NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Description of Business and Basis of Presentation
Description of Business
Ouster, Inc. was incorporated in the Cayman Islands on June 4, 2020 as “Colonnade Acquisition Corp”. Following the closing of the business combination in March 2021, the Company domesticated as a Delaware corporation and changed its name to “Ouster, Inc.” The Company’s prior operating subsidiary, Ouster Technologies, Inc. (“OTI” and prior to the Merger (as defined below)), was incorporated in the state of Delaware on June 30, 2015. The Company is a leading provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, allowing each to understand and visualize the surrounding world and ultimately enabling safe operation and ubiquitous autonomy. Unless the context otherwise requires, references in this subsection to “the Company” refer to the business and operations of OTI (formerly known as Ouster, Inc.) and its consolidated subsidiaries prior to the Merger (as defined below) and to Ouster, Inc. (formerly known as Colonnade Acquisition Corp.) and its consolidated subsidiaries following the consummation of the Merger.
Colonnade Acquisition Corp. (“CLA”), the Company’s legal predecessor, was originally a blank check company incorporated as a Cayman Islands exempted company on June 4, 2020. CLA was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. On March 11, 2021, CLA consummated a merger with the Company pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of December 21, 2020, details of which are included below.
Basis of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries (all of which are wholly owned) and have been prepared in conformity with U.S. generally accepted accounting principles (“US GAAP”) applicable to interim periods. The functional currency for the Company is the United States dollar. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the results of operations for the periods shown. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021 and the notes related thereto, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP. Certain information and note disclosures normally included in the audited financial statements prepared in accordance with US GAAP have been condensed or omitted from this report, as is permitted by applicable rules and regulations. The results of operations for any interim period are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other future years or interim periods.
Liquidity
The Company has experienced recurring losses from operations, and negative cash flows from operations. As of September 30, 2022, the Company had an accumulated deficit of approximately $399.7 million. The Company has historically financed its operations primarily through the Merger and related transactions, the sale of convertible notes and equity securities, proceeds from debt and, to a lesser extent, cash received from sales. Management expects significant operating losses and negative cash flows from operations to continue for the foreseeable future. The Company expects to continue investing in product development and sales and marketing activities. The long-term continuation of the Company’s business plan is dependent upon the generation of sufficient revenues from its products to offset expenses and its ability to raise more capital. In the event that the Company does not generate sufficient cash flows from operations and is unable to obtain funding on acceptable terms or at all, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to continue operations.
The FASB Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) requires the Company to make certain disclosures if it concludes that there is substantial doubt about the entity’s ability to continue as a going concern within one year from the date of the issuance of these condensed consolidated financial statements.
Management has determined that the Company has funds that are sufficient to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis.
In evaluating the Company’s ability to continue as a going concern, the Company considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following November 8, 2022, the date the Company’s condensed financial statements were issued. Management considered the Company’s current financial condition and liquidity sources, including current funds and available working capital, forecasted future cash flows and the Company’s obligations due before November 8, 2023. As discussed in Note 14 the Company intends to execute the merger transaction with Velodyne Lidar, Inc. (which is subject to usual and customary closing conditions beyond our control). Although there is no assurance that the merger transaction will be successfully completed, the Company believes it can successfully complete the acquisition, enabling it to continue as a going concern. Also, the Company will evaluate whether it can meet its future obligations through the issuance of additional shares. If neither of these occur, the Company would expect to execute plans to reduce operating costs.
Impact of the COVID-19 Pandemic
Ouster has been actively monitoring the COVID-19 pandemic on a global scale and continues to evaluate the long-term impacts on the business while keeping abreast of the latest developments, particularly the variants of the virus, to ensure preparedness for Ouster’s employees and its business. We maintain our commitment to protecting the health and safety of our employees and customers. We continue to adapt and enhance our safety protocols as we follow the guidance from local authorities. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, research and development costs and employee-related amounts, will depend on future events that are uncertain, including as a result of new information that continues to emerge concerning the virus, its variants, the deployment and effectiveness of vaccination roll-outs, vaccination hesitancy, therapeutics, and the actions taken to contain the virus or treat it, as well as the economic impact on local, regional, national and international customers and markets. Thus, the Company is not able to estimate the future consequences on its operations, its financial condition, or its liquidity.
Merger Agreement with Colonnade Acquisition Corp. and Beam Merger Sub, Inc.
On December 21, 2020, OTI entered into the Merger Agreement with CLA and Beam Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and subsidiary of CLA. OTI’s board of directors unanimously approved OTI’s entry into the Merger Agreement, and on March 11, 2021, the transactions contemplated by the Merger Agreement were consummated. Pursuant to the terms of the Merger Agreement, (i) CLA domesticated as a corporation incorporated under the laws of the State of Delaware and changed its name to “Ouster, Inc.” and (ii) Merger Sub merged with and into OTI (such transactions contemplated by the Merger Agreement, the “Colonnade Merger”), with OTI surviving the Colonnade Merger.
As a result of the Merger, among other things, (1) each of the then issued and outstanding 5,000,000 CLA Class B ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class B ordinary shares”) converted automatically, on a one-for-one basis, into a CLA Class A ordinary share (as defined below), (2) immediately following the conversion described in clause (1), each of the then issued and outstanding 25,000,000 Class A ordinary shares, par value $0.0001 per share, of CLA (the “CLA Class A ordinary shares”), converted automatically, on a one-for-one basis, into a share of common stock, par value $0.0001 per share, of Ouster (the “Ouster common stock”), (3) each of the then issued and outstanding 10,000,000 redeemable warrants of CLA (the “CLA warrants”) converted automatically into a redeemable warrant to purchase one share of Ouster common stock (the “Public warrants”) pursuant to the Warrant Agreement, dated August 20, 2020 (the “Warrant Agreement”), between CLA and Continental Stock Transfer & Trust Company (“Continental”), as warrant agent, and (4) each of the then issued and outstanding units of CLA that had not been previously separated into the underlying CLA Class A ordinary shares and underlying CLA warrants upon the request of the holder thereof (the “CLA units”), were cancelled and entitled the holder thereof to one share of Ouster common stock and one-half of one Public warrant, and (5) each of the then issued and outstanding 6,000,000 private placement warrants of CLA (the “Private Placement warrants”) converted automatically into a Public warrant pursuant to the Warrant Agreement. No fractional Public warrants were issued upon separation of the CLA units.
Immediately prior to the effective time of the Colonnade Merger, (1) each share of OTI’s Series B Preferred Stock, par value $0.00001 per share (the “OTI Preferred Stock”), converted into one share of common stock, par value $0.00001 per share, of OTI (the “OTI common stock” and, together with OTI Preferred Stock, the “OTI Capital Stock”) (such conversion, the “OTI Preferred Conversion”) and (2) all of the outstanding warrants to purchase shares of OTI Capital Stock were exercised in full or terminated in accordance with their respective terms (the “OTI Warrant Settlement”).
