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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-28 · 137 added, 129 removed, 142 unchanged (65% of the section changed)

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Business Combination and Public Company Costs

As a result of the Business Combination, which was closed on August 16, 2021, a subsidiary of CF Finance Acquisition Corp III, or CF III, Meliora Merger Sub, Inc., merged with and into AEye, Inc., then known as AEye Technologies, Inc., or AEye Technologies, with AEye Technologies continuing as the surviving entity as a wholly owned subsidiary of CF III, and CF III thereafter operating under the new name AEye, Inc., or AEye, or the combined entity.

As a result of the Business Combination, which closed on August 16, 2021, a subsidiary of CF Finance Acquisition Corp III, or CF III, Meliora Merger Sub, Inc., merged with and into AEye, Inc., then known as AEye Technologies, Inc., or AEye Technologies, with AEye Technologies continuing as the surviving entity as a wholly owned subsidiary of CF III, and CF III thereafter operating under the new name AEye, Inc., or AEye, or the combined entity.

The Business Combination was accounted for as a reverse recapitalization, in accordance with U.S.

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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.

Additionally, AEye Technologies’ senior management comprise the senior management of the combined entity and AEye Technologies’ operations comprise the ongoing operations of the combined entity.

Additionally, AEye Technologies’ senior management comprises the senior management of the combined entity and AEye Technologies’ operations comprise the ongoing operations of the combined entity.

Accordingly, for accounting purposes, the financial statements of the combined entity will represent a continuation of the financial statements of AEye Technologies, and the Business Combination will be treated as the equivalent of AEye Technologies issuing stock for the net assets of CF III, accompanied by a recapitalization.

The most significant change in AEye Technologies’ financial position and results of the business combination was an increase in cash of $256,811.

The most significant change in AEye Technologies’ financial position and results of the business combination was an increase in cash of $256,811 before transaction costs.

Total non-recurring transaction costs incurred for this transaction were $52,661.

Upon the closing of the Business Combination, AEye began trading under the symbols “LIDR” and “LIDRW” on the Nasdaq Stock Market LLC, or Nasdaq.

Upon the closing of the Business Combination, our common stock and warrants began trading under the symbols “LIDR” and “LIDRW,” respectively, on the Nasdaq Stock Market LLC, or Nasdaq.

We anticipate that we will continue to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.

We have incurred and expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.

COVID-19 Impact

The extensive impact of the pandemic caused by the COVID-19 pandemic has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world, despite the reports of declines in severity.

The ongoing COVID-19 pandemic has disrupted and affected AEye’s business operations, which has led to business and supply chain disruptions, as well as broad changes in its supply and demand.

For example, AEye’s offices and R&D and manufacturing have been, and from time-to-time may continue to be, impacted due to national and regional government declarations requiring closures, quarantines and travel restrictions.

To mitigate the impact of the COVID-19 pandemic, AEye took several steps during 2020 to ensure its viability.

We significantly reduced internal discretionary costs, reduced senior leadership salaries, furloughed and laid off a portion of the employees, and obtained a loan and rent deferral for a period of six months in 2020.

We also applied for and were granted a Paycheck Protection Program, or PPP, loan of $2.3 million with Silicon Valley Bank, or SVB, as part of the U.S.

Small Business Administration program.

This loan enabled us to bring back a portion of the furloughed employees.

The continued impact of the COVID-19 pandemic on AEye’s operational and financial performance will depend on various future developments, including the duration and spread of the outbreak and impact on its customers, suppliers, and employees, all of which is uncertain at this time.

We expect the COVID-19 pandemic may adversely impact our future revenue and results of operations but we are unable to predict at this time the size and duration of this adverse impact.

At the same time, we have seen some signs of positive effects for our long-term business prospects and partnerships as a result of the pandemic.

We believe automakers perceive the incorporation of lidar solutions in new models as a long-term strategic initiative that will be necessary for future growth and are therefore beyond the direct impact of the COVID-19 pandemic, although the timing of the incorporation may be impacted by the pandemic.

For more information on our operations and risks related to epidemics, including COVID-19, please see the section of this Annual Report on Form 10-K entitled “Risk Factors.”

Key Factors Affecting AEye’s Operating Results

AEye believes that its future performance and success depends to a substantial extent on its ability to capitalize on the following opportunities, which in turn is subject to significant risks and challenges, including those discussed below and the risk factors described in the section of this Annual Report on Form 10-K entitled “Risk Factors.”

We are subject to those risks common in the technology industry and also those risks common to early stage companies including, but not limited to, the possibility of not being able to successfully develop or commercialize its products;

attract new customers and retain existing customers;

develop and protect intellectual property;

comply with existing and new or modified laws and regulations applicable to its business;

maintain and enhance the value of its reputation and brand;

hire, integrate, and retain talented people at all levels of its organization;, and successfully develop new solutions to enhance the experience of customers.

