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 Ceptonand 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
Ceptonis 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 Ceptonis 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.'sfuture 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 Ceptonstockholders 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 Ukraineand 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
Ceptonor with Koito in a manner that is adverse to Ceptonor OEM-B would delay the introduction of the vehicle models that are part of the series production award, Cepton'sbusiness would be materially adversely affected. Similarly, if Ceptonis unable to maintain its relationship with Koito, or the terms of Cepton'sarrangement with Koito with respect to the OEM-B program differs from Cepton'sexpectations, including with respect to volume, pricing, and timing, then Cepton'sbusiness 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
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
SECand 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 ParkAgreement.
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 Statesand 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
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 $ 1,122171
$ 4,642 $ 1,989 $ 2,653133 % 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 $ 2,62581 % 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)
NM NA: Not applicable NM: Not meaningful
Comparison of three and nine months ended
Revenue Lidar sensor and prototype revenue increased by
$1.1 million, or 171%, to $1.8 millionfor the three months ended September 30, 2022, from $0.7 millionfor the three months ended September 30, 2021. Approximately $1.1 millionof the increase was driven by an increase in lidar sales volume and approximately $0.2 millionrelated to new products sold during the period. The increase was partially offset by a $0.3 milliondecrease 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 thousandfor the three months ended September 30, 2022, from $1.2 millionfor 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 millionfor the nine months ended September 30, 2022, from $2.0 millionfor the nine months ended September 30, 2021. Approximately $2.3 millionof the increase was driven by an increase in lidar sales volume and approximately $1.4 millionrelated to new products sold during the period. The increase was partially offset by a $0.9 milliondecrease 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
Cost of Revenue Lidar sensor and prototype cost of revenue increased by
$1.3 million, or 203%, to $1.9 millionfor the three months ended September 30, 2022, from $0.6 millionfor the three months ended September 30, 2021. The increase resulted primarily from an increase in sales volume of $0.9 millionand inventory adjustments
write downs of
$0.4 million. Development cost of revenue decreased by $0.4 million, or 99%, to $3 thousandfor the three months ended September 30, 2022, from $0.4 millionfor 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 millionfor the nine months ended September 30, 2022, from $3.1 millionfor the nine months ended September 30, 2021. The increase resulted primarily from an increase in sales volume of $2.0 millionand standard costing adjustments of $0.5 million. Development cost of revenue increased by $0.2 million, or 60%, to $0.6 millionfor the nine months ended September 30, 2022, from $0.4 millionfor 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 millionfor the three months ended September 30, 2022, from $6.3 millionfor the three months ended September 30, 2021, resulting primarily from a $1.4 millionincrease in personnel related costs, $0.3 millionincrease in permits and license fees, and a $0.2 millionincrease in professional services fees. Research and development expense increased by $7.0 million, or 41%, to $24.4 millionfor the nine months ended September 30, 2022, from $17.3 millionfor the nine months ended September 30, 2021, resulting primarily from a $3.8 millionincrease in personnel related costs, a $1.1 millionincrease in materials costs, a $1.1 millionincrease in professional services costs, $0.6 millionin rent, permits and license fees, and $0.3 millionincrease in software subscription and equipment fees. Sales, general and administrative expense increased by $3.2 million, or 91%, to $6.7 millionfor the three months ended September 30, 2022, from $3.5 millionfor the three months ended September 30, 2021, resulting primarily from a $1.4 millionincrease in personnel related costs, a $1.0 millionincrease in directors and officers insurance related costs, $0.6 millionin professional services costs, and a $0.3 millionincrease in other general and administrative costs. 34 Sales, general and administrative expense increased by $12.0 million, or 120%, to $22.0 millionfor the nine months ended September 30, 2022, from $10.0 millionfor the nine months ended September 30, 2021, resulting primarily from a $4.0increase in personnel related costs, a $2.7 millionincrease in transaction costs related to the Business Combination attributable to liability-classified instruments, $2.7 millionincrease in directors and officers insurance related costs, and a $2.5 millionincrease 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 millionresulting 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 millionresulting 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, 2022to September 30, 2022. The fair value of the warrant liability increased by $0.1 millionfor the three months ended September 30, 2022resulting from a $0.1 millionunrealized loss due to the mark-to-market adjustment on private placement warrants. The fair value of the warrant liability decreased by $2.5 millionfor the nine months ended September 30, 2022resulting from a $1.8 millionunrealized gain due to the mark-to-market adjustment on private placement warrants and $0.7 millionrealized 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 millionfor the three and nine months ended September 30, 2022resulting primarily from an one-time gain on extinguishment of debt of $1.1 millionrelated to prior year borrowings in 2021 and increase in expense on issuance of common stock to Lincoln Parkof $0.2 millionfor the three and nine months ended September 30, 2022.
Interest income (expense), net
Interest income (expense), net decreased by
$0.3 millionfor the three months ended September 30, 2022resulting primarily from an increase in interest expense of $0.3 millionrelated to borrowings under the Trinity Loan Agreement. Interest income decreased by $1.6 millionfor the nine months ended September 30, 2022resulting primarily from an increase in interest expense of $1.5 millionrelated to borrowings under the Trinity Loan Agreement. The remaining $0.1 millionrelates 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, 2022and 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, 2022and 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 Agencysecurities, 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 Parkhas agreed to purchase up to $100.0 millionof 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 Parkas a source of funds. On January 4, 2022, we entered into the Loan Agreement with Trinity Capital Inc. to borrow up to $25.0 millionat 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 $16.89per 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 millionof 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 millionof commitments from July 1, 2022to January 1, 2023. As of September 30, 2022, $15.0 millionof 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 millionfrom 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 $0.00001per 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 $2.585per 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 millionas 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
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 millionin cash. We recorded net income of $24.6 million; however, this was offset by $65.2 millionof 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 millionfrom changes in our operating assets and liabilities resulting primarily from a $0.9 millionincrease in other long-term assets primarily related to prepaid director and officer insurance, a $0.9 millionincrease in accounts receivable, a $1.2 milliondecrease in operating lease liabilities, a $0.8 milliondecrease in accounts payable due to timing of payments, a $0.5 millionincrease 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 millionincrease 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 millionin cash resulting primarily from our net loss of $26.4 million, which was partially offset by $2.7 millionof non-cash expenses. Non-cash expenses consisted primarily of $3.3 millionof stock-based compensation expense and $0.2 millionof other amortization, which were partially offset by $1.1 millionof gain from debt forgiveness. During the nine months ended September 30, 2021, we used $3.5 millionnet cash from changes in our operating assets and liabilities resulting primarily from an increase in prepaid expenses and other current assets of $4.4 milliondue to transaction costs incurred in anticipation of a business combination and a decrease of $1.2 millionin other long term liabilities. This was partially offset by an increase of $1.4 millionin accrued expenses and other current liabilities, an increase in accounts payable of $0.9 milliondue to timing of payments, a decrease of $0.6 millionin inventories, and a increase of $0.5 millionin accounts receivable. Investing Activities During the nine months ended September 30, 2022, our investing activities used $16.0 millionof cash, resulting primarily from purchases of short-term investments of $32.4 millionand 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
In the nine months ended
In the nine months ended
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 Carlomethod. 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 Carlovaluation 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.
Ceptonis 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. Ceptonexpects 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'sfinancial 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 Boardregarding 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 millionas 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 billionin 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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