As a result of and upon the closing of the Colonnade Merger, among other things, all shares of OTI Capital Stock (after giving effect to the OTI Warrant Settlement) outstanding immediately prior to the closing of the Colonnade Merger together with shares of OTI common stock reserved in respect of options to purchase shares of OTI common stock and restricted shares of OTI common stock (together, the “OTI Awards”) outstanding immediately prior to the closing of the Colonnade Merger that were converted into awards based on Ouster common stock, were cancelled in exchange for the right to receive, or the reservation of, an aggregate of 150,000,000 shares of Ouster common stock (at a deemed value of $10.00 per share), which, in the case of OTI Awards, were shares underlying awards based on Ouster common stock, representing a fully-diluted pre-transaction. Upon closing of the Colonnade Merger, the Company received gross proceeds of $299.9 million from the Colonnade Merger and private offering, offset by $8.5 million of pre-merger costs relating to CLA and offerings costs of $26.6 million.
The Colonnade Merger was accounted for as a reverse recapitalization under US GAAP. Under this method of accounting, CLA is treated as the “acquired” company for financial reporting purposes. This determination is primarily based on OTI stockholders comprising a relative majority of the voting power of the Company and having the ability to nominate the members of the board of directors of the Company after the Colonnade Merger, OTI’s operations prior to the Colonnade Merger comprising the only ongoing operations of the Company following the Colonnade Merger, and OTI’s senior management prior to the Colonnade Merger comprising a majority of the senior management of the Company following the Colonnade Merger. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of OTI with the Colonnade Merger being treated as the equivalent of OTI issuing stock for the net assets of CLA, accompanied by a recapitalization whereby no goodwill or other intangible assets are recorded. Transactions and balances prior to the Colonnade Merger are those of OTI. The shares and net loss per share available to holders of OTI’s common stock prior to the Colonnade Merger have been retroactively restated as shares reflecting the exchange ratio established in the Colonnade Merger Agreement.
PIPE Investment
On December 21, 2020, concurrently with the execution of the Colonnade Merger Agreement, CLA entered into subscription agreements with certain institutional and accredited investors (collectively, the “PIPE Investors”), pursuant to which the PIPE Investors agreed to purchase, in the aggregate, 10,000,000 shares of Ouster common stock at $10.00 per share for an aggregate commitment amount of $100,000,000 (the “PIPE Investment”), a portion of which was funded by certain affiliates of Colonnade Sponsor LLC, CLA’s sponsor (the “Sponsor”). The PIPE Investment was consummated substantially concurrently with the closing of the Colonnade Merger.
At the Market Issuance Sales Agreement
On April 29, 2022, the Company entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with B. Riley Securities, Inc., Cantor Fitzgerald & Co. and Oppenheimer & Co. Inc., pursuant to which the Company may offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock having an aggregate offering price of up to $150 million under the Company’s Form S-3 registration statement. From the date of the ATM Agreement through September 30, 2022, the Company sold 7,833,709 shares at a weighted-average sales price of $2.08 per share, resulting in cumulative gross proceeds to the Company totaling approximately $16.8 million before deducting offering costs, sales commissions and fees.
Loan and Security Agreement
On April 29, 2022, the Company entered into a loan and security agreement (the “Loan Agreement”) with Hercules. The Loan Agreement provides with the term loan of up to $50.0 million, subject to terms and conditions. The Company borrowed the initial tranche of $20.0 million on April 29, 2022. The Company may borrow an additional $20.0 million on or before March 15, 2023, subject satisfying certain conditions. An additional $10.0 million may be drawn on or before June 15, 2023, subject to satisfying certain conditions relating to the achievement of trailing twelve-month revenue and profit milestones.
For additional information, see Note 5, Debt.
Note 2 – Summary of Significant Accounting Policies
During the nine months ended September 30, 2022, there were no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2022, except for the changes described below. The Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
Deferred Debt Financing Costs
Financing costs incurred in connection with a loan and security agreement with Hercules Capital, Inc. (“Hercules”) are deferred and amortized using the effective interest rate method over the life of the respective agreement. Any discount or premium on the issuance of any debt is amortized using the effective interest method over the life of the respective debt security.
The Company presents deferred debt financing costs on the balance sheet as a contra-liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
Recently Issued and Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06: Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU also simplify the guidance in ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The new standard became effective for the Company for annual periods beginning December 15, 2021. The Company adopted this ASU as of January 1, 2022 using a modified retrospective method of transition, which did not have an impact on its condensed consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
The Company considers the applicability and impact of all ASUs. ASUs not referenced below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. Cash, cash equivalents, and restricted cash are deposited with federally insured commercial banks in the United States; and at times, cash balances may be in excess of federal insurance limits. The Company generally does not require collateral or other security deposits for accounts receivable.
To reduce credit risk, the Company considers customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms when determining the collectability of specific customer accounts. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
Accounts receivable from the Company’s major customer representing 10% or more of total accounts receivable was as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Customer A | * | | 11 | % |
| | | |
| | | |
| | | |
* Customer accounted for less than 10% of total accounts receivable in the period.
Revenue from the Company’s major customers representing 10% or more of total revenue was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Customer C | * | | * | | * | | 10 | % |
* Customer accounted for less than 10% of total revenue in the period.
Concentrations of Supplier Risk
Purchases from the Company’s major suppliers representing 10% or more of total purchases were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, 2022 |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
Supplier B | 29 | % | | 19 | % | | 33 | % | | 17 | % |
Supplier B accounted for 32% and 55% of total accounts payable balance as of September 30, 2022 and December 31, 2021.
Note 3. Fair Value of Financial Instruments
The Company applies the fair value measurement accounting standard whenever other accounting pronouncements require or permit fair value measurements. Fair value is defined in the accounting standard as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 - Instruments whose significant value drivers are unobservable.
As of September 30, 2022 and December 31, 2021, the Company’s Level 3 liabilities consisted of the Private Placement warrant liability. The determination of the fair value of warrant liability is discussed in Note 6.
The following table provides information by level for the Company’s assets and liabilities that were measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Money market funds | $ | 129,919 | | | $ | — | | | $ | — | | | $ | 129,919 | |
Total financial assets | $ | 129,919 | | | $ | — | | | $ | — | | | $ | 129,919 | |
Liabilities | | | | | | | |
Warrant liabilities | $ | — | | | $ | — | | | $ | 276 | | | $ | 276 | |
Total financial liabilities | $ | — | | | $ | — | | | $ | 276 | | | $ | 276 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Money market funds | $ | 177,513 | | | $ | — | | | $ | — | | | $ | 177,513 | |
Total financial assets | $ | 177,513 | | | $ | — | | | $ | — | | | $ | 177,513 | |
Liabilities | | | | | | | |
Warrant liabilities | $ | — | | | $ | — | | | $ | 7,626 | | | $ | 7,626 | |
Total financial liabilities | $ | — | | | $ | — | | | $ | 7,626 | | | $ | 7,626 | |
Money market funds are included within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The fair value of the redeemable convertible preferred stock warrant, redeemable convertible preferred stock tranche and Private Placement warrant liabilities is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the warrant liabilities, the Company used the Black-Scholes option pricing model to estimate the fair value using unobservable inputs, including the expected term, expected volatility, risk-free interest rate and dividend yield (see Note 6).