We believe that our future performance and success depends to a substantial extent on our ability to capitalize on the following opportunities, which in turn is subject to significant risks and challenges, including those discussed below and the risk factors described in the section of this Annual Report on Form 10-K entitled “Risk Factors.”

secure additional capital in a timely manner in order to meet operating cash flow needs;

secure a "design win" with automotive OEMs and their suppliers;

attract new customers and retain our existing customers;

develop and protect our intellectual property;

comply with existing and new or modified laws and regulations applicable to our business;

maintain and enhance the value of our reputation and brand;

hire, integrate, and retain talented people at all levels of our organization;

and successfully develop new solutions to enhance the

experience of, and deliver value to, our customers.

Market Trends and Uncertainties

AEye anticipates growing demand for its 4Sight TM Intelligent Sensing Platform across three major markets, the Automotive, Industrial and Mobility markets.

AEye anticipates the total addressable market for lidar-based perception technology to grow to $42 billion by 2030.

Within those markets, AEye is targeting attractive segments including advanced driver-assistance systems, or ADAS, autonomous driving, commercial trucking, robo-taxis, and various Industrial and Mobility market segments such as mining, aviation, shuttles, railway, and intelligent transportation systems, or ITS.

This provides AEye with multiple opportunities for sustained growth by enabling new applications and product features across these market segments.

We anticipate growing demand for our 4Sight TM Intelligent Sensing Platform across two major markets, Automotive and Industrial.

We also anticipate the total addressable market for lidar-based perception technology will grow to $42 billion by 2030.

Within those markets, we are targeting attractive segments including advanced driver-assistance systems, or ADAS, autonomous driving, commercial trucking, robo-taxis, and various Industrial market segments such as mining, aerospace, defense, railway, and intelligent transportation systems, or ITS.

This provides us with multiple opportunities for sustained growth by enabling new applications and product features across these market segments.

However, as our customers continue R&D projects to commercialize solutions that rely on lidar technology, it is difficult to estimate the timing of ultimate end market and customer adoption.

In the Automotive market for example, which accounted for 76% and 79% of revenue in 2021 and 2020, respectively, AEye’s growth and financial performance will be heavily influenced by its ability to successfully integrate into OEM programs that require years of development, testing, and validation.

Because of the size and complexity of these OEM programs, AEye sees its existing Tier 1 partnerships as a substantial competitive advantage given their large scale, mass-production capabilities, and existing OEM customer relationships.

AEye’s primary focus in Automotive is on ADAS for passenger and commercial vehicle autonomy, particularly highway autonomy applications.

In the Automotive market for example, which accounted for 52% and 76% of revenue in 2022 and 2021, respectively, our growth and financial performance will be heavily influenced by our ability to successfully integrate into OEM programs that require years of development, testing, and validation.

Because of the size and complexity of these OEM programs, we see our existing Tier 1 partnerships as a substantial competitive advantage given their large scale, mass-production capabilities, and existing OEM customer relationships.

Our primary focus in the Automotive market is on ADAS for passenger and commercial vehicle autonomy, particularly highway autonomy applications.

We believe that growth in that market is driven by both more stringent safety regulations and consumer demand for vehicles offering increased safety.

AEye will need to anticipate and adapt to any changes in the regulatory environment, as well as changes in consumer demand in order to take advantage of this opportunity.

Additionally, AEye is increasing its investments in international operations and partnerships that will position the company to expand its business globally and meet growing demand in the international markets.

This is an important part of AEye’s core strategy and may expose AEye to additional factors such as foreign currency risk, additional operating costs, and other risks and challenges that may impact the ability to meet projected sales and margins.

We will need to anticipate and adapt to any changes in the regulatory environment, as well as changes in consumer demand in order to take advantage of this opportunity.

Additionally, we are increasing our investments in international operations and partnerships that will position us to expand our business globally and meet growing demand in international markets.

This is an important part of our core strategy and may expose us to additional factors such as foreign currency risk, additional operating costs, and other risks and challenges that may impact our ability to meet projected sales and margin targets.

Partnerships and Commercialization

AEye’s technology is designed to be a key enabler of autonomous solutions for Automotive, Industrial, and Mobility market applications.

Because our technology must be integrated into a broader solution by our customers, it is critical that AEye achieves design wins with these customers.

Achieving these design wins varies based on the market and application.

Achieving a design win with an OEM within the Automotive market may take considerably longer than a design win with customers in the Industrial or Mobility markets.

AEye considers design wins to be critical to its future success, although the revenue generated by each design win and the time necessary to achieve such a win can vary significantly, making it difficult to predict AEye’s financial performance.

AEye’s revenue and profitability will be dependent upon our success in licensing our technology to Tier 1 automotive suppliers, such as Continental, which represented 55% of 2021 revenue, that intend to use our technology in volume production of lidar sensors for OEMs.

Delays of autonomy programs from OEMs that AEye is currently or will be working with through our Tier 1 partners could result in AEye being unable to achieve its revenue targets and profitability in the time frame we anticipate.

