Unless otherwise indicated, references in this section to "we," "our," "us," and
"Cepton" generally refer to Cepton Technologies, Inc. and its consolidated
subsidiaries prior to the Business Combination and to Cepton and its
consolidated subsidiaries after giving effect to the Business Combination. The
following discussion and analysis of our results of operations and financial
condition should be read in conjunction with the condensed consolidated
financial statements included in this Report. This discussion contains
forward-looking statements based upon our current expectations, estimates and
projections that involve risks and uncertainties. Actual results could differ
materially from those anticipated in these forward-looking statements due to,
among other considerations, the matters discussed under "Risk Factors" and
"Cautionary Note Regarding Forward-Looking Statements" herein.



Certain amounts that appear in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") may not sum due to
rounding. Percentage amounts included in this MD&A have not in all cases been
calculated on the basis of such rounded figures, but on the basis of such
amounts prior to rounding. For this reason, percentage amounts in this MD&A may
vary from those obtained by performing the same calculations using the figures
in our condensed consolidated financial statements included elsewhere in this
Report. Terms used but not defined in this MD&A shall have the meanings ascribed
to such terms in this Report.



Business Overview


Cepton is focused on the deployment of high performance, mass-market lidars to
deliver safety and autonomy across the Automotive and Smart Infrastructure
markets. By adopting our solutions, our customers can enable safety and autonomy
applications across a broad range of end-markets including our primary market,
advanced driver assistance systems ("ADAS") in consumer and commercial vehicles,
which we believe represents not just the largest market opportunity for lidar
applications over the next decade, but also the market with the best potential
for near term mass-market commercialization.



Since the inception of our company in 2016, building lidars for broad market
adoption has been our guiding principle. Mass-market deployment guided not just
our end-market focus, but also our product design choices, our areas of
technological innovation, and our approach to manufacturing, and our
go-to-market strategy and partnerships. To pursue mass-market adoption, our
value proposition has focused on developing a lidar that achieves high
performance with automotive grade reliability at competitive prices. Our thesis
was that lidar would gain broad based adoption only when solutions strike the
right balance across three key facets of performance, cost and reliability.



Based on this approach, we have gained acceptance for our technology in the
automotive market. In 2019, following approximately three years of rigorous
engagement and working alongside our automotive tier 1 partner, Koito, we were
awarded the largest known ADAS lidar series production award in the industry to
date by General Motors ("OEM-B"). This award includes multiple platforms and
vehicle models, with an estimated production start in 2023.



As a Silicon Valley-based company led by recognized technical experts in the
optical field, technology innovation is at the core of our company. We developed
a comprehensive lidar platform consisting of proprietary components including
our breakthrough imaging technology and our system-on-a-chip lidar engine
application-specific integrated circuit, a portfolio of automotive-grade and
industrial-grade long-range and near-range lidars, a software layer enabling the
integration of automotive functions, and feature rich perception software
capabilities.



Business Combination



On February 10, 2022, the Business Combination was consummated and as a result,
a subsidiary of Growth Capital Acquisition Corp. ("GCAC"), GCAC Merger Sub Inc.,
merged with and into Cepton Technologies, Inc. ("Legacy Cepton"). GCAC changed
its name to Cepton, Inc., and the Company is now listed on the Nasdaq under the
symbol "CPTN". Legacy Cepton is deemed to be the accounting predecessor and
Cepton, Inc. is the successor registrant with the U.S. Securities and Exchange
Commission ("SEC"), which means that Legacy Cepton's financial statements for
previous periods will be disclosed in Cepton, Inc.'s future periodic reports
filed with the SEC.



                                       27





The Business Combination was accounted for as a reverse recapitalization. Under
this method of accounting, GCAC is treated as the acquired company for financial
statement reporting purposes. This determination is primarily based on Legacy
Cepton stockholders comprising a majority of the voting power of the combined
entity and having the ability to nominate the majority of the governing body of
the combined entity, Legacy Cepton's senior management comprising the senior
management of the combined entity, and Legacy Cepton's operations comprising the
ongoing operations of the combined entity. For accounting purposes, the combined
entity represents a continuation of the financial statements of Legacy Cepton
and the Business Combination is treated as the equivalent of Legacy Cepton
issuing stock for the net assets of GCAC, accompanied by a recapitalization. See
Note 2 to the condensed consolidated financial statements in this Report for
further information regarding the Business Combination.



As a result of our having become a publicly traded company, we have hired, and
will need to hire additional personnel and implement procedures and processes to
address public company regulatory requirements and customary practices. We have
incurred, and expect to continue to incur, additional annual expenses as a
public company for, among other things, directors' and officers' liability
insurance, director fees and additional internal and external accounting and
legal and administrative resources, including increased audit and legal fees.



Market Conditions



The global economy, including the financial and credit markets, has recently
experienced significant volatility and disruptions impacted by the COVID-19
pandemic, increases in inflation rates, the ongoing conflict in Ukraine and
rising fuel prices, rising interest rates, declines in consumer confidence,
declines in economic growth, and uncertainty about economic stability. While we
believe the COVID-19 pandemic will act as a long-term catalyst for our vehicle
sales and wider adoption of ADAS programs, the severity and duration of the
impact of broader macroeconomic conditions on our business is dynamic and cannot
be predicted.


For more information on our business and the risks related to our macroeconomic environment, please see the section entitled “Risk Factors”.