The following table presents a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):
| | | | | | | | | | | |
| Redeemable Convertible Preferred Stock Warrant Liability | | Private Placement Warrant Liability |
Fair value as of December 31, 2021 | $ | — | | | $ | 7,626 | |
Change in the fair value included in other income (expense), net | — | | | (7,350) | |
Fair value as of September 30, 2022 | $ | — | | | $ | 276 | |
| | | |
Fair value as of December 31, 2020 | (49,293) | | | — | |
Private placement warrant liability acquired as part of the Colonnade Merger | — | | | (19,377) | |
Change in the fair value included in other income (expense), net | (8,804) | | | 8,398 | |
Issuance of preferred stock upon exercise of warrants | 58,097 | | | — | |
Fair value as of September 30, 2021 | $ | — | | | $ | (10,979) | |
Disclosure of Fair Values
Financial instruments that are not re-measured at fair value include accounts receivable, accounts payable, accrued and other current liabilities and debt. The carrying values of these financial instruments approximate their fair values.
Note 4. Balance Sheet Components
Cash and Cash Equivalents
The Company’s cash and cash equivalents consist of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Cash | $ | 3,270 | | | $ | 5,131 | |
Cash equivalents: | | | |
Money market funds(1) | 129,919 | | | 177,513 | |
| | | |
Total cash and cash equivalents | $ | 133,189 | | | $ | 182,644 | |
(1)The Company maintains a cash sweep account, which is included in money market funds as of September 30, 2022. Cash is invested in short-term money market funds that earn interest.
Restricted Cash
Restricted cash consists of certificates of deposit held by a bank as security for outstanding letters of credit. In September 2022, the Company received $0.7 million of restricted cash balance that was related to a deposit in connection with the execution of a respective lease contract at 2741 16th Street. The Company had a restricted cash balance of $1.3 million and $2.0 million as of September 30, 2022 and December 31, 2021, respectively, which has been excluded from the Company’s cash and cash equivalents balances. The Company presented $0.3 million and $1.0 million of the total amount of restricted cash within current assets on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively. The remaining restricted cash balance of $1.1 million and $1.0 million is included in non-current assets on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
Reconciliation of cash, cash equivalents and restricted cash as shown in the condensed consolidated statement of cash flows to the respective accounts within the condensed consolidated balance sheet is as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Cash and cash equivalents | $ | 133,189 | | | $ | 221,576 | |
Restricted cash, current | 250 | | | 1,008 | |
Restricted cash, non-current | 1,088 | | | 1,004 | |
Total cash, cash equivalents and restricted cash | $ | 134,527 | | | $ | 223,588 | |
Inventory
Inventory, consisting of material, direct and indirect labor, and manufacturing overhead, consists of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Raw materials | $ | 6,194 | | | $ | 2,401 | |
Work in process | 2,658 | | | 1,951 | |
Finished goods | 11,952 | | | 3,096 | |
Total inventory | $ | 20,804 | | | $ | 7,448 | |
Total inventory balance as of September 30, 2022 and December 31, 2021 includes a write down of $2.2 million and $1.7 million, respectively, for obsolete, scrap, or returned inventory. During the three months ended September 30, 2022 and 2021, $0.5 million and $0.7 million of inventory write offs were charged to cost of revenue. During the nine months ended September 30, 2022 and 2021, respectively, $0.9 million and $0.9 million of inventory write offs were charged to cost of revenue. During the three and nine months ended September 30, 2022, $0.3 million of inventory write offs were charged to research and development.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Prepaid expenses | $ | 1,875 | | | $ | 1,970 | |
Prepaid insurance | 1,520 | | | 1,355 | |
Receivable from contract manufacturer | 2,068 | | | 1,344 | |
Other current assets | 1,460 | | | 897 | |
Total prepaid and other current assets | $ | 6,923 | | | $ | 5,566 | |
Property and Equipment, Net
Property and equipment consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Estimated Useful Life (in years) | | September 30, 2022 | | December 31, 2021 |
Machinery and equipment | 3 | | $ | 9,292 | | | $ | 8,404 | |
Computer equipment | 3 | | 504 | | | 498 | |
Automotive and vehicle hardware | 5 | | 93 | | | 93 | |
Software | 3 | | 104 | | | 104 | |
Furniture and fixtures | 7 | | 772 | | | 730 | |
Construction in progress | | | 3,187 | | | 1,700 | |
Leasehold improvements | Shorter of useful life or lease term | | 9,358 | | | 9,265 | |
| | | 23,310 | | | 20,794 | |
Less: Accumulated depreciation | | | (14,716) | | | (10,740) | |
Property and equipment, net | | | $ | 8,594 | | | $ | 10,054 | |
Depreciation expense associated with property and equipment was $3.7 million and $2.3 million in the nine months ended September 30, 2022 and 2021, respectively.
Goodwill and Acquired Intangible Assets, Net
In the fourth quarter of 2021, the Company completed the acquisition of Sense Photonics Inc. (“Sense”), a privately held lidar technology company for autonomous vehicles. The transaction has been accounted for as a business combination. The Company purchased all of the outstanding shares of the capital stock of Sense and settled all Sense debt for total consideration of $72.8 million. Goodwill represents the excess of the purchase price over the preliminary estimated fair values of the identifiable assets and assumed liabilities acquired and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. Goodwill is not deductible for tax purposes.
The Company assesses goodwill for impairment during the fourth quarter of each year or more often if deemed necessary. As of September 30, 2022, the Company with the assistance of third-party valuation specialist performed an interim impairment test of its goodwill as a result of the decline in market conditions and updated outlook as a result of the impact of market uncertainties that prolonged sales cycle. The Company’s reporting unit fair value was determined based on a discounted future cash flow model (income approach). The estimated fair value of the reporting unit exceeded its carrying value by approximately 4% as of September 30, 2022. Accordingly, the Company determined that goodwill was not impaired as of September 30, 2022.
Given this level of fair value, in the event the financial performance of the Company does not meet management’s current expectations in the future or the Company experiences prolonged market downturns or persistent declines in the Company’s stock price, worsening trends from the COVID-19 pandemic, or there are other negative revisions to key assumptions, the Company may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. As of September 30, 2022, goodwill was $51.2 million.
