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Form 424B3 AEye, Inc.

August 15, 2022 6:15 AM EDT

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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-264727
PROSPECTUS SUPPLEMENT NO. 3
To Prospectus dated May 16, 2022
AEYE, INC.
Up to 30,865,419 Shares of Common Stock
_____________________________________
This prospectus supplement (this “Supplement”) supplements the prospectus dated May 16, 2022 (as may be supplemented from time to time, the “Prospectus”), which is part of a registration statement on Form S-1 (File No. 333-264727) relating to the offer and resale of up to 30,865,419 shares of common stock of AEye, Inc. (the “Common Stock”) by Tumim Stone Capital LLC (the “Selling Securityholder” or “Tumim”). The shares of Common Stock being offered by Tumim have been and may be issued pursuant to the purchase agreement dated December 8, 2021 that we entered into with Tumim (the “Purchase Agreement”). We are not selling any securities under the Prospectus and will not receive any of the proceeds from the sale of our Common Stock by Tumim. However, we may receive up to $125.0 million in aggregate gross proceeds from sales of our Common Stock to Tumim that we may make under the Purchase Agreement from time to time after the date of the Prospectus. On December 8, 2021, we issued 302,634 shares of our Common Stock (the “Commitment Shares”), to Tumim as consideration for its irrevocable commitment to purchase shares of our Common Stock under the Purchase Agreement. See the sections entitled “The Tumim Transaction” in the Prospectus for a description of the transaction contemplated by the Purchase Agreement and “Selling Stockholder” in the Prospectus for additional information regarding Tumim.
This Supplement is being filed to update and supplement the information in the Prospectus with the information contained in the Form 10-Q filed with the Securities and Exchange Commission on August 15, 2022.
This Supplement is not complete without, and may not be delivered or utilized except in connection with, the Prospectus. This Supplement should be read in conjunction with the Prospectus, and if there is any inconsistency between the information in the Prospectus and this Supplement, you should rely on the information in this Supplement.
Tumim may sell the shares of our Common Stock included in the Prospectus in a number of different ways and at varying prices. We provide more information about how Tumim may sell the shares in the section in the Prospectus entitled “Plan of Distribution.” Tumim is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act of 1933, as amended (the “Securities Act”).
Tumim will pay all sales and brokerage commissions and similar expenses in connection with the offer and resale of the Common Stock by Tumim pursuant to the Prospectus. We will pay the expenses (except sales and brokerage commissions and similar expenses) incurred in registering under the Securities Act the offer and resale of the shares included in the Prospectus by Tumim, including legal and accounting fees. See “Plan of Distribution” in the Prospectus.
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, and are subject to reduced public company reporting requirements. The Prospectus complies with the requirements that apply to an issuer that is an emerging growth company.
Our Common Stock is listed on The Nasdaq Stock Market LLC (“Nasdaq”) under the symbols “LIDR.” On August 12, 2022, the closing price of our Common Stock was $2.65 per share.
Our business and investment in our Common Stock and Warrants involve significant risks. These risks are described in the section titled “Risk Factors” beginning on page 11 of the Prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of the Prospectus. Any representation to the contrary is a criminal offense.

The date of this Supplement is August 15, 2022.
_____________________________________




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022

OR
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file number 333-259554
a-aeye_fullcolorxtmxrgb.jpg
AEye, Inc.
(Exact name of registrant as specified in its charter)
Delaware
37-1827430
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Park Place, Suite 200, Dublin, CA
94568
(Address of Principal Executive Offices)
(Zip Code)
(925) 400-4366
Registrant’s telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.0001 par value per shareLIDRThe Nasdaq Stock Market LLC
Warrants to purchase one share of common stockLIDRWThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company
                
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 10, 2022, the registrant had 159,300,358 shares of common stock, $0.0001 par value per share, outstanding.






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AEye, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2022


TABLE OF CONTENTS

Page









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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve substantial risks and uncertainties. These statements reflect the current views of management with respect to future events and our financial performance. In some cases, you can identify these statements by forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words or phrases, but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies, and anticipated trends in our business.

These statements are only predictions based on our current expectations and projections about future events. These statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from the results, level of activity, performance, or achievements expressed or implied by the forward-looking statements. Given these risks, uncertainties, and other factors, you should not place undue reliance on these forward-looking statements. These factors include the information set forth in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 under the heading “Risk Factors,” and Part II, Item 1A, of this Quarterly Report under the heading “Risk Factors,” which we encourage you to carefully read. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. We undertake no obligation to update any forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.



