Key Factors Affecting Cepton’s Results of Operations




We believe that our future performance and success depends, to a substantial
extent, on our ability to capitalize on the following opportunities, which in
turn is subject to significant risks and challenges, including those discussed
below and in the section entitled "Risk Factors."



Serial production awards in the automotive market

An important part of our mission is to deploy high performance, mass-market
lidar in the automotive market. Within the automotive market, we believe that
passenger car ADAS applications represent the largest opportunity but also have
the most stringent requirements for reliability, cost, and performance. Major
automotive OEMs typically undergo several years of planning, technology
selection, and vehicle integration work before introducing new and important
technologies in their vehicle offerings. We anticipate that lidar, as a new
sensor that improves safety and enhances autonomy, will undergo the same
technology introduction and validation process as similar technologies in the
past, such as anti-lock braking systems or stability control systems. The number
of vehicle platforms and vehicle models that will be equipped with lidar will
depend on OEM product planning, vehicle integration, and marketing schedules.
Once a lidar supplier is chosen, the number of awarded vehicle platforms and
vehicle models is likely to increase over time. This is because the development
efforts of integrating lidar into the OEM's product offerings is leveraged
across multiple vehicle classes and platforms to maximize the OEM's return
on
investment.



                                       28




For example, our series production award from OEM-B initially included four
vehicle models and was subsequently updated to include nine vehicle models
spanning different classes of vehicles from luxury sedans to mid-level passenger
cars to SUVs and trucks. These vehicles include traditional internal combustion
engine types as well as electric drive train types. We expect additional vehicle
models to be added to this series production award over time, with an
anticipated start of production in 2023 and significant volume increase
anticipated in the following years. However, if the targets of this series
production award are not realized, or if OEM-B were to terminate or
significantly alter or delay its OEM-B series production award and/or alter its
relationship with Cepton or with Koito in a manner that is adverse to Cepton or
OEM-B would delay the introduction of the vehicle models that are part of the
series production award, Cepton's business would be materially adversely
affected. Similarly, if Cepton is unable to maintain its relationship with
Koito, or the terms of Cepton's arrangement with Koito with respect to the OEM-B
program differs from Cepton's expectations, including with respect to volume,
pricing, and timing, then Cepton's business and prospects would be materially
adversely affected.


Adoption of lidar solutions in Automotive and Smart Infrastructure markets



In an endless pursuit of safety and product differentiation, many leading
automotive OEMs have decided to include lidar in their next generation of
vehicles for increased safety and higher levels of autonomy. The speed of lidar
adoption depends on many factors, including sensor performance, reliability, and
cost, as well as the time it takes to win large series production awards. Large
automotive series production awards usually take a number of years to secure but
once awarded, the production award typically covers the entire duration of a
typical vehicle model period of five to seven years for consumer vehicles. In
the case of trucking applications, the production period of a typical model may
exceed seven years in many cases. We are currently engaged in discussions with
all of the top 10 global automotive OEMs (by ADAS and AV program volumes). We
believe that our current series production award from OEM-B is a validation of
our technology leadership, product maturity, and potential for scalability that
favorably positions us for additional series production awards at other large
global OEMs.



While lidar adoption in the automotive market may take multiple years to
materialize, smart infrastructure end markets could adopt lidar solutions at a
more rapid pace. Applications within smart infrastructure vary widely from
tolling to security, to delivery and logistics. These applications are typically
project based and require certain levels of customization to deliver an
end-to-end solution. To address opportunities in the smart infrastructure space,
we partner with system integrators who leverage our lidar hardware as well as
our Helius perception software to provide solutions unique to each opportunity.
We expect to grow our system integrator partnership network to further drive the
adoption of lidar in smart infrastructure applications.



We expect our revenue to increase as adoption increases in the automotive and
smart infrastructure markets; however, the rate of adoption may vary due to many
factors, including but not limited to competing technologies, time to market,
changes in macroeconomic conditions, including rising inflation and interest
rates, geopolitical conflicts and tensions, any of which may impact the pace and
magnitude of lidar adoption and our revenues.



Product Cost and Margins


To drive mass-market adoption of lidar in automotive applications, product cost
must be controlled. As such, cost is one of the primary design criteria that we
focused on from the very beginning. Design choices were carefully evaluated to
create products with the best overall balance between performance, reliability,
and cost. Working with our partners, we expect to continue driving costs down as
volumes increase and we achieve higher margin unit economics in the future.



In the case of our series production award from OEM-B, we are working with our
tier 1 partner, Koito, on manufacturing in order to effectively manage supply
chain, component costs, and manufacturing costs to meet margin expectations at
scale. Pursuant to our arrangement with Koito, we license our technology and
sell components to Koito, who can manufacture and sell lidars using our
technology. We expect our gross margin to rapidly increase as material costs
decrease and fixed manufacturing overhead costs are absorbed over larger
production volumes and as other economies of scale are achieved.



In the smart infrastructure space, average selling price of a lidar solution may
be higher than that in the automotive space due to a number of reasons, such as
unit volume, level of customization, and additional software content. At the
same time, the cost of production is also higher due to lower levels of
economies of scale and higher levels of system integration requirements.