Measurement period adjustments recognized during 2022 related primarily to updated estimated fair values for assumed employer withholding tax liabilities, royalty liability and a net working capital adjustment. A reconciliation of preliminary total consideration as of December 31, 2021, and total consideration as of September 30, 2022, are presented below (in thousands):
| | | | | | | | | | | | | | | | | |
| As Reported | | Measurement Period Adjustment | | As Adjusted Value |
Fair value of common stock issued at closing | $ | 60,024 | | | $ | (358) | | | $ | 59,666 | |
Fully vested replacement equity awards | 1,081 | | | — | | | 1,081 | |
Cash paid at closing to settle Sense pre-existing debt and transaction costs incurred by Sense | 11,703 | | | — | | | 11,703 | |
Total consideration | $ | 72,808 | | | $ | (358) | | | $ | 72,450 | |
| | | | | | | | | | | | | | | | | |
| As Reported | | Measurement Period Adjustment | | As Adjusted Value |
Assets acquired: | | | | | |
Cash | 689 | | | — | | | 689 | |
Restricted cash | 69 | | | — | | | 69 | |
Accounts receivable, net | 768 | | | — | | | 768 | |
Prepaid expenses and other current assets | 463 | | | — | | | 463 | |
Property and equipment, net | 626 | | | — | | | 626 | |
Developed technology | 15,900 | | | — | | | 15,900 | |
Vendor relationship | 6,600 | | | — | | | 6,600 | |
Customer relationships | 900 | | | — | | | 900 | |
Goodwill | 51,076 | | | 76 | | | 51,152 | |
Total assets acquired | $ | 77,091 | | | $ | 76 | | | $ | 77,167 | |
Liabilities assumed: | | | | | |
Accounts payable | $ | (266) | | | $ | — | | | $ | (266) | |
Accrued and other current liabilities | $ | (1,540) | | | $ | (234) | | | $ | (1,774) | |
Other non-current liabilities | $ | — | | | $ | (200) | | | $ | (200) | |
Deferred tax liability | $ | (2,477) | | | $ | — | | | $ | (2,477) | |
Total liabilities assumed | $ | (4,283) | | | $ | (434) | | | $ | (4,717) | |
Net Assets acquired | $ | 72,808 | | | $ | (358) | | | $ | 72,450 | |
The following tables present acquired intangible assets, net as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 |
| Estimated Useful Life (in years) | | Gross Carrying amount | | Accumulated Amortization | | Net Book Value |
Developed technology | 8 | | $ | 15,900 | | | $ | (1,822) | | | $ | 14,078 | |
Vendor relationship | 3 | | 6,600 | | | (2,017) | | | 4,583 | |
Customer relationships | 3 | | 900 | | | (275) | | | 625 | |
Intangible assets, net | | | $ | 23,400 | | | $ | (4,114) | | | $ | 19,286 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| Estimated Useful Life (in years) | | Gross Carrying amount | | Accumulated Amortization | | Net Book Value |
Developed technology | 8 | | $ | 15,900 | | | $ | (331) | | | $ | 15,569 | |
Vendor relationship | 3 | | 6,600 | | | (367) | | | 6,233 | |
Customer relationships | 3 | | 900 | | | (50) | | | 850 | |
Intangible assets, net | | | $ | 23,400 | | | $ | (748) | | | $ | 22,652 | |
Amortization expense was $3.4 million in the nine months ended September 30, 2022.
The following table summarizes estimated future amortization expense of finite-lived intangible assets-net (in thousands):
| | | | | |
Years: | Amount |
2022 (the remainder of 2022) | $ | 1,120 | |
2023 | 4,488 | |
2024 | 4,071 | |
2025 | 1,988 | |
2026 | 1,988 | |
Thereafter | 5,631 | |
Total | $ | 19,286 | |
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued compensation | $ | 4,017 | | | $ | 3,229 | |
Uninvoiced receipts | 7,973 | | | 9,835 | |
Accrued interest | 290 | | | — | |
ESPP contributions | 159 | | | — | |
Other | 1,956 | | | 1,109 | |
Total accrued and other current liabilities | $ | 14,395 | | | $ | 14,173 | |
Note 5. Debt
Runway Growth Loan Agreement
On November 27, 2018, the Company entered into a Loan and Security Agreement with Runway Growth Credit Fund Inc. (“Runway Loan and Security Agreement”). The Runway Loan and Security Agreement provided for loans in an aggregate principal amount up to $10.0 million with a loan maturity date of November 15, 2021. The loan carried an interest rate equal to LIBOR plus 8.5%, unless LIBOR was no longer attainable or ceased to fairly reflect the costs of the lender, in which case the applicable interest rate would have been Prime Rate plus 6.0%. In an event of default, annual interest would have been increased by 5.0% above the otherwise applicable rate.
In conjunction with the Runway Loan and Security Agreement, OTI issued a warrant to purchase 35,348 shares of Series A redeemable convertible preferred stock (the “Series A Preferred Stock”) of OTI (4.0% of original principal amount of $10.0 million, divided by the exercise price), with an exercise price of $11.3518 per share. The fair value of this warrant was estimated to be $0.1 million and accounted for as a debt discount. On August 5, 2019, in connection with the second amendment to the Runway Loan and Security Agreement, OTI amended the warrant issued to Runway Growth to increase the number of shares available to purchase to 53,023 shares of Series A Preferred Stock of OTI. The aggregate value of the warrants increased by $0.1 million after the warrant modification.
The warrants were exercised on March 11, 2021 and the warrant liability was remeasured to fair value with the increase recognized as a loss of $0.6 million for the three months ended March 31, 2021 within other income (expense), net in the consolidated statements of operations and comprehensive loss. The warrant liability was remeasured to fair value as of March 31, 2021 and the reduction was recognized as a gain of $0.2 million.
On March 26, 2021, the Company terminated the Runway Loan and Security Agreement and repaid the $7.0 million principal amount outstanding as well as interest and fees amounting to $0.4 million. The Company incurred no prepayment fees in connection with the termination and all liens and security interests securing the loan made pursuant to the Runway Loan and Security Agreement were released upon termination. As of September 30, 2022 and December 31, 2021, the outstanding principal balance of the loan was nil, respectively.
Promissory Notes
The Company issued a $5 million promissory note in January 2021 to certain current investors of the Company (or their respective affiliates) to help continue to fund the Company’s ongoing operations through the consummation of the Colonnade Merger. The note accrued interest at a rate equal to LIBOR plus 8.5% per annum and was repaid on March 11, 2021 in accordance with its terms in connection with the consummation of the Colonnade Merger.
Loan and Security Agreement
On April 29, 2022, the Company entered into the Loan Agreement with Hercules. The Loan Agreement provides the Company with a term loan of up to $50.0 million, subject to terms and conditions. The Company borrowed the initial tranche of $20.0 million on April 29, 2022. The Company may borrow an additional $20.0 million on or before March 15, 2023, subject satisfying certain conditions. An additional $10.0 million may be drawn on or before June 15, 2023, subject to satisfying certain conditions relating to the achievement of trailing twelve-month revenue and profit milestones.
Advances under the Loan Agreement bear interest at the rate of interest equal to greater of either (i) (x) the prime rate as reported in The Wall Street Journal plus (y) 6.15%, and (ii) 9.40%, subject to compliance with financial covenants and other conditions. The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. The Loan Agreement matures on May 1, 2026.
Interest on amounts borrowed under the Loan Agreement is payable on a monthly basis until June 1, 2025. After June 1, 2025, payments consist of equal monthly installments of principal and interest payable until the secured obligations are repaid in full. However, if the Company achieves certain equity proceeds, revenue or profit targets for the twelve-month period ending December 31, 2023, then the interest-only payments will continue and the Company will be obligated to repay the aggregate principal amount on May 1, 2026. The entire principal balance and all accrued but unpaid interest shall be due and payable on May 1, 2026. On the earliest to occur of May 1, 2026, the date on which the obligations under the Loan Agreement are paid and the date on which such obligations become due and payable, the Company is also required to pay Hercules an end of term charge from $1.5 million to $3.7 million, depending on the amount borrowed.
