Ouster, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OUSTER, INC. Consolidated Financial Statements Report of Independent Registered Public Accounting Firm ( PCAOB ID 238 ) 63 Consolidated Balance Sheets as of December 31, 2023 and 2022 65 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2023 and 2022 66 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022 67 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 68 Notes to Consolidated Financial Statements 69 62 Table of C ontents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Ouster, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Ouster Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive loss, of stockholders' equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Merger with Velodyne Lidar, Inc. – Valuation of Hardware Developed Technology and Customer Relationships As described in Notes 1, 2 and 3 to the consolidated financial statements, on February 10, 2023, the Company completed its merger with Velodyne Lidar, Inc. for an acquisition price of $306.6 million. Management accounted for the merger as a business combination using the acquisition method of accounting and allocated the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Of the identified intangible assets acquired, $2.5 million of hardware developed technology and $5.4 million of customer relationships were recorded. Management valued the hardware developed technology using the relief-from-royalty method, which involved significant assumptions related to the relief-from-royalty rate, the migration curve, the discount rate, and the economic life. Management valued the customer relationships using the distributor method, which involved significant assumptions related to the distributions margin. 63 Table of C ontents The principal considerations for our determination that performing procedures relating to the valuation of hardware developed technology and customer relationships acquired in the merger with Velodyne Lidar, Inc. is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the hardware developed technology and customer relationships acquired; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the relief-from-royalty rate, the migration curve, the discount rate, and the economic life for hardware developed technology and the distributions margin for customer relationships; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others (i) reading the agreement and plan of merger; (ii) testing management’s process for developing the fair value estimate of the hardware developed technology and customer relationships acquired; (iii) evaluating the appropriateness of the relief-from-royalty and distributor methods used by management; (iv) testing the completeness and accuracy of the underlying data used by management in the relief-from-royalty and distributor methods; and (v) evaluating the reasonableness of the significant assumptions used by management related to the relief-from-royalty rate, the migration curve, the discount rate, and the economic life for hardware developed technology and the distributions margin for customer relationships. Evaluating management’s assumptions related to the distributions margin for customer relationships involved considering (i) the consistency with external market and industry data; (ii) the completeness and accuracy of the distributor data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the relief-from-royalty and distributor methods and (ii) the reasonableness of the relief-from-royalty rate, the migration curve, the discount rate, and the economic life assumptions for hardware developed technology. /s/ PricewaterhouseCoopers LLP San Jose, California March 28, 2024 We have served as the Company’s auditor since 2019. 64 Table of C ontents OUSTER, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 50,991 $ 122,932 Restricted cash, current 552 257 Short-term investments 139,158 — Accounts receivable, net 14,577 11,233 Inventory 23,232 19,533 Prepaid expenses and other current assets 34,647 8,543 Total current assets 263,157 162,498 Property and equipment, net 10,228 9,695 Operating lease, right-of-use assets 18,561 12,997 Unbilled receivable, long-term portion 10,567 — Goodwill — 51,152 Intangible assets, net 24,436 18,165 Restricted cash, non-current 1,091 1,089 Other non-current assets 2,703 541 Total assets $ 330,743 $ 256,137 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 3,545 $ 8,798 Accrued and other current liabilities 58,166 17,071 Contract liabilities 12,885 402 Operating lease liability, current portion 7,096 3,221 Total current liabilities 81,692 29,492 Operating lease liability, long-term portion 18,827 13,400 Debt 43,975 39,574 Contract liability, long-term portion 4,967 342 Other non-current liabilities 1,610 1,710 Total liabilities 151,071 84,518 Commitments and contingencies (Note 9) Stockholders’ equity: Common stock, $ 0.0001 par value; 100,000,000 shares authorized at December 31, 2023 and 2022; 43,257,862 and 18,658,798 issued and outstanding at December 31, 2023 and 2022, respectively 42 19 Additional paid-in capital 995,464 613,665 Accumulated deficit ( 816,026 ) ( 441,916 ) Accumulated other comprehensive income (loss) 192 ( 149 ) Total stockholders’ equity 179,672 171,619 Total liabilities and stockholders’ equity $ 330,743 $ 256,137 The accompanying notes are an integral part of these consolidated financial statements 65 Table of C ontents OUSTER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except share and per share data) Year Ended December 31, 2023 2022 Revenue $ 83,279 $ 41,029 Cost of revenue 74,965 30,099 Gross profit 8,314 10,930 Operating expenses: Research and development 91,210 64,317 Sales and marketing 41,639 30,833 General and administrative 81,982 61,203 Goodwill impairment charges 166,675 — Total operating expenses 381,506 156,353 Loss from operations ( 373,192 ) ( 145,423 ) Other (expense) income: Interest income 9,038 2,208 Interest expense ( 9,303 ) ( 2,694 ) Other (expense) income, net ( 130 ) 7,654 Total other (expense) income, net ( 395 ) 7,168 Loss before income taxes ( 373,587 ) ( 138,255 ) Provision for income tax expense 523 305 Net loss $ ( 374,110 ) $ ( 138,560 ) Other comprehensive loss Changes in unrealized gain (loss) on available for sale securities $ 354 $ — Foreign currency translation adjustments ( 13 ) ( 143 ) Total comprehensive loss $ ( 373,769 ) $ ( 138,703 ) Net loss per common share, basic and diluted $ ( 10.10 ) $ ( 7.79 ) Weighted-average shares used to compute basic and diluted net loss per share 37,042,081 17,792,316 The accompanying notes are an integral part of these consolidated financial statements 66 Table of C ontents OUSTER, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Common Stock Additional Paid-in- Capital Accumulated Deficit Accumulated other comprehensive loss Total Stockholders’ Equity Shares Amount Balance — January 1, 2022 17,220,042 $ 17 $ 564,045 $ ( 303,356 ) $ ( 6 ) $ 260,700 Proceeds from at-the-market offering, net of commissions and fees of $ 505 and issuance costs of $ 546 783,371 1 15,775 — — 15,776 Issuance of common stock upon exercise of stock options 215,850 — 470 — — 470 Issuance of common stock upon vesting of restricted stock units - net of tax withholding 443,971 1 ( 59 ) — — ( 58 ) Issuance of common stock to employees under employee stock purchase plan 32,201 — 378 — — 378 Repurchase of common stock ( 31,124 ) — ( 45 ) — — ( 45 ) Cancellation of Sense acquisition shares ( 5,513 ) — ( 358 ) — — ( 358 ) Vesting of early exercised stock options — — 138 — — 138 Stock-based compensation expense — — 33,321 — — 33,321 Net loss — — — ( 138,560 ) — ( 138,560 ) Other Comprehensive loss — — — — ( 143 ) ( 143 ) Balance — December 31, 2022 18,658,798 $ 19 $ 613,665 $ ( 441,916 ) $ ( 149 ) $ 171,619 Issuance of common stock upon Velodyne Merger 19,483,269 20 306,582 — — 306,602 Common Stock adjustment reflected as a result of the one-for-10 reverse stock split effectuated on April 6, 2023 85,893 — — — — — Proceeds from at-the-market offering, net of commissions and fees of $ 872 and issuance costs of $ 327 2,878,875 3 15,424 — — 15,427 Issuance of common stock upon exercise of stock options 142,117 — 270 — — 270 Issuance of common stock upon vesting of restricted stock units 1,755,157 — — — — — Issuance of common stock to employees under employee stock purchase plan 257,506 — 1,175 — — 1,175 Repurchase of common stock ( 3,753 ) — ( 3 ) — — ( 3 ) Common stock warrants issuable to customer — — 528 — — 528 Vesting of early exercised stock options — — 98 — — 98 Stock-based compensation expense — — 57,725 — — 57,725 Net loss — — — ( 374,110 ) — ( 374,110 ) Other Comprehensive income — — — — 341 341 Balance — December 31, 2023 43,257,862 $ 42 $ 995,464 $ ( 816,026 ) $ 192 $ 179,672 The accompanying notes are an integral part of these consolidated financial statements 67 Table of C ontents OUSTER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 374,110 ) $ ( 138,560 ) Adjustments to reconcile net loss to net cash used in operating activities: Goodwill impairment charges 166,675 — Depreciation and amortization 17,148 9,456 Loss on write-off of construction in progress and right-of-use asset impairment 1,732 — Gain on lease termination ( 807 ) — Stock-based compensation 57,725 33,321 Reduction of revenue related to stock warrant issued to customer 528 — Amortization of right-of-use asset 4,519 2,730 Non-cash interest income ( 732 ) — Interest expense and loss on debt extinguishment 4,001 799 Amortization of debt issuance costs and debt discount 190 160 Accretion or amortization on short-term investments ( 4,685 ) — Change in fair value of warrant liabilities 49 ( 7,446 ) Inventory write down 10,047 1,600 Provision for doubtful accounts 1,346 346 (Gain)/loss from disposal of property and equipment ( 59 ) 430 Changes in operating assets and liabilities: Accounts receivable 3,574 ( 856 ) Inventory ( 4,047 ) ( 13,684 ) Prepaid expenses and other assets ( 21,575 ) ( 3,148 ) Accounts payable ( 8,520 ) 4,191 Accrued and other liabilities 8,081 3,196 Contract liabilities 6,597 — Operating lease liability ( 5,567 ) ( 3,225 ) Net cash used in operating activities ( 137,890 ) ( 110,690 ) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property & equipment 560 275 Purchases of property and equipment ( 3,006 ) ( 5,422 ) Purchase of short-term investments ( 137,104 ) — Proceeds from sales of short-term investments 158,014 — Cash and cash equivalents acquired in the Velodyne Merger 32,137 — Net cash used in investing activities 50,601 ( 5,147 ) CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of common stock — ( 45 ) Proceeds from exercise of stock options 271 470 Proceeds from ESPP purchase 1,174 378 Proceeds from borrowings, net of debt discount and issuance costs 43,975 39,077 Repayments of borrowings ( 43,975 ) — Proceeds from the issuance of common stock under at-the-market offering, net of commissions and fees 14,575 16,322 At-the-market offering costs for the issuance of common stock ( 363 ) ( 541 ) Taxes paid related to net share settlement of restricted stock units — ( 59 ) Net cash provided by financing activities 15,657 55,602 Effect of exchange rates on cash and cash equivalents ( 12 ) ( 143 ) Net increase decrease in cash, cash equivalents and restricted cash ( 71,644 ) ( 60,378 ) Cash, cash equivalents and restricted cash at beginning of year 124,278 184,656 Cash, cash equivalents and restricted cash at end of year $ 52,634 $ 124,278 SUPPLEMENTAL DISCLOSURES OF OPERATING ACTIVITIES: Cash paid for interest $ 5,115 $ 1,735 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: Proceeds from the issuance of common stock under at-the-market offering not received $ 1,255 $ — Property and equipment purchases included in accounts payable and accrued liabilities $ 524 $ 269 Common stock shares issued in the Velodyne Merger $ 297,425 $ — Common stock warrants issued in the Velodyne Merger $ 9,177 $ — The accompanying notes are an integral part of these consolidated financial statements 68 Table of Contents OUSTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Description of Business and Basis of Presentation Description of Business Ouster, Inc. was incorporated in the Cayman Islands on June 4, 2020 as “Colonnade Acquisition Corp.” (“CLA”). Following the closing of the business combination in March 2021, the Company domesticated as a Delaware corporation and changed its name to “Ouster, Inc.” The Company’s prior operating subsidiary, Ouster Technologies, Inc. (“OTI” and prior to the Merger (as defined below)), was incorporated in the state of Delaware on June 30, 2015. The Company is a leading provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, allowing each to understand and visualize the surrounding world and ultimately enabling safe operation and ubiquitous autonomy. Unless the context otherwise requires, references in this subsection to “the Company” refer to the business and operations of OTI (formerly known as Ouster, Inc.) and its consolidated subsidiaries prior to the Merger (as defined below) and to Ouster, Inc. (formerly known as CLA) and its consolidated subsidiaries following the consummation of the Merger. CLA, the Company’s legal predecessor, was originally a blank check company incorporated as a Cayman Islands exempted company on June 4, 2020. CLA was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. On March 11, 2021, CLA consummated a merger (the “Merger”) with OTI pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of December 21, 2020. As a result of the Merger, among a number of other things, (1) each of the then issued and outstanding 10,000,000 redeemable warrants of CLA (the “CLA warrants”) converted automatically into a redeemable warrant to purchase one share of Ouster common stock (the “Public warrants”) pursuant to the Warrant Agreement, dated August 20, 2020 (the “Warrant Agreement”), between CLA and Continental Stock Transfer & Trust Company (“Continental”), as warrant agent and (2) each of the then issued and outstanding 6,000,000 private placement warrants of CLA (the “Private Placement warrants”) converted automatically into a Public warrant pursuant to the Warrant Agreement. No fractional Public warrants were issued upon separation of the CLA units. On February 10, 2023, the Company completed the merger with Velodyne Lidar, Inc., a Delaware corporation (“Velodyne”) pursuant to the terms of the Agreement and Plan of Merger (the “Velodyne Merger Agreement”) with Velodyne, Oban Merger Sub, Inc. (“Merger Sub I”) and Oban Merger Sub II LLC (“Merger Sub II”) (the “Velodyne Merger”) dated as of November 4, 2022, accounted for as a business combination with the Company being an accounting acquiror (Note 3). Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries (all of which are wholly owned) and have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation. The presentation of certain prior period amounts has been reclassified to conform with current year presentation. On April 6, 2023, the Board of Directors approved a one-for-10 reverse stock split and a corresponding reduction in authorized shares of common stock (the “Reverse Stock Split”). On April 20, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Certificate of Incorporation to effect the one-for-10 Reverse Stock Split of the Company’s common stock and a corresponding reduction in authorized shares of common stock. The par value of the Company’s common stock was not adjusted as a result of the Reverse Stock Split. All share and per share amounts and related stockholders’ equity balances presented herein have been retroactively adjusted to reflect the Reverse Stock Split. Liquidity The Company’s principal sources of liquidity are its cash and cash equivalents, short-term investments, cash generated from revenues, sales of common stock under its at-the-market equity offering program and debt financing. The accompanying consolidated financial statements have been prepared on a going concern basis. The Company has experienced recurring losses from operations, and negative cash flows from operations. As of December 31, 2023, the Company’s existing sources of liquidity included cash and cash equivalents, restricted cash and short-term investments of $ 191.8 million. 