                                       29





Due to recent supply chain shortages, lead times for some of our products are
increasing, which may lead to a significant mismatch between supply and demand,
giving rise to product shortages for both the Company and our customers, making
our demand forecast more uncertain. During fiscal year 2022, we made continued
efforts in broadening our supply base to scale our Company and better serve
customer demand. Recent market conditions, including the impacts from the
COVID-19 pandemic and the war in Ukraine, have strained global supply chains and
could result in a shortage of key materials that our suppliers require to
satisfy our needs. We expect continued supply constraints for some of our
products, through the end of fiscal year 2022 and potentially beyond. We have
placed orders for certain supply in advance of our historical lead times, paid
premiums to secure future supply and capacity, and may need to continue to do so
in the future. Placing orders in advance of our historical lead times to secure
supply in a constrained environment may result in excess inventory, cancellation
penalties, or other charges if there is a partial or complete reduction in
long-term demand for our products. These actions may also increase our product
costs and decrease gross margin, in addition to increased overall costs as a
result of rising inflation. Increased costs for components, logistics and other
supply chain expenses, driven in part by inflation and supply chain shortages,
have negatively impacted, and may continue to negatively impact, our gross
margin.



If we cannot generate our expected revenues, margins or income from operations,
we may be required to raise additional debt or equity capital, which may not be
available or may only be available on terms that are onerous to our
stockholders.



End Market Concentration



We believe that the automotive market represents a large portion of the total
addressable market and large global automotive OEMs represent the majority of
unit volume demand as well as leaders in active safety and autonomy. To drive
mass-market commercialization of our lidar solutions, we have focused on top
automotive OEMs and are currently engaged with all of the top 10 global
automotive OEMs based on vehicle production volume rankings for 2019. Series
production awards from top OEMs tend to be large and long-term in nature. While
we continue to expand our system integrator partnership network to address
opportunities in the smart infrastructure markets, program awards tend to be
smaller and short-term in nature as compared to those in the automotive
end-markets. As such, we expect a large portion of our future revenue to come
from the automotive end-market.



Components of operating results



Revenue


We categorize our revenue into (1) lidar sensor and prototype revenue and (2) development revenue.




Lidar sensor and prototype revenue is primarily derived from the sale of
components and license of technologies to tier 1 suppliers for mass market ADAS
applications in the automotive market and the sale of lidar sensors directly to
end-user customers in the Smart Infrastructure markets. Our lidar sensors are
used in applications such as advanced driver assistance systems, autonomous
vehicles, and intelligent transportation systems. Our customers include leading
original equipment manufacturers and suppliers within the automotive and smart
infrastructure industries. We anticipate strong revenue growth in the
foreseeable future as we continue to form strategic partnerships and as the
primary source of revenue shifts from prototype sales to sales of commercialized
production-ready lidar sensors.



Development revenue represents arrangements with tier 1 suppliers focused on the
specific customization of our proprietary lidar capabilities to the customers'
applications, typically involving development of customized lidar sensor
prototypes for those customers. The timing of revenue recognition for
development contracts is determined for each performance obligation based on the
unique facts and circumstances within each development arrangement, which
generally results in recognition at a point in time. This assessment is made at
the outset of the arrangement for each performance obligation.



Revenue is primarily derived from the sale of components and license of
technologies to tier 1 suppliers for mass market ADAS applications in the
automotive market and the sale of lidar sensors directly to end-user customers
in the Smart Infrastructure markets. Our lidar sensors are used in applications
such as advanced driver assistance systems, autonomous vehicles, and intelligent
transportation systems. Our customers include leading original equipment
manufacturers and suppliers within the automotive and smart infrastructure
industries.



                                       30





Cost of Revenue



Cost of revenue includes the manufacturing cost of our lidar sensors and
components, which primarily consists of personnel-related costs directly
associated with our manufacturing organization, and amounts paid to our
third-party contract manufacturers and vendors. Our cost of revenue also
includes cost of component inventory, product testing costs, an allocated
portion of overhead costs, warranty expense, excess and obsolete inventory, and
shipping costs. We expect cost of revenue to increase in absolute dollars in
future periods. Increased costs for components, logistics and other supply chain
expenses, driven in part by inflation and supply chain shortages, have
negatively impacted, and may continue to negatively impact, our cost of revenue.



Gross Margin



Our gross margin in future periods will depend on a variety of factors including
market conditions that may impact our pricing; product mix changes between
established products and new products; excess and obsolete inventories; our cost
structure for manufacturing operations, including third-party manufacturers,
relative to volume. Our gross margin varies by product. We expect our gross
margins to fluctuate over time, depending on the factors described above.
Increased costs for components, logistics and other supply chain expenses,
driven in part by inflation and supply chain shortages, have negatively
impacted, and may continue to negatively impact, our gross margin.



Operating Expenses


Research and development costs




Research and development expenses consist primarily of personnel-related costs,
material expenses, permits, licenses, and professional services costs directly
associated with our research and development activities. The remainder primarily
relates to the allocated portion of overhead costs. Our research and development
efforts are focused on enhancing and developing additional functionality for our
existing products and on new product development, including new releases and
upgrades to our lidar sensors. We expense research and development costs as
incurred. We expect our research and development expenses to increase in
absolute dollars as we increase our investment in software development to
broaden the capabilities of our solutions and introduce new products and
features.



Selling, general and administrative expenses




Our selling, general and administrative expenses consist primarily of
personnel-related costs, professional services costs, and advertising expenses
directly associated with our sales and general and administrative activities.
The remainder primarily relates to the allocated portion of overhead costs. We
expect our selling expenses will increase in absolute dollars over time as we
hire additional sales personnel, increase our marketing activities, grow our
domestic and international operations, and build brand awareness. We expect to
incur additional general and administrative expenses as a result of operating as
a public company, including expenses related to compliance with the rules and
regulations of the SEC and stock exchange listing standards, additional
insurance expenses (including directors' and officers' insurance), investor
relations activities, and other administrative and professional services costs.
We also expect to increase the size of our general and administrative function
to support the foregoing as well as the growth of our business.