In connection with the Loan Agreement, the Company paid the lender a cash facility and legal fees of $0.6 million and incurred debt issuance costs to third parties that were directly related to issuing debt in the amount of $0.3 million. The effective interest rate on this debt is 14.3% after giving effect to the debt discount, debt issuance costs and the end of term charge. Amortization expense included in the interest expense related to debt discount and debt issuance costs of the Loan Agreement was not material for the three and nine months ended September 30, 2022.
The Company may prepay the principal of any advance made pursuant to the terms of the Term Loan Facility at any time subject to a prepayment charge equal to: 2.50%, if such advance is prepaid in any of the first 12 months following the Closing Date, 1.50%, if such advance is prepaid after 12 months but prior to 24 months following the Closing Date, and 1.0%, if such advance is prepaid anytime thereafter.
If the Company failed to maintain an unrestricted cash balance of $60.0 million, it would then be subject to a financial covenant that requires the Company to achieve certain trailing twelve-month revenue targets tested quarterly as set forth in the Loan Agreement and commencing with the quarter ending on June 30, 2023. All obligations under the Loan Agreement are unconditionally guaranteed by the Company’s subsidiary Sense Photonics, Inc. The Term Loan Facility is secured by substantially all of the Company’s and the guarantors’ existing and after-acquired assets, including all intellectual property, all securities in existing and future domestic subsidiaries and 65.0% of the securities in foreign subsidiaries, subject to certain exceptions and exclusions.
The Loan Agreement contains customary covenants for transactions of this type and other covenants agreed to by the parties, including, among others, (i) the provision of annual, quarterly and monthly financial statements, management rights and insurance policies and (ii) restrictions on incurring debt, granting liens, making acquisitions, making loans, paying dividends, dissolving, and entering into leases and asset sales. The Loan Agreement also provides for customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control, judgment and material adverse effect defaults.
Long-term debt outstanding is summarized below (in thousands):
| | | | | |
| September 30, 2022 |
Long-term debt | $ | 20,000 | |
Less: unamortized debt discount | (530) | |
Less: debt issuance costs | (289) | |
Total debt | $ | 19,181 | |
The unamortized debt discount and debt issuance costs are amortized to interest expense over the life of the instrument using the effective interest rate method.
Note 6. Warrants
Series A and B Redeemable Convertible Preferred Stock Warrants
On November 27, 2018, in connection with the execution of the prior Loan and Security Agreement (the “Runway Loan and Security Agreement”), OTI issued a warrant to purchase 35,348 shares of Series A Preferred Stock of OTI at an exercise price of $11.3518 per share (the “Runway warrant”). On August 5, 2019, in connection with the second amendment to the Runway Loan and Security Agreement, OTI amended the Runway warrant to increase the number of shares available to purchase to 53,023 shares of Series A Preferred Stock of OTI at an exercise price of $11.3518 per share.
The Runway warrants included a cashless exercise provision under which their holders could, in lieu of payment of the exercise price in cash, surrender the Runway warrant and receive a net amount of shares based on the fair market value of OTI’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Runway warrants contained provisions for adjustment of the exercise price and number of shares issuable upon the exercise of the Runway warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations.
The fair value of the warrants issued was recorded as of the date of initial issuance in the amount of $0.1 million. The subsequent issuance of warrants pursuant to the August 5, 2019 amendment to the Runway Loan and Security Agreement was recorded in the amount of $0.1 million. Immediately prior to the Colonnade Merger, the warrants were exercised in full in accordance with their terms.
On April 3, 2020, in connection with the closing of the Series B redeemable convertible preferred stock, OTI issued a warrant to purchase 4,513,993 shares of Series B redeemable convertible preferred stock of the Company at an exercise price of $0.3323 per share (the “Series B warrants”). The Series B warrants could be exercised prior to the earliest to occur of (i) the 10-year anniversary of the date of issuance, (ii) the consummation of a liquidation transaction, or (iii) the consummation of an initial public offering. The Series B warrants included a cashless exercise provision under which their holders may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the Company’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. The Series B warrants contained provisions for adjustment of the exercise price and number of shares issuable upon the exercise of the Series B warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications, and consolidations.
The Series B warrants were initially recognized as a liability at a fair value of $0.7 million. The Series B warrants were exercised on February 11, 2021 and the warrant liability was remeasured to fair value as of that date, resulting in a loss of $8.3 million for the nine months ended September 30, 2021, classified within other income (expense), net in the consolidated statements of operations and comprehensive loss. Upon exercise, redeemable convertible preferred stock converted into common stock pursuant to the conversion rate effective immediately prior to the Colonnade Merger.
Historically, value was assigned to each class of equity securities using an option pricing model method (“OPM”). In September 2020, OTI began allocating the equity value using a hybrid method that utilizes a combination of the OPM and the probability weighted expected return method (“PWERM”). The PWERM is a scenario-based methodology that estimates the fair value of equity securities based upon an analysis of future values for OTI, assuming various outcomes. As the probability of a transaction with a special purpose acquisition company (“SPAC”) increased, the fair value of the redeemable convertible preferred stock warrant liability increased as of the date of the exercise.
The redeemable convertible preferred stock warrants were valued using the following assumptions under the Black-Scholes option-pricing model:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Initial Issuance Date | | Subsequent Issuance Date | | December 31, 2020 | | February 11, 2021 | | March 11, 2021 |
Stock price | $ | 5.80 | | | $ | 5.80 | | | $ | 7.11 | | | $ | 10.27 | | | $ | 8.44 | |
Expected term (years) | 10.00 | | 9.31 | | 2.00 | | 2.00 | | 2.00 |
Expected volatility | 57.81 | % | | 57.35 | % | | 76.00 | % | | 76.00 | % | | 76.00 | % |
Risk-free interest rate | 3.06 | % | | 1.75 | % | | 0.13 | % | | 0.13 | % | | 0.13 | % |
Dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Private Placement Warrants
Simultaneously with the closing of the Company’s initial public offering (the “IPO”) in August 2020, the sponsor of CLA, Colonnade Sponsor LLC, purchased an aggregate of 6,000,000 Private Placement warrants at a price of $1.00 per warrant, for an aggregate purchase price of $6,000,000. The Private Placement warrants became exercisable 12 months following the closing of the Company’s IPO, and will expire five years from the completion of the Colonnade Merger, or earlier upon redemption or liquidation. On March 11, 2021, each outstanding Private Placement warrant automatically converted into a warrant to purchase one share of Ouster common stock pursuant to the Warrant Agreement, at an exercise price of $11.50 per share.
The private placement warrant liability was remeasured to fair value as of September 30, 2022, resulting in a gain of $0.2 million and $7.4 million for the three and nine months ended September 30, 2022, respectively, classified within other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The private placement warrant liability was remeasured to fair value as of September 30, 2021 resulting in a loss of $14.5 million and $8.4 million for the three and nine months ended September 30, 2021, respectively, classified within other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.