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PART 1. FINANCIAL INFORMATION
Item 1. Financial statements (Unaudited)
AEYE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value)
June 30, 2022December 31, 2021
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$4,236 $14,183 
Marketable securities121,526 149,824 
Accounts receivable, net 189 4,222 
Inventories, net5,066 4,085 
Prepaid and other current assets4,151 5,051 
Total current assets135,168 177,365 
Right-of-use assets16,186 — 
Property and equipment, net6,717 5,129 
Restricted cash2,150 2,150 
Other noncurrent assets1,098 1,509 
Total assets$161,319 $186,153 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$3,836 $2,542 
Accrued expenses and other current liabilities10,792 8,739 
Contract liabilities1,633 2,287 
Total current liabilities16,261 13,568 
Operating lease liabilities, noncurrent17,424 — 
Deferred rent, noncurrent— 3,032 
Other noncurrent liabilities46 786 
Total liabilities33,731 17,386 
COMMITMENTS AND CONTINGENCIES (Note 19)
STOCKHOLDERS’ EQUITY:
Preferred stock—$0.0001 par value: 1,000,000 shares authorized; no shares issued and outstanding
— — 
Common stock—$0.0001 par value: 300,000,000 shares authorized; 158,475,630 and 155,137,237 shares issued and outstanding at June 30, 2022 and December 31, 2021
16 16 
Additional paid-in capital332,344 320,937 
Accumulated other comprehensive loss(1,629)(391)
Accumulated deficit(203,143)(151,795)
Total stockholders’ equity127,588 168,767 
Total liabilities and stockholders’ equity$161,319 $186,153 
The accompanying notes are an integral part of these condensed consolidated financial statements.






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AEYE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
(Unaudited)
Three months ended June 30,Six months ended June 30,
2022202120222021
REVENUE:
Prototype sales$195 $228 $530 $461 
Development contracts511 519 1,258 615 
Total revenues706 747 1,788 1,076 
Cost of revenue1,427 454 2,909 1,071 
Gross loss(721)293 (1,121)
OPERATING EXPENSES:
Research and development10,762 5,726 19,338 11,562 
Sales and marketing5,323 1,911 9,939 3,498 
General and administrative9,827 4,750 21,157 7,760 
Total operating expenses25,912 12,387 50,434 22,820 
LOSS FROM OPERATIONS(26,633)(12,094)(51,555)(22,815)
OTHER INCOME (EXPENSE):
Change in fair value of embedded derivative liability and warrant liabilities141 (16)109 (119)
Gain on PPP loan forgiveness— 2,297 — 2,297 
Interest income and other350 774 
Interest expense and other(307)(1,264)(650)(1,952)
Total other income (expense), net184 1,019 233 231 
Provision for income tax expense18 — 26 — 
Net loss$(26,467)$(11,075)$(51,348)$(22,584)
PER SHARE DATA
Net loss per common share (basic and diluted)$(0.17)$(0.11)$(0.33)$(0.22)
Weighted average common shares outstanding (basic and diluted)157,310,419 101,458,886 156,071,676 101,398,851 
COMPREHENSIVE LOSS:
Net loss$(26,467)$(11,075)$(51,348)$(22,584)
Change in net unrealized loss on available-for-sale securities, net of tax(182)— (1,238)— 
Comprehensive loss$(26,649)$(11,075)$(52,586)$(22,584)

The accompanying notes are an integral part of these condensed consolidated financial statements.






5




AEYE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the six months ended June 30, 2022 and 2021
(In thousands, except share data)
(Unaudited)
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance as of December 31, 2021
— $— 155,137,237 $16 $320,937 $(391)$(151,795)$168,767 
Stock-based compensation— — — — 5,340 — — 5,340 
Issuance of common stock upon exercise of stock options— — 656,303 — 222 — — 222 
Issuance of common stock upon vesting of restricted stock units— — 856,917 — — — — — 
Taxes related to net share settlement of equity awards— — (285,533)— (1,149)— — (1,149)
Change in net unrealized loss on available-for-sale securities, net of tax— — — — — (1,056)— (1,056)
Net loss— — — — — — (24,881)(24,881)
BALANCE—March 31, 2022— $— 156,364,924 $16 $325,350 $(1,447)$(176,676)$147,243 
Stock-based compensation— — — — 6,557 — — 6,557 
Issuance of common stock upon exercise of stock options— — 1,105,298 — 446 — — 446 
Issuance of common stock upon vesting of restricted stock units— — 883,318 — — — — 
Taxes related to net share settlement of equity awards— — (312,920)— (1,431)— — (1,431)
Issuance of common stock under the Common Stock Purchase Agreement— — 435,000 — 1,422 — — 1,422 
Issuance of stock upon exercise of public warrants— — 10 — — — — — 
Change in net unrealized loss on available-for-sale securities, net of tax— — — — — (182)— (182)
Net loss— — — — — — (26,467)(26,467)
BALANCE—June 30, 2022— $— 158,475,630 $16 $332,344 $(1,629)$(203,143)$127,588 







