Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion and analysis of our financial condition and results of operations together with “Note about Forward-Looking Statements,” Part I, Item 1 “Business,” Part I, Item 1A “Risk Factors,” and our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K.
Overview
This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for fiscal year 2023, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Annual Report, including our consolidated financial statements and accompanying notes.
All dollar amounts expressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands of dollars, except for per share amounts and unless otherwise specified.
Reverse Stock Split
On December 27, 2023, we effected a 1-for-30 reverse stock split of its issued and outstanding shares of common stock (the "Reverse Stock Split"). Pursuant to the Reverse Stock Split, every thirty (30) shares of issued and outstanding shares of common stock were combined into one (1) share of common stock. We did not issue fractional shares in connection with the Reverse Stock Split. Stockholders who were otherwise entitled to fractional shares of common stock were instead entitled to receive a proportional cash payment. The number of outstanding warrants were also proportionately adjusted.
In connection with the Reverse Stock Split, there was no change to the shares authorized or in the par value per share of $0.0001. Accordingly, unless we indicate otherwise, all historical per share data, number of shares issued and outstanding, stock awards, and other common stock equivalents for the periods presented in this Annual Report on Form 10-K have been adjusted retroactively, where applicable, to reflect the Reverse Stock Split.
Key Factors Affecting AEye’s Operating Results
We believe that our future performance and success depends to a substantial extent on our ability to capitalize on the opportunities described herein, which in turn are 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 our products;
• securing additional capital in a timely manner in order to meet operating cash flow needs; doing so on terms that are favorable to us, or at all, may be challenging given the current capital markets and overall macroeconomic conditions;
• maintain and establish relationships with one or more Tier 1 automotive suppliers to facilitate "design wins" with potential end customers, which in our case are automotive OEMs;
• 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
We anticipate future demand for our 4Sight TM Intelligent Sensing Platform will come from two major markets, Automotive and Industrial. In the near term, we anticipate concentrating on the Automotive market by more effectively leveraging our business model, focusing on advanced driver-assistance systems, or ADAS, autonomous driving, and commercial trucking. In the longer term, we will look for opportunities in the Industrial
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market, such as in the railway and intelligent transportation systems, or ITS segments, when it becomes cost-effective to do so based on higher volume production in the Automotive market. 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 their R&D projects to commercialize solutions that rely on lidar technology, it is difficult to estimate the timing of ultimate end markets and customer adoption. In the Automotive market for example, which accounted for 70% and 52% of revenue in 2023 and 2022, 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, having Tier 1 partnerships would provide a substantial competitive advantage over our competitors given their large scale, mass-production capabilities, and existing OEM customer relationships. The decision by our former Tier 1 partner, Continental, to discontinue our joint lidar development program and if we are unable to find a replacement Tier 1 automotive supplier in a timely manner, it could have a material and adverse effect on our business as our business model is predicated on licensing our lidar designs and other intellectual property to automotive Tier 1 suppliers. 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, and advanced driver assist features. 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.
As is common in early-stage companies with limited operating histories, we are subject to risks and uncertainties such as those described in Part I, Item 1A of this Annual Report on Form 10-K. Since inception, we have incurred net losses and negative cash flows from operations and expect to continue incurring losses until after we reach commercialization. We plan to improve our liquidity position through securing additional financing and finding one or more replacement Tier 1 partners. Should we be unable to do so, we would anticipate further reducing operating expenses and cash outlays. We believe that these plans can be successfully implemented, which would likely result in adequate cash flows to support our ongoing operations for at least one year from the date of this Annual Report on Form 10-K.