The Private Placement warrants were valued using the following assumptions under the Black-Scholes option-pricing model:
| | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2021 | | September 30, 2022 |
Stock price | $ | 7.32 | | | $ | 5.20 | | | $ | 0.96 | |
Exercise price of warrant | 11.5 | | 11.5 | | 11.5 |
Expected term (years) | 4.44 | | 4.19 | | 3.44 |
Expected volatility | 46.00 | % | | 57.00 | % | | 69.24 | % |
Risk-free interest rate | 0.90 | % | | 1.14 | % | | 4.21 | % |
| | | | | |
Public Warrants
CLA, in its IPO in August 2020, issued 20,000,000 units that each consisted of one Class A ordinary share and one-half warrant to purchase a Class A ordinary share, which the Company refers to as CLA warrants before the Colonnade Merger and Public warrants after the Colonnade Merger. These warrants may only be exercised for a whole number of shares, and no fractional warrants were issued or issuable upon separation of the units and only whole warrants will trade. The warrants became exercisable 12 months following the closing of the Company’s IPO, and will expire five years from the completion of the Colonnade Merger, or earlier upon redemption or liquidation. Each Public warrant is exercisable at a price of $11.50 per share. On March 11, 2021, upon the closing of the Colonnade Merger pursuant to the Colonnade Merger Agreement (Note 1), each of the 9,999,996 outstanding warrants, as adjusted for any fractional warrants that were not issued upon separation, was converted automatically into a redeemable Public warrant to purchase one share of the Company’s common stock. The Public warrants were recognized as equity upon the Colonnade Merger in the amount of $17.9 million.
Prior to their expiration, the Company may redeem the Public warrants at a price of $0.01 per warrant, provided that the closing price of the Company’s common stock equals or exceeds $18.00 per share for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date on which the Company gives proper notice of such redemption to the warrants holders.
Note 7. Commitments and Contingencies
Letters of Credit
In connection with certain office leasehold interests in real property located in San Francisco (350 Treat Ave and, 2741 16th Street) and in Paris (5, rue Coq Héron), the Company obtained letters of credit from certain banks as required by the lease agreements. If the Company defaults under the terms of the applicable lease, the lessor will be entitled to draw upon the letters of credit in the amount necessary to cure the default. The amounts covered by the letters of credit are collateralized by certificates of deposit, which are included in restricted cash on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021. The outstanding amount of the letters of credit was $1.3 million and $2.0 million as of September 30, 2022 and December 31, 2021, respectively.
Non-Cancelable Purchase Commitments
As of September 30, 2022, the Company had non-cancelable purchase commitments to a third-party contract manufacturer for approximately $26.0 million and other vendors for approximately $7.5 million.
Litigation
The Company is involved in various legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. Legal fees are expensed as incurred. The Company has identified certain claims as a result of which a loss may be incurred, but in the aggregate any loss is expected to be immaterial. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Actual outcomes of these legal and regulatory proceedings may materially differ from our current estimates.
The company has made no accruals with respect to the following:
On June 10, 2021, the Company received a letter from the SEC notifying us of an investigation and document subpoena. The subpoena seeks documents regarding projected financial information in CLA’s Form S-4 registration statement filed on December 22, 2020. The Company has complied with the SEC’s requests to date; however, the SEC may request additional documents or information.
On June 14, 2022, Velodyne Lidar USA, Inc. (“Velodyne”) filed a lawsuit against the Company relating to two patents and requested an International Trade Commission proceeding with respect to the same two patents. On July 8, 2022, the Company filed a complaint against Velodyne, alleging multiple claims including intellectual property misappropriation and false advertising. While the cases remain pending, the Company and Velodyne have agreed that no later than seven days after the execution of the merger agreement with Velodyne (the “Velodyne Merger Agreement”), each will cooperate to take certain actions in connection with dismissing these pending litigation matters between the Company and Velodyne and moving to terminate United States International Trade Commission Investigation No. 337-TA-1332. There can be no assurances that such matters will ultimately be dismissed.
Other than as set forth above, as of September 30, 2022 and December 31, 2021 there were no material updates and no other material litigation matters.
Indemnification
From time to time, the Company enters into agreements in the ordinary course of business that include indemnification provisions. Generally, in these provisions the Company agrees to defend, indemnify, and hold harmless the indemnified parties for claims and losses suffered or incurred by such indemnified parties for which the Company is responsible under the applicable indemnification provisions. The terms of the indemnification provisions vary depending upon negotiations between the Company and its counterpart; however, typically, these indemnification obligations survive the term of the contract and the maximum potential amount of future payments the Company could be required to make pursuant to these provisions are uncapped. To date, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnification provisions.
The Company has also entered into indemnity agreements pursuant to which it has indemnified its directors and officers, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer, other than liabilities arising from
willful misconduct of the individual. To date, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnity agreements. The unaudited condensed consolidated financial statements do not include a liability for any potential obligations under the indemnification agreements at September 30, 2022 and December 31, 2021.
Note 8. Redeemable Convertible Preferred and Common Stock
The Company’s common stock and warrants trade on the New York Stock Exchange under the symbol “OUST” and “OUSTWS”, respectively. Pursuant to the terms of the Second Amended and Restated Certificate of Incorporation, the Company is authorized to issue the following shares and classes of capital stock, each with a par value of $0.0001 per share: (i) 1,000,000,000 shares of common stock; (ii) 100,000,000 shares of preferred stock. Immediately following the Colonnade Merger, there were 161,449,205 shares of common stock with a par value of $0.0001, and 15,999,996 warrants outstanding. The holder of each share of common stock is entitled to one vote.
The Company has retroactively adjusted the shares issued and outstanding prior to March 11, 2021 to give effect to the exchange ratio established in the Colonnade Merger Agreement to determine the number of shares of common stock into which they were converted.
Immediately prior to the Colonnade Merger, OTI’s certificate of incorporation, as amended, authorized it to issue 342,367,887 shares of $0.00001 par value, with 210,956,516 shares designated as common stock and 131,411,372 shares of redeemable convertible preferred stock.
On March 11, 2021, upon the closing of the Transaction pursuant to the Colonnade Merger Agreement (Note 1), all of the outstanding redeemable convertible preferred stock was converted to the Company’s common stock pursuant to the conversion rate effective immediately prior to the Transaction and the remaining amount was reclassified to additional paid-in capital. As of September 30, 2022 and December 31, 2021, the Company does not have any redeemable convertible preferred stock outstanding.
On April 29, 2022, the Company entered into an At-Market-Issuance Sales Agreement (the “ATM Agreement”) pursuant to which the Company may, subject to the terms and conditions set forth in the agreement offer and sell, from time to time, through or to the agents, acting as agent or principal, shares of the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $150.0 million.
From the date of the ATM Agreement through September 30, 2022, the Company sold 7,833,709 shares at a weighted-average sales price of $2.08 per share, resulting in cumulative gross proceeds to the Company totaling approximately $16.8 million before deducting offering costs, sales commissions and fees. Cumulative net proceeds to the Company totaled approximately $15.8 million after deducting offering costs, sales commissions and fees. The Company plans to use the net proceeds from this offering for working capital and general corporate purposes.
In September 2022, the Company suspended sales of common stock through its ATM Agreement. The remaining availability under the ATM Agreement as of September 30, 2022 is approximately $133.2 million.