Our revenue and profitability will be further dependent upon both our success in selling our lidar solutions to customers in the Industrial and Mobility markets.

Our technology is designed to be a key enabler of in certain Automotive and Industrial market applications.

Because our technology must be integrated into a broader solution by our customers, it is critical that we achieve design wins with these customers.

The timing of these design wins varies based on the market and application.

Achieving a design win with an OEM within the Automotive market may take considerably longer than a design win with customers in the Industrial market.

We consider design wins to be critical to our future success, although the revenue generated by each design win and the time necessary to achieve such a win can vary significantly, making it difficult to predict our financial performance.

We believe our revenue and profitability will also be dependent upon our success in licensing our technology to Tier 1 automotive suppliers, such as Continental, which represented 51% and 55% of 2022 and 2021 revenue, respectively, that intend to use our technology in volume production of lidar sensors for OEMs.

Delays of autonomy programs by OEMs that we are currently or will be working with through our Tier 1 partners could result in us being unable to achieve our revenue and profitability targets in the timeframe we anticipate.

Our overall revenue and profitability will also be dependent upon both our success in selling our lidar solutions to customers in the Industrial market.

Gross Margin Improvement

Our gross margins will depend on numerous factors, including, among others, the selling price of our products, pricing of our development contracts with customers, royalty rates on licenses we grant to our customers, unit volumes, product mix, component costs, personnel costs, contract manufacturing costs, overhead costs, and product features.

In the future, we expect to generate attractive gross margins from licensing our lidar technology and software to our Tier 1 partners in Automotive, and we expect those licenses will begin generating revenue for AEye in 2024.

We also sell our own lidar solutions to customers in the Industrial and Mobility markets utilizing low-cost components that are sourced from the Tier 2 automotive supply chain and assembled by our contract manufacturing partners.

If our Tier 1 partners in Automotive do not achieve the volumes that we expect, then the cost of the components we use to address the Industrial and Mobility markets may be higher than we currently anticipate and may impact our gross margins and our ability to achieve profitability.

To date, our revenue has been generated through development and/or collaboration arrangements with OEMs and Tier 1 suppliers to the OEMs, as well as unit sales of our products.

The development contracts primarily focus on customization of our proprietary 4Sight capabilities to the customers’ applications, typically involving software implementation to assist with sensor connection and control, customization of scan patterns, and enhancement of particular perception capabilities to meet specific customer needs.

In general, development and/or collaboration arrangements that require more complex configurations have higher prices.

We expect development contracts to represent a smaller share of our total revenue over time, as we increase our focus on technology licensing and product sales.

We expect our gross margins from the sale of products to improve over time as we outsource volume production of our lidar sensors to contract manufacturers, which will both increase unit volumes and reduce the cost per unit.

In September 2021, we commenced our transition process to contract manufacturers which we expect to be complete in mid-2022.

In the future, we expect to generate attractive gross margins from licensing our lidar technology and software to our Tier 1 partners in the Automotive market.

We also sell our own lidar solutions to customers in the Industrial market utilizing lower-cost components that are sourced, in part, from the Tier 2 automotive supply chain and assembled by our contract manufacturing partners.

If our Tier 1 partners in the Automotive market do not achieve the volumes that we expect, then the cost of the components we use to address the Industrial market may not decrease to the extent we anticipate and may impact our gross margins and our ability to achieve profitability in the future.

To date, our revenue has been generated through development contracts with OEMs and Tier 1 suppliers, as well as unit sales of our products to Industrial customers.

These development contracts primarily focus on customization of our proprietary 4Sight capabilities to our customers’ applications, typically involving software implementation to assist with sensor connection and control, customization of scan patterns, and enhancement of

particular perception capabilities to meet specific customer needs.

In general, development contracts that require more complex configurations have higher prices.

We expect development contracts to remain a significant part of our business in the near-term, but represent a smaller share of our total revenue over time, as we increase our focus on technology licensing and product sales.

We expect our gross margins from the sale of products to improve over time as we outsource volume production of our lidar sensors to contract manufacturers, which we anticipate will both increase unit volumes and reduce the cost per unit.

In September 2021, we commenced our transition process to contract manufacturers, and we completed the first phase of this transition in late 2022.

Investment and Innovation

Our proprietary adaptive, intelligent lidar technology delivers industry-leading performance that helps to solve the most difficult challenges in delivering partial or full autonomy.

While traditional sensing systems passively collect data, AEye’s active 4Sight Intelligent Sensing Platform leverages principles from automated targeting systems and biomimicry to scan its environment, while intelligently focusing on what matters in order to enable safer, smarter, and faster decisions in complex scenarios.

While traditional sensing systems passively collect data, our active 4Sight TM Intelligent Sensing Platform leverages principles from automated targeting systems and biomimicry to scan the environment, while intelligently focusing on what matters most in order to enable safer, smarter, and faster decisions in complex scenarios.

We believe our financial performance is significantly dependent on our ability to maintain a technology leadership position.