6




AEYE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the six months ended June 30, 2022 and 2021
(In thousands, except share data)
(Unaudited)
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
BALANCE—December 31, 2020 (as previously reported)16,383,725 $62,639 10,838,010 $— $5,920 $(86,784)$(18,225)
Retroactive application of recapitalization (Note 2)(16,383,725)(62,639)90,448,635 10 62,629 — — 
Balance as of December 31, 2020, as adjusted— — 101,286,645 10 68,549 (86,784)(18,225)
Stock-based compensation— — — — 1,610 — 1,610 
Issuance of common stock upon exercise of stock options— — 171,724 — 85 — 85 
Net loss— — — — — (11,509)(11,509)
BALANCE—March 31, 2021 — $— 101,458,369 $10 $70,244 $(98,293)$(28,039)
Issuance of common stock upon exercise of stock options— — 8,478 — — $
Stock-based compensation— — — — 2,620 — 2,620 
Net loss— — — — — (11,075)(11,075)
BALANCE—June 30, 2021— — 101,466,847 10 72,868 (109,368)(36,490)

The accompanying notes are an integral part of these condensed consolidated financial statements.






7


AEYE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
20222021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss$(51,348)$(22,584)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 463 498 
Noncash lease expense relating to operating lease right-of-use assets654 — 
Inventory write-downs, net of scrapped inventory335 — 
Change in fair value of embedded derivative liability and warrant liabilities(109)119 
Noncash gain on PPP loan forgiveness— (2,297)
Stock-based compensation11,897 4,230 
Amortization of debt issuance costs— 437 
Amortization of debt discount— 543 
Amortization of premiums on marketable securities, net of change in accrued interest826 — 
Other— 189 
Changes in operating assets and liabilities:
Accounts receivable, net4,033 18 
Inventories, net (1,316)(1,813)
Prepaid and other current assets900 (316)
Other noncurrent assets 411 (144)
Accounts payable 932 1,513 
Accrued expenses and other current liabilities1,354 1,953 
Operating lease liabilities(859)— 
Deferred rent— (297)
Contract liabilities(1,285)(388)
Net cash used in operating activities(33,112)(18,339)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment(1,759)(245)
Proceeds from redemption of marketable securities26,234 — 
Net cash provided by (used in) operating activities24,475 (245)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options668 89 
Proceeds from the issuance of convertible notes— 8,045 
Proceeds from bank loan— 10,000 
Principal payments - bank loan— (667)
Transaction costs related to Business Combination and PIPE Financing paid prior to the close— (1,287)
Payment of debt issuance costs— (717)
Taxes paid related to the net share settlement of equity awards(3,400)— 
Proceeds from issuance of common stock under the Common Stock Purchase Agreement1,422 — 
Net cash provided by (used in) financing activities(1,310)15,463 
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH(9,947)(3,121)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period16,333 16,497 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Ending$6,386 $13,376 
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes$10 $— 
Cash paid for interest$— $142 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property and equipment included in accounts payable and accrued liabilities$562 $85 
Taxes related to net settlement of restricted stock units included in accrued liabilities$15 $— 
Operating lease right-of-use assets obtained in exchange for lease obligations upon adoption of ASC 842$16,284 $— 
Financings costs included in accounts payable and accrued liabilities$— $2,143 
Noncash gain on extinguishment of debt related to PPP loan$— $2,297 
Operating lease right-of-use assets obtained in exchange for lease obligations$556 $— 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AEYE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data or otherwise stated)

1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

AEye, Inc. (the “Company” or “AEye”) is a provider of high-performance, active lidar systems for vehicle autonomy, advanced driver-assistance systems (ADAS), and robotic vision applications. AEye’s software-definable 4SightTM Intelligent Sensing Platform combines solid-state active lidar, an optionally fused low-light HD camera, and integrated deterministic artificial intelligence to capture more intelligent information with less data, enabling faster, more accurate, and more reliable perception.

On February 17, 2021, AEye Technologies, Inc., then known as AEye, Inc. (“AEye Technologies”), entered into the Agreement and Plan of Merger (the “Merger Agreement”) with CF Finance Acquisition Corp. III, a Delaware corporation (“CF III”), now known as AEye, Inc., and Meliora Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of CF III (“Merger Sub”). Based on CF III’s business activities, it was a “shell company” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On August 16, 2021 (the “Closing Date”), CF III closed the business combination (the “Business Combination,” and together with the other transactions contemplated by the Merger Agreement, the “Transactions”) pursuant to the Merger Agreement, and Merger Sub was merged with and into AEye Technologies with AEye Technologies surviving the merger as a wholly owned subsidiary of CF III. On the Closing Date, and in connection with the closing of the Transactions (the “Closing”), CF III changed its name to AEye, Inc.

The Company’s common stock and public warrants are now listed on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbols “LIDR” and “LIDRW”, respectively. Unless otherwise specified, “we,” “us,” “our,” “AEye,” and the “Company” refers to AEye, Inc., the combined entity following the Business Combination. Refer to Note 2 for further discussion of the Business Combination.