Note 9. Stock-based Compensation
As of September 30, 2022, the Company has four equity incentive plans, the 2015 Stock Plan (the “2015 Plan”), the Sense 2017 Equity Incentive Plan (the “Sense Plan”), the 2021 Incentive Award Plan (the “2021 Plan”) and 2022 Employee Stock Purchase Plan (the “2022 ESPP” and, collectively with the 2015 Plan, the Sense Plan and the 2021 Plan, together the “Plans”).
The Plans provide for the grant of stock options, stock appreciation rights, restricted stock awards (“RSA”), restricted stock units (“RSUs”), performance stock unit awards and other forms of equity compensation (collectively, “equity awards”). In addition, the 2021 Plan provides for the grant of performance bonus awards. All awards under the Plans may be granted to employees, including officers, and awards under the 2015 Plan, Sense Plan and 2021 Plan also may be granted to directors and consultants, in each case, within the limits defined in the Plans.
The Company’s 2022 ESPP has been offered to all eligible employees since August 2022 and generally permits certain employees to purchase shares of our common stock through payroll deductions of up to 15% of their compensation of each offering period, subject to certain limitations. Under the 2022 ESPP, the purchase price of a share under the ESPP equals 85% of the lesser of the fair market value of a share of common stock on either the first or last day of each offering period, but no less than the par value per share of common stock. As of September 30, 2022, 6.9 million shares of our common stock were available for issuance under the 2022 ESPP. The stock-based compensation expense is calculated as of the beginning of the
offering period as the fair value of the 2022 ESPP shares utilizing the Black-Scholes option valuation model and is recognized over the offering period. The first offering period under the 2022 ESPP commenced on September 6, 2022. As of September 30, 2022, the maximum number of shares that may be issued under the first offering period was 349,630 shares of our common stock, but no shares were issued under the 2022 ESPP.
Certain employees have the right to early exercise unvested stock options, subject to rights held by the Company to repurchase unvested shares in the event of voluntary or involuntary termination. The Company accounts for cash received in consideration for the early exercise of unvested stock options as a non-current liability, included as a component of other liabilities in the Company’s condensed consolidated balance sheets.
On October 12, 2020, certain executives and employees issued the Company partial recourse promissory notes with an aggregate principal of $1.1 million. The promissory notes carried a 0.38% annual interest rate and were due on the earliest of the ninth anniversary of the date of issuance of the notes, the termination of employment of the executive/employee, the filing by the Company of a registration statement under the Securities Act of 1933, the promissory notes being prohibited under Section 13(k) of the Securities Exchange Act of 1934 or, the closing of a change in control of the Company. The promissory notes were issued by the executives and employees in satisfaction of the exercise price of vested options to purchase 2,883,672 shares of common stock and unvested options to purchase 4,603,833 shares of common stock. No cash was exchanged as part of the exercises. In March 2021, in connection with the close of the Colonnade Merger, the Company forgave half of the respective obligations under the promissory notes for certain executives and required such noteholders to repay the remaining balance of $0.3 million under their respective notes. Additional compensation expense of $0.3 million was recognized in general and administrative expenses for the nine months ended September 30, 2021 for the value of the loans forgiven. No obligations under the promissory notes for non-executive noteholders were outstanding as of September 30, 2022 and December 31, 2021.
Stock option activity for the nine months ended September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares Underlying Outstanding Options | | Weighted- Average Exercise Price per Share | | Weighted- Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
Outstanding—December 31, 2021 | 24,129,096 | | | $ | 1.01 | | | 8.60 | | $ | 100,992 | |
Options exercised | (1,753,708) | | | 0.20 | | | | | |
Options cancelled | (857,212) | | | 2.85 | | | | | |
Outstanding—September 30, 2022 | 21,518,176 | | | $ | 1.01 | | | 7.92 | | $ | 9,866 | |
Vested and expected to vest—September 30, 2022 | 21,518,176 | | | $ | 1.01 | | | 7.92 | | $ | 9,866 | |
Exercisable—September 30, 2022 | 11,545,615 | | | $ | 0.89 | | | 7.86 | | $ | 5,669 | |
The following table summarizes information about stock options outstanding and exercisable at September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Exercise Price | | Options Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Options Exercisable | | Weighted Average Exercise Price |
$ | 0.18 | | | 4,088,911 | | | 7.73 | | $ | 0.18 | | | 3,027,603 | | | $ | 0.18 | |
$ | 0.21 | | | 8,909,207 | | | 7.98 | | $ | 0.21 | | | 4,415,060 | | | $ | 0.21 | |
$ | 1.42 | | | 7,524,114 | | | 8.00 | | $ | 1.42 | | | 3,605,304 | | | $ | 1.42 | |
$ | 1.49 | | | 34,036 | | | 0.18 | | $ | 1.49 | | | 34,036 | | | $ | 1.49 | |
$ | 5.24 | | | 316,111 | | | 6.25 | | $ | 5.24 | | | 234,893 | | | $ | 5.24 | |
$ | 10.26 | | | 645,797 | | | 8.60 | | $ | 10.26 | | | 228,719 | | | $ | 10.26 | |
| | 21,518,176 | | | | | | | 11,545,615 | | | |
As of September 30, 2022, there was approximately $15.7 million of unamortized stock-based compensation expense related to unvested stock options that is expected to be recognized over a weighted average period of 1.9 years.
Restricted Stock Units (“RSU”)
A summary of RSU activity is as follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value (per share) |
Unvested—December 31, 2021 | 9,326,572 | | | $ | 7.82 | |
Granted during the year | 14,701,880 | | | 2.86 | |
Canceled during the year | (2,887,605) | | | 5.95 | |
Vested during the year | (2,754,926) | | | 7.22 | |
Unvested—September 30, 2022 | 18,385,921 | | | $ | 4.24 | |
Stock compensation expense is recognized on a straight-line basis over the vesting period of each RSU. As of September 30, 2022, total compensation expense related to unvested RSUs granted to employees, but not yet recognized, was $72.3 million, with a weighted-average remaining vesting period of 2.9 years.
RSUs settle into shares of common stock upon vesting.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expense for all stock options in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Cost of product revenue | $ | 207 | | | $ | 206 | | | $ | 570 | | | $ | 457 | |
Research and development | 3,681 | | | 2,063 | | | 11,248 | | | 4,305 | |
Sales and marketing | 1,913 | | | 1,717 | | | 5,276 | | | 2,702 | |
General and administrative | 2,654 | | | 3,161 | | | 8,230 | | | 11,093 | |
Total stock-based compensation | $ | 8,455 | | | $ | 7,147 | | | $ | 25,324 | | | $ | 18,557 | |
The following table summarizes stock-based compensation expense by award type (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
RSUs | $ | 6,313 | | | $ | 4,892 | | | $ | 18,460 | | | $ | 8,824 | |
Stock Options | 2,099 | | | 2,251 | | | 6,807 | | | 9,718 | |
Employee stock purchase plan | 43 | | | — | | | 43 | | | — | |
RSAs | — | | | 4 | | | 14 | | | 15 | |
Total stock-based compensation | $ | 8,455 | | | $ | 7,147 | | | $ | 25,324 | | | $ | 18,557 | |
Note 10. Net Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per common share attributable to common stockholders (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net loss | $ | (35,987) | | | $ | (12,669) | | | $ | (96,384) | | | $ | (65,637) | |
Denominator: | | | | | | | |
Weighted average shares used to compute basic and diluted net loss per share | 181,361,354 | | | 156,647,259 | | | 175,795,093 | | | 123,175,390 | |
Net loss per common share—basic and diluted | $ | (0.20) | | | $ | (0.08) | | | $ | (0.55) | | | $ | (0.53) | |
The shares and net loss per common share, prior to the Colonnade Merger, have been retroactively restated as shares reflecting the exchange ratio of approximately 0.703 shares of the Company per one share of OTI as established in the Colonnade Merger Agreement.