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Basis of Presentation

AEye currently conducts its business through one operating segment.

We currently conduct our business through one operating segment.

Components of Results of Operations

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We categorize our revenue as (1) prototype sales and (2) development contracts.

In 2021 and 2020, our prototype revenue primarily related to unit sales of the company’s 4Sight M product.

In 2022 and 2021, our prototype sales revenue primarily related to unit sales of the company’s 4Sight product.

Revenue from prototype sales is typically recognized at a point in time when the control of goods is transferred to the customer, generally upon delivery or shipment to the customer.

Development contracts represented the majority of our total revenues in 2022 and 2021.

Revenue from development and/or collaboration arrangement contracts are earned from R&D activities and collaboration with OEMs and Tier 1 suppliers to the OEMs.

These contracts primarily focus on customization of our proprietary 4Sight capabilities to the customers’ applications, typically involving software implementation to assist with sensor connection and control, customization of scan patterns, and enhancement of perception capabilities to meet specific customer needs.

Revenue from development and/or collaboration arrangement contracts is recognized when we satisfy performance obligations in the contract, which can result in recognition at either a point in time or over time.

Revenue from development and/or collaboration arrangement contracts are earned from R&D activities and collaboration with OEMs and Tier 1 suppliers.

These contracts primarily focus on customization of our proprietary 4Sight capabilities to our customers’ applications, typically involving software implementation to assist with sensor connection and control, customization of scan patterns, and enhancement of perception capabilities to meet specific customer needs.

Revenue from development contracts is recognized when we satisfy performance obligations in the contract, which can result in recognition at either a point in time or over time.

This assessment is made at the outset of the arrangement for each performance obligation.

Cost of Revenue

Cost of revenue includes the costs directly associated with the production of prototypes and certain costs associated with development arrangements.

Such costs for prototypes are direct materials, direct labor, indirect labor, warranty expense, and allocation of overhead.

Costs associated with development arrangements include the direct costs and allocation of overhead costs involved in the execution of the contract.

Cost of revenue includes the costs directly associated with the production of prototypes and certain costs associated with development contracts.

Such costs for prototypes include direct materials, direct labor, indirect labor, inventory write downs, warranty expense, and allocation of overhead.

Costs associated with development contracts include the direct costs and allocation of overhead costs involved in the execution of the contracts.

Operating Expenses

Research and Development

Our R&D efforts are focused primarily on hardware, software, and system engineering related to the design and development of our advanced lidar solutions.

Our research and development, or R&D efforts are focused primarily on hardware, software, and system engineering related to the design and development of our advanced lidar solutions.

R&D expenses include:

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• lab equipment;

• engineering parts and test units;

• new hardware and software expenses;

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R&D costs are expensed as they are incurred.

Our investment in R&D will continue to grow because we believe that investment is essential to maintain our position as a provider of one of the most advanced lidar solutions available.

We expect our investment in R&D will continue to grow over time because we believe that investment in R&D is essential to maintain our position as a provider of one of the most advanced lidar solutions available.

Sales and Marketing

Our S&M efforts are focused primarily on sales, business development, and marketing programs in pursuit of revenue contracts from potential and existing customers.

Our sales and marketing, or S&M, efforts are focused primarily on sales, business development, and marketing programs in pursuit of revenue contracts from potential and existing customers.

S&M expenses include:

• personnel-related costs, including salaries, benefits, bonuses, and stock-based compensation;

• personnel-related expenses, including salaries, benefits, bonuses, and stock-based compensation expense;

• demonstration equipment;

• trade shows expenses, advertising, and promotions expenses for press releases and other public relations services;

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General and Administrative

Our G&A spending supports all business functions.

Our general and administrative, or G&A, spending supports all business functions.

G&A expenses include:

• personnel-related costs, including salaries, benefits, bonuses, and stock-based compensation for executive, finance, legal, human resources, technical support, and other administrative personnel;

• consulting, accounting, legal and professional fees;

• personnel-related costs, including salaries, benefits, bonuses, and stock-based compensation expense for executive, finance, legal, human resources, technical support, and other administrative personnel;

• consulting, accounting, audit, legal, and other professional fees;

• insurance premiums, software and computer equipment costs, general office expenses;

• allocated overhead expenses.

We expect our G&A expenses to increase for the foreseeable future as we increase our headcount to support the growth of our business, and as a result of operating as a public company, including additional costs and expenses associated with compliance with the rules and regulations of the SEC, legal, audit, insurance, investor relations, and other administrative and professional services.

Change in Fair Value of Embedded Derivative and Warrant Liabilities

Change in fair value of embedded derivative and warrant liabilities is the result of the change in fair value at each reporting date.

The carrying amounts of the embedded derivative and warrant liabilities are recorded at fair value at issuance, marked-to-market as of each balance sheet date, and changes in fair value are reported as other income (expense) during the period.