Change in fair value of liabilities related to price supplements and warrants

The change in fair value of earnout and warrant liabilities consists of the
change in fair value of earnout and warrant liabilities assumed in connection
with the Business Combination as well as the change in fair value of other
warrant liability. We expect continued financial statement volatility from the
fair value adjustments at the end of each reporting period or until the Earnout
Shares are issued upon the attainment of common share price milestones or
through the exercise of the warrants.



                                       31





Other Income (Expense), Net



Other income (expense), net consists primarily of foreign currency transaction
gains and losses related to the impact of transactions denominated in a foreign
currency other than the U.S. dollar and gains or losses related to the
extinguishment of debt and issuance of common stock under the Lincoln Park
Agreement.



Interest income (expense), net

Interest income (expense), net consists primarily of interest earned on our cash
equivalents and short-term investments in commercial paper, corporate debt
securities, and available-for-sale securities. These amounts will vary based on
our cash, cash equivalents and short-term investment balances, and also with
market rates. Our interest income is fully offset by interest expense from our
debt financings as well as accretion expense from our short-term investments.



Provision for Income Taxes



Our provision for income taxes consists of federal, state, and foreign current
and deferred income taxes. As we expand the scale and scope of our international
business activities, any changes in the United States and foreign taxation of
such activities may increase our overall provision for income taxes in the
future.



We have a full valuation allowance for net deferred tax assets, including
federal and state net operating loss carryforwards and research and development
credit carryforwards. We expect to maintain this valuation allowance until it
becomes more likely than not that the benefit of our federal and state deferred
tax assets are realizable by way of expected future taxable income.



We believe that we have adequately reserved for our uncertain tax positions,
although we can provide no assurance that the final outcome of these matters
will not be materially different. To the extent that the final outcome of these
matters is different than the amounts recorded, such differences will affect the
provision for income taxes in the period in which such determination is made and
could have a material impact on our financial condition and results of
operations.



                                       32




Results of operations for the three and nine months ended September 30, 2022 and 2021

The results of operations presented below should be reviewed in conjunction with
the condensed consolidated financial statements and notes included elsewhere in
this Report. The following table sets forth our condensed consolidated results
of operations data for the periods presented:


                         Three Months Ended                                        Nine Months Ended
                           September 30,             Change       Change             September 30,           Change        Change
                        2022            2021           $             %            2022          2021            $             %
                       (dollars in thousands)
Lidar sensor and
prototype revenue    $    1,778       $     656     $  1,122           171
%    $   4,642     $   1,989     $   2,653           133 %
Development
revenue                      26           1,235       (1,209 )         (98 %)       1,207         1,235           (28 )          (2 )%
Total revenue        $    1,804       $   1,891     $    (87 )          (5 %)   $   5,849     $   3,224     $   2,625            81 %
Lidar sensor and
prototype cost of
revenue                   1,872             617        1,255           203 %        5,608         3,053         2,555            84 %
Development cost
of revenue                    3             376         (373 )         (99 %)         600           376           224            60 %
Cost of revenue           1,875             993          882            89 %        6,208         3,429         2,779            81 %
Gross margin
(loss)                      (71 )           898         (969 )          NM 

(359) (205) (154) 75%


Operating expenses
Research and
development               8,227           6,331        1,896            30 %       24,368        17,321         7,047            41 %
Sales, general,
and administrative        6,722           3,520        3,202            91 %       21,954         9,992        11,962           120 %
Total operating
expenses                 14,949           9,851        5,098            52 %       46,322        27,313        19,009            70 %

Operating loss (15,020 ) (8,953 ) (6,067 ) 68% (46,681 ) (27,518 ) (19,163 ) 70%

Change in fair
value of earnout
liability                (1,440 )             -       (1,440 )          NA         70,868             -        70,868            NA
Change in fair
value of warrant
liability                  (135 )             -         (135 )          NA          2,549             -         2,549            NA
Other income
(expense), net             (493 )         1,096       (1,589 )        (145 %)        (487 )       1,098        (1,585 )        (144 )%
Interest income
(expense), net             (318 )             -         (318 )          NA         (1,597 )          14        (1,611 )          NM
Income (loss)
before income
taxes                   (17,406 )        (7,857 )     (9,549 )         122 %       24,652       (26,406 )      51,058            NM

Provision for
income taxes                 (5 )            (5 )          -             -

% (21 ) (16 ) (5 ) 31% Net income (loss) ($17,411) ($7,862) ($9,549) 121% $24,631 ($26,422) $51,053

            NM




NA: Not applicable
NM: Not meaningful


Comparison of three and nine months ended September 30, 2022 and 2021



Revenue



Lidar sensor and prototype revenue increased by $1.1 million, or 171%, to $1.8
million for the three months ended September 30, 2022, from $0.7 million for the
three months ended September 30, 2021. Approximately $1.1 million of the
increase was driven by an increase in lidar sales volume and approximately $0.2
million related to new products sold during the period. The increase was
partially offset by a $0.3 million decrease driven by decreased lidar sensor
average sales price driven by customer projects maturing from proof-of-concept
phase to deployment phase.