Unaudited Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include all adjustments necessary to the fair presentation of the Company’s condensed consolidated financial position, results of operations, and cash flows for the period presented under the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. The accompanying interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP along with instructions to Form 10-Q and Article 10 of SEC Regulation S-X.

Principle of Consolidation and Liquidity

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company has funded its operations primarily through the Business Combination and issuances of stock. As of June 30, 2022, the Company’s existing sources of liquidity included cash, cash equivalents, and marketable securities of $125,762. The Company has incurred losses and negative cash flows from operations. As the Company incurs additional losses in the future, it may need to raise additional capital through issuances of equity and debt. However, management believes that the Company’s existing sources of liquidity are adequate to fund its operations for at least the next 12 months.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. Specifically, Amortization of debt issuance costs is now presented as amortization of debt discounts on the consolidated statements of cash flows. Amortization of issuance costs is now presented as amortization of debt issuance costs on the consolidated statements of cash flows. Additionally, Payments of deferred financing costs is now presented as Transaction costs related to Business Combination and PIPE financing paid prior to the close on the consolidated statements of cash flows. Advances to suppliers has been broken out from Other within Footnote 6, Prepaid and other current assets.
9



Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. This may make it difficult or impossible to compare the Company’s financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include investments, embedded derivative and warrant liabilities, fair value of common stock, and stock-based compensation.

Segment Reporting

The Company manages its business on the basis of one reportable and operating segment. Operating segments are defined as components of an enterprise with separate financial information, and are evaluated regularly by the chief operating decision maker, which is the Company's Chief Executive Officer (“CEO”). The CEO decides how to allocate resources and assesses the Company’s performance based upon consolidated financial information. All of the Company's sales were made to customers (in USD) located in the U.S., Europe, and Asia through AEye, Inc. Of the $6,717 of net property and equipment as of June 30, 2022, $6,617 is located in the U.S., $73 is located in Europe, and $27 is in Asia.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, and marketable securities, and accounts receivable. The Company places its cash and cash equivalents with major financial institutions, which management assesses to be of high credit quality, to limit the exposure of each investment. The Company’s marketable securities have investment grade ratings when purchased which mitigates risk.

The Company’s accounts receivables are derived from customers located in the U.S., Europe, and Asia. The Company mitigates its credit risks by performing ongoing credit evaluations of its customers’ financial conditions. The Company generally does not require collateral.

10


The Company’s concentration of risk related to accounts receivable and accounts payable was determined by evaluating the number of customers and vendors accounting for 10% or more of accounts receivable (“AR”) and accounts payable (“AP”). As of June 30, 2022, AEye had two customers each accounting for 10% or more of AR and two vendors accounting for 10% or more of AP. As of December 31, 2021, AEye had one customer accounting for 10% or more of AR and two vendors accounting for 10% or more of AP. During the six months ended June 30, 2022 and 2021, the Company did not have any write-offs and at June 30, 2022 and 2021 did not record an allowance for doubtful accounts as all accounts receivable amounts are expected to be collected.

For the three and six months ended June 30, 2022 and 2021, revenue from the Company’s major customers representing 10% or more of total revenue was as follows:

Three months ended June 30,Six months ended June 30,
2022202120222021
Customer A72 %*64 %13 %
Customer B*16 %*18 %
Customer C****
Customer D**20 %*
Customer E*67 %*46 %
*Customer accounted for less than 10% of total revenue in the period.

Significant Accounting Policies

The Company's significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021. Other than the accounting policy discussed below related to the adoption of Accounting Standards Codification ("ASC") 842, Leases, there have been no material change to the Company's significant accounting policies during the six months ended June 30, 2022.

Leases

The Company determines if an arrangement is or contains a lease at inception. The Company evaluates the classification of leases at commencement, and, as necessary, at modification. Operating leases, consisting of office leases, are included in Right-of-use ("ROU") assets, Accrued expenses and other current liabilities, and Operating lease liabilities, noncurrent, on the Company's consolidated balance sheets. The Company did not have any finance leases as of June 30, 2022 and December 31, 2021. ROU assets represent the Company's right to an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made prior to lease commencement and initial direct costs and excludes lease incentives. Variable lease payments not dependent on an index or a rate are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. As most of the Company's leases do not include an implicit rate, the Company uses the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date in determining the present value of future payments. The incremental borrowing rate is a hypothetical rate based on the Company's understanding of what its credit rating would be for a secured borrowing when the lease was executed. The Company's lease term includes the noncancelable period, any rent-free periods provided by the lessor, and options to extend or terminate the lease when it is reasonably certain that it will exercise that option. At lease inception, and in subsequent periods as necessary, the Company estimates the lease term based on its assessment of extension and termination options that are reasonably certain to be exercised. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term and is included in operating expenses on the consolidated statements of operations and comprehensive loss. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (short-term leases) and elected to not separate lease components and non-lease components for its long-term real estate leases.