69 Table of Contents Management expects significant operating losses and negative cash flows from operations to continue for the foreseeable future. The Company expects to continue investing in product development and sales and marketing activities. The long-term continuation of the Company’s business plan is dependent upon the generation of sufficient revenues from its products to offset expenses. The Company may require additional capital in order to execute management’s current business plan and in the event that the Company does not generate sufficient cash flows from operations and is unable to obtain funding, the Company may be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to continue operations. The Company has concluded that it has sufficient capital to fund its obligations in the ordinary course of business for at least one year from the date these consolidated financial statements were issued. Merger Agreement with Velodyne Lidar, Inc. On November 4, 2022, the Company entered into an Agreement and Plan of Merger (the “Velodyne Merger Agreement”) with Velodyne Lidar, Inc., a Delaware corporation (“Velodyne”), Oban Merger Sub, Inc., a Delaware corporation and one of the Company’s direct, wholly owned subsidiaries (“Velodyne Merger Sub I”) and Oban Merger Sub II LLC, a Delaware limited liability company and one of the Company’s direct, wholly owned subsidiaries (“Velodyne Merger Sub II”). On February 10, 2023, the Company completed the merger with Velodyne Lidar, Inc., a Delaware corporation (“Velodyne”) pursuant to the terms of the Agreement and Plan of Merger (the “Velodyne Merger Agreement”) with Velodyne, Oban Merger Sub, Inc. (“Merger Sub I”) and Oban Merger Sub II LLC (“Merger Sub II”) (the “Velodyne Merger”) dated as of November 4, 2022, accounted for as a business combination with the Company being an accounting acquiror (Note 3). At the Market Issuance Sales Agreement On April 29, 2022, the Company entered into an At-Market-Issuance Sales Agreement (the “ATM Agreement”) with B. Riley Securities, Inc., Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc., pursuant to which the Company may offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock having an aggregate offering price of up to $ 150.0 million under the Company’s Form S-3 registration statement. During the years ended December 31, 2023 and 2022, the Company sold 2,878,875 and 783,371 shares, respectively. The weighted-average sales price and gross proceeds to the Company before deducting offering costs, sales commissions and fees were approximately $ 5.67 and $ 21.48 per share and $ 33.1 million and $ 16.8 million, respectively, during the year ended December 31, 2023 and 2022. Note 2 – Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. The most significant estimates included in these consolidated financial statements are the useful lives of long-lived assets, revenue recognition, inventory write downs, the realizability of deferred tax assets, the measurement of stock-based compensation, and the valuation of the Company’s various financial instruments. The complexity of the estimation process and factors relating to assumptions, risks and uncertainties inherent with the use of the estimates affect the amount of revenue and related expenses reported in the Company’s consolidated financial statements. Internal and external factors can affect the Company’s estimates. Actual results could differ from these estimates under different assumptions or conditions. 70 Table of Contents Business Combinations Business combinations are accounted for under the acquisition method. The Company recognizes the assets acquired and liabilities assumed in business combinations on the basis of their fair values at the date of acquisition. The Company assesses the fair value of assets acquired, including intangible assets, and liabilities assumed using a variety of methods. Each asset acquired and liability assumed is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant estimates and assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset, future cash inflows and outflows, probabilities of success, asset lives, and the appropriate discount rates. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred. During the measurement period, which extends no later than one year from the acquisition date, the Company may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the consolidated statements of operations within other income (expense), net. Foreign Currencies The functional currency of the Company is the U.S. dollar. The functional currency of the Company’s wholly-owned foreign subsidiaries is generally the same as the entity’s local currency. Accordingly, the asset and liability accounts of our foreign operations are translated into U.S. dollars using the current exchange rate in effect at the balance sheet date and equity accounts are translated into U.S. dollars using historical rates. The revenues and expenses are translated using the weighted-average exchange rates in effect during the period, and gains and losses from foreign currency translation adjustments are included as a component of accumulated other comprehensive loss in the consolidated balance sheets. Foreign currency translation adjustments are recorded in other comprehensive loss in the consolidated statements of operations and comprehensive loss. Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations and comprehensive loss. Segment Information The Company operates as one reportable and operating segment, which relates to the sale and production of lidar sensor kits. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources. The profitability of the Company’s product group is not a determining factor in allocating resources and the CODM does not evaluate profitability below the level of the consolidated company. Revenue Recognition The Company recognizes revenue when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these products or services. To achieve the core principle of this standard, the Company performs the following five steps: 1) Identify the contract with a customer A contract with a customer exists when the contract is approved, each party’s rights regarding the product or services to be transferred and the payment terms for the product or services can be identified, it is determined that the customer has the ability and intent to pay and the contract has commercial substance. The Company applies judgement in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. Accounts receivable are due under normal trade terms, typically three months or less. 2) Identify the performance obligations in the contract Performance obligations promised in a contract are identified based on the product or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the product or services is separately identifiable from other promises in the contract. 71 Table of Contents 3) Determine the transaction price The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring product or services to the customer. Royalties from the license of intellectual property (“IP”) are included in the transaction price in the period the sales occur. Other forms of variable consideration are included in the transaction price if the Company judges that it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts contain a significant financing component. All taxes assessed by a governmental authority on a specific revenue-producing transaction collected by the Company from a customer are excluded from the transaction price. 4) Allocate the transaction price to performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”). In 2023 and 2022, the Company did not have a material volume of contracts that required the allocation of transaction price to multiple performance obligations. 5) Recognize revenue when or as the Company satisfies a performance obligation Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to a customer. Product revenue The majority of the Company’s revenue comes from product sales of lidar sensors to direct customers and distributors. Revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery dependent upon the terms of the underlying contract. Product sales to certain customers may require customer acceptance due to performance acceptance criteria that are considered more than a formality. For these product sales, revenue is recognized upon the expiration of the customer acceptance period. Amounts billed to customers for shipping and handling are included in revenue, and the Company has elected to recognize the cost of shipping activities that occur after control has transferred to the customer as a fulfillment cost rather than a separate performance obligation. All related shipping costs are accrued and recognized within cost of revenue when the related revenue is recognized. Services The Company’s services revenue consists primarily of product development and validation services. The obligation to provide services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as the Company satisfies its performance obligations. For product development and validation service projects, the Company bills and recognizes revenue as the services are performed. For these arrangements, control is transferred over as the Company’s inputs are incurred to complete the project; therefore, revenue is recognized over the service period with the measure of progress using the input method based on labor costs incurred to total labor cost (“cost-to-cost”) as the services are provided. IP Licenses The Company licenses rights to its IP to certain customers and collects royalties based on customer’s product sales. IP revenue recognition is dependent on the nature and terms of each agreement. The Company recognizes license revenue upon the later of (a) delivery of the IP or (b) commencement of the license term if there are no substantive future obligations to perform under the arrangement. Revenue for licenses to future technology developed on a when-and-if -available basis is recognized straight-line over the license period as long as customers continue to have access to the future technology. Royalties from the license of IP are recognized at the later of the period the sales occur or the satisfaction of the performance obligation to which some or all of the royalties have been allocated. Software Licenses The Company’s Gemini software license arrangements provide the customer with the right to install and use functional intellectual property (as it exists at the point in time at which the license is granted) for the duration of the contract term (perpetual or term license). Revenue from distinct software licenses is recognized at the point in time when the software is made available to the customer. 72 Table of Contents Maintenance The Company’s Gemini software license arrangements typically include an initial (bundled) post contract customer support (maintenance or “PCS”) term. Those software license arrangements, which include PCS represent a distinct, stand-alone performance obligation. Contract consideration is allocated to the PCS based on its relative SSP and revenue is recognized ratably over the PCS term. Product Warranties The Company provides standard product warranties for a term of typically one to two years to ensure that its products comply with agreed-upon specifications. Standard warranties are considered to be assurance type warranties and are not accounted for as separate performance obligations. The Company also provides service type extended warranties for typically an additional term ranging up to two additional years. For service type extended warranty contracts, the Company allocates revenue to this performance obligation on a relative standalone selling price basis and recognizes the revenue on a ratable basis over time during the effective period of the services as the Company stands ready to provide services as needed. Costs to obtain a contract The Company expenses the incremental costs of obtaining a contract when incurred because the amortization period for these costs would typically be less than one year. These costs primarily relate to sales commissions and are expensed as incurred in sales and marketing expense in the Company’s consolidated statements of operations and comprehensive loss. The incremental cost of obtaining a contract for the years ended December 31, 2023 and 2022 was $ 5.0 million and $ 2.9 million, respectively. Right of return The Company’s general terms and conditions for its contracts do not contain a right of return that allows the customer to return products and receive a credit, however it has in practice permitted returns of its sensor kits in limited circumstances. Allowances for sales returns, which reduce revenue, are estimated using historical experience and were immaterial as of December 31, 2023 and 2022. Actual returns in subsequent periods have been consistent with estimated amounts. Net loss per common share The Company follows the two-class method when computing net loss per common share. The two-class method determines net loss per common share for common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company has no participating securities outstanding for the periods presented. Basic net loss per common share attributable to common stockholders is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per common share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of common stock equivalents. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the years ended December 31, 2023 and 2022. Comprehensive Loss Comprehensive loss is comprised of net loss and other comprehensive income (loss). The Company’s changes in unrealized loss on available for sale securities and foreign currency translation adjustment are the only components of other comprehensive loss that is excluded from the reported net loss for all periods presented. 73 Table of Contents Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash deposited with banks, money market accounts and commercial paper. Restricted Cash Restricted cash consists of certificates of deposit held by banks as security for outstanding letters of credit. Investments The Company considers investments with an original maturity greater than three months and remaining maturities less than one year to be short-term investments. The Company classifies those investments that are not required for use in current operations and that mature in more than 12 months as long-term investments. The Company classifies its investments as available for sale and reports them at fair value, with unrealized gains and losses recorded in accumulated other comprehensive loss. For investments sold prior to maturity, the cost of investments sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in other income, net in the consolidated statement of operations and comprehensive loss. 74 Table of Contents Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for expected credit losses representing its best estimate of expected credit losses related to its existing accounts receivable and their net realizable value. The allowance is determined using a combination of factors including historical losses adjusted to take into account current market conditions and customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company writes off accounts receivable against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Changes in the Company’s allowance for expected credit losses were as follows (in thousands): Year Ended December 31, 2023 2022 Beginning balance $ 853 $ 507 Provisions 1,346 346 Uncollectible accounts written off, net of recoveries ( 1,095 ) — Ending balance $ 1,104 $ 853 Inventory Inventory consists primarily of raw materials, work-in-process, and finished goods and is stated at the lower of cost or estimated net realizable value. Costs are computed under the standard cost method, which approximates actual costs determined on the first-in, first-out basis. The Company charges cost of revenue for write-downs of inventories which are obsolete or in excess of anticipated demand based on purchase commitments, production needed to fulfil the warranty obligations, consideration of product marketability and product development plans, historical revenue and assumptions about future demand and market conditions. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Upon disposition, the cost and related accumulated depreciation and amortization are removed from the accounts and resulting gain or loss is reflected in the consolidated statement of income. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (see Note 5). Impairment of Long-Lived Assets The Company evaluates events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future undiscounted cash flows is less than the carrying amount of those assets, the Company records an impairment charge in the period in which such determination is made. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Goodwill Goodwill represents the excess of the purchase price over the fair value of net tangible and identified intangible assets acquired in a business combination. Goodwill is not amortized but is evaluated at least annually for impairment or when a change in facts and circumstances indicate that the fair value of the goodwill may be below the carrying value. Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition. The Company has determined that it operates in a single operating segment and has a single reporting unit. 75 Table of Contents Prior to performing the impairment test, the Company assesses qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the reporting unit was less than the carrying amount. If after assessing the totality of events or circumstances, the Company were to determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the Company would perform a quantitative impairment test. The quantitative impairment test involves comparing the fair value of the reporting unit to the carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, the Company measures the amount of impairment loss, if any, as the excess of the carrying value over the fair value of the reporting unit. In connection with the Company’s goodwill impairment assessments during the year ended December 31, 2023, the Company impaired all of its goodwill. Intangible Assets Intangible assets consist of developed technology, vendor relationship and customer relationships. Acquired intangible assets are initially recorded at the acquisition-date fair value. Intangible assets are amortized on a straight-line basis over their estimated useful lives, generally 3 to 8 years. Fair Value of Financial Instruments The Company applies the fair value measurement accounting standard whenever other accounting pronouncements require or permit fair value measurements. Fair value is defined in the accounting standard as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels: • Level 1 - Quoted prices for identical instruments in active markets. • Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. • Level 3 - Instruments whose significant value drivers are unobservable. Warrant Liabilities Warrant liabilities consist of Private Placement warrants. The Private Placement warrants are not redeemable for cash so long as they are held by the initial purchasers or their permitted transferees but may be redeemable for common stock if certain other conditions are met. If the Private Placement warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement warrants are redeemable by the Company and exercisable by such holders subject to certain conditions, such as the reported closing price of our common stock equaling or exceeding $ 180.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading-day period ending three business days before the Company sends the notice of redemption to the holders of Private Placement warrants. The Company evaluated the Private Placement warrants and concluded that they do not meet the criteria to be classified within stockholders’ equity. The agreement governing the Private Placement warrants includes a provision, the application of which could result in a different settlement value for the Private Placement warrants depending on their holder. Because the holder of an instrument is not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Private Placement warrants are not considered to be “indexed to the Company’s own stock.” This provision precludes the Company from classifying the Private Placement warrants in stockholders’ equity. As the Private Placement warrants meet the definition of a derivative, the Company recorded these warrants as liabilities on the consolidated balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statements of operations and comprehensive loss at each reporting date. 76 Table of Contents Concentrations of credit risk Financial instruments that potentially subject the Company to credit risk consist primarily of cash, cash equivalents, short-term investments, restricted cash and accounts receivable. Cash, cash equivalents, restricted cash are deposited with federally insured commercial banks in the U.S. and UK, Netherlands, France, Hong Kong, China, Thailand, India, Canada and Germany. At times, cash balances in the U.S. may be in excess of federal insurance limits. As of December 31, 2023 and 2022, the Company had cash, cash equivalents, short-term investment and restricted cash with financial institutions in U.S. of $ 184.8 million and $ 123.5 million, respectively. As of December 31, 2023 and 2022, the Company also had cash with financial institutions in countries other than the U.S. of approximately $ 7.0 million and $ 0.8 million, respectively, that was not federally insured. The Company generally does not require collateral or other security deposits for accounts receivable. To reduce credit risk, the Company considers customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms when determining the collectability of specific customer accounts. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Accounts receivable from the Company’s major customers representing 10% or more of total accounts receivable was as follows: December 31, 2023 2022 Customer A 42 % — % Customer B 12 % — % Concentrations of supplier risk Purchases from the Company’s suppliers and vendors representing 10% or more of total purchases were as follows: Year Ended December 31, 2023 2022 Supplier A 11 % — % Supplier B 17 % 28 % Supplier B accounted for 44 % and 39 % of total accounts payable balance as of December 31, 2023 and 2022. No professional services vendor accounted for 10% greater of total accounts payable balance as of December 31, 2023. One professional services vendor accounted for approximately 14 % of total accounts payable balance as of December 31, 2022. Amazon Warrant The Amazon Warrant (as defined in Note 7) is accounted for as an equity instrument. To determine the fair value of the Amazon Warrant on its issuance date, the Company used the Black-Scholes option pricing model. For awards granted to a customer, which are not in exchange for distinct goods or services, the fair value of the awards earned based on service or performance conditions is recorded as a reduction of the transaction price. Accordingly, when Amazon purchases goods or services and vesting conditions become probable of being achieved, the Company records a non-cash stock-based reduction to revenue associated with the Amazon Warrant, which is calculated based on the fair value of the Amazon Warrant shares as of the Velodyne Merger date. 77 Table of Contents Stock-based compensation The Company measures and recognizes stock-based compensation expense for stock-based awards granted to employees, directors, and consultants over the requisite service periods based on the estimated grant date fair value, which for options is using the Black-Scholes-Merton option pricing model using the following variables: • Common Stock Valuation – The fair value of the shares of common stock underlying the Company’s stock-based awards issued after the Colonnade Merger is based on the grant date closing fair market value of the Company’s common stock. Before closing of the Colonnade Merger, the fair value of the shares of common stock underlying the Company’s stock-based awards was historically determined by management and approved by the board of directors. Because there was no public market for the Company’s common stock, the board of directors determined the fair value of the common stock at the time of grant of the option by considering a number of objective and subjective factors, including contemporaneous valuations performed by an unrelated third-party specialist, valuations of comparable public companies, operating and financial performance, the lack of liquidity of capital stock, and general and industry-specific economic outlook. Valuations performed by the third-party valuation specialist used methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (“AICPA” Accounting and Valuation Guide). In relation to options, the Board intends all options granted to be exercisable at a price per share not less than the per share fair value of the common stock underlying those options on the date of grant. • Expected Term – The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined using the simplified method, which deems the term to be the average of the time to vesting and the contractual life of the options. • Expected Volatility – The expected volatility is based on the historical volatility for the period commensurate with the expected term of the awards for a peer group of comparable companies with publicly traded shares. • Expected Dividends – The Company does not currently pay cash dividends on its common stock and does not anticipate doing so in the foreseeable future. Accordingly, the expected dividend yield is 0 %. • Risk-Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. The fair values of the restricted stock awards and restricted stock units were determined based on the fair value of the Company’s common stock on the grant date. The Company recognizes stock-based compensation expense over the requisite service period. Forfeitures are accounted for as they occur. The Company’s policy for issuing stock upon stock option exercise is to issue new common stock. Income taxes Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss (“NOL”) and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Due to its history of operating losses, the Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2023 and 2022. The Company accounts for uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of the related appeals or litigation processes, if any. An uncertain tax position that meets a more likely than not standard based on its technical merit would then be evaluated under the measurement step to determine the largest tax benefit that the taxpayer more likely than not will realize. The Company classifies any liabilities for unrecognized tax benefits as current to the extent that the Company anticipates payment of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. 78 Table of Contents Recently Issued and Adopted Accounting Pronouncements In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. In the fourth quarter of 2022, Ouster adopted the amendments and recognized contract assets acquired and contract liabilities assumed in the mergers in accordance with ASC 606. Ouster has elected to apply the practical expedient under paragraph ASC 805-20-30-29(b) of the adopted amendments and allocated the transaction price based on the standalone selling price of each performance obligation in the contract with a customer for all contracts acquired in the mergers. As of December 31, 2022, the adoption of this new standard had no impact on the Company’s consolidated financial statements and related footnote disclosures. Recently Issued Accounting Pronouncements Not Yet Adopted The Company considers the applicability and impact of all ASUs. ASUs not referenced below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements. In November 2023, the FASB issued ASU No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. The Company does not expect ASU 2023-07 to have a material impact on the Company’s financial statement and related disclosures. In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740) Improvements to Income Tax Disclosures” (“ASU 2023-09”), which prescribes standard categories for the components of the effective tax rate reconciliation and requires disclosure of additional information for reconciling items meeting certain quantitative thresholds, requires disclosure of disaggregated income taxes paid, and modifies certain other income tax-related disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 and can be adopted on a prospective or retrospective basis. The Company is currently evaluating the potential impact of the adoption of ASU 2023-09 on its consolidated financial statements and related disclosures. Note 3. Business Combination and Related Transactions On February 10, 2023, the Company completed the Velodyne Merger. Velodyne shares ceased trading on the Nasdaq Stock Market LLC after market close on February 10, 2023, and each Velodyne share was exchanged for 0.8204 shares of the Company’s common stock. Velodyne is treated as the acquired company for financial reporting purposes. This determination is primarily based on the Company’s senior management prior to the Velodyne Merger comprising a majority of the senior management of the Company following the Velodyne Merger, the Company being the initiator of acquiring Velodyne and the Company being the party issuing shares in the Velodyne Merger. The acquisition price for the Velodyne Merger was $ 306.6 million, primarily consisting of fair value of the Company’s common stock issued in exchange for Velodyne shares and fair value of the Amazon Warrant (Note 7) of $ 8.6 million. Through December 31, 2023, transaction costs incurred by the Company in connection with the Velodyne Merger, including professional fees, were $ 13.0 million. 79 Table of Contents Under the acquisition method of accounting in accordance with ASC 805, the total purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date. The purchase accounting, including the identification and allocation of consideration to assets acquired was completed as of the fourth quarter of 2023. The following table provides the assets acquired and liabilities assumed as of the date of acquisition (in thousands): Estimated Fair Value Purchase consideration $ 306,602 Preliminary amounts of identifiable assets and liabilities assumed Cash and cash equivalents $ 32,137 Short-term investments 155,031 Accounts receivable, net 8,611 Inventory 9,700 Prepaid expenses and other current assets 4,387 Unbilled receivable, long-term portion 6,657 Property and equipment, net 9,900 Operating lease, right-of-use assets 10,887 Intangible assets, net 13,000 Other non-current assets 1,047 Accounts payable ( 3,356 ) Accrued and other current liabilities ( 32,821 ) Contract liabilities ( 5,475 ) Operating lease liability, current portion ( 3,735 ) Operating lease liability, long-term portion ( 11,940 ) Contract liabilities, long-term portion ( 2,206 ) Other non-current liabilities ( 745 ) Total identifiable net assets $ 191,079 Goodwill $ 115,523 $ 306,602 Identified intangible assets acquired and their estimated useful lives as of February 10, 2023, were (in thousands, except years): Estimated Useful Life (in years) Estimated Fair Value Developed technology - Hardware 3 $ 2,500 Developed technology - Software 5 5,100 Customer relationships 8 5,400 Intangible assets, net 5.9 $ 13,000 Developed technology relates to Velodyne’s lidar sensors and Blue City AI software used to monitor traffic networks and public spaces. The Company applied significant judgment in estimating the fair value of the developed technology, which involved significant assumptions related to the relief-from-royalty rate, the migration curve, the discount rate, and the economic life. The Company valued the hardware developed technology using the relief-from-royalty method under the income approach. Software developed technology was valued using the excess earnings method. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecasted period. The estimated fair value of the customer relationships was determined using the distributor method, which involved significant assumptions related to the distributions margin. The Company estimated customer relationships useful life of 8 years that approximates the pattern in which the economic benefits are expected to be realized. 