                                       33




Development revenue decreased by $1.2 million, or 98%, to $26 thousand for the
three months ended September 30, 2022, from $1.2 million for the three months
ended September 30, 2021. The decrease relates to the achievement of milestones
defined under the development work order project issued by Koito in 2021. During
the three months ended September 30, 2021, the Company satisfied milestones
defined under the development work order projects and recognized development
revenue of $1.2 million.



Lidar sensor and prototype revenue increased by $2.7 million, or 133%, to $4.6
million for the nine months ended September 30, 2022, from $2.0 million for the
nine months ended September 30, 2021. Approximately $2.3 million of the increase
was driven by an increase in lidar sales volume and approximately $1.4 million
related to new products sold during the period. The increase was partially
offset by a $0.9 million decrease driven by decreased lidar sensor average sales
price driven by customer projects maturing from proof-of-concept phase to
deployment phase.



The variation in development revenues was not significant compared to the nine months ended
September 30, 2021 at the nine months ended September 30, 2022.



Cost of Revenue



Lidar sensor and prototype cost of revenue increased by $1.3 million, or 203%,
to $1.9 million for the three months ended September 30, 2022, from $0.6 million
for the three months ended September 30, 2021. The increase resulted primarily
from an increase in sales volume of $0.9 million and inventory adjustments
write
downs of $0.4 million.



Development cost of revenue decreased by $0.4 million, or 99%, to $3 thousand
for the three months ended September 30, 2022, from $0.4 million for the three
months ended September 30, 2021. The decrease resulted primarily from the
decrease in development revenue described above.



Lidar sensor and prototype cost of revenue increased by $2.6 million, or 84%, to
$5.6 million for the nine months ended September 30, 2022, from $3.1 million for
the nine months ended September 30, 2021. The increase resulted primarily from
an increase in sales volume of $2.0 million and standard costing adjustments of
$0.5 million.



Development cost of revenue increased by $0.2 million, or 60%, to $0.6 million
for the nine months ended September 30, 2022, from $0.4 million for the nine
months ended September 30, 2021. The increase resulted primarily from the
achievement of milestones and cost inputs defined under different development
work order projects.



Operating Expense


Research and development expense increased by $1.9 million, or 30%, to $8.2
million for the three months ended September 30, 2022, from $6.3 million for the
three months ended September 30, 2021, resulting primarily from a $1.4 million
increase in personnel related costs, $0.3 million increase in permits and
license fees, and a $0.2 million increase in professional services fees.



Research and development expense increased by $7.0 million, or 41%, to $24.4
million for the nine months ended September 30, 2022, from $17.3 million for the
nine months ended September 30, 2021, resulting primarily from a $3.8 million
increase in personnel related costs, a $1.1 million increase in materials costs,
a $1.1 million increase in professional services costs, $0.6 million in rent,
permits and license fees, and $0.3 million increase in software subscription and
equipment fees.



Sales, general and administrative expense increased by $3.2 million, or 91%, to
$6.7 million for the three months ended September 30, 2022, from $3.5 million
for the three months ended September 30, 2021, resulting primarily from a $1.4
million increase in personnel related costs, a $1.0 million increase in
directors and officers insurance related costs, $0.6 million in professional
services costs, and a $0.3 million increase in other general and administrative
costs.



                                       34





Sales, general and administrative expense increased by $12.0 million, or 120%,
to $22.0 million for the nine months ended September 30, 2022, from $10.0
million for the nine months ended September 30, 2021, resulting primarily from a
$4.0 increase in personnel related costs, a $2.7 million increase in transaction
costs related to the Business Combination attributable to liability-classified
instruments, $2.7 million increase in directors and officers insurance related
costs, and a $2.5 million increase in other general and administrative costs.



Change in fair value of liabilities related to price supplements and warrants




The earnout liability was assumed in connection with the Business Combination.
The fair value of the earnout liability increased by $1.4 million resulting in
the recognition of an unrealized loss for the three months ended September 30,
2022. This is primarily due to an increase in the Company's common share price
for the three months ended September 30, 2022. The fair value of the earnout
liability decreased by $70.9 million resulting in the recognition of an
unrealized gain for the nine months ended September 30, 2022. This is primarily
due to a decrease in the Company's common share price from February 10, 2022 to
September 30, 2022.



The fair value of the warrant liability increased by $0.1 million for the three
months ended September 30, 2022 resulting from a $0.1 million unrealized loss
due to the mark-to-market adjustment on private placement warrants. The fair
value of the warrant liability decreased by $2.5 million for the nine months
ended September 30, 2022 resulting from a $1.8 million unrealized gain due to
the mark-to-market adjustment on private placement warrants and $0.7 million
realized gain due to the exercise of certain liability classified warrants in
connection with the Business Combination.



Other Income (Expense), net



Other income (expense), net decreased by $1.6 million for the three and nine
months ended September 30, 2022 resulting primarily from an one-time gain on
extinguishment of debt of $1.1 million related to prior year borrowings in 2021
and increase in expense on issuance of common stock to Lincoln Park of $0.2
million for the three and nine months ended September 30, 2022.



Interest income (expense), net




Interest income (expense), net decreased by $0.3 million for the three months
ended September 30, 2022 resulting primarily from an increase in interest
expense of $0.3 million related to borrowings under the Trinity Loan Agreement.
Interest income decreased by $1.6 million for the nine months ended September
30, 2022 resulting primarily from an increase in interest expense of $1.5
million related to borrowings under the Trinity Loan Agreement. The remaining
$0.1 million relates to a decrease in interest income from short-term
investments.