11


Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, ("FASB"), issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, which has subsequently been amended by ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, and ASU No. 2019-11. The objective of the guidance in ASU 2016-13 is to allow entities to recognize estimated credit losses in the period that the change in valuation occurs. ASU 2016-13 requires an entity to present financial assets measured on an amortized cost basis on the balance sheet net of an allowance for credit losses. Available-for-sale and held to maturity debt securities are also required to be held net of an allowance for credit losses. For public business entities, this standard is effective for fiscal years beginning after December 15, 2019. For smaller reporting companies, the standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements and related disclosures and will adopt the guidance on January 1, 2023, as permitted for smaller reporting companies.

Recently Adopted Accounting Guidance

In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02. FASB Accounting Standards Codification ("ASC") Topic 842, Leases (“ASC 842”) supersedes the previous accounting guidance for leases included within ASC 840. The new guidance generally requires an entity to recognize operating and financing lease liabilities and corresponding right-of-use assets on its balance sheet, as well as recognize the associated lease expenses on its statements of operations in a manner similar to that required under current accounting rules. The guidance requires a modified retrospective transition approach with application in all comparative periods presented (the “Comparative Method”), or alternatively, as of the effective date as the date of initial application without restating comparative period financial statements (the “Effective Date Method”).

The Company adopted this new standard on January 1, 2022 using the Effective Date Method. Upon adoption, the Company recorded net ROU assets and lease liabilities of $16,284 and $19,921, respectively, and a reversal of deferred rent of $3,032; there were no cumulative effect adjustments as of January 1, 2022. The standard did not have a material effect on the Company's consolidated statements of operations and comprehensive loss and the consolidated statement of cash flows. The Company elected the transition practical expedient package, which among other things, allows the carryforward of historical lease classifications. The Company will continue to apply ASC Topic 840, Leases, prior to January 1, 2022, including Topic 840 disclosure requirements, in the comparative periods presented. The Company did not elect to apply the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment of right-of-use assets.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by, among other things, eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2021. The Company adopted ASU 2019-12 as of January 1, 2022, and the Company's adoption did not have a material impact on the consolidated financial statements.

2.RECAPITALIZATION

As discussed in Note 1, on August 16, 2021, AEye Technologies and CF III closed the Business Combination, with AEye Technologies surviving the Business Combination as a wholly owned subsidiary of CF III. As part of the closing of the Business Combination, CF III changed its name to AEye, Inc. (the “Combined Entity”).

Immediately prior to the closing of the Business Combination, the Company’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 301,000,000 shares, of which 300,000,000 shares were designated common stock, $0.0001 par value per share, and of which 1,000,000 shares were designated preferred stock, $0.0001 par value per share.

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The Business Combination is accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with US GAAP. Under this method of accounting, AEye Technologies was treated as the accounting acquirer and CF III was treated as the acquired company for financial reporting purposes under FASB ASC Topic 805, Business Combinations (“ASC 805”). This determination is primarily based on AEye Technologies’ stockholders comprising a majority of the voting power of the combined entity, and having the ability to nominate the majority of the governing body of the combined entity, AEye Technologies’ senior management comprising the senior management of the Combined Entity, and AEye Technologies’ operations comprising the ongoing operations of the combined entity. Accordingly, for accounting purposes, the financial statements of the combined entity represented a continuation of the financial statements of AEye Technologies and the Business Combination was treated as the equivalent of AEye Technologies issuing stock for the net assets of CF III, accompanied by a recapitalization. The net assets of CF III are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of AEye Technologies in future reports of the combined entity. Loss per share and stockholders’ equity (deficit), prior to the Business Combination, have been retroactively converted into 3.7208 shares (the “Exchange Ratio”).

Immediately prior to the closing of the Business Combination, all outstanding principal and unpaid accrued interest of the 2020 Notes were ultimately converted into 5,584,308 shares of AEye Technologies’ common stock and subsequently converted to Class A common stock of the Company (see Note 11). Separately, each issued and outstanding share of AEye Technologies’ 16,383,725 redeemable convertible preferred stock was converted into shares of AEye Technologies’ common stock based on a one-to-one ratio. The consolidated financial statements are accounted for with a retrospective application of the Business Combination that results in 16,383,725 shares of redeemable convertible preferred stock converting into common stock of the Company. Upon the closing of the Business Combination, each share of AEye Technologies common stock issued and outstanding was canceled and converted into the right to receive 3.7208 shares of CF III’s common stock (the “Per Share Merger Consideration”).

Immediately prior to the closing of the Business Combination, the Board approved the net exercise of common stock warrants and Series A preferred warrants which provides for the cashless exercise of 61,612 common stock warrants into 57,770 shares of AEye Technologies common stock and 7,353 Series A preferred warrants into 6,949 shares of AEye Technologies common stock at the Transaction Price of 37.21 per share. Upon the Closing, the combined 64,719 shares were cancelled and exchanged for 240,806 shares of the Company’s Class A common stock, after giving effect to the Exchange Ratio.