Partnerships and Commercialization
Our technology is designed to be a key enabler 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 time to achieve a design wins varies based on the market and application. We consider design wins to be critical to our future success, although the revenue that may be 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. In the Industrial market, our strategy has been to sell our lidar solutions to customers utilizing components that are sourced, in part, from the Tier 2 automotive supply chain and assembled by our contract manufacturing partners. In the Automotive market, we will utilize a licensing model with Tier 1 suppliers which is intended to generate a royalty for us and, hence, can be more easily replicated with multiple Tier 1 suppliers. As the Tier 2 automotive supply chain matures, we intend to leverage those suppliers, and the volume created for the Automotive market, to participate in the Industrial market. With that in mind, in the fourth quarter of 2023, we made the decision to wind down our existing product line for the Industrial market and curtail support until we achieve sufficient scale in our automotive products, which we believe represents our largest market opportunity. If we fail to achieve sufficient scale in our automotive products, we may not be in a position to reenter the Industrial market in the time frame we expect, or at all. In addition, as discussed above, the decision by our former Tier 1 partner, Continental, to discontinue our joint lidar development program could have a material and adverse effect on our business.
We believe our revenue and profitability will also be dependent upon our success in licensing our technology to Tier 1 automotive suppliers, such as our previous partner Continental, which represented 70% and 51% of 2023 and 2022 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.
Restructuring
In the first quarter of 2023, we began the implementation of a revised strategic plan which outlines the steps we are taking to focus on key products and critical customer engagements that we believe will generate the best long-term results for our Company and our stakeholders. Our revised strategic plan focuses on realignment of our resources and significant reduction of operating expenses, a part of which included reducing our workforce by
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approximately one-third prior to the implementation of the revised strategic plan. Most of the workforce reduction went into effect in April 2023.
In October 2023, we implemented the second phase of our automotive-first strategic plan initially announced in May 2023. The second phase of the plan was intended to align our operations with evolving business needs by focusing on our transition from research and development to the commercialization of our automotive products, while winding down our existing industrial product and reducing fixed operating costs.
The winding down of our existing industrial product, combined with an accumulation of other triggering events such as the termination of our partnership with a large Tier 1 automotive supplier, and a current period and history of cash flow losses, indicated that the carrying amount of our long-lived assets may not be recoverable. We performed an impairment review of our long-lived assets as of December 31, 2023 and wrote down our property and equipment and the ROU asset and leasehold improvements related to our headquarters to fair value.
As a result of the implementation of both phases of our revised strategic plan and the impairment review, we recorded restructuring charges of $19,153 in the twelve months ended December 31, 2023 primarily relating to one-time employee termination benefits, inventory and other current asset write-downs, losses on purchase commitments, and impairment and disposal charges on our long-lived assets.
Gross Margin
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. Our gross margins have in the past and may continue to be negatively impacted by inventory write-downs, as an example. During the third and fourth quarters of 2023, we recorded inventory write-downs of $7,005 relating to the transition to certain higher grade components in our automotive products as well as the winding down of our existing product line for the Industrial market. 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 anticipate being able to leverage on our foundation in the Automotive market to move to other markets.
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 TM product 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 in the Automotive market and over time leverage the economies of scale we achieve to move into other markets.
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, 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. This is further dependent on the investments we make in research and development and our ability to commercialize our products. We believe price is becoming a critical differentiator in the marketplace and OEMs are favoring companies that have the infrastructure to build lower cost products at higher volumes. It is essential that we continually identify and respond to rapidly evolving customer requirements, develop and introduce innovative new products, enhance and service existing products, lower BOM costs, industrialize, and generate strong market demand for our products. If we fail to do this, our market position and revenue may be adversely affected, and our investments in that area will not be recovered.
Basis of Presentation
We currently conduct our business through one operating segment.
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Components of Results of Operations
Total Revenues
We categorize our revenue as (1) prototype sales and (2) development contracts. In 2023 and 2022, our prototype sales revenue primarily related to unit sales of our 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 2023 and 2022. 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.
We expect our 2024 revenues related to prototype sales and development contracts to remain flat or marginally higher than in 2023.
Cost of Revenue
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, losses on purchase commitments, 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. We expect our 2024 costs of revenue to fluctuate in line with 2024 revenues.
Operating Expenses
Research and Development
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:
• personnel-related expenses, including salaries, benefits, bonuses, one-time termination benefits, and stock-based compensation expense;
• third-party engineering and contractor costs;
• lab equipment;
• engineering parts and test units;
• new hardware and software expenses; and
• allocated overhead expenses.