We expect our G&A expenses to increase for the foreseeable future as we support the growth of our business, and as a result of operating as a public company, including additional costs and expenses associated with compliance with the rules and regulations of the SEC, legal, audit, insurance, investor relations, and other administrative and professional services.

Change in Fair Value of Convertible Note, Embedded Derivative Liability, and Warrant Liabilities

Changes in fair value of the convertible note, embedded derivative, and warrant liabilities are the result of the change in fair value at each reporting date.

The convertible note, embedded derivative, and warrant liabilities are recorded at fair value for each reporting period, and the changes in fair value are reported as other income (expense) during the period.

We have also elected to record interest expense on the 2022 convertible note as changes in fair value.

Upon the closing of the Business Combination, the embedded derivative was settled, the pre-combination common stock warrants and Series A preferred stock warrants were net settled and converted to Class A common stock and private placement warrants were acquired.

See additional discussion of derivatives in Note 3 to our consolidated financial statements.

Interest Income, Interest Expense and Other

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These amounts will vary based on our cash and cash equivalents balances and market rates.

Interest expense consisted primarily of interest on our borrowings and convertible notes and amortization of debt issuance costs and discount.

Upon the closing of the Business Combination, the borrowings were repaid with any remaining debt issuance costs and discounts expensed.

The pre-combination convertible notes and accrued interest were settled and converted to Class A common stock.

Interest expense consists primarily of convertible note issuance costs and amortization of premiums on marketable securities, net of accretion discounts.

Upon the closing of the Business Combination, our borrowings were repaid with any remaining debt issuance costs and discounts expensed.

The pre-Business Combination convertible notes and accrued interest were settled and converted to Class A common stock.

See additional discussion in Note 2 to our consolidated financial statements.

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Development contracts 1,904 2,003 (99) (5) %

Total revenues 3,007 1,579 1,428 90 %

Total revenue 3,647 3,007 640 21 %

Cost of revenue 8,732 3,637 5,095 140 %

Gross profit (630) 771 (1,401) (182) %

Gross loss (5,085) (630) (4,455) 707 %

Research and development 37,644 26,543 11,101 42 %

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Loss from operations (98,808) (63,235) (35,573) 56 %

Change in fair value of embedded derivative and warrant liabilities 223 1,410 (1,187) (84) %

Change in fair value of convertible note, embedded derivative liability, and warrant liabilities (14) 223 (237) (106) %

Gain on PPP loan forgiveness — 2,297 (2,297) (100) %

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Total other income (expense), net 152 (1,776) 1,928 (109) %

Provision for income tax expense 58 — 58 100 %

Net loss $ (98,714) $ (65,011) $ (33,703) 52 %

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Prototype sales increased by $739, or 74%, to $1,743 for the year ended December 31, 2022 from $1,004 for the year ended December 31, 2021.

This increase was primarily due to an increase in 4Sight M unit sales.

This increase was primarily due to an increase in 4Sight unit sales.

Development Contracts

Development contracts increased by $789, or 65%, to $2,003 for the year ended December 31, 2021, from $1,214 for the year ended December 31, 2020.

The increase was primarily due to revenue recognized in the current year from a large Tier 1 Automotive Supplier contract.

Development contracts decreased by $99, or 5%, to $1,904 for the year ended December 31, 2022, from $2,003 for the year ended December 31, 2021.

The decrease was primarily due to less revenue recognized in the current year from a large Tier 1 Automotive Supplier contract.

Cost of Revenue

Cost of revenue increased by $5,095, or 140%, to $8,732 for the year ended December 31, 2022, from $3,637 for the year ended December 31, 2021.

This increase was primarily due to the increase in prototype sales, the cost of revenue associated with the Tier 1 Automotive Supplier contract, and additional inventory reserves in the current period.

This increase was primarily due to the cost of revenue associated with the Tier 1 Automotive Supplier contract in the current period, increased prototype sales, and increased labor and warranty costs.

Operating Expenses

Research and Development

Research and development expenses increased by $9,413, or 55%, to $26,543 for the year ended December 31, 2021, from $17,130 for the year ended December 31, 2020.

This increase was primarily driven by increases in contract development of $2,359, consumption of parts from inventory of $1,120, stock-based compensation expense of $1,473, personnel costs of $3,276, and information technology expense of $619.

Research and development expenses increased by $11,101, or 42%, to $37,644 for the year ended

December 31, 2022, from $26,543 for the year ended December 31, 2021.

This increase was primarily driven by increases in stock-based compensation expense of $5,026, personnel costs of $4,804, information technology expense of $780, engineering parts of $757, rent and facilities expense of $953, and travel expense of $377.

These increases were offset by decreases in third party research and development work of $1,530.

Sales and Marketing

Total sales and marketing expenses increased by $8,769, or 83%, to $19,317 for the year ended December 31, 2022, from $10,548 for the year ended December 31, 2021.

This increase was primarily due to increases in marketing program spend of $1,830, stock-based compensation expense of $1,132, and personnel costs of $3,284.