Income Taxes



Our provision for income taxes remained consistent for the three and nine months
ended September 30, 2022 and 2021. We provided a full valuation allowance on our
net U.S. federal and state deferred tax assets for the three and nine months
ended September 30, 2022 and 2021. For the nine months ended September 30, 2022,
we had U.S. federal and state tax-effected net operating loss carryforwards
available to reduce future taxable income, of which post-2017 Federal net
operating loss will be carried forward indefinitely and post-2017 Federal net
operating loss carryover and state net operating loss carryover and state net
operating loss carryover will expire on varying dates.



Cash and capital resources



Sources of Liquidity



As of September 30, 2022, we had cash, cash equivalents, and short-term
investments totaling $21.6 million, comprised of money market funds, commercial
paper, U.S. Treasury and Agency securities, corporate debt securities, and other
available-for-sale securities held for working capital purposes. We believe that
our current cash position, including our available borrowings and Purchase
Agreement with Lincoln Park, will be sufficient to satisfy our foreseeable
liquidity needs and capital expenditure requirements, including for at least the
next twelve months.



                                       35





On November 24, 2021, we entered into a Purchase Agreement with Lincoln Park,
pursuant to which Lincoln Park has agreed to purchase up to $100.0 million of
common stock (subject to certain limitations contained in the Purchase
Agreement) from time to time over a 36-month period after the consummation of
the Business Combination and certain other conditions set forth in the Purchase
Agreement. On May 11, 2022, the S-1 registration statement related to the
Lincoln Park Purchase Agreement became effective and the other terms and
conditions of the Purchase Agreement were satisfied, which enabled us to begin
selling common stock to Lincoln Park as a source of funds.



On January 4, 2022, we entered into the Loan Agreement with Trinity Capital Inc.
to borrow up to $25.0 million at a floating per annum rate equal to the greater
of (i) 10.75% or (ii) the prime rate plus 7.0%. In connection with the Loan
Agreement, we issued a warrant to purchase 96,998 shares of common stock with an
exercise price of $16.89 per share. On January 4, 2022, we borrowed $10.0
million (the "Initial Advance") under the terms of the Loan Agreement. In 2021,
we incurred approximately $0.2 million of issuance costs related to the Loan
Agreement. Immediately prior to the consummation of the Business Combination,
the warrant was net exercised and subsequently converted into 73,741 shares
of
Class A common stock.



On June 20, 2022, the Trinity Loan Agreement was amended to, among other things,
extend the commitment termination date for the remaining $15.0 million of
commitments from July 1, 2022 to January 1, 2023. As of September 30, 2022,
$15.0 million of unused commitments remained available. On November 7, 2022, we
repaid all outstanding principal and accrued interest under and terminated the
Trinity Loan Agreement with borrowings under a new Secured Term Loan Agreement
entered into with Koito. See Note 21 to the condensed consolidated financial
statements in this Report for further information.



Following the approval of the Business Combination, on February 10, 2022, we
received net cash proceeds of $47.1 million from the Business Combination and
PIPE, net of certain transaction costs.



On October 27, 2022, we entered into an Investment Agreement with Koito,
pursuant to which, among other things, at the closing of the transactions, and
based on the terms and subject to the conditions set forth therein, we will
issue and sell to Koito, 100,000 shares of Series A Convertible Preferred Stock,
par value $0.00001 per share (the "Preferred Stock"), for a purchase price of
$100.0 million. The Preferred Stock will be convertible, beginning on the first
anniversary of the issue date, into shares of our common stock at an approximate
initial conversion price of $2.585 per share. Consummation of the investment is
subject to, among other things, approval of the Company's shareholders and
satisfaction of applicable closing conditions. The investment is expected to
close in the first quarter of 2023.



We have incurred negative cash flows from operating activities and significant
losses from operations in the past as reflected in our accumulated deficit of
$70.8 million as of September 30, 2022. During the nine months ended September
30, 2022, we had negative cash flows from operating activities of $43.5 million.
Although much of the negative cash flow resulted from an increase in engineering
services and expensed materials for research and development, and continuing
administrative expenses related to becoming a publicly traded company, we expect
to continue to invest in research and development and generate operating losses
in the future. In addition, our future capital requirements will depend on many
factors, including our lidar sales volume, the timing and extent of spending to
support our research and development efforts in lidar technology, the expansion
of sales and marketing activities, market adoption of new and enhanced products
and features, and increased spending due to inflation and supply chain
shortages. If we are required to raise additional funds by issuing equity
securities, dilution to stockholders would result. Any equity securities issued
may also provide for rights, preferences, or privileges senior to those of
common stockholders. For example, the pending transaction entered into with
Koito involves the issuance of preferred equity securities that rank senior to
our common stock in the event of liquidation and include other rights and
preferences senior to those of our common stock. In addition, the preferred
equity securities to be issued to Koito are convertible into shares of our
common stock and, upon conversion, will result in dilution to our stockholders.
If we raise funds by issuing debt securities, these debt securities would have
rights, preferences, and privileges senior to those of common stockholders. For
information regarding our cash requirements from lease obligations and
contractual obligations, see Notes 16 and 17 to the condensed consolidated
financial statements included in this Report.