R&D costs are expensed as they are incurred. We expect our investment in R&D to be reduced as a result of our revised strategic plan, with a reduced workforce and consolidated global footprint. We also plan to execute more focused spending with vendors in critical areas that support our strategy and product development, in line with our revised strategic plan and manage costs more efficiently.
Sales and Marketing
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 expenses, including salaries, benefits, bonuses, one time termination benefits, and stock-based compensation expense;
• demonstration equipment;
• trade shows expenses, advertising, and promotions expenses for press releases and other public relations services; and
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• allocated overhead expenses.
We expect our S&M expenses to be significantly reduced as a result of our revised strategic plan to focus on the commercialization of our automotive products. Through our capital light business, we are able to significantly reduce our workforce and consolidate our global footprint as we expect to leverage our Tier 1 partners to commercialize our products and manage relationships with the OEMs.
General and Administrative
Our general and administrative, or G&A, spending supports all business functions. G&A expenses include:
• personnel-related costs, including salaries, benefits, bonuses, one-time termination benefits, and stock-based compensation expense for executive, finance, legal, operations, 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; and
• allocated overhead expenses.
We expect our G&A expenses to be reduced as a result of our revised strategic plan with reduced workforce and consolidated global footprint. We also plan to manage spending with vendors more effectively to support our revised strategic plan to manage costs.
Change in Fair Value of Convertible Note and Warrant Liabilities
Changes in fair value of the 2022 Note and warrant liabilities are the result of the change in fair value at each reporting date. The 2022 Note and warrant liabilities are recorded at fair value for each reporting period, and the changes in fair value are reported within other income (expense), net during the period. We also elected to record interest expense on the 2022 Note as changes in fair value.
Interest Income, Interest Expense and Other
Interest income and other consists primarily of interest earned on our cash, cash equivalents, and marketable securities. These amounts will vary based on our cash and cash equivalents balances and market rates. Interest income and other also includes gains on sale of property and equipment. Interest expense and other consists primarily of convertible note issuance costs, and amortization of premiums and accretion of discounts on marketable securities, net.
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Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this report. The following table sets forth our consolidated results of operations data for the years ended December 31, 2023 and 2022 (in thousands, except for percentages):
Year ended December 31, Change Change
2023
2022
$ %
Prototype sales $ 477 $ 1,743 $ (1,266) (73) %
Development contracts 987 1,904 (917) (48) %
Total revenue 1,464 3,647 (2,183) (60) %
Cost of revenue 15,319 8,732 6,587 75 %
Gross loss (13,855) (5,085) (8,770) 172 %
Research and development 26,171 37,644 (11,473) (30) %
Sales and marketing 12,528 19,317 (6,789) (35) %
General and administrative 25,234 36,762 (11,528) (31) %
Impairment of long-lived assets 9,988 — 9,988 100 %
Total operating expenses 73,921 93,723 (19,802) (21) %
Loss from operations (87,776) (98,808) 11,032 (11) %
Change in fair value of convertible note and warrant liabilities (858) (14) (844) 6,029 %
Interest income and other 1,317 1,545 (228) (15) %
Interest expense and other 248 (1,379) 1,627 (118) %
Total other income (expense), net 707 152 555 365 %
Provision for income tax expense 57 58 (1) (2) %
Net loss $ (87,126) $ (98,714) $ 11,588 (12) %
Revenue
Prototype Sales
Prototype sales decreased by $1,266, or 73%, to $477 for the year ended December 31, 2023 from $1,743 for the year ended December 31, 2022. This was primarily due to a decrease in units sold of our 4Sight™-based industrial product due to bid delays from various customers and our focus on key automotive milestones.
Development Contracts
Development contracts decreased by $917, or 48%, to $987 for the year ended December 31, 2023, from $1,904 for the year ended December 31, 2022. The decrease was primarily due to less revenue recognized in the current year from a Tier 1 automotive supplier contract as we fulfilled our obligations in the fourth quarter of 2023.