The weighted average number of shares used to compute basic and diluted net loss per share excludes unvested early exercised common stock options subject to repurchase.
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Options to purchase common stock | 21,518,176 | | | 24,959,807 | |
Public and private common stock warrants | 15,999,900 | | | 15,999,996 | |
Restricted Stock Units | 18,385,921 | | | 4,304,588 | |
Unvested early exercised common stock options | 970,090 | | | 2,234,455 | |
ESPP shares pending issuance | 349,630 | | | — | |
Unvested RSAs | — | | | 23,288 | |
Vested and early exercised options subject to nonrecourse notes | — | | | 2,172,238 | |
Total | 57,223,717 | | | 49,694,372 | |
Note 11. Income Taxes
The Company’s income tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in the quarter. The Company’s effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on the deferred tax assets as it is more likely than not that some, or all, of the Company’s deferred tax assets will not be realized. The Company continues to maintain a full valuation allowance against its net deferred tax assets. Due to tax losses and the offsetting valuation allowance, the income tax provision for the three and nine months ended September 30, 2022 and 2021 was not material to the Company’s condensed consolidated financial statements.
Note 12. Revenue
Revenue from the sale of lidar sensor kits, which is recognized at a point in time, was $11.2 million and $7.8 million in the three months ended September 30, 2022 and 2021, respectively, and $30.1 million and $21.7 million in the nine months ended September 30, 2022 and 2021, respectively.
The following table presents total revenues by geographic area based on the location products were shipped to and services provided (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
United States | $ | 4,010 | | | $ | 4,037 | | | $ | 9,850 | | | $ | 8,463 | |
North and South America, excluding United States | 172 | | | 147 | | | 835 | | | 675 | |
Asia and Pacific | 2,072 | | | 1,957 | | | 7,004 | | | 4,904 | |
Europe, Middle East and Africa | 4,950 | | | 1,614 | | | 12,402 | | | 7,684 | |
Total | $ | 11,204 | | | $ | 7,755 | | | $ | 30,091 | | | $ | 21,726 | |
Note 13. Related Party Transactions
See Note 5, Debt for details of promissory notes issued by the Company to certain investors of the Company (or an affiliate thereof).
See Note 9, Stock-based compensation for details of partial recourse promissory notes issued by the Company to certain executives and employees.
Note 14. Subsequent events
Velodyne Merger
On November 4, 2022, the Company, Velodyne Lidar, Inc., a Delaware corporation (“Velodyne”), Oban Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of the Company (“Merger Sub I”) and Oban Merger Sub II LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of the Company (“Merger Sub II”), entered into an Agreement and Plan of Merger (the “Velodyne Merger Agreement”). Pursuant to the Velodyne Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, Merger Sub I shall be merged with and into Velodyne (the “Velodyne First Merger”), with Velodyne surviving as a wholly owned subsidiary of the Company (the “Surviving Corporation”) and as soon as practicable following the First Merger, the Surviving Corporation will be merged with and into Merger Sub II with Merger Sub II surviving as a wholly owned subsidiary of the Company (the “Velodyne Second Merger”, and together with the First Merger, the “Velodyne Mergers”).
The board of directors of each of the Company and Velodyne has unanimously approved the Velodyne Merger Agreement and the transactions contemplated thereby. The Velodyne Mergers are subject to customary closing conditions including stockholder approval by both companies. Both companies will continue to operate their businesses independently until the close of the Velodyne Merger. The Velodyne Mergers are expected to be completed in the first half of 2023.
Merger Consideration
At the effective time of the Velodyne Mergers (the “Effective Time”), (i) each share of common stock, par value $0.0001 per share, of Velodyne (“Velodyne Common Stock”) issued and outstanding immediately prior to the Effective Time (other than the shares that are owned by Velodyne, Ouster, Merger Sub I or Merger Sub II or any wholly owned subsidiary of Velodyne, Ouster, Merger Sub I or Merger Sub II) will be converted into the right to receive 0.8204 (the “Exchange Ratio”) validly issued, fully paid and non-assessable shares of common stock of the Company (such shares the “Velodyne Common Stock Merger Consideration”) and (ii) each share of preferred stock, par value $0.0001 per share, of Velodyne (“Velodyne Preferred Stock”) issued and outstanding immediately prior to the Effective Time (other than the shares that are owned by Velodyne, Ouster, Merger Sub I or Merger Sub II or any wholly owned subsidiary of Velodyne, Ouster, Merger Sub I or Merger Sub II) will be cancelled for no consideration. No fractional shares of the Company’s common stock will be issued in the Velodyne Mergers, and Velodyne stockholders will receive cash in lieu of any fractional shares as part of the Velodyne Common Stock Merger Consideration, as specified in the Velodyne Merger Agreement.
The Exchange Ratio will result in Velodyne common stockholders and the Company’s common stockholders owning approximately 50% and 50%, respectively, of the outstanding shares of Ouster Common Stock following the Effective Time, based on shares outstanding as of the date of the Velodyne Merger Agreement.
Voting Agreements
Simultaneously with the execution of the Velodyne Merger Agreement, Velodyne entered into Voting and Support Agreements (the “Velodyne Voting and Support Agreement”) with its directors and officers, and Ouster entered into voting and support agreements with Banyan Venture Holdings and its directors and officers (the “Ouster Voting and Support Agreements”).
Pursuant to the Ouster Voting and Support Agreements, Banyan Venture Holdings and Ouster’s directors and officers have agreed, among other things, to vote their respective shares in favor of the adoption of the Velodyne Merger Agreement. Pursuant to the Velodyne Voting and Support Agreements, Velodyne’s directors and officers have agreed, among other things, to vote their respective shares in favor of the adoption of the Velodyne Merger Agreement.
Loan and Security Agreement
On October 17, the Company drew down $20.0 million available under the Loan and Security Agreement, dated April 29, 2022, by and between Ouster, Sense Photonics, Inc. and Hercules Capital, Inc. (as amended from time to time, the “Hercules Loan Agreement”).
In contemplation of entry into the Velodyne Merger Agreement, on November 1, 2022, the Company entered into the Consent and Second Amendment to Loan and Security Agreement (the “Hercules Amendment”), amending the Hercules Loan Agreement. Pursuant to the terms of the Hercules Amendment, the financial covenant requiring Ouster to achieve certain trailing twelve month revenue thresholds commencing with the quarter ending June 30, 2023 will be eliminated and replaced, contingent upon and effective as of the closing of the Velodyne Mergers, with a minimum liquidity financial covenant whereby the Company must maintain at least $60.0 million of cash in deposit accounts that are subject to an account control agreement in favor of Hercules.