                                       36





We are subject to risks and uncertainties frequently encountered by early-stage
companies including, but not limited to, the uncertainty of successfully
developing products, securing certain contracts, building a customer base,
successfully executing business and marketing strategies, and hiring appropriate
personnel.



To date, we have been funded primarily by equity financings, convertible
promissory notes, and the net proceeds we received through the Business
Combination, PIPE offering, and private placements of the Legacy Cepton
convertible preferred stock. Failure to generate sufficient revenues, achieve
planned gross margins and operating profitability, control operating costs, or
secure additional funding may require us to modify, delay, or abandon some of
our planned future expansion or development, or to otherwise enact operating
cost reductions available to management, which could have a material adverse
effect on our business, operating results, financial condition, and ability to
achieve our intended business objectives.



Cash Flow Summary – Nine Months Ended September 30, 2022 and 2021



                                       Nine Months Ended
                                         September 30,
                                      2022            2021
                                    (dollars in thousands)
Net cash provided by (used in):
Operating activities              $    (43,505 )    $ (27,224 )
Investing activities                   (16,025 )       23,198
Financing activities                    59,207            386




Operating Activities



During the nine months ended September 30, 2022, our operating activities used
$43.5 million in cash. We recorded net income of $24.6 million; however, this
was offset by $65.2 million of non-cash income and expenses consisting primarily
of gains from the change in fair value of earnout and warrant liabilities of
$73.4 million. These non-cash income items were partially offset by stock-based
compensation expense of $6.0 million, depreciation and amortization of $0.2
million, and amortization of right-of-use assets of $1.0 million, and other
amortization of $0.8 million. During the nine months ended September 30, 2022,
we used net cash of $2.9 million from changes in our operating assets and
liabilities resulting primarily from a $0.9 million increase in other long-term
assets primarily related to prepaid director and officer insurance, a $0.9
million increase in accounts receivable, a $1.2 million decrease in operating
lease liabilities, a $0.8 million decrease in accounts payable due to timing of
payments, a $0.5 million increase in prepaid expenses and other current assets
due to increases in prepaid insurance offset by decreases in deferred
transaction costs in connection with the closing of the Business Combination, a
$1.0 million increase in accrued expenses and other current liabilities due
to
timing of payments.



During the nine months ended September 30, 2021, our operating activities used
$27.2 million in cash resulting primarily from our net loss of $26.4 million,
which was partially offset by $2.7 million of non-cash expenses. Non-cash
expenses consisted primarily of $3.3 million of stock-based compensation expense
and $0.2 million of other amortization, which were partially offset by $1.1
million of gain from debt forgiveness. During the nine months ended September
30, 2021, we used $3.5 million net cash from changes in our operating assets and
liabilities resulting primarily from an increase in prepaid expenses and other
current assets of $4.4 million due to transaction costs incurred in anticipation
of a business combination and a decrease of $1.2 million in other long term
liabilities. This was partially offset by an increase of $1.4 million in accrued
expenses and other current liabilities, an increase in accounts payable of $0.9
million due to timing of payments, a decrease of $0.6 million in inventories,
and a increase of $0.5 million in accounts receivable.



Investing Activities



During the nine months ended September 30, 2022, our investing activities used
$16.0 million of cash, resulting primarily from purchases of short-term
investments of $32.4 million and purchases of property and equipment of $0.6
million, partially offset by proceeds from the sales and maturities of
short-term investments of $16.9 million.



                                       37




In the nine months ended September 30, 2021our investing activities provided $23.2 million cash, mainly from disposals and maturities of short-term investments of $31.8 millionpartially offset by $8.5 million purchases of short-term investments.



Financing Activities


In the nine months ended September 30, 2022our fundraising activities provided $59.2 million cash consisting mainly of $47.1 million the net proceeds of the Business Combination and the investment in PIPE, $9.7 million proceeds from the issuance of debt securities and warrants, $1.7 million proceeds from the issuance of common shares, and $0.7 million proceeds from the exercise of stock options.

In the nine months ended September 30, 2021our fundraising activities provided $0.4 million cash consisting of proceeds from the exercise of stock options.

Significant Accounting Policies and Estimates




We prepare our condensed consolidated financial statements in accordance with
U.S. GAAP. The preparation of these condensed consolidated financial statements
requires us to make estimates, assumptions and judgments that can significantly
impact the amounts we report as assets, liabilities, revenue, costs and expenses
and the related disclosures. We base our estimates on historical experience and
other assumptions that we believe are reasonable under the circumstances. Our
actual results could differ significantly from these estimates under different
assumptions and conditions.



Revenue



We primarily recognize revenues from the sale of lidar sensors and prototypes.
Revenue represents the amount of expected consideration we are entitled to
receive upon the transfer of promised goods or services in the ordinary course
of business and is recorded net of sales taxes. We recognize revenue when
performance obligations are satisfied by transferring control of a promised good
or service to a customer. For performance obligations satisfied at a point in
time, we consider the following indicators to assess whether control of a
promised good or service is transferred to the customer: (i) right of payment,
(ii) legal title, (iii) physical possession, (iv) significant risks and rewards
of ownership, and (v) acceptance of the good or service. For performance
obligations satisfied over time, we recognize revenue over time by measuring the
progress toward complete satisfaction of a performance obligation.