This increase was primarily due to increases in stock-based compensation of $3,315, personnel costs of $2,813, marketing program spend of $973, travel expense of $809, information technology expense of $428, and rent and facilities expense of $306.

General and Administrative

Total general and administrative expenses increased by $11,248, or 44%, to $36,762 for the year ended December 31, 2022, from $25,514 for the year ended December 31, 2021.

This increase was primarily due to an increase in administrative expense, including professional accounting and legal fees of $5,062, directors' and officers' insurance premium of $1,893, information technology expense of $609, stock-based compensation expense of $5,461, and personnel costs of $6,243.

Change in Fair Value of Embedded Derivative and Warrant Liabilities

Change in fair value of embedded derivative (See Note 3) and warrant liabilities decreased by $1,187, or 84%, to $223 for the year ended December 31, 2021, from $1,410 for the year ended December 31, 2020.

This decrease was primarily due to the embedded derivative value decreasing by $1,503 for the year ended December 31, 2020 versus $17 for the year ended December 31, 2021, offset by the acquisition of private placement warrants resulting from the Business Combination.

This increase was primarily due to an increase in stock-based compensation of $5,471, directors' and officers' insurance premium of $2,467, professional accounting and legal fees of $2,387, investor and stock related expenses of $622, and travel expense of $348.

Change in Fair Value of Convertible Note, Embedded Derivative, and Warrant Liabilities

Change in fair value of convertible note, embedded derivative, and warrant liabilities (see Note 3) decreased by $237, or 106%, to $14 for the year ended December 31, 2022, from $223 for the year ended December 31, 2021.

This decrease was primarily due to a decrease in the fair values of the warrant liabilities compared to prior period, offset by an increase in fair value of the 2022 convertible note.

Gain on PPP Loan Forgiveness

Gain on PPP loan forgiveness increased by $2,297, or 100%, for the year ended December 31, 2021.

Gain on PPP loan forgiveness decreased by $2,297, or 100%, for the year ended December 31, 2022.

In June 2021 the full principal and interest of the PPP loan was forgiven.

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Interest Expense and Other

Interest expense and other increased by $3,355, or 223%, to $4,857 for the year ended December 31, 2021, from $1,502 for the year ended December 31, 2020.

This increase was primarily due to $1,583 of costs associated with the Tumim Stone Common Stock Purchase Agreement, and increases related to the SVB financing facility loan of $430, interest on convertible notes of $341, amortization of discounts on marketable securities of $456, and an increase in the amortization of debt discount and debt issuance costs of $550.

Interest expense and other decreased by $3,478, or 72%, to $1,379 for the year ended December 31, 2022, from $4,857 for the year ended December 31, 2021.

This decrease was primarily due to $2,818 of prior period interest expense not recurring in the current year due to the payoff of the loan balances in the prior year, as well as $1,583 of costs associated with the Tumim Stone Common Stock Purchase Agreement in the prior year which did not recur in the current year.

This is offset by $474 in convertible note issuance costs and an increase of $322 in amortization of premiums on marketable securities, net of accretion of discounts, in the current period.

Provision for Income Tax Expense

Provision for income tax expenses increased to $58 for the year ended December 31, 2022, from $0 for the year ended December 31, 2021.

This increase is due to changes in pretax income (loss) in the U.S.

and certain foreign entities and changes in tax rates.

Net loss increased by $33,703, or 52%, to $98,714 for the year ended December 31, 2022, from $65,011 for the year ended December 31, 2021.

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Sources of Liquidity

AEye’s capital requirements will depend on many factors, including sales volume, the timing and extent of spending to support R&D efforts, investments in information technology systems, the expansion of sales and marketing activities, increased costs as we continue to hire additional personnel, and market adoption of new and enhanced products and features.

Our capital requirements will depend on many factors, including sales volume, the timing and extent of spending to support R&D efforts, investments in information technology systems, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features.

As of December 31, 2022, our cash, cash equivalents, and marketable securities totaled $94.2 million.

To date, AEye’s principal sources of liquidity have been proceeds received from the issuance of equity.

In December 2021 the Company entered into a Common Stock Purchase Agreement, or CSPA, with Tumim Stone, whereby AEye will have the right, but not the obligation, to issue and sell to Tumim Stone over a 36-month period up to $125,000 of the Company’s common stock once AEye files the registration statement covering the resale of registrable securities under the CSPA.

As of December 31, 2021 no shares were issued under this CSPA.

AEye anticipates filing the registration statement in April 2022.

Until AEye can generate sufficient revenue from the sale of its products to cover operating expenses, working capital, and capital expenditures, AEye expects the funds raised in the Business Combination, PIPE financing, as well as any future funds from the CSPA, to fund its near term cash needs.

If we are required to raise additional funds by issuing equity securities, dilution of stockholders may result.

Any debt securities issued may also have rights, preferences, and privileges senior to those of holders of AEye common stock.

The terms of debt securities or borrowings could impose significant restrictions on AEye’s operations.