Cost of Revenue
Cost of revenue increased by $6,587, or 75%, to $15,319 for the year ended December 31, 2023, from $8,732 for the year ended December 31, 2022. This increase was primarily due to non-routine inventory write-downs associated with transitioning to certain higher-grade components in our automotive products in the third quarter of 2023 as well as the implementation of the second phase of our revised strategic plan in the fourth quarter of 2023 which focuses on the commercialization of our automotive product and the winding down of our existing industrial product. This increase was partially offset by decreased costs recognized in the current year relating to a Tier 1 automotive supplier contract as the we fulfilled our obligations in the fourth quarter of 2023.
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Operating Expenses
Research and Development
Research and development expenses decreased by $11,473, or 30%, to $26,171 for the year ended December 31, 2023, from $37,644 for the year ended December 31, 2022. This decrease was primarily driven by the implementation of our revised strategic plan, with decreases in third party research and development work of $4,459, personnel costs of $2,974, engineering parts and lab equipment expense of $2,419, information technology and facilities expense of $707, stock-based compensation expense of $379, and travel and entertainment expense of $292.
Sales and Marketing
Total sales and marketing expenses decreased by $6,789, or 35%, to $12,528 for the year ended December 31, 2023, from $19,317 for the year ended December 31, 2022. This decrease was primarily driven by the implementation of our revised strategic plan, with decreases in personnel costs of $2,250, stock-based compensation of $1,703, marketing and consultant spend of $1,507, travel and entertainment expense of $721, and information technology and facilities expense of $550.
General and Administrative
Total general and administrative expenses decreased by $11,528, or 31%, to $25,234 for the year ended December 31, 2023, from $36,762 for the year ended December 31, 2022. This decrease was primarily driven by the implementation of our revised strategic plan, with decreases in stock-based compensation of $3,811, accounting, legal, and consulting fees of $3,419, personnel costs of $2,114, insurance, tax, and license expense of $1,952, travel and entertainment expense of $571 , and stock-related expenses of $236.
Impairment of Long-Lived Assets
Impairment of long-lived assets increased to $9,988 for the year ended December 31, 2023, from $0 for the year ended December 31, 2022 primarily as a result of the non-cash impairment of property and equipment and right-of-use assets. In the fourth quarter of 2023 we determined that an accumulation of triggering events, including the winding down of our existing industrial product as a result of the implementation of our automotive-first strategic plan to focus on commercialization of our automotive product, the termination of our partnership with a large Tier 1 automotive supplier, and a current period and history of cash flow losses, required an impairment review of our long-lived assets, resulting in our long-lived assets being written down to their fair values.
Change in Fair Value of Convertible Note and Warrant Liabilities
Change in fair value of convertible note and warrant liabilities decreased by $844, or 6,029%, to a loss of $858 for the year ended December 31, 2023, from a loss of $14 for the year ended December 31, 2022. This decrease was primarily due to changes in fair value of the 2022 Note between the periods partially offset by a favorable change in fair value on warrant liabilities.
Interest Income and Other
Interest income and other decreased by $228, or 15%, to $1,317 for the year ended December 31, 2023, from $1,545 for the year ended December 31, 2022. This decrease was primarily due to less interest earned on our marketable securities in the current period.
Interest Expense and Other
Interest expense and other decreased by $1,627, or 118%, to a gain of $248 for the year ended December 31, 2023, from a loss of $1,379 for the year ended December 31, 2022. This decrease was primarily due to a favorable increase in accretion of discounts on marketable securities, resulting in a net decrease within amortization of premiums and accretion of discounts on marketable securities, net, of $1,252, and decreased debt issuance costs of $474.
Provision for Income Tax Expense
Provision for income tax expenses decreased to $57 for the year ended December 31, 2023, from $58 for
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the year ended December 31, 2022. This change is due to changes in pretax income (loss) in the U.S. and certain foreign entities and changes in tax rates.
Net Loss
Net loss decreased by $11,588, or 12%, to $87,126 for the year ended December 31, 2023, from $98,714 for the year ended December 31, 2022. This decrease was primarily due to decreases in operating expenses following restructuring and cost reduction efforts as announced during 2023 partially offset by increases in cost of revenues due to write-downs of inventory and losses on purchase commitments as well as impairment of long-lived assets.