Immediately prior to the closing of the Business Combination, CF III’s amended and restated certificate of incorporation, dated November 12, 2020 (the “Charter”), was further amended and restated to eliminate the Class B common stock (after giving effect to the conversion of each outstanding share of Class B common stock immediately prior to the closing of the Business Combination into one share of Class A common stock).

PIPE Subscription Agreement

Contemporaneously with the execution of the Merger Agreement, CF III entered into separate PIPE Subscription Agreements in a private placement with a number of PIPE investors, pursuant to which the PIPE Investors agreed to purchase, and CF III agreed to sell to the PIPE Investors, an aggregate of 22,000,000 shares of common stock, for a purchase price of $10.00 per share and an aggregate purchase price of $220,000. CF III also entered into a PIPE Subscription Agreement for 500,000 shares of common stock, for a purchase price of $10.00 per share and an aggregate purchase price of $5,000 with an investor who defaulted on the Closing under the PIPE Subscription Agreement. The Company recently initiated litigation to enforce the terms of that investor's PIPE Subscription Agreement.

Redemption

Certain CF III shareholders exercised their right to redeem certain of their outstanding shares for cash, resulting in the redemption of 19,355,365 shares of CF III Class A common stock for an aggregate payment of $195,498, at a redemption price of $10.10 per share based on the Trust Account balance as of August 11, 2021.

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Public and Private Placement Warrants

CF III Warrants issued in connection with the IPO (“Public Warrants”) and in connection with the private placement units held by the Sponsor (“Private Placement Warrants”) to purchase shares of the Company’s common stock, at an exercise price of $11.50 per share, remained outstanding after the closing of the Business Combination. The warrants became exercisable 30 days after the completion of the Business Combination, subject to other conditions, including with respect to the effectiveness of a registration statement covering the shares of common stock underlying such warrants, and will expire 5 years after the completion of the Business Combination or earlier upon redemption or liquidation. The Public Warrants are classified as equity and valued based on the instrument’s publicly listed trading price. The Private Placement Warrants are classified as liabilities and measured at fair value, with changes in fair value each period reported in the consolidated statements of operations and comprehensive loss. The Company uses the Public Warrants listed trading price to value the Private Placement Warrants each reporting period.

Transaction Costs

In connection with the Business Combination, the Company incurred direct and incremental costs of approximately $52,661 related to the equity issuance, consisting primarily of investment banking, legal, accounting, and other professional fees, which were recorded to additional paid-in capital as a reduction of proceeds upon the closing of the Business Combination. Transaction costs that were not directly related to the Business Combination of approximately $2,198 were expensed.

Transaction Proceeds

Upon closing of the Business Combination, the Company received gross proceeds of $256,811 from the Business Combination and PIPE financing, offset by offerings costs of $52,661. The following table reconciles the elements of the Business Combination to the consolidated statements of cash flows and the consolidated statements of changes in stockholders’ deficit for period ended December 31, 2021 (in thousands, except share data):

Cash - CF III's trust and cash (net of redemption)$36,811 
Cash - Private offering220,000 
Less: transaction costs and advisory fees paid(52,661)
Net Business combination and private offering$204,150 

The number of shares of common stock issued immediately following the closing of the Business Combination were:

CF III Class A common stock, outstanding prior to Business Combination23,000,000 
Less: redemption of CF III Class A common stock19,355,365 
Class A common stock of CF III3,644,635 
CF III founder shares5,750,000 
CF III Private Placement shares500,000 
CF III Shares issued in PIPE22,000,000 
Business Combination and PIPE shares31,894,635 
Legacy AEye shares122,509,667 
August 16, 2021154,404,302 

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The number of Legacy AEye shares was determined as follows:

AEye shares
AEye shares, effected for Exchange Ratio
Balance at December 31, 201911,283,838 41,984,908 
Recapitalization applied to Convertible preferred stock outstanding at December 31, 201916,383,725 60,960,574 
Exercise of common stock options - 2020504,524 1,877,233 
Repurchase of common stock - 2020(950,352)(3,536,070)
Exercise of common stock options - 2021 (pre-Closing)54,859 204,119 
Conversion of Convertible Notes and Accrued Interest – 20215,584,308 20,778,097 
Exercise of common stock and Series A preferred stock warrants - 202164,719 240,806 
Total
122,509,667 
3.FAIR VALUE MEASUREMENTS

The fair value of the Company’s financial assets and liabilities is determined in accordance with the fair value hierarchy established in FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy of ASC 820 requires an entity to maximize the use of observable inputs when measuring fair value and classifies those inputs into three levels:

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs, other than Level 1 inputs, which are observable either directly or indirectly or can be corroborated by observable market data using quoted prices for similar assets or liabilities.

Level 3—Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company's financial instruments that are not re-measured at fair value include accounts receivable, prepaid and other current assets, accounts payable, accrued expenses and other current liabilities, convertible notes, and long-term debt. The carrying values of these financial instruments approximate their fair values.

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The Company’s financial assets and liabilities measured at fair value on a recurring basis and the level of inputs used for such measurements were as follows (in thousands):

Fair Value Measured as of June 30, 2022 Using:
Adjusted CostUnrealized lossesFair ValueCash and Cash EquivalentMarketable Securities
Assets
Level 1
Money market funds$195 $— $195 $195 $— 
Level 2
Asset-backed securities$21,675 $(190)$21,485 $— $21,485 
Corporate bonds29,336 (515)28,821 — 28,821 
Commercial paper42,186 — 42,186 — 42,186 
U.S. Government securities29,958 (924)29,034 — 29,034 
Total financial assets$123,350 $(1,629)$121,721 $195 $121,526 
Liabilities
Level 2
Private placement warrant liability$— $— $46 $— $— 
Total financial liabilities$— $— $46 $— $— 

Fair Value Measured as of December 31, 2021 Using:
Adjusted CostUnrealized lossesFair ValueCash and Cash EquivalentMarketable Securities
Assets
Level 1
Money market funds$4,863 $— $4,863 $4,863 $— 
Level 2
Asset-backed securities$26,491 $(68)$26,423 $— $26,423 
Corporate bonds48,643 (150)48,493 — 48,493 
Commercial paper45,145 — 45,145 — 45,145 
U.S. Government securities29,936 (173)29,763 — 29,763 
Total financial assets$155,078 $(391)$154,687 $4,863 $149,824 
Liabilities
Level 2
Private placement warrant liability$— $— $155 $— $— 
Total financial liabilities$— $— $155 $— $— 

As of June 30, 2022 and December 31, 2021, the Company’s financial assets and liabilities subject to fair value procedures were comprised of the following:

Money Market Funds: The Company holds financial assets consisting of money market funds. These securities are valued using observable inputs, such as quoted prices in active markets for identical assets or liabilities.

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Marketable Securities: The Company holds financial assets consisting of fixed-income U.S. government agency securities, corporate bonds, commercial paper and asset-backed securities. The securities are valued using prices from independent pricing services based on quoted prices of identical instruments in less active or inactive markets. Additionally, quoted prices of similar instruments in active market or industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets are used to value marketable securities.

Private Placement Warrant Liability: As of June 30, 2022, Level 2 fair value measurements were used for Private Placement Warrant liabilities. Any changes in the fair value of the liability are reflected in Change in fair value of embedded derivative liability and warrant liabilities on the consolidated statements of operations and comprehensive loss. Private Placement Warrant liability is included within other noncurrent liabilities on the consolidated balance sheets.

For the six months ended June 30, 2022 and year ended December 31, 2021, there were no transfers between Level 1 and Level 2 inputs.

4.CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

Cash, cash equivalents (which consists entirely of money market funds) and restricted cash as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022December 31, 2021
(unaudited)
Cash and cash equivalents$4,236 $14,183 
Restricted cash2,150 2,150 
Total cash, cash equivalents, and restricted cash$6,386 $16,333 


5. INVENTORIES

Inventory, net of write-downs, as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022December 31, 2021
(unaudited)
Raw materials$2,298 $1,544 
Work in-process2,762 2,447 
Finished goods94 
Total inventory, net$5,066 $4,085 

The Company's inventory as of June 30, 2022 and December 31, 2021 was written down by $827 and $1,122, respectively, in order to reduce inventory to the lower of cost or to its net realizable value.


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6.PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022December 31, 2021
(unaudited)
Prepaid expenses$2,601 $3,980 
Advances to suppliers970 745 
Demonstration units366 224 
Other214 102 
Total prepaid and other current assets$4,151 $5,051 


7.     LEASES

The Company primarily leases office facilities in Northern California under noncancelable operating leases expiring at various dates through November 2026. Some of the Company's leases include options to renew, with renewal terms that, if exercised by the Company, extend the lease term from two to five years. The exercise of these renewal options is at the Company's discretion. The Company's lease agreements do not contain any material terms and conditions of residual value guarantees or material restrictive covenants. The Company's short-term lease expense was determined to not be material.

The components of operating lease expenses for the three and six months ended June 30, 2022 are as follows (in thousands):

Three months endedSix months ended
June 30, 2022June 30, 2022
(Unaudited)(Unaudited)
Operating lease cost$600 $1,178 
Variable lease cost52 115 
Total operating lease cost$652 $1,293 

Supplemental cash flow information for the six months ended June 30, 2022 were as follows (in thousands):

June 30, 2022
(Unaudited)
Cash paid for operating leases included in operating cash flows$859 

Supplemental balance sheet information related to operating leases was as follows (in thousands):

As of June 30, 2022
(Unaudited)
Operating lease right-of-use assets$16,186 
Operating lease liabilities:
Operating lease liabilities, current$2,194 
Operating lease liabilities, non-current17,424 
Total operating lease liabilities$19,618 
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As of June 30, 2022
(Unaudited)
Weighted average remaining lease term (in years)9.27
Weighted average discount rate5.35 %

Maturities of lease liabilities were as follows (in thousands):

Operating leases
Years ended: (Unaudited)
2022 (remaining six months)$1,023 
20232,514 
20242,570 
20252,583 
20262,660 
Thereafter13,817 
Total lease payments25,167 
Less amount to discount to present value(5,549)
Present value of lease liabilities $19,618 

Disclosures under ASC 840, Leases

The Company recognizes rent expense on a straight-line basis over the lease period. Rent expense is principally for leased office space and was $941 within operating expenses in the consolidated statements of operations and comprehensive loss for the six months ended June 30, 2021. Deferred rent liabilities, including unamortized leasehold improvement incentives was $3,909 as of June 30, 2021 within the consolidated balance sheet.

Future minimum payments as of June 30, 2021 under the noncancellable operating leases are as follows (in thousands):
Operating leases
(Unaudited)
Years ended:
2021 (remaining six months)$1,143 
20222,331 
20232,342 
20242,412 
2025 and after 4,824 
Total minimum lease payments$13,052 

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8. PROPERTY AND EQUIPMENT, NET

Property and equipment, net as of June 30, 2022 and December 31, 2021 consists of the following (in thousands):

June 30, 2022December 31, 2021
(unaudited)
Machinery and equipment$2,338 $1,444 
Computers, software and related equipment682 268 
Office furniture and equipment427 341 
Vehicles510 342 
Leasehold improvements4,725 4,725 
Construction in progress702 213 
Total property and equipment9,384 7,333 
Less accumulated depreciation and amortization(2,667)(2,204)
Property and equipment, net$6,717 $5,129 

Depreciation and amortization expense related to property and equipment amounted to $255 and $463 for the three and six months ended June 30, 2022, respectively. Depreciation and amortization expense related to property and equipment amounted to $253 and $498 for the three and six months ended June 30, 2021, respectively. Disposals of property and equipment were not material for the three months ended June 30, 2022 and 2021.

9. OTHER NONCURRENT ASSETS

Other noncurrent assets as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022December 31, 2021
(unaudited)
Long-term prepaid expenses895 1,376 
Security deposits203 133 
Total other noncurrent assets$1,098 $1,509 

10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022December 31, 2021
(unaudited)
Accrued purchases and other3,175 1,947 
Operating lease liabilities - current2,194 — 
Accrued bonuses3,225 3,408 
Accrued payroll1,459 957 
Accrued payroll taxes324 1,547 
Warranty reserve398 275 
Income tax payable17 — 
Deferred rent - current— 605 
Accrued expenses and other current liabilities$10,792 $8,739 

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11. BORROWINGS

Silicon Valley Bank Financing Facility

On April 26, 2021, the Company entered into a loan and security agreement (the “Loan Agreement”) with an affiliate of Silicon Valley Bank (“SVB” or the “Lender”) in connection with the non-binding term sheet for a financing facility of up to $10,000 entered into on March 18, 2021. Under the Loan Agreement, the Lender was obligated to make a term loan advance to the Company of $4,000. Subject to the terms and conditions of the Loan Agreement, and upon the Company’s request, the Lender was obligated to make one term loan advance to the Company of $6,000. The interest rate on the term loan advance is calculated at 8% per annum and payable monthly, in arrears. Upon entering the Loan Agreement, $4,000 was drawn. On May 13, 2021, an additional $6,000 was drawn. The balance of $10,540 for the financing facility, including interest, was repaid on August 20, 2021.

Silicon Valley Bank Credit Facility

On August 16, 2019, the Company entered into a loan and security agreement with SVB. Borrowings under this facility are secured by substantially all the Company’s assets, excluding intellectual property. The term loan’s borrowings are subject to certain financial covenants and restrictions. The Company complied with all financial covenants and restrictions. The balance of $2,333 for the term loan was repaid on September 7, 2021.

Paycheck Protection Program (PPP) Loan

On June 19, 2021, the Company received notice of the Paycheck Protection Program (PPP) forgiveness payment made to SVB by the Small Business Administration in the amount of $2,270 in principal and $27 in interest. This amount represents the forgiveness of the total PPP loan the Company received in 2020 under the PPP Loan provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.

As of June 30, 2022 and December 31, 2021, there were no borrowings outstanding.

12. CONVERTIBLE NOTES

During 2020, the Company entered into various convertible note agreements (“2020 Notes”) under which the Company may issue