To date, our principal sources of liquidity have been proceeds received from the issuance of equity.

In December 2021, we entered into a Common Stock Purchase Agreement, or CSPA, with Tumim Stone Capital LLC, or Tumim Stone, pursuant to which we have the right, but not the obligation, to issue and sell to Tumim Stone over a 36-month period up to $125,000 of the Company’s common stock.

On May 6, 2022, the Company filed a Registration Statement on Form S-1, which related to the offer and resale of up to 30,865,419 shares of our common stock to be purchased by Tumim Stone, pursuant to the CSPA.

As of December 31, 2022, 1,145,000 shares were issued under this CSPA.

In September 2022, we entered into a Securities Purchase Agreement, or SPA, with an investor allowing for the sale and issuance of two convertible notes, each with cash proceeds of $10,000, for a total of $20,000 in proceeds between the two issuances (each, a "Note Closing").

On September 15, 2022, we closed the first Note Closing with the investor and received proceeds of $9,850 (net of fees paid to the investor).

The second Note Closing may occur, at our option, after the ninetieth (90 th ) calendar day after the first Note Closing provided that we meet certain equity conditions.

Until we can generate sufficient revenue from the sale of our products to cover operating expenses, working capital, and capital expenditures, we expect the funds raised in the Business Combination and PIPE financing, as well as any future funds from the CSPA and SPA, and other potential sources of capital, to fund our near-term cash needs.

If we are required to raise additional funds by issuing equity securities, dilution of stockholders will result.

Any debt securities issued may also have rights, preferences, and privileges senior to those of holders of our common stock.

The terms of debt securities or borrowings could impose significant restrictions on our operations.

The credit market and financial services industry have in the past, and may in the future, experience periods of uncertainty that could impact the availability and cost of equity and debt financing.

For the year ended December 31, 2021 and 2020, we had a net loss of $65,011 and $26,551, respectively.

For the years ended December 31, 2022 and 2021, we had a net loss of $98,714 and $65,011, respectively.

We anticipate that we will continue to incur losses for at least the next several years.

We expect that our research and development, selling and marketing, and general and administrative expenses will continue to be significant and, as a result, we may need additional capital resources to fund our operations.

We believe that the net proceeds from the Business Combination and CSPA with Tumim Stone, together with our existing cash, cash equivalents, and marketable securities will enable us to fund our operating expenses and capital expenditure requirements for a period of at least twelve months from the date of this Annual Report on Form 10-K.

We believe that the net proceeds from the Business Combination, CSPA, and SPA, together with our existing cash, cash equivalents, and marketable securities will enable us to fund our operating expenses, working capital, and capital expenditure requirements for a period of at least twelve months from the date of this Annual Report on Form 10-K.

Our plans for the use of cash in the long-term (beyond twelve months from this Annual Report) are similarly related to funding operating expenses and capital expenditure requirements as we continue to scale the business.

For additional information regarding our cash requirements from lease obligations and contractual obligations, see Note 18.

“Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

For additional information regarding our cash requirements from lease obligations and contractual obligations, see Notes 7 and 21 in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

On March 10, 2023, Silicon Valley Bank, or SVB, was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation, or FDIC, was appointed as receiver.

We have deposit accounts at SVB.

The standard deposit insurance amount is up to $250 thousand per depositor, per insured bank, for each account ownership category.

As of March 10, 2023, we had approximately $9.6 million in deposit accounts at SVB, of which approximately $2.2 million is held as collateral for a letter of credit under our lease agreements.

We do not maintain any other material accounts or lines of credit with SVB.

On March 12, 2023, the U.S.

Treasury, Federal Reserve, and FDIC announced that SVB depositors will have access to all of their money starting March 13, 2023.

Cash Flow Summary

Year ended December 31,

Twelve months ended December 31,

(in thousands)

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Operating Activities

For the year ended December 31, 2021, net cash used in operating activities were $55,703.

Factors affecting our operating cash flows during this period were net loss of $65,011 and gain on PPP loan forgiveness of $2,297, offset by stock-based compensation of $10,018, and depreciation and amortization of $1,014.

Within operating activities, the net changes in operating assets and liabilities were cash used of $4,064, primarily driven by increases in prepaids and other current assets of $3,655, accounts receivable of $4,066 and inventories of $2,633, partially offset by increases in accrued expenses and other current liabilities of $5,496, and accounts payable of $557.

For the year ended December 31, 2022, net cash used in operating activities was $71,649.

Factors affecting our operating cash flows during this period were net loss of $26,551 and change in fair value of embedded derivative (See Note 3) and warrant liabilities of $1,410, offset by stock-based compensation of $1,952 and depreciation and amortization of $922.

Within operating activities net changes in operating assets and liabilities was cash provided of $4,371, primarily driven by decreases in prepaids and other current assets of $3,811 and increase in accrued expenses and other current liabilities of $1,377, partially offset by decreases in deferred rent of $496 and contract liabilities of $290.

Factors affecting our operating cash flows during this period were net loss of $98,714, offset by stock-based compensation of $23,959, depreciation and amortization of $1,422, noncash lease expense of $1,338, amortization of premiums on marketable securities, net of change in accrued interest, of $1,086, inventory write-downs of $675, and issuance costs of $474.

Within operating activities, the net changes in operating assets and liabilities were cash used of $1,980, primarily driven by increases in inventories and prepaid and other current assets of $2,634 and $1,130, respectively, and decreases in operating lease liabilities and contract liabilities of $1,341 and $1,931, respectively.

Cash used was offset by cash provided by decreases in accounts receivable and other noncurrent assets of $3,605 and $527, respectively, and increases in accounts payable of $839.

For the year ended December 31, 2021, net cash used in operating activities was $55,703.

Factors affecting our operating cash flows during this period were net loss of $65,011 and gain on PPP loan forgiveness of $2,297, offset by stock-based compensation of $10,018 and depreciation and amortization of $1,014.

Investing Activities

For the year ended December 31, 2022, net cash provided by investing activities was $68,463.

The primary factors affecting net cash provided by investing activities during this period were proceeds from redemptions and maturities of marketable securities of $96,592, offset by the purchases of available-for-sale debt securities of $23,929 and property and equipment purchases of $4,200.

For the year ended December 31, 2021, net cash used in investing activities was $151,546.

The primary factor affecting net cash used in investing activities during this period was the purchase of available-for-sale debt securities of $150,525.

For the year ended December 31, 2020, net cash used in investing activities was $4,036, due to the purchase of property and equipment of $4,036 associated with the leasehold improvement incentive for the new headquarters.

Financing Activities

For the year ended December 31, 2022, net cash provided by financing activities was $8,067.

The primary factors affecting our financing cash flows during this period were the proceeds from the Business Combination and private offering of $256,811, partially offset by transaction costs related to the Business Combination of $52,372, proceeds from a bank loan of $10,000, offset by principal payments on bank loans of $13,333.

The primary factors affecting our financing cash flows during this period were net proceeds from the issuance of convertible notes of $9,850, proceeds from issuance of common stock under the CSPA of $2,891, and proceeds from the exercise of stock options of $1,174, offset by taxes paid related to the net share settlement of equity awards of $4,621 and payments for convertible note redemptions of $874.

For the year ended December 31, 2021, net cash provided by financing activities was $207,084.

The primary factors affecting our financing cash flows during this period were the proceeds from the issuance of AEye Convertible Equity Instruments of $29,990, proceeds from PPP loan of $2,270, offset by principal payments on bank loans of $667.

The primary factors affecting our financing cash flows during this period were the proceeds from the Business Combination and PIPE financing of $256,811 and proceeds from a bank loan of $10,000, partially offset by transaction costs related to the Business Combination of $52,372 and principal payments on bank loans of $13,333.

Critical Accounting Policies and Estimates

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We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods, fair value measures, and the related disclosures in the consolidated financial statements.

We believe that the following accounting policies described in Note 1:

“Organization and Summary of Significant Accounting Policies” in the audited consolidated financial statements for the year ended December 31, 2021 are critical because they involve a higher degree and judgment and uncertainty.

We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities and fair value measures that are not readily apparent from other sources.

As a result, these accounting policies could materially affect our financial statements.

On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances.

While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available.

Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material impact on our financial position and results of operations.

We recognize revenues from the sale of prototype products and from R&D and development arrangements with OEMs and suppliers to the OEMs.

Our actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material impact on our financial position and results of operations.

We believe our critical

accounting policies involve the greatest degree of judgement and complexity and have the greatest potential impact on our consolidated financial statements.

We recognize revenues from R&D and development arrangements with OEMs and suppliers to the OEMs and from the sale of prototype products.

Revenue represents the amount of expected consideration we are entitled to receive upon the transfer of promised goods or services in the ordinary course of our activities and is recorded net of sales taxes.

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The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.

AEye is an “emerging growth company” as defined in Section 2(a) of the Securities Act, and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

Following the closing of the Business Combination, our Post-Combination Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of common stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which the Company has total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which the Company has issued more than $1.0 billion in non-convertible debt in the prior three-year period, or (iv) December 31, 2025.

AEye expects to continue to take advantage of the benefits of the extended transition period, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards.

This may make it difficult or impossible to compare 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.

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

Following the closing of the Business Combination, we will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of common stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which the Company has total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which the Company has issued more than $1.0 billion in non-convertible debt in the prior three-year period, or (iv) December 31, 2025.

We expect to continue to take advantage of the benefits of the extended transition period, although we may decide to adopt such new or revised accounting standards early to the extent permitted by such standards.

This may make it difficult or impossible to compare our 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.

Recent Accounting Pronouncements

See Note 1 to AEye’s consolidated f inancial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.

See Note 1 to our consolidated f inancial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted

as of the date of this Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis