities balance of $ 2,287 at December 31, 2021 is expected to be recognized over the next 12 months. 17. INCOME TAXES Prior to the Business Combination, AEye Technologies, and CF III filed separate standalone federal, state, and local income tax returns. As a result of the Business Combination, the Company will file a consolidated income tax return. For legal purposes, CF III acquired AEye Technologies, and the transaction represents a reverse acquisition for federal income tax purposes. CF III will be the parent of the consolidated group with AEye Technologies as a subsidiary, but in the year of the closing of the Business Combination, AEye Technologies will file a full-year tax return with CF III joining in the return the day after the Closing. There has historically been no federal or state provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. For the years ended December 31, 2021 and 2020, the Company recognized no provision for income taxes. Utilization of net operating loss carryforwards, tax credits, and other attributes may be subject to future annual limitations due to the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. 85 The following table presents a reconciliation of the federal statutory rate of 21.0% to our effective tax rate for the periods presented: Year ended December 31, 2021 2020 U.S. federal tax benefit at statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit 11.8 % 3.5 % Non-deductible expenses and other ( 0.3 ) % 0.3 % Stock-based compensation ( 1.1 ) % ( 1.5 ) % Research and development credits 1.2 % 2.5 % Transaction cost 3.9 % — % Foreign rate differential ( 3.1 ) % ( 4.3 ) % Change in valuation allowance, net ( 33.4 ) % ( 21.5 ) % Effective tax rate — % — % For 2021 and 2020, our effective tax rate differs from the amount computed by applying the statutory federal and state income tax rates to net loss before income tax, primarily as the result of state income taxes, R&D credits and changes in our valuation allowance. The Company did not have deferred tax liabilities as of December 31, 2021 and 2020. Significant components of the Company’s deferred tax assets are presented below: Year ended December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 41,856 $ 17,011 Research and development credit carryforward 4,545 2,810 Stock-based compensation 1,040 51 Property and equipment 178 40 Other accruals 734 464 Gross deferred tax assets 48,353 20,376 Valuation allowance ( 48,353 ) ( 20,376 ) Total deferred tax assets— net $ — $ — The Company recognizes deferred tax assets to the extent that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company could not conclude that it was more likely than not that tax benefits from operating losses would be realized and, accordingly, has provided a full valuation allowance against its deferred tax assets. The valuation allowance as of December 31, 2021 was $ 48,353 which increased from $ 20,376 at December 31, 2020. The increase in the valuation allowance is primarily due to additional reserve required against net operating losses and research credits generated during the year ended December 31, 2021. As of December 31, 2021, the Company had $ 156,584 and $ 104,555 of federal and state net operating losses available to reduce future taxable income, of which $ 110 will begin to expire in 2033 for federal tax purposes and $ 5,041 will begin to expire in 2029 for state tax purposes. Approximately $ 114,514 of federal net operating loss included above can be carried forward indefinitely. As of December 31, 2020, the Company had $ 67,955 and $ 41,106 of federal and state net operating losses available to reduce future taxable income, which will begin to expire on 2033 for federal and 2035 for state tax purposes. The Company also has federal and state research and development tax credit carryforwards of $ 3,373 and $ 2,854 as of December 31, 2021 and $ 2,299 and $ 2,043 as of December 31, 2020. The federal credits begin to expire in 2034 and the state credits have no expiration date. 86 The Company has completed a Section 382 study through December 31, 2020 to determine whether it had experienced a change in ownership and, if so, whether the tax attributes (NOL and credits) were impaired. As a result of this study, the Company concluded all of its NOLs and credits would be available to use as of December 31, 2020. However future change in ownership may limit the ability to use tax attributes under Section 382. Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s ability to utilize NOL or other tax attributes, such as research tax credits, in any taxable year, may be limited if the Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws. Unrecognized Tax Benefits — The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: Year ended December 31, 2021 2020 Unrecognized tax benefits as of the beginning of the year $ 1,210 $ 938 Increases (decreases) related to prior year tax provisions 40 ( 14 ) Increase related to current year tax provisions 431 286 Unrecognized tax benefits as of the end of the year $ 1,681 $ 1,210 The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. As of December 31, 2021 there was no accrued interest nor penalties related to uncertain tax positions. The Company reports income taxes in accordance with ASC 740, which requires an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. The Company has a history of operating losses and has incurred cumulative book losses since its formation. Based upon the history of losses, the Company has determined that it is more likely than not that the deferred tax assets will not be realized, and accordingly, a full valuation allowance has been recorded. The Company files income tax returns in the U.S., various state jurisdictions, and foreign jurisdictions. The U.S., state and foreign jurisdictions have statutes of limitations that generally range from three to five years. Due to the Company’s net losses, substantially all of its federal, state and local income tax returns are subject to examination for federal and state purposes since inception. The Company is not currently under examination for federal or state income tax purposes. 18. COMMITMENTS AND CONTINGENCIES The Company primarily leases offices, under noncancellable operating lease agreements that expire from 2022 to 2026. During 2019 the Company entered into a rental agreement for the Company’s headquarters in Dublin, California. Under the agreement the Company is provided an option to extend the lease term one time for a period of five years and the Company received leasehold improvement incentives of $ 3,845 . Leasehold improvement incentives are amortized over the life of the lease. The Company recognizes rent expense on a straight-line basis over the lease period. Rental expense is principally for leased office space and was $ 1,876 and $ 1,942 within operating expenses in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2021 and 2020, respectively. Deferred rent liabilities, including unamortized leasehold improvement incentives, were $ 3,637 and $ 4,175 as of December 31, 2021 and 2020 within the consolidated balance sheets. 87 F uture minimum payments as of December 31, 2021 under the noncancellable operating leases are as follows (in thousands): Operating Leases Years ended: 2022 $ 2,393 2023 2,341 2024 2,412 2025 2,484 2026 and after 2,340 Total minimum lease payments $ 11,970 Contingencies —The Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Management is not currently aware of any matters that will have a material effect on the financial position, results of operations, or cash flows of the Company. 19. RELATED PARTIES Revenue, accounts receivable, and contract liabilities for stockholders of the Company who were also related parties were as follows (in thousands) - these stockholders no longer qualified as related parties in 2021: Year ended December 31, 2021 2020 Prototype sales: Stockholder A $ — $ 60 Development contracts: Stockholder B $ — $ 100 Stockholder C $ — $ 1,050 Year ended December 31, 2021 2020 Accounts receivable: Stockholder A $ — $ 22 Year ended December 31, 2021 2020 Contract liabilities (current): Stockholder B $ — $ 65 Stockholder D $ — $ 500 Since November 2016, the Company has employed a sibling of Mr. Dussan, the Company’s Chief Technology Officer, who held the position of Sr. Manager of Human Resources at December 31, 2021 and 2020. For the year ended December 31, 2021 and 2020, Mr. Dussan’s sibling received total cash compensation of $ 136 and $ 115 , respectively. For the year ended December 31, 2021, Mr. Dussan’s sibling was granted 1,860 RSUs. In 2020 he was granted options to purchase 37,208 shares of common stock with an exercise price of $ 0.63 per share. In addition, he participates in all other benefits that the Company generally offers to all of its employees. 20. SUBSEQUENT EVENTS Management has evaluated subsequent events through March 28, 2022 and determined that there were no such events requiring recognition or disclosure in the financial statements. 88 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.