80 Table of Contents The estimated fair value of the inventory was determined using the comparative sales method, which estimated the expected sales price of the product, reduced by all costs expected to be incurred to complete or dispose of the inventory, as well as a profit on the sale. The estimated fair value of property and equipment utilized a replacement cost method incorporating the age, quality and condition of the assets. The excess of the purchase consideration and the fair value of identifiable assets acquired and liabilities assumed at the acquisition date over the fair value of net tangible and identified intangible assets acquired was recorded as goodwill, which is not deductible for tax purposes. Goodwill is primarily attributable to the assembled workforce and the anticipated operational synergies at the time of the Velodyne Merger. The Company’s consolidated statement of operations as of December 31, 2023, includes Velodyne revenue of $ 29.0 million for the period from the acquisition date of February 10, 2023 to December 31, 2023. Due to the integration of the combined businesses, it was impractical to determine the earnings. The unaudited supplemental pro forma information below presents the combined historical results of operations of the Company and Velodyne as if the Velodyne Merger had been completed as of January 1, 2022 (in thousands): Year Ended December 31, 2023 2022 Revenue $ 86,935 $ 84,984 Net loss $ ( 372,689 ) $ ( 326,269 ) The unaudited supplemental pro forma information above includes the following adjustments to net loss in the appropriate pro forma periods (in thousands): Year Ended December 31, 2023 2022 An increase in amortization expense related to the fair value of acquired identifiable intangible assets, net of the amortization expense already reflected in actual historical results $ ( 277 ) $ ( 2,820 ) A decrease (increase) in expenses related to the transaction expenses $ 6,058 $ ( 6,058 ) A net increase in revenue related to the impact of the acceleration of the Amazon Warrant vesting recognized by Velodyne at the close of the Velodyne Merger transaction $ 3,656 $ — A decrease in expenses related to the impact of the acceleration of the Amazon Warrant vesting recognized by Velodyne at the close of the Velodyne Merger transaction $ 26,704 $ — Represents decrease (increase) in additional stock-based compensation expense related to Ouster employee terminations due to change in control. $ 6,383 $ ( 5,195 ) Represents a decrease (increase) in severance expense in connection with the Velodyne Merger transaction $ 10,586 ( 10,586 ) The unaudited supplemental pro forma information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the Velodyne Merger taken place on the date indicated, or of the Company’s future consolidated results of operations. The supplemental pro forma information presented above has been derived from the Company’s historical consolidated financial statements and from historical consolidated financial statements and the historical accounting records of Velodyne. 81 Table of Contents Note 4. Fair Value of Financial Instruments The following table provides information by level for the Company’s assets and liabilities that were measured at fair value on a recurring basis (in thousands): December 31, 2023 Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents: Money market funds $ 7,354 $ — $ — $ 7,354 Commercial paper — 2,989 — 2,989 Short-term investments: Commercial paper — 80,620 — 80,620 Corporate debt and U.S. government agency securities — 58,538 — 58,538 Total short-term investments — 139,158 — 139,158 Total financial assets $ 7,354 $ 142,147 $ — $ 149,501 Liabilities Warrant liabilities $ — $ — $ 229 $ 229 Total financial liabilities $ — $ — $ 229 $ 229 December 31, 2022 Level 1 Level 2 Level 3 Total Assets Money market funds $ 121,100 $ — $ — $ 121,100 Total financial assets $ 121,100 $ — $ — $ 121,100 Liabilities Warrant liabilities $ — $ — $ 180 $ 180 Total financial liabilities $ — $ — $ 180 $ 180 Money market funds are included within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. The fair value of the Private Placement warrant liabilities is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the warrant liabilities, the Company used the Black-Scholes option pricing model to estimate the fair value using unobservable inputs including the expected term, expected volatility, risk-free interest rate and dividend yield (see Note 7). Non-Recurring Fair Value Measurements The Company has certain assets, including intangible assets, which are measured at fair value on a non-recurring basis and are adjusted to fair value only if an impairment charge is recognized. The categorization of the framework used to measure fair value of the assets is considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. Disclosure of Fair Values Our financial instruments that are not re-measured at fair value includ e accounts receivable, accounts payable, accrued and other current liabilities and debt. The carrying values of these financial instruments approximate their fair values. 82 Table of Contents Note 5. Balance Sheet Components Cash and Cash Equivalents and Short-Term Investments The Company’s cash and cash equivalents consist of the following (in thousands): December 31, 2023 2022 Cash $ 40,648 $ 1,832 Cash equivalents: Money market funds (1) 7,354 121,100 Commercial paper 2,989 — Total cash and cash equivalents $ 50,991 $ 122,932 (1) The Company maintains a cash sweep account, which is included in money market funds as of December 31, 2023 and 2022, respectively. Cash is invested in short-term money market funds that earn interest. The Company acquired short-term investments consisting of commercial paper, corporate debt and U.S. government agency securities as a result of the merger with Velodyne that closed on February 10, 2023 (see Note 3). Short-term investments were $ 139.2 million as of December 31, 2023. Unrealized gains and losses on the Company’s short-term investments were not significant as of December 31, 2023 and therefore, the amortized cost of the Company’s short-term investments approximated their fair value. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total of the amounts reported in the consolidated statements of cash flows (in thousands): December 31, 2023 2022 2021 Cash and cash equivalents $ 50,991 $ 122,932 $ 182,644 Restricted cash, current 552 257 977 Restricted cash, non-current 1,091 1,089 1,035 Total cash, cash equivalents and restricted cash $ 52,634 $ 124,278 $ 184,656 Inventory Inventory, consisting of material, direct and indirect labor, and manufacturing overhead, consists of the following (in thousands): December 31, 2023 2022 Raw materials $ 10,062 $ 6,971 Work in process 75 3,857 Finished goods 13,095 8,705 Total inventory $ 23,232 $ 19,533 During the years ended December 31, 2023 and 2022, $ 10.0 million and $ 1.3 million of inventory write downs were charged to cost of revenue. 83 Table of Contents Prepaid expenses and other current assets Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2023 2022 Prepaid expenses $ 5,377 $ 2,502 Prepaid insurance 648 1,442 Receivable from contract manufacturers 2,028 2,526 Insurance receivable 23,375 — Other current assets 3,219 2,073 Total prepaid and other current assets $ 34,647 $ 8,543 Property and Equipment, net Property and equipment consists of the following (in thousands): Estimated Useful Life (in years) December 31, 2023 2022 Machinery and equipment 3 $ 16,535 $ 8,716 Computer equipment 3 1,104 340 Automotive and vehicle hardware 5 22 93 Software 3 593 85 Furniture and fixtures 7 946 848 Construction in progress 3,572 3,448 Leasehold improvements Shorter of useful life or lease term 10,879 9,319 33,651 22,849 Less: Accumulated depreciation ( 23,423 ) ( 13,154 ) Property and equipment, net $ 10,228 $ 9,695 Depreciation expense associated with property and equipment was $ 10.4 million and $ 5.0 million in the years ended December 31, 2023 and 2022, respectively. The following table summarizes the Company's property and equipment, net by geography (in thousands): December 31, 2023 2022 United States $ 4,967 $ 5,295 Thailand 2,733 2,481 France 2,416 1,750 Others 112 169 Total $ 10,228 $ 9,695 Goodwill and Acquired Intangible Assets, Net In the first quarter of 2023, the Company completed the acquisition of Velodyne. The transaction has been accounted for as a business combination. The Company acquired Velodyne for the price of $ 306.6 million, primarily consisting of fair value of the Company’s common stock issued in exchange for Velodyne shares and fair value of the Amazon Warrant (Note 7) of $ 8.6 million. Goodwill represents the excess of the purchase price over the preliminary estimated fair values of the identifiable assets and assumed liabilities acquired and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. Goodwill is not deductible for tax purposes. 84 Table of Contents The following table presents goodwill activity (in thousands): Goodwill December 31, 2022 $ 51,152 Goodwill addition related to Velodyne Merger 115,523 Goodwill impairment charges ( 166,675 ) December 31, 2023 $ — Goodwill is not amortized and is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In 2023 the Company experienced a significant decline in its stock price. This decline resulted in the total market value of its shares of stock outstanding (“market capitalization”) being less than the carrying value of its reporting unit as of March 31, 2023 and June 30, 2023. The Company also considered the impact of current macroeconomic conditions in the lidar sensor industry that potentially impact the fair value of the Company’s reporting unit. The macroeconomic conditions considered include deterioration in the equity markets evidenced by sustained declines in the Company’s stock price, those of its peers, along with an increase in the weighted-average cost of capital primarily driven by an increase in interest rates. After considering all available evidence in the evaluation of goodwill impairment indicators, the Company determined it was appropriate to perform an interim quantitative assessment of its goodwill as of March 31, 2023 and June 30, 2023. In connection with the Company’s interim goodwill impairment assessments the Company recorded goodwill impairment charges of approximately $ 99.4 million in the three months ended March 31, 2023 and $ 67.3 million in the three months ended June 30, 2023. The Company’s goodwill impairment analysis included a comparison of the aggregate estimated fair value of our reporting unit to our total market capitalization. As of December 31, 2023, remaining goodwill balance was nil . No goodwill impairment charges were recognized during the year ended December 31, 2022. The following tables present acquired intangible assets, net as of December 31, 2023 and 2022 (in thousands): December 31, 2023 Estimated Useful Life (in years) Gross Carrying amount Accumulated Amortization Net Book Value Developed technology 3 - 8 $ 23,500 $ ( 5,948 ) $ 17,552 Vendor relationship 3 6,600 ( 4,767 ) 1,833 Customer relationships 3 - 8 6,300 ( 1,249 ) 5,051 Intangible assets, net $ 36,400 $ ( 11,964 ) $ 24,436 December 31, 2022 Estimated Useful Life (in years) Gross Carrying amount Accumulated Amortization Net Book Value Developed technology 8 $ 15,900 $ ( 2,318 ) $ 13,582 Vendor relationship 3 6,600 ( 2,567 ) 4,033 Customer relationships 3 900 ( 350 ) 550 Intangible assets, net $ 23,400 $ ( 5,235 ) $ 18,165 Amortization expense was $ 6.7 million and $ 4.5 million in the years ended December 31, 2023 and 2022, respectively. The following table summarizes estimated future amortization expense of finite-lived intangible assets-net (in thousands): Years: Amount 2024 6,604 2025 4,514 2026 3,776 2027 3,682 2028 2,779 Thereafter 3,081 Total $ 24,436 85 Table of Contents Product Warranties The following table reflects the activity in accrued warranty cost (in thousands): December 31, 2023 2022 Beginning balance $ 2,096 $ 983 Additions from acquisitions 802 — Warranty expenditures ( 2,820 ) ( 1,702 ) Increase to warranty accrual 3,583 2,815 Ending balance $ 3,661 $ 2,096 Accrued and Other Current Liabilities Accrued and other current liabilities consist of the following (in thousands): December 31, 2023 2022 Uninvoiced receipts $ 12,980 $ 10,727 Accrued compensation 6,387 3,758 Accrued legal contingencies 27,500 — Sales and use taxes 2,667 403 Other 8,632 2,183 Total accrued and other current liabilities $ 58,166 $ 17,071 Note 6. Debt Loan and Security Agreement On April 29, 2022 the Company entered into a Loan Agreement with Hercules Capital, Inc. (“Hercules”) (as amended, the “Loan Agreement”). The Loan Agreement provided the Company with a term loan facility of up to $ 50.0 million, subject to certain terms and conditions. The Company borrowed the initial tranche of $ 20.0 million on April 29, 2022. On October 17, 2022, the Company borrowed an additional $ 20.0 million. The Loan Agreement included a minimum liquidity financial covenant whereby the Company was required to maintain at least $ 60.0 million of cash in deposit accounts that are subject to an account control agreement in favor of Hercules. On February 10, 2023, the Company entered into the Third Amendment, which amended the Loan Agreement to (i) increase the existing debt baskets for (a) purchase money debt and capital leases and (b) letter of credit obligations, (ii) provide for increased flexibility to maintain cash in non-US accounts, and (iii) provide for increased flexibility to relocate certain equipment. Advances under the Loan Agreement bore interest at the rate of interest equal to greater of either (i) (x) the prime rate as reported in The Wall Street Journal plus (y) 6.15 %, and (ii) 9.40 %, subject to compliance with financial covenants and other conditions. The Loan Agreement included covenants, limitations, and events of default customary for similar facilities. In connection with the Loan Agreement, the Company paid the lender a cash facility and legal fees of $ 0.6 million and incurred debt issuance costs to third parties that were directly related to issuing debt in the amount of $ 0.3 million. The effective interest rate on this debt was 17.90 % after giving effect to the debt discount, debt issuance costs and the end of term charge. Amortization expense included in the interest expense related to debt discount and debt issuance costs of the Loan Agreement was not material for the year ended December 31, 2023. 86 Table of Contents Prior to repayment of the Loan Agreement, interest on amounts borrowed was payable on a monthly basis until June 1, 2025 (the “Amortization Date”). On and as of the Amortization Date, payments consist of equal monthly installments of principal and interest payable until the secured obligations are repaid in full. However, if the Company achieved certain equity proceeds, revenue or profit targets for the twelve-month period ending December 31, 2023, then the Amortization Date would have been extended to the Maturity Date. The entire principal balance and all accrued but unpaid interest were to be due and payable on the Maturity Date. On the earliest to occur of May 1, 2026, the date on which the obligations under the Loan Agreement were paid and the date on which such obligations became due and payable, the Company was also required to pay Hercules an end of term fee in an amount equal to 7.45 % of the aggregated amount of all Advances made under the Loan Agreement. The Company was permitted to prepay the principal of any advance made pursuant to the terms of the Term Loan Facility at any time subject to a prepayment charge equal to: 2.50 %, if such advance was prepaid in any of the first 12 months following the Closing Date, 1.50 %, if such advance was prepaid after 12 months but prior to 24 months following the Closing Date, and 1.0 %, if such advance was prepaid anytime thereafter. On October 25, 2023, the Loan Agreement was repaid with proceeds of the loans drawn under the Credit Agreement (as defined below) with UBS Bank USA and UBS Financial Services Inc. resulting in a loss on extinguishment of debt of $ 3.6 million and recorded it as interest expense in its consolidated statements of operations and comprehensive loss for the twelve months ended December 31, 2023. Revolving Credit On October 25, 2023, the Company entered into the Credit Line Account Application and Agreement for Organizations and Businesses (the “Credit Agreement”) and the Addendum to Credit Line Account Application and Agreement (the “Addendum”; and the Credit Agreement as amended, modified, and/or supplemented by the Addendum, the “UBS Agreement”) by and among the Company, UBS Bank USA (the “Bank”), and UBS Financial Services Inc. The facility under the UBS Agreement matures and terminates on August 2, 2025 (the “Maturity Date”). The UBS Agreement provides the Company with a revolving credit line of up to $ 45.0 million, subject to certain terms and conditions. The Company borrowed $ 44.0 million on October 25, 2023, and all of the proceeds were used to prepay and terminate the Company’s Loan Agreement on October 25, 2023. The Company recognized constructive financing cash outflows and financing cash inflows on the statement of cash flows of $ 44.0 million, respectively, even though no funds were actually paid or received. Pursuant to the terms of the UBS Agreement, the Company has agreed to maintain minimum liquidity, that can be comprised of unencumbered cash and cash equivalents, U.S. treasuries and other assets acceptable to the Bank, of $ 52.0 million in an account maintained with the Bank or its affiliates at all times. As of December 31, 2023, the Company is in compliance with this minimum liquidity requirement within the loan agreement. Loans under the UBS Agreement bear interest at a rate equal to (x) for variable rate loans, the sum of (i) the applicable SOFR average plus 0.110 %, plus (ii) 1.20 %, and (y) for fixed rate loans, the sum of either (1) CME Term Rate or (2) the U.S. Treasury Rate, as applicable and as defined in the UBS Agreement, as determined based on the duration of the advance, plus the applicable liquidity premium with a range of 0.15 % to 0.50 %, as set forth in the UBS Agreement. Interest payments are due (x) for variable rate loans, on the last day of each calendar month, and on each date that any portion of the principal amount is due, including on the Maturity Date, and (y) for fixed rate loans, on the last day of the applicable interest period, and on each date that any portion of the principal amount is due, including on the Maturity Date. The Company may repay any variable rate loans at any time in whole or in part, without penalty. The Company may repay any fixed rate loans in whole, but not in part, subject to certain breakage costs. The Company has agreed to pay an unused line fee in an amount equal to (i) the commitment amount of $ 45.0 million less the average daily balance of the sum of the principal amount of the obligations outstanding during the preceding calendar quarter, multiplied by (ii) 0.50 % per annum, and such unused line fee is payable quarterly in arrears on the last day of each calendar quarter. The UBS Agreement also contains affirmative and negative covenants customary for a credit line of this type, including requirements for maintenance of the collateral accounts and certain limitations on withdrawal of cash from such collateral accounts. The UBS Agreement also provides for customary events of default, including, among others, non-payment, failure to maintain an amount equal to the greater of (x) the outstanding loans and (y) the collateral value as determined by the Bank, in the securities accounts maintained with the Bank, bankruptcy, or breach of a covenant, representation and warranty. As of December 31, 2023, the Company was in compliance with the covenants set forth in the UBS Agreement. 