The application of various accounting principles related to the measurement and
recognition of revenue requires us to make judgments and estimates.
Specifically, complex arrangements with nonstandard terms and conditions may
require relevant contract interpretation to determine the appropriate accounting
treatment, including whether the promised goods and services specified in a
multiple element arrangement should be treated as separate performance
obligations. When a contract involves multiple performance obligations, the
Company accounts for individual products and services separately if the customer
can benefit from the product or service on its own or with other resources that
are readily available to the customer and the product or service is separately
identifiable from other promises in the arrangement.



Transaction price is allocated to each performance obligation on a relative
standalone selling price ("SSP") basis. Judgment is required to determine SSP
for each distinct performance obligation. We use a range of amounts to estimate
SSP when products and services are sold separately. In instances where SSP is
not directly observable, we determine SSP using information that may include
other observable inputs available to us.



Changes in judgment with respect to these assumptions and estimates could affect the timing or amount of revenue recognition.



Stock-Based Compensation



We recognize stock-based awards granted to our employees and directors based on
the estimated grant-date fair value of the awards. Compensation expense is
recognized on a straight-line basis over the requisite service period, which is
generally the vesting period of the respective award. We estimate the fair value
of options using the Black-Scholes option-pricing model, which requires
objective and subjective assumptions such as the option's expected term, the
fair value of underlying share, risk-free interest rate, expected dividend
yield, expected term, and expected volatility of our ordinary shares. The fair
value of performance-based stock units with market conditions are measured at
the valuation date using the Monte Carlo method. Our assumptions may differ from
those used in prior periods. Changes to the estimates we make from time to time
may have a significant impact on our stock-based compensation expense and could
materially impact our results of operations.



                                       38




The grant date fair value of our common stock, prior to the closing of the
Business Combination was determined using valuation methodologies that utilize
certain assumptions, including probability weighting of events, volatility, time
to liquidation, risk-free interest rate, and an assumption for a discount for
lack of marketability. Subsequent to the Business Combination, the valuation of
our common stock is determined using the publicly traded closing price as
reported on Nasdaq.



Change in fair value of earn-out liability




The Company concluded the Earnout Shares meet the criteria for liability
classification due to the existence of contingent settlement provisions that
could result in holders receiving differing amounts of shares depending on the
Company's stock price or the price paid in a change of control. Because the
settlement is not solely determined by the share price of the Company (that is,
the share price observed in or implied by a qualifying change-in-control event),
but also by the occurrence of a qualifying change-in-control event, this causes
the Earnout Shares to not be indexed to the Company's own shares, resulting in
liability classification. The fair value of the earnout liability was determined
using a Monte Carlo valuation model that utilizes significant assumptions,
including expected volatility, expected term, and risk-free rate, to determine
the probability of achieving the common share price milestones.



The following table summarizes the assumptions used to estimate the fair value of the earn-out liability for each of the periods concerned:




                                                February 10,
                           September 30,            2022
                               2022            (Closing Date)
Current stock price       $          1.96     $           7.99
Expected volatility                  79.0 %               77.5 %
Risk-free interest rate              4.25 %               1.80 %
Expected term                   2.4 years            3.0 years
Expected dividend yield                 0 %                  0 %



Emerging Growth Company Status




Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the "JOBS
Act") exempts emerging growth companies from being required to comply with new
or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act
provides that a company can choose not to take advantage of the extended
transition period and comply with the requirements that apply to non-emerging
growth companies, and any such election to not take advantage of the extended
transition period is irrevocable.



Cepton is an "emerging growth company" as defined in Section 2(a) of the
Securities Act and has elected to take advantage of the benefits of the extended
transition period for new or revised financial accounting standards. Cepton
expects to remain an emerging growth company at least through the end of the
2022 fiscal year and to continue to take advantage of the benefits of the
extended transition period, although it may decide to early adopt such new or
revised accounting standards to the extent permitted by such standards. This may
make it difficult or impossible to compare Cepton's financial results with the
financial results of another public company that is either not an emerging
growth company or is an emerging growth company that has chosen not to take
advantage of the extended transition period exemptions because of the potential
differences in accounting standards used.



                                       39




Subject to certain conditions set forth in the JOBS Act, if, as an emerging
growth company, we intend to rely on such exemptions, we are not required to,
among other things: (i) provide an auditor's attestation report on our system of
internal controls over financial reporting pursuant to Section 404(b) of the
Sarbanes-Oxley Act; (ii) provide all of the compensation disclosure that may be
required of non-emerging growth public companies under the Dodd-Frank Wall
Street Reform and Consumer Protection Act; (iii) comply with any requirement
that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor's report providing
additional information about the audit and the financial statements (auditor
discussion and analysis); and (iv) disclose certain executive
compensation-related items such as the correlation between executive
compensation and performance and comparisons of the Chief Executive Officer's
compensation to median employee compensation.



We will remain an emerging growth company until the earlier of: (1) the last day
of the fiscal year (a) ending December 31, 2026, (b) in which we have total
annual gross revenue of at least $1.235 billion, or (c) in which we are deemed
to be a large accelerated filer, which means the market value of our common
stock that is held by non-affiliates exceeds $700 million as of the end of the
prior fiscal year's second fiscal quarter; and (2) the date on which we have
issued more than $1.0 billion in non-convertible debt during the prior
three-year period. References herein to "emerging growth company" shall have the
meaning associated with it in the JOBS Act.



Recent accounting pronouncements

See Note 1 to our condensed consolidated financial statements included elsewhere in this report for recently adopted accounting pronouncements and recently issued accounting pronouncements that have not yet been adopted as of the date of this report.

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