Liquidity and Capital Resources
Sources of Liquidity
Our capital requirements will depend on many factors, including, but not exclusively, sales volume and timing of revenue, our efforts to find a replacement Tier 1 automotive supplier and the timing of an OEM design win, our ability to extend our cash runway based on the restructuring initiatives announced this year, the timing and extent of spending to support R&D efforts, how quickly we can commercialize our products , and market adoption of new and enhanced products and features. As of December 31, 2023, our cash, cash equivalents, and marketable securities totaled $36,523. For the years ended December 31, 2023 and 2022, we had a net loss of $87,126 and $98,714, respectively. We anticipate that we will continue to incur losses for at least the next several years.
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 our common stock. On May 6, 2022, we filed a Registration Statement on Form S-1, which related to the offer and resale of up to 1,028,847 shares of our common stock to be purchased by Tumim Stone, pursuant to the CSPA. As of December 31, 2023, 67,754 shares have been 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 cash proceeds of $9,850 (net of fees paid to the investor). On September 26, 2023, the U.S. Securities and Exchange Commission declared our registration statement on Form S-3 to be effective (the "Shelf Registration"). The Shelf Registration may be used by us to raise up to $200,000 through one or more offerings of our securities over a period of three years. Although we have not yet utilized the Shelf Registration to offer securities, we intend to do so when market conditions are appropriate and to support continued execution on our key automotive milestones. 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 with CF Finance Acquisition Corp. III and PIPE financing, as well as any future funds from the CSPA, SPA, the Shelf Registration, 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. We may also be unable to raise additional capital through the sale of securities and debt financing, or to do so on terms that are favorable to us, particularly given current capital market and overall macroeconomic conditions.
Accounting Standards Codification, or ASC, Subtopic 205-40, Presentation of Financial Statements - Going Concern , requires us to assess our ability to meet our future financial obligations as they become due within one year after the date that the financial statements are issued. Despite the recent restructuring initiatives, we expect that our expenses will continue to exceed our operating income and, as a result, we may need additional capital resources to fund our operations. We believe that the net proceeds from the business combination with CF Finance Acquisition Corp. III and PIPE financing,, CSPA, SPA, and Shelf Registration, together with our existing cash, cash equivalents, and marketable securities and implementation of our plans should we not be able to secure additional financing in 2024 will sufficiently alleviate the risk of substantial doubt about our ability to continue as a going concern and 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. For additional discussion of our plans, see Note 1 in the Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. If our cash needs are greater than we anticipate, we may be required to reduce our operating expenses even further or raise additional capital sooner. Reducing our operating expenses could be very challenging
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for us, since we have already undertaken significant operating expense reductions; further reductions could adversely impact our business operations. Given the current macroeconomic environment, OEMs appear to be more cautious about their capital spending and investments into new technologies and as a result we have seen the timelines delayed for certain opportunities which may negatively impact the time for us to reach positive cash flows from operations. Our plans for the use of cash in the long-term (beyond twelve months from this Annual Report) are primarily related to funding operating expenses to support the commercialization of our products. For additional information regarding our cash requirements from lease obligations and contractual obligations, see Notes 6 and 20 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. On March 27, 2023, First Citizens Bank entered into a whole bank purchase of SVB. We had and continue to have deposit accounts at SVB. The standard deposit insurance amount is up to $250 per depositor, per insured bank, for each account ownership category. We do not maintain any other material accounts or lines of credit with SVB. Although we continue to maintain an operating account at SVB, we subsequently established operating accounts at other financial institutions to mitigate the risks associated with any one financial institution's potential risk of insolvency or receivership.
Cash Flow Summary
Twelve months ended December 31,
2023 2022
(in thousands)
Net cash provided by (used in):
Operating activities $ (50,725) $ (71,649)
Investing activities $ 55,351 $ 68,463
Financing activities $ (6,758) $ 8,067
Operating Activities
For the year ended December 31, 2023, net cash used in operating activities was $50,725. Factors affecting our operating cash flows during this period were net loss of $87,126, offset by stock-based compensation of $18,071,impairment of long-lived assets of $9,988, inventory write-downs of $7,712, depreciation and amortization of $1,547, noncash lease expense of $1,406, loss on advances to suppliers of $1,385, and change in fair value of convertible note and warrant liabilities of $858. Within operating activities, the net changes in operating assets and liabilities were cash used of $4,460, primarily driven by increases in inventories of $2,459, and decreases in accrued expenses and other current liabilities, and operating lease liabilities of $3,135 and $1,528, respectively. Cash used was offset by cash provided by decreases in prepaid and other current assets, accounts receivable, and other noncurrent assets of $2,279, $451 and $284, respectively, and an increase in accounts payable of $252.
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 $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.
Investing Activities
For the year ended December 31, 2023, net cash provided by investing activities was $55,351. The primary factors affecting net cash provided by investing activities during this period were proceeds from redemptions and maturities of marketable securities of $76,350, partially offset by the purchases of marketable securities of $19,331 and purchases of property and equipment of $1,951.
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.
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Financing Activities
For the year ended December 31, 2023, net cash used in financing activities was $6,758. The primary factors affecting our financing cash flows during this period were payments for convertible note redemptions of $6,235 and payments for taxes related to net settlement of equity awards of $1,445, partially offset by proceeds from the exercise of stock options and from issuance of common stock through the Employee Stock Purchase Plan of $455 and $334, respectively.
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 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.
Critical Accounting Policies and Estimates
Our consolidated financial statements are in accordance with GAAP. 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. 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.
Revenue
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. We recognize revenue when performance obligations are satisfied by transferring control of a promised good or service to a customer. For performance obligations that are satisfied at a point in time, we also consider the following indicators to assess whether control of a promised good or service is transferred to the customer: (i) right to payment; (ii) transfer of legal title; (iii) physical possession; (iv) significant risks and rewards of ownership; and (v) acceptance of the goods or service. For performance obligations satisfied over time, we recognize revenue over time by measuring the progress toward complete satisfaction of a performance obligation.
The application of various accounting principles related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, complex development arrangements with nonstandard terms and conditions may require relevant contract interpretation to determine the appropriate accounting treatment, including whether the promised goods and services specified in a multiple element arrangement are capable of being distinct and accounted for as separate performance obligations. Determining whether products or services are considered distinct performance obligations that should be accounted for separately versus together may sometimes require significant judgment. When a contract involves multiple performance obligations, we account 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. For multiple element arrangements, the transaction price is allocated to each performance obligation using the relative stand-alone selling price, or SSP. Judgment is required to determine SSP for each distinct performance obligation. We use a range of amounts to estimate SSP when products and services are sold separately. In instances where SSP is not directly observable, we determine SSP using information that may include other observable inputs, or use a residual approach to estimate the SSP for performance obligations where SSP is highly variable or uncertain. Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition.
Impairment of long-lived assets
We evaluate the recoverability of our long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such triggering events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, a significant
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adverse change in legal factors or in the business climate, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted cash flows to the carrying value of the asset group. We perform testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the test for recoverability identifies a possible impairment, the asset group's fair value is measured and impairment expense is recognized equal to the excess of the asset group's carrying value over its fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amounts are depreciated over their remaining useful life.
We determined that an accumulation of triggering events that occurred in the fourth quarter of 2023, including the winding down of our existing industrial product as a result of the implementation of our automotive-first strategic plan to focus on commercialization of our automotive product, the termination of our partnership with a large Tier 1 automotive supplier, and a current period and history of cash flow losses, required an impairment review of our long-lived assets. A test of recoverability was performed which identified a possible impairment as the asset group's carrying value exceeded projected undiscounted cash flows. These assets were written down to their fair values based on an independent third-party valuation of these long-lived assets based on each asset's highest and best use. The fair value of our proprietary property and equipment was based upon estimated salvage value, which was determined to be zero. The fair value of our non-proprietary property and equipment was based upon estimated orderly liquidation value. The fair value of our leased headquarters and associated leasehold improvements were based on a value-in-use approach.
Emerging Growth Company Status
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, and we have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. 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 we have total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have 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 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.