87 Table of Contents Note 7. Warrants Private Placement Warrants Simultaneously with the closing of the Company’s initial public offering (the “IPO”) in August 2020, the sponsor of CLA, Colonnade Sponsor LLC, purchased an aggregate of 600,000 Private Placement warrants at a price of $ 10.00 per warrant, for an aggregate purchase price of $ 6,000,000 . The Private Placement warrants became exercisable 12 months following the closing of the Company’s IPO, and will expire 5 years from the completion of the Colonnade Merger, or earlier upon redemption or liquidation. On March 11, 2021, as adjusted to reflect the Reverse Stock Split, each outstanding Private Placement warrant automatically converted into a warrant to purchase one-tenth of a share of Ouster common stock pursuant to the Warrant Agreement. Each 10 Private Placement warrants is exercisable for one share of Ouster common stock at an exercise price of $ 115.00 per share, with no fractional shares being issuable upon exercise of a warrant. The private placement warrant liability was initially recognized as a liability at a fair value of $ 19.4 million and the private placement warrant liability was remeasured to fair value as of December 31, 2023 and 2022, resulting in a loss of $ 0.05 million and $ 7.4 million in the years ended December 31, 2023 and 2022, respectively, classified within other income (expense), net in the consolidated statements of operations and comprehensive loss. The private placement warrant was valued using the following assumptions under the Black-Scholes option-pricing model: December 31, 2023 December 31, 2022 Stock price $ 7.67 $ 8.60 Exercise price of warrant $ 115.00 $ 115.00 Term (years) 2.19 3.19 Expected volatility 94.00 % 70.01 % Risk-free interest rate 4.19 % 4.39 % Public Warrants CLA, in its IPO in August 2020, issued units that each consisted of one Class A ordinary share and one-half warrant to purchase a Class A ordinary share (the “Public warrants”). The warrants became exercisable 12 months following the closing of the Company’s IPO, and expire five years from the completion of the Merger, or earlier upon redemption or liquidation. On March 11, 2021, upon the closing of the Colonnade Merger each of the 999,999 outstanding warrants, as adjusted for any fractional warrants that were not issued upon separation, was converted automatically into a redeemable Public warrant to purchase one share of the Company’s common stock. As adjusted for the Reverse Stock Split, each 10 Public warrants is exercisable for one share of Ouster common stock at an exercise price of $ 115.00 per share with no fractional shares issuable upon exercise of a warrant. The Public warrants were recognized as equity upon the Merger in the amount of $ 17.9 million. Prior to their expiration, the Company may redeem the Public warrants at a price of $ 0.10 per warrant, provided that the closing price of the Company’s common stock equals or exceeds $ 180.00 per share for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date on which the Company gives proper notice of such redemption to the warrants holders. The Company also assumed 5,973,170 outstanding public warrants upon closing the Velodyne Merger to purchase shares of the Company’s common stock (the “Velodyne Public warrants”). Each warrant entitles the holder to purchase 0.06153 shares of the Company’s common stock. Each 10 Velodyne Public warrants is exercisable for 0.6153 shares of the Company’s common stock at an exercise price of $ 140.20 per 0.6153 share of common stock, with no fractional shares being issuable upon exercise of a warrant. The warrants are exercisable at any time and expire in September 2025. The Company may redeem the outstanding warrants in whole and not in part at a price of $ 0.10 per warrant at any time after they become exercisable, provided that the last sale price of the Company’s common stock equals or exceeds $ 219.41 per share, subject to adjustments, for any 20 -trading days within a 30 -trading day period ending three business days prior to the date on which the Company sends the notice of redemption to the warrant holders. The Velodyne Public warrants were recognized as equity upon the Velodyne Merger. 88 Table of Contents Amazon Warrant On February 10, 2023, as part of the Velodyne Merger, the Company assumed a warrant agreement and a transaction agreement, pursuant to which Velodyne agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly-owned subsidiary of Amazon Inc. (“Amazon”), a warrant to acquire, following customary antidilution adjustments, up to an aggregate of 3,263,898 shares of the Company’s common stock at an exercise price of $ 50.71 per share (the “Amazon Warrant”). The exercise price and the warrant shares issuable upon exercise of the Amazon Warrant are subject to further antidilution adjustments, including in the event the Company makes certain sales of common stock (or securities exercisable or convertible into or exchangeable for shares of the Company’s common stock) at a price less than the exercise price of the Amazon Warrant. As a result of the issuance and sale by the Company of an additional 2,878,875 shares of common stock in the twelve months ended December 31, 2023 pursuant to the At-Market-Issuance Sales Agreement at prices below the exercise price of the Amazon Warrant, an antidilution adjustment to the terms of the Amazon Warrant occurred (see Note 11), resulting in the increase in the number of shares issuable under the Amazon Warrant by 618 shares of common stock and a reduction to the original strike price of the Amazon Warrant to $ 50.70 per share. As of December 31, 2023, there were 3,264,516 shares of common stock issuable under the Amazon Warrant. The Amazon Warrant is subject to vesting. As a result of the Velodyne Merger, 50 % of the unvested Amazon Warrant as of the date of the Velodyne Merger have vested and the remainder will vest over time based on payments by Amazon or its affiliates to us in connection with Amazon’s purchase of goods and services from the Company. The vested portion of the Amazon Warrant, representing 1,848,694 shares of Ouster common stock with a fair value of $ 8.6 million, was included in the Velodyne Merger purchase price consideration on February 10, 2023. The Amazon Warrant shares vest in multiple tranches over time based on payments of up to $ 100.0 million by Amazon or its affiliates (directly or indirectly through third parties) to the Company in connection with Amazon’s purchase of goods and services. The fair value of the unvested Amazon Warrant, representing 1,330,903 unvested Ouster common stock shares will be recognized as a non-cash stock-based reduction to revenue when Amazon makes payments and vesting conditions become probable of being achieved. For the year ended December 31, 2023, 56,613 Amazon Warrant shares vested and the Company recognized non-cash stock-based reduction to revenue of $ 0.5 million. The fair value of the Amazon Warrant shares was estimated on February 10, 2023, the date of completion of the Velodyne Merger, using the Black-Scholes option pricing model on the remaining contractual term of 6.98 years, an expected volatility of 53.7 %, a 3.86 % risk-free interest rate and a 0 % expected dividend yield. The Company estimated expected volatility by using historical volatility of the Company’s publicly traded stock and historical volatility of a group of publicly traded peer companies for the period commencing February 16, 2016 and ending on the date of the Merger. The right to exercise the Amazon Warrant and receive the warrant shares that have vested expires February 4, 2030. As of December 31, 2023, 1,933,613 Amazon Warrant shares have vested. Note 8. Leases The Company leases its headquarters located in San Francisco, California, where the Company lease properties as follows: (i) 26,125 square feet of office space pursuant to a lease that is scheduled to expire in August 2027 and (ii) 20,032 square feet of office space in a building adjacent to our corporate headquarters, which term is scheduled to expire in August 2027. Prior to 2023, the Company had executed or assumed as lessee other five operating leases for rental of office space. The terms of those leases range from 1 to 3 years. On February 10, 2023, the Company assumed long-term non-cancellable lease agreements stemming from the Velodyne Merger: (i) approximately 204,000 square feet of office and manufacturing space in San Jose, California and (ii) additional space pursuant to the assumed leases for offices located in Alameda, California; and Bengaluru, India. Supplemental balance sheet information related to leases was as follows: December 31, 2023 2022 Weighted-average remaining lease term 3.84 4.52 Weighted-average discount rate 6.83 % 4.66 % The Company incurred total lease costs in its consolidated statements of operations and comprehensive loss of $ 8.1 million and $ 3.9 million for the years ended December 31, 2023 and 2022, respectively. 89 Table of Contents Additionally, the Company determined that the lease office facility located in Bengalaru, India assumed in the Velodyne Merger was not needed to support the future growth of its business. The Company fully vacated the facilities in March 2023 and remained contractually obligated to the lessor for the underlying lease. The Company recorded $ 0.8 million for right-of-use asset impairment in connection with these leased office facilities in the three months ended March 31, 2023. In the twelve months ended December 31, 2023, the Company recorded $ 0.8 million gain on lease modification due to the termination of its Bengalaru, India lease. 350 Treat Building Lease In September 2017, the Company entered into a lease agreement (the “350 Treat Building Lease”) to lease approximately 26,125 square feet of office and warehouse space located in San Francisco, California for its corporate headquarters. In November 2021, the Company entered into an amendment to the 350 Treat Building Lease agreement, whereby the parties agreed to extend the term of the lease for an additional four years and seven months and provided for an additional tenant improvement allowance. The total base lease payments for the extended period of 4.6 years equals $ 7.6 million. The amendment resulted in an adjustment of $ 5.5 million to the right-of-use asset and right-of-use operating lease liability which was recorded in November 2021. As of December 31, 2023 the remaining lease term is 3.7 years that expires on August 31, 2027. In addition to minimum lease payments, the lease requires the Company to pay associated taxes and operating costs. The 350 Treat Building Lease is considered to be an operating lease as it does not meet the criteria of a finance lease. As of December 31, 2023, the operating lease right-of-use asset and operating lease liability were $ 4.5 million and $ 6.0 million, respectively. As of December 31, 2022, the operating lease right-of-use asset and operating lease liability were $ 5.6 million and $ 7.1 million, respectively. The discount rate used to determine the lease liability was 3.7 %. 2741 16 th Street Lease In September 2017 the Company entered into a lease agreement (the “2741 16 th Street Lease”) to lease approximately 20,032 square feet of office space and 25,000 of parking space located in San Francisco, California. In May 2020, the Company entered into an amendment to the 2741 16 th Street Lease agreement, whereby the parties agreed to extend the term of the lease for an additional four years , restructure the monthly rent payable under the lease and provide for an additional tenant improvement allowance. The total base lease payments for the extended period of 4.0 years equals $ 8.5 million and the increase in total base lease payments for the lease term provided for by the original agreement is $ 0.7 million. The amendment resulted in an adjustment of $ 6.2 million to the right-of-use asset and right-of-use operating lease liability which was recorded in May 2020. As of December 31, 2023 the remaining lease term is 3.7 years that expires on August 31, 2027. In addition to minimum lease payments, the lease requires the Company to pay associated taxes and operating costs. The 2741 16 th Street Lease is considered to be an operating lease as it does not meet the criteria of a finance lease. As of December 31, 2023, the operating lease right-of-use asset and lease liability were $ 5.3 million and $ 7.1 million, respectively. As of December 31, 2022, the operating lease right-of-use asset and operating lease liability were $ 6.5 million and $ 8.7 million, respectively. The discount rate used to determine the operating lease liability was 5.25 %. 5521 Hellyer Avenue Lease As part of the Velodyne Merger, the Company assumed a long-term non-cancellable lease agreement of 5521 Hellyer Avenue (the “5521 Hellyer Avenue Lease”), which was entered into in January 2017, to lease approximately 204,000 square feet of office, research and development, manufacturing and storage space in San Jose, California. In October 2019, as part of the second amendment to the 5521 Hellyer Avenue Lease, the lease term was extended for an additional five years ending in December 31, 2027. The total base lease payments for the extended period of 5.0 years equals $ 17.6 million. As of December 31, 2023, the operating lease right-of-use asset and operating lease liability were $ 8.4 million and $ 12.0 million, respectively. The discount rate used to determine the operating lease liability was 9.75 %. 90 Table of Contents Other operating real estate leases The Company has executed or assumed as lessee operating leases for rental of office space. The terms of those leases range from 1 to 3 years. The Company is obligated to make lease payments totaling approximately $ 0.4 million for those leases over the respective lease terms. Total operating lease cost for the years ended December 31, 2023 and 2022 was $ 8.1 million and $ 3.9 million, which consisted of $ 7.4 million and $ 3.8 million of fixed lease expense and $ 0.7 million and $ 0.1 million of variable lease expense, respectively. Cash paid for amounts included in the measurement of lease liabilities was $ 7.0 million and $ 4.0 million for the years ended December 31, 2023 and 2022, respectively. The maturities of the operating lease liabilities as of December 31, 2023 were as follows (in thousands): Year ending December 31, 2024 $ 7,944 2025 7,668 2026 7,688 2027 6,514 Total undiscounted lease payments 29,814 Less: imputed interest ( 3,891 ) Total operating lease liabilities $ 25,923 Note 9. Commitments and Contingencies Letters of credit In connection with certain office leasehold interests in real property located in San Francisco (350 Treat Ave and, 2741 16th Street) and in Paris, the Company obtained letters of credit from certain banks as required by the lease agreements. If the Company defaults under the terms of the applicable lease, the lessor will be entitled to draw upon the letters of credit in the amount necessary to cure the default. The amounts covered by the letters of credit are collateralized by certificates of deposit, which are included in restricted cash on the consolidated balance sheets as of December 31, 2023 and 2022. The outstanding amount of the letters of credit was $ 1.4 million and $ 1.3 million as of December 31, 2023 and 2022, respectively. Non-cancelable purchase commitments As of December 31, 2023, the Company had non-cancelable purchase commitments to third-party contract manufacturers for approximately $ 23.4 million and other vendors for approximately $ 3.6 million. Contingencies From time to time, the Company may be involved in legal and administrative proceedings arising in the ordinary course of business. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). Legal costs incurred in connection with loss contingencies are expensed as incurred. 91 Table of Contents Litigation The Company is involved in various legal proceedings arising in the ordinary course of business. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Actual outcomes of these legal and regulatory proceedings may materially differ from our current estimates. Velodyne Legacy Litigation On March 3, 2021, a purported shareholder of Velodyne filed a complaint for a putative class action against Velodyne, Anand Gopalan and Andrew Hamer in the United States District Court, Northern District of California, entitled Moradpour v. Velodyne Lidar, Inc., et al. , No. 3:21-cv01486-SI. The complaint alleged purported violations of the federal securities laws and that, among other things, the defendants made materially false and/or misleading statements and failed to disclose material facts about Velodyne’s business, operations and prospects, including with respect to David Hall’s role with Velodyne and removal as Chairman of Velodyne’s Board of Directors. The complaint alleged that purported class members have suffered losses and sought, among other things, an award of compensatory damages on behalf of a putative class of persons who purchased or otherwise acquired Velodyne’s securities between November 9, 2020 and February 19, 2021. On March 12, 2021, a putative class action entitled Reese v. Velodyne Lidar, Inc., et al. , No. 3:21-cv-01736-VC, was filed against Velodyne, Mr. Gopalan and Mr. Hamer in the United States District Court for the Northern District of California, based on allegations similar to those in the earlier class action and seeking recovery on behalf of the same putative class. On March 19, 2021, another putative class action entitled Nick v. Velodyne Lidar, Inc., et al. , No. 4:21-cv-01950-JST, was filed in the United States District Court for the Northern District of California, against Velodyne, Mr. Gopalan, Mr. Hamer, two current or former directors, and three other entities. The complaint was based on allegations similar to those in the earlier class actions and sought, among other things, an award of compensatory damages on behalf of a putative class of persons who purchased or otherwise acquired Velodyne’s securities between July 2, 2020 and March 17, 2021. The class actions have been consolidated, lead plaintiffs have been appointed and an amended consolidated complaint was filed on September 1, 2021, based on allegations similar to those in the earlier class actions. Velodyne filed a motion to dismiss the amended and consolidated complaint on November 1, 2021. The plaintiffs filed a first amended complaint on February 11, 2022. Velodyne filed a motion to dismiss on March 4, 2022. On July 1, 2022, the court denied the motion to dismiss as it relates to the claims related to David Hall’s role with Velodyne, but granted the motion to dismiss as to all other claims. On July 14, 2023, the Court granted Diane Smith’s motion for class certification. The Court encouraged the parties to conduct mediation and the parties conducted mediation. On March 13, 2024, the parties to the securities class action lawsuit entitled Moradpour v. Velodyne Lidar, Inc., et al. , No. 3:21-cv01486-SI (N.D. Cal.) filed a stipulation of settlement to settle this lawsuit, without any admission or concession of wrongdoing or liability by Velodyne or the individual defendants. The settlement is subject to, among other things, final documentation and court approval. The proposed settlement provides for a payment of $ 27.5 million, of which the Company expects approximately $ 23.4 million to be funded by insurance proceeds. The Company accrued for and recorded the entire amount of this $ 27.5 million settlement liability and recorded the expense within general and administrative expenses in 2023 after concluding that such settlement amount is probable and reasonably estimable. As of December 31, 2023, the Company recorded an insurance receivable of $ 23.4 million in prepaid expenses and other current assets to be funded by insurance proceeds based on the terms of the settlement. The $ 23.4 million insurance proceeds allows the Company to recover the majority of the settlement expense, resulting in a net charge of $ 4.1 million in its consolidated statement of operations. The Company will continue to assess the probable amount of insurance proceeds expected to be received in future reporting periods based on any additional facts that arise and make adjustments, if necessary. On March 12, 2021, a putative shareholder derivative lawsuit entitled D’Arcy v. Gopalan, et al. , No. 1:21-cv-00369-MN, was filed in the United States District Court for the District of Delaware against current and former directors and/or officers Anand Gopalan, Andrew Hamer, David S. Hall, Marta Thoma Hall, Joseph B. Culkin, Michael E. Dee, James A. Graf, Barbara Samardzich, and Christopher A. Thomas, and names Velodyne as a nominal defendant. The complaint asserted claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets against all of the individual defendants, and asserted a contribution claim under the federal securities laws against Mr. Gopalan and Mr. Hamer. On March 16, 2021, a second shareholder derivative lawsuit entitled Kondner, et al. v. Culkin, et al. , No. 1:21cv-00391-MN, was filed in the United States District Court for the District of Delaware against most of the same defendants named in the earlier derivative complaint, and asserted claims against the individual defendants for alleged breaches of fiduciary duty and waste of corporate assets. Both derivative actions are based on allegations similar to those in the class actions discussed above, and have now been consolidated. On January 3, 2022, the plaintiffs filed an amended complaint. On November 7, 2023, the court approved the parties’ stipulation to dismiss the derivative action and directed that the case be closed. 92 Table of Contents On January 18, 2022, David and Marta Hall filed a lawsuit in the Superior Court of California, County of Alameda, against current and former officers and directors of Velodyne, as well as Jeff Vetter, Velodyne’s outside counsel. The Halls sought to recover damages for financial and other injuries they allegedly sustained as a result of the merger between Graf and Velodyne. On May 3, 2022, certain defendants filed motions to compel arbitration and other defendants filed motions to quash service of process for lack of personal jurisdiction. The court conducted a hearing on the motions on July 20, 2022. On August 30, 2022, the court granted the motion to quash service with respect the out of state defendants. On October 3, 2022, the court granted the motion to compel Mr. Hall to arbitrate his claims, and stayed proceedings on Ms. Hall’s claims pending arbitration of Mr. Hall’s claims. On October 20, 2022, the Halls voluntarily dismissed the action without prejudice. On January 3, 2023, the Halls filed an arbitration demand with substantially the same allegations as the prior lawsuit. On or about August 22, 2023, the Halls filed an application in Texas District Court, Dallas County to compel arbitration of Messrs. Graf and Dee who had been dismissed from the prior court action for lack of personal jurisdiction. Messrs. Graf and Dee agreed to participate in the arbitration and thus the Texas action has been stayed. The arbitrator has not yet set a schedule in the arbitration. The Company does not believe the claims are meritorious and intends to defend the action vigorously. On August 10, 2023, Plaintiffs David and Marta Hall filed a complaint against Velodyne in the Superior Court of California, County of San Francisco asserting claims for breach of contract and failure to reimburse expenses in violation of California Labor Code Section 2802 (the “2023 Hall Matter”). The 2023 Hall Matter seeks indemnification for legal fees incurred on the Halls’ behalf in connection with a derivative action against certain Velodyne officers and directors, and naming Velodyne as a nominal defendant , captioned In Re Velodyne Lidar, Inc. Derivative Action, Case No. 1:21-cv-00369-TMH (D. Del.). On November 21, 2023, Velodyne denied all allegations. The 2023 Hall Matter is set for trial on September 9, 2024. The Company does not believe the claims are meritorious and intends to defend the action vigorously. On December 8, 2021, Velodyne received a subpoena for documents related to Wei Weng’s trading in stock of Graf Acquisition Corp. (Velodyne’s predecessor) stock during 2020, prior to the announcement that Velodyne was planning to merge into Graf Acquisition Corp. Velodyne has complied with the SEC’s requests to date; however, the SEC may request additional documents or information. No such follow up requests have been received to date. On December 1, 2022 and December 20, 2022, purported stockholders of Velodyne filed the following lawsuits against Velodyne and certain of its directors in the Southern District of New York for violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and U.S. Securities and Exchange Commission ("SEC") Rule 14a-9: O’Dell v. Velodyne Lidar, Inc., et al., Civil Action No. 22-cv-10211, Carlisle v. Velodyne Lidar, Inc., et al., Civil Action No. 22-cv-10720. On December 29, 2022, a complaint alleging generally the same claims was filed in the United States District Court for the District of Delaware, captioned Wheeler v. Velodyne Lidar, Inc., et al., Civil Action No. 22-cv-01641-UNA. All of the lawsuits were voluntarily dismissed by the respective Plaintiffs. The parties settled for immaterial mootness fees in September 2023. On August 25, 2023, a putative shareholder class action suit was filed in the Delaware Court of Chancery against six former officers and directors of Graf Industrial Corp. (“GIC”), the predecessor entity of Velodyne, as well as two other entities, entitled Berger v. Graf Acquisition, LLC, et al ., No. C.A. 2023 0873 LWW. The Company, GIC and Velodyne are not named as defendants. The plaintiff, who was allegedly a GIC shareholder, asserts claims for breach of fiduciary duty and unjust enrichment in connection with the merger of GIC and Velodyne on September 29, 2020, and seeks damages, disgorgement and other recovery on behalf of the putative class of GIC shareholders in an unspecified amount. The Company is obligated to indemnify such former officers and directors under certain circumstances. The Company does not believe the claims are meritorious. Ouster Litigation On June 10, 2021, the Company received a letter from the SEC notifying us of an investigation and document subpoena. The subpoena seeks documents regarding projected financial information in CLA’s Form S-4 registration statement filed on December 22, 2020. On August 15, 2023, the SEC informed the Company that they have concluded the investigation and that they do not intend to recommend any enforcement action. On April 11, 2023, the Company filed a complaint with the United States International Trade Commission (the “Commission”) pursuant to 19 U.S.C. § 1337 (“Section 337”). The complaint requests that the Commission institute an investigation relating to the unlawful importation, sale for importation, and/or sale after importation into the United States by Hesai Group, Hesai Technology Co., Ltd., and Hesai Inc. (collectively “Hesai”) of certain LiDAR (Light Detection and Ranging) systems and/or components thereof. The complaint alleges that Hesai’s LiDAR products infringe certain claims of the Company’s U.S. Patent Nos. 11,175,405, 11,178,381, 11,190,750, 11,287,515 and/or 11,422,236. The complaint seeks the issuance of a permanent exclusion order and cease and desist order. On May 11, 2023, the Commission decided to institute an investigation based on the Company’s complaint as In the Matter of Certain LiDAR (Light Detection and Ranging) Systems and Components Thereof, 337-TA-1363. On May 25, 2023, the Administrative Law Judge issued a 93 Table of Contents procedural schedule whereby the evidentiary hearing is set to begin on January 4, 2024, with a target date for completion of the Investigation by the Commission on October 17, 2024. On June 7, 2023, Hesai responded to the complaint and denied all allegations. On June 22, 2023, Hesai filed a motion to terminate or alternatively stay the investigation in light of an alleged agreement to arbitrate based on the Settlement Agreement signed in 2020 between Hesai and Velodyne (the "Settlement Agreement”). Hesai alleges that the Company is bound to the 2020 Settlement Agreement as a result of the Company’s merger with Velodyne in 2023. The Company has opposed the motion, including any allegation that the Company has any obligation to arbitrate or that its patents are subject to any terms of the 2020 Settlement Agreement, which the Company never signed. On August 24, 2023, the administrative law judge (“ALJ”) issued an initial determination granting the motion to terminate, holding that a valid arbitration agreement exists as part of the Settlement Agreement, and thus the Company has obligation to arbitrate. On August 31, 2023, the Company filed a petition for review of the initial determination with the Commission. On September 14, 2023, Hesai responded. On October 11, 2023, the Commission issued a notice of its determination to review and, on review, to affirm with modification the ALJ’s initial determination granting the motion to terminate the investigation in its entirety based upon the arbitration agreement. As a result, the investigation was terminated. The Company has until December 11, 2023 to file a notice of appeal with the Federal Circuit. On April 11, 2023, the Company also filed a complaint in the District of Delaware alleging patent infringement of the same patents as in the aforestated Section 337 proceeding against Hesai Group and Hesai Technology Co., Ltd. The complaint seeks monetary damages as well as the issuance of a permanent injunction. On May 30, 2023, the Court granted stay the case pending the resolution, including all appeals, of In the Matter of Certain LiDAR (Light Detection and Ranging) Systems and Components Thereof, 337-TA-1363. On May 17, 2023, Hesai Photonics Technology Co. Ltd. and Hesai Group (collectively “Hesai Photonics”) filed a request for arbitration with JAMS against the Company, Velodyne, Velodyne, LLC, and Oban Merger Sub II LLC. Hesai Photonics alleges that the Company is bound by the terms and conditions, including an obligation to arbitrate disputes, of a Settlement Agreement signed in 2020 between Hesai Photonics and Velodyne as a result of the Company’s 2023 merger with Velodyne. On June 13, 2023, the Company responded to the arbitration demand. The Company denied all allegations. The Company also disputed that there was an obligation to arbitrate, and thus, alleged that JAMS lacked jurisdiction. No further dates have been set. On September 14, September 25, and September 26, 2023, Hesai filed Petitions for Inter Partes Review with the Patent Trial and Appeal Board (“PTAB”) challenging the validity of the Company’s patents asserted in the ITC and Delaware patent actions. The Company has an opportunity to respond in late December 2023 and early January 2024. On March 19, 2024, the PTAB issued decisions to institute inter partes review for two of the five patents. The PTAB is expected to issue decisions on whether to institute inter parties review for the remaining three patents by April 3, 2024. Other than as set forth above, as of December 31, 2023 the Company is unable to estimate a possible loss or range of losses in respect to those disclosed matters. Indemnification From time to time, the Company enters into agreements in the ordinary course of business that include indemnification provisions. Generally, in these provisions the Company agrees to defend, indemnify, and hold harmless the indemnified parties for claims and losses suffered or incurred by such indemnified parties for which the Company is responsible under the applicable indemnification provisions. The terms of the indemnification provisions vary depending upon negotiations between the Company and its counterpart; however, typically, these indemnification obligations survive the term of the contract and the maximum potential amount of future payments the Company could be required to make pursuant to these provisions are uncapped. To date, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnity agreements pursuant to which it has indemnified its directors and officers, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer, other than liabilities arising from willful misconduct of the individual. To date, the Company is indemnifying and has incurred costs to defend lawsuits or settle claims described above under the heading “Litigation” pursuant to the indemnity agreements of former directors and officers. 94 Table of Contents Note 10. Common Stock Pursuant to the terms of the Second Amended and Restated Certificate of Incorporation, the Company is authorized to issue the following shares and classes of capital stock, each with a par value of $ 0.0001 per share: (i) 100,000,000 shares of common stock; (ii) 100,000,000 shares of preferred stock. The holder of each share of common stock is entitled to one vote. On April 29, 2022, the Company entered into the ATM Agreement pursuant to which the Company may, subject to the terms and conditions set forth in the agreement offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock, par value $ 0.0001 per share, having an aggregate offering price of up to $ 150.0 million. During the years ended December 31, 2023 and 2022, the Company sold 2,878,875 and 783,371 shares, respectively. The weighted-average sales price and gross proceeds to the Company before deducting offering costs, sales commissions and fees were approximately $ 5.67 and $ 21.48 per share and $ 33.1 million and $ 16.8 million, respectively, during the year ended December 31, 2023 and 2022. The Company plans to use the net proceeds from this offering for working capital and general corporate purposes. The remaining availability under the ATM Agreement as of December 31, 2023 is approximately $ 116.9 million. Note 11. Stock-based Compensation As of December 31, 2023, the Company has five equity incentive plans: its Amended and Restated 2015 Stock Plan (the “2015 Plan”), the Sense Photonics, Inc. 2017 Equity Incentive Plan (the “Sense Plan”), the Velodyne Lidar, Inc. 2020 Equity Incentive Plan (the “Velodyne Plan”), its 2021 Incentive Award Plan (the “2021 Plan”) and its 2022 Employee Stock Purchase Plan (the “2022 ESPP” and, collectively with the 2015 Plan, the Sense Plan, the Velodyne Plan and the 2021 Plan, the “Plans”). The Plans, other than the 2022 ESPP, provide for the grant of stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance stock unit awards and other forms of equity compensation (collectively, “equity awards”). In addition, the 2021 Plan provides for the grant of performance bonus awards. New equity awards may only be granted under the Velodyne Plan and the 2021 Plan. Awards under the Velodyne Plan may be granted to employees, including officers, and other service providers who were not previously employed by or who did not previously provide services to the Company or a subsidiary of the Company, in each case, prior to February 10, 2023, within the limits provided in the Velodyne Plan. Awards under the 2021 Plan can also be granted to employees, including officers, directors and consultants of the Company and its subsidiaries, in each case, within the limits provided in the 2021 Plan. Options under the Plans will be exercisable at such times and as specified in the Award Agreement (as defined in the Plans) provided that the term of an option or stock appreciation will not exceed ten years . Options granted under the Plans may be Incentive Stock Options (ISOs) or Non-statutory Stock Options, as determined by the Administrator (as defined in the Plans) at the time of grant of an option and subject to the applicable provisions of Section 422 of the Internal Revenue Code and the regulations promulgated thereunder. The exercise price of an option will be no less than 100 % of the fair market value of the shares of common stock on the date of grant. The exercise price of an ISO granted to a 10 % shareholder will be no less than 110 % of the fair market value of the shares on the date of grant and the term of the ISO will not exceed five years . Options granted generally vest over four years and vest at a rate of 25 % upon the first anniversary of the issuance date and 1/36th per month thereafter. The Company accounts for forfeitures as they occur. Restricted stock and restricted stock units granted to employees generally vest as to 25 % of the shares on the first anniversary service date of the grant, and quarterly thereafter so as to be 100 % vested on the fourth anniversary of the vesting commencement date. All participants holding shares of restricted stock will be entitled to all the rights of a stockholder with respect to such shares and have voting power and other rights with respect to such shares, provided, however, that such shares are held in escrow and subject to forfeiture until the shares vested. The exercise price of stock options granted before the Colonnade Merger were determined based on the fair value of stock at the date of grant obtained by the Company on a contemporaneous basis from an independent valuation firm. The valuation firm used a PWERM to estimate the aggregate enterprise value of the Company at each valuation date. The PWERM involves applying appropriate risk adjusted discount rates to future values for the enterprise assuming various possible scenarios. The projections used in connection with these valuations were based on the Company’s expected operating performance over the forecast period. Share value is based on the probability-weighted present value of expected future returns to the equity investor considering each of the likely future scenarios available to the enterprise, and the rights and preferences of each share class. 95 Table of Contents Certain employees have the right to early exercise unvested stock options, subject to rights held by the Company to repurchase unvested shares in the event of voluntary or involuntary termination. The Company accounts for cash received in consideration for the early exercise of unvested stock options as a non-current liability, included as a component of other liabilities in the Company’s consolidated balance sheets. 2021 Incentive Award Plan On March 11, 2021, the board of directors approved the 2021 Plan. 18,558,576 shares of the Company’s common stock were initially reserved for issuance under the 2021 Plan. The 2021 Plan includes an evergreen provision that provides for an annual increase in the number of shares of common stock available for issuance thereunder beginning on January 1, 2022 and ending on January 1, 2031, equal to 5 % of the shares of Company common stock outstanding on the last day of the immediately preceding fiscal year and such smaller number of shares as determined by the board of directors or a committee thereof. 2015 Stock Plan In 2015, the Company established its 2015 Stock Plan. As of March 11, 2021, the effective time of the Colonnade Merger, the Company no longer grants equity awards pursuant to the 2015 Plan, but it continues to govern the terms of outstanding stock options that were granted prior to that date. 2022 Employee Stock Purchase Plan The Company’s 2022 ESPP has been offered to all eligible employees since August 2022 and generally permits certain employees to purchase shares of our common stock through payroll deductions of up to 15 % of their compensation of each offering period, subject to certain limitations. The 2022 ESPP provides offering periods that have a duration of 24 months in length and are comprised of purchase periods of six months in length. The offering periods are scheduled to start on the first trading day on or after May 16 and November 16 of each year. Under the 2022 ESPP, the purchase price of a share under the ESPP equals 85 % of the lesser of the fair market value of a share of common stock on either the first or last day of the applicable offering period of the last day of the applicable purchase period. In May of 2023, the Company increased the share purchase limit under the 2022 ESPP to 3,000 shares of the Company’s common stock per offering period and added Velodyne Lidar, Inc. as a participating employer in the 2022 ESPP. The stock-based compensation expense is calculated as of the beginning of the offering period as the fair value of the 2022 ESPP shares utilizing the Black-Scholes option valuation model and is recognized over the offering period. The first offering period under the 2022 ESPP commenced on September 6, 2022. During fiscal 2023 employees purchased 257,506 shares of common stock under the 2022 ESPP at a weighted-average purchase price of $ 4.56 , with proceeds of $ 1.2 million. Equity Plans Assumed from Acquisition On October 22, 2021 (“Effective Time”), the Company closed the acquisition of Sense pursuant to the Agreement and Plan of Merger and Plan of Reorganization (“Sense Agreement”). Pursuant to the Sense Agreement, upon the completion of the transaction, the Company assumed the Sense 2017 Equity Incentive Plan (the “Sense Plan”). In addition, pursuant to the Sense Agreement, at the Effective Time, each outstanding option to purchase Sense common stock and each award of time-based RSUs in respect of shares of Sense common stock held by Sense employees, in each case, that was outstanding as of immediately prior to the Effective Time was automatically adjusted by the Exchange Ratio (as defined in the Sense Agreement) and converted into an equity award of the same type covering shares of the Company’s common stock, on the same terms and conditions, (including, if applicable, any continuing vesting requirements) under the applicable Sense plan and award agreement in effect immediately prior to the Effective Time (the “Assumed Awards”). In connection with the closing of the acquisition, 82,311 stock options and 449,098 RSUs were assumed. On February 10, 2023, the Company consummated the Velodyne Merger. Pursuant to the Velodyne Merger, the Company assumed the Velodyne Lidar, Inc. 2020 Equity Incentive Plan (the “Velodyne Plan”), and all restricted stock units granted thereunder that were outstanding immediately prior to the consummation of the Velodyne Merger and converted into restricted stock units covering shares of the Company’s common stock (such assumed awards, the “Assumed RSUs”) and all shares of Velodyne Lidar, Inc. restricted stock were converted into shares of Company restricted stock. Each Assumed RSU and award of restricted stock is subject to substantially the same terms and conditions as applied to the related Velodyne restricted stock unit award or restricted stock award immediately prior to the consummation of the Velodyne Merger, except that the number of shares of common stock subject to each Assumed RSU or constituting restricted stock 96 Table of Contents was adjusted in accordance with the terms of the Velodyne Merger Agreement. In connection with the consummation of the Velodyne Merger, 961,012 Assumed RSUs and 728,646 shares of restricted stock were assumed. Pursuant to the terms of the Velodyne Plan, the number of shares reserved for issuance increases on January 1 of each year by the lesser of 820,400 shares or such smaller number of shares determined by the board of directors. In addition, any shares that are subject to awards forfeited and any shares of restricted stock that are forfeited will be available for grant under the Velodyne Plan. As of December 31, 2023, the Company had reserved 1,077,184 shares of the Company’s common stock for issuance under the Velodyne Plan. The Company recognized stock-based compensation for all stock options in the statements of operations and comprehensive loss as follows (in thousands): Year Ended December 31, 2023 2022 Cost of revenue $ 2,854 $ 783 Research and development 24,551 14,611 Sales and marketing 9,966 7,065 General and administrative 20,354 10,862 Total stock-based compensation $ 57,725 $ 33,321 The following table summarizes stock-based compensation expense by award type (in thousands): Year Ended December 31, 2023 2022 RSUs $ 43,772 $ 24,236 Stock Options 7,292 8,851 Employee stock purchase plan 1,476 220 RSAs 5,185 14 Total stock-based compensation $ 57,725 $ 33,321 Stock option activity for the years ended December 31, 2023 and 2022 is as follows: Number of Shares Underlying Outstanding Options Weighted- Average Exercise Price per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding—January 1, 2022 2,412,910 $ 10.10 8.6 $ 100,992 Options exercised ( 213,318 ) 2.00 4,639 Options cancelled ( 98,055 ) 28.60 1,015 Outstanding—December 31, 2022 2,101,536 $ 10.12 7.7 $ 8,285 Options exercised ( 142,117 ) 1.94 617 Options cancelled ( 87,770 ) 82.17 58 Outstanding—December 31, 2023 1,871,649 $ 7.36 6.7 $ 6,191 Vested and expected to vest—December 31, 2023 1,871,649 $ 7.36 6.7 $ 6,191 Exercisable—December 31, 2023 1,528,830 $ 7.26 6.7 $ 5,160 97 Table of Contents The following table summarizes information about stock options outstanding and exercisable at December 31, 2023. Options Outstanding Exercise Price Options Outstanding Weighted Average Remaining Contractual Life (Years) Options Exercisable $ 1.85 274,431 6.6 255,051 $ 2.13 829,595 6.8 663,843 $ 14.22 752,408 6.8 595,653 $ 52.40 15,215 5.2 14,283 1,871,649 1,528,830 No options were granted during the years ended December 31, 2023 and December 31, 2022. As of December 31, 2023, there was approximately $ 4.5 million of unamortized stock-based compensation expense related to unvested stock options that is expected to be recognized over a weighted average period of 0.7 years. Cash received from option exercises and purchases of shares was $ 1.4 million and $ 0.8 million for years ended December 31, 2023 and 2022, respectively. Restricted Stock Units (“RSU”) A summary of RSUs activity under the Plan is as follows: Number of Shares Weighted Average Grant Date Fair Value (per share) Unvested—January 1, 2022 932,657 $ 78.22 Granted during the year 1,571,079 27.41 Canceled during the year ( 407,307 ) 56.01 Vested during the year ( 445,614 ) 61.60 Unvested—December 31, 2022 1,650,815 $ 39.83 Granted during the year 3,976,916 $ 9.05 Canceled during the year ( 793,135 ) $ 21.24 Vested during the year ( 1,759,657 ) $ 25.18 Unvested—December 31, 2023 3,074,939 $ 13.19 As of December 31, 2023, total compensation expense related to unvested RSUs granted to employees, but not yet recognized, was $ 37.6 million, with a weighted-average remaining vesting period of 1.8 years. Restricted Stock Awards A summary of RSA activity is as follows: Number of Shares Weighted Average Grant Date Fair Value (per share) Unvested—December 31, 2022 — $ — Granted 732,110 15.30 Vested ( 351,727 ) 15.30 Unvested—December 31, 2023 380,383 $ 15.30 Stock compensation expense is recognized on a straight-line basis over the vesting period of each award of RSAs. As of December 31, 2023, total compensation expense related to unvested RSAs granted to employees, but not yet recognized, was $ 3.0 million, with a weighted-average remaining vesting period of 1.70 years. The common stock comprising RSAs is issued at grant but, generally, is subject to a risk of forfeiture if the holder terminates service with the Company and its subsidiaries prior to vesting. 98 Table of Contents Note 12. Employee benefit plan In 2018, the Company adopted a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company at its discretion offers matching contributions of up to 4 % of each employee’s annual compensation. The Company provided matching contributions of $ 2.1 million and $ 1.5 million to the plan during the years ended December 31, 2023 and 2022, respectively. Note 13. Net Loss Per Common Share The following table sets forth the computation of basic and diluted net loss per common share attributable to common stockholders (in thousands, except share and per share data): Year Ended December 31, 2023 2022 Numerator: Net loss $ ( 374,110 ) $ ( 138,560 ) Denominator: Weighted average shares used to compute basic and diluted net loss per share 37,042,081 17,792,316 Net loss per common share-basic and diluted $ ( 10.10 ) $ ( 7.79 ) The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive: December 31, 2023 2022 Options to purchase common stock 1,871,649 2,101,716 Public and private common stock warrants 5,232,035 1,599,990 Restricted Stock Units 3,074,939 1,651,019 Unvested early exercised common stock options 16,087 75,028 ESPP shares pending issuance 2,068,574 251,143 Unvested RSAs 376,919 — Total 12,640,203 5,678,896 Note 14. Income taxes Loss before income taxes for the years ended December 31, 2023, 2022 and 2021 are as follows (in thousands): Year Ended December 31, 2023 2022 Domestic $ ( 375,023 ) $ ( 139,295 ) Foreign 1,436 1,040 Total $ ( 373,587 ) $ ( 138,255 ) 99 Table of Contents The components of income tax expense are as follows (in thousands): Year Ended December 31, 2023 2022 Current: Federal $ 84 $ — State 38 62 Foreign 372 243 Total current expense 494 305 Deferred: Federal — — State — — Foreign 29 — Total deferred (benefit) expense 29 — Total income tax expense (benefit) $ 523 $ 305 A reconciliation between the statutory U.S. federal rate and the Company’s effective tax rate is as follows: Year Ended December 31, 2023 2022 Tax at federal statutory rate $ ( 78,453 ) $ ( 29,034 ) State income taxes, net of federal benefit 30 57 Stock compensation 8,185 5,587 Foreign rate differential 99 25 Tax credits — ( 539 ) Fair value changes - warrants 10 ( 1,564 ) Goodwill impairment 35,002 — Valuation allowance 35,856 25,666 Non-deductible expenses ( 412 ) 78 Other 206 29 Total tax provision (benefit) $ 523 $ 305 100 Table of Contents Significant components of the Company’s deferred tax assets and liabilities for federal, state and foreign income taxes are as follows (in thousands): Year Ended December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 222,481 $ 43,990 Credits 9,863 4,828 Stock based compensation 6,359 3,653 Accruals and reserves 10,805 1,718 Deferred revenue 5,017 30 Fixed assets 2,260 2,771 Operating lease liability 9,725 3,631 Capitalized research and development expenditures 53,647 15,875 Gross deferred tax assets 320,157 76,496 Valuation allowance ( 305,007 ) ( 69,608 ) Net deferred tax assets 15,150 6,888 Deferred tax liabilities: Intangible property ( 6,343 ) ( 4,077 ) Operating lease, right of use assets ( 8,388 ) ( 2,811 ) Gross deferred tax liabilities ( 14,731 ) ( 6,888 ) Net deferred tax assets $ 419 $ — The Company has established a full valuation allowance of $ 305.0 million and $ 69.6 million for the years ended December 31, 2023 and 2022, respectively, against its U.S. Federal and state deferred tax assets. The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Due to the history of losses the Company has generated in the past, the Company believes that it is not more likely than not that all of its U.S. Federal and state deferred tax assets can be realized as of December 31, 2023. The valuation allowance on the Company’s net deferred taxes increased by $ 235.4 million and $ 22.2 million during the years ended December 31, 2023 and 2022, respectively. The increase in valuation allowance is primarily attributable to the generation of net operating losses and capitalization of research and development expenditures. As of December 31, 2023, the Company had federal net operating loss carryforwards and state net operating loss carryforwards of approximately $ 844.3 million and $354.1 million, respectively. As of December 31, 2023, federal net operating loss carryforwards generated after December 31, 2017 will be carried forward indefinitely and the state net operating loss carryforward begins expiring in 2028 through 2043. As of December 31, 2023, the amount of federal net operating loss that does not expire is $ 835.8 million. As of December 31, 2023, the Company had federal and state research and development credit carryforwards of approximately $ 5.0 million and $ 12.8 million, respectively. As of December 31, 2023 the federal credits will expire starting in 2035, if not utilized and state credits carryforward indefinitely. The Tax Reform Act of 1986 and similar state legislation impose substantial restrictions on the utilization of the net operating losses and tax credit carryforwards in the event there is a change in ownership as provided by Section 382 and Section 383 of the Internal Revenue Code and similar state provisions. We have completed an analysis of Section 382 ownership changes in our stock through February 10, 2023 and have concluded that we have experienced ownership changes that will result in limitations in our ability to use certain of our tax credit carryforwards. The Company may experience ownership changes in the future as a result of future transactions in our stock. If it is determined that we undergo one or more ownership changes in the future, then our ability to utilize our U.S. Federal and state net operating loss carryforwards or other tax attributes may be limited or eliminated. 101 Table of Contents The balance of gross unrecognized tax benefits as of December 31, 2023, and 2022 was $ 24.8 million and $ 18.8 million, respectively. Out of the total unrecognized tax benefits, $ 0.5 million at December 31, 2023, if recognized, would impact our effective tax rate in the period of recognition. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2023 and 2022, the Company has accrued immaterial interest and penalties related to uncertain tax positions. The following table sets forth the change in the uncertain tax positions for the years ended December 31, 2023 and 2022 (in thousands): Year Ended December 31, 2023 2022 Balance at the beginning of the year $ 18,812 $ 18,534 Decreases: For prior years’ tax positions ( 1,958 ) ( 64 ) Increases: For current year’s tax positions — 320 For prior years’ tax positions 7,901 22 Balance at the end of the year $ 24,755 $ 18,812 The Company files income tax returns in the U.S. for Federal, California, and other US states, as well as miscellaneous foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The earliest year open for examination is the 2016 tax year. The Company’s 2017 and 2018 tax years are currently under IRS examination. The Company believes that an adequate provision has been made for any adjustments that may result from the tax examination. Although the timing of the resolution, settlement, and closure of the examination is not certain, the Company does not believe it is reasonably possible that the Company’s unrecognized tax benefits will materially change in the next 12 months. All of the net operating losses and research and development credit carry-forwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would begin in the year of the utilization. 102 Table of Contents Note 15. Revenue Revenue from the sale of lidar sensor kits, which is recognized at a point in time, was $ 83.3 million and $ 41.0 million for the years ended December 31, 2023 and 2022, respectively. Revenue from the sale of licenses and services are not material for any period presented and, therefore, not presented separately. The following table presents total revenues by geographic area based on the location products were shipped to and services provided (in thousands): Year Ended December 31, 2023 2022 Americas $ 45,744 $ 15,977 Asia-Pacific 12,929 9,510 Europe, Middle East and Africa 24,606 15,542 Total $ 83,279 $ 41,029 There were no customers that accounted for more than 10% of revenue during the years ended December 31, 2023 and 2022 . Country that accounted for more than 10% of revenue was as follows: Year Ended December 31, 2023 2022 United States 53 % 36 % Revenue contract balances Timing of revenue recognition may differ from the timing of invoicing to customers. An unbilled receivable is recorded in instances when revenue is recognized prior to invoicing, and amounts collected in advance of services being provided are recorded as deferred revenue. Contract assets are generated when contractual billing schedules differ from revenue recognition timing. Unbilled receivables A receivable for multi-year licensing contracts is generally recorded upon invoicing. A receivable for multi-year license contracts is recorded upon delivery, whether or not invoiced, to the extent the Company has an unconditional right to receive payment in the future related to those licenses. As of December 31, 2023, the current portion of these unbilled receivables in the amount of $ 3.0 million, primarily consisting of unbilled receivables from multi-year license contracts, is included in “Accounts receivable, net” on the consolidated balance sheet. Contract Assets Contract assets primarily relate to the Company’s rights to consideration under license arrangements when the licenses have been transferred to the customers, but payment is contingent upon a future event, other than the passage of time (i.e. type of unbilled receivable) and for which the Company does not have an unconditional right at the reporting date. Contract asset also arises when the timing of billing differs from the timing of revenue recognized, such as when revenue is recognized on guaranteed minimum payments at the inception of the contract when there is not yet a right to invoice in accordance with contract terms and payment is contingent upon future event. Contract Liabilities Contract liabilities consist of deferred revenue, customer advanced payments and customer deposits. Deferred revenue includes billings in excess of revenue recognized related to product sales, licenses, extended warranty and other services revenue, and is recognized as revenue when the Company performs under the contract. The long-term portion of deferred revenue, mostly related to obligations under license arrangements and extended warranty, is classified as non-current contract liabilities and is included in other non-current liabilities in the Company’s consolidated balance sheets. Customer advanced payments represent required customer payments in advance of product shipments according to customer’s payment term. Customer advance payments are recognized as revenue when control of the performance obligation is transferred to the customer. Customer deposits represent consideration received from a customer which can be applied to future product or service purchases, or refunded. 103 Table of Contents Contract assets and liabilities are presented net at the individual contract level in the consolidated balance sheet and are classified as current or long-term based on the nature of the underlying contractual rights and obligations. December 31, 2023 December 31, 2022 Contract liabilities, current Deferred revenues from multi-year licensing contracts $ 4,723 $ — Other contract liabilities 8,162 402 Contract liabilities, long-term portion Deferred revenues from multi-year licensing contracts $ 3,997 $ — Other contract liabilities 970 342 Total contract liabilities $ 17,852 $ 744 Deferred revenues from multi-year licensing contracts mainly represent minimum royalty payments received from licensees relating to long-term IP license contracts for which the Company has future obligations under the license agreements. Royalties from the IP licenses are recognized at the later of the period the sales occur or the satisfaction of the performance obligation to which some or all of the royalties have been allocated. The Company evaluated its performance obligations under multi-year licensing contracts and did not recognize any revenue under such licensing contracts in 2023 because the Company concluded there is significant uncertainty associated with resolving the Company’s performance. Other contract liabilities mainly relates to one $ 6.6 million multiyear contract entered in 2023 with a customer to sell its products. During the twelve months ended December 31, 2023, the Company partially satisfied the related performance obligation and recognized $ 0.7 million revenue that was included in the contract liabilities balance. As of December 31, 2023, $ 5.9 million remained deferred until a future product delivery date. The following table provides information about contract liabilities (remaining performance obligations) and the significant changes in the balances during the years ended December 31, 2023 and 2022 (in thousands). Contract Liabilities Ending balance as of December 31, 2021 $ 280 Net revenue deferred in the period 621 Revenue recognized that was included in the contract liability balance at the beginning of the period ( 157 ) Ending balance as of December 31, 2022 744 Contract liabilities acquired in the Velodyne Merger 8,384 Net revenue deferred in the period 9,126 Revenue recognized that was included in the contract liability balance at the beginning of the period ( 402 ) Ending balance as of December 31, 2023 $ 17,852 104 Table of Contents Note 16. Restructuring In connection with the closing of the Velodyne Merger, in the year ended December 31, 2023, the Company initiated and completed actions to reduce operating expenses, which included a reduction in force and the closure of its India facility (see Note 8. Leases) (collectively, the “Restructuring Initiatives”). Non-cash stock-based compensation charge related to the vesting of share-based awards for employees who were terminated related to a "double-trigger provision" that provided for acceleration in the event of a change in control and subsequent termination of the employee from the Company. The following table presents Restructuring Initiatives charges incurred (in thousands): December 31, 2023 Employee termination and associated benefits $ 15,172 Stock-based compensation expense 7,139 Long-lived asset write-down 804 Total $ 23,115 For the year ended December 31, 2023, the Restructuring Initiatives were recorded as follows (in thousands): Employee termination and associated benefits Stock-based compensation expense Long-lived asset write-down Total Cost of product revenue $ 1,293 $ 70 $ — $ 1,363 Research and development 6,758 4,922 804 12,484 Sales and marketing 2,322 1,225 — 3,547 General and administrative 4,799 922 — 5,721 Total $ 15,172 $ 7,139 $ 804 $ 23,115 The following table presents a roll forward of the Restructuring Initiatives liability, which is recorded in accrued expenses in the consolidated balance sheets for the twelve months ended December 31, 2023 (in thousands): Employee termination and associated benefits Beginning balance $ — Additions as a result from Velodyne Merger 422 Restructuring Initiative expenses related to one-time employee termination and associated benefits 15,172 Amount paid during the period ( 15,331 ) Balance at December 31, 2023 $ 263 Note 17. Subsequent Events On March 13, 2024, the parties to the previously disclosed securities class action lawsuit entitled Moradpour v. Velodyne Lidar, Inc., et al., No. 3:21-cv01486-SI (N.D. Cal.) filed a stipulation of settlement to settle this lawsuit, without any admission or concession of wrongdoing or liability by Velodyne or the individual defendants. The settlement is subject to, among other things, final documentation and court approval. Defendants entered into the proposed settlement to eliminate the uncertainty, burden, distraction, and expense of further protracted litigation. Defendants continue to deny all claims and allegations in the litigation, including but not limited to any claims of wrongdoing or impropriety, and the proposed settlement does not constitute, contain or reflect any admission of wrongdoing or liability by Velodyne, the individual defendants, or Ouster. The proposed settlement provides for a payment of $ 27.5 million, of which the Company expects approximately $ 23.4 million to be funded by insurance proceeds. See Note 9. Commitments and Contingencies for additional information regarding the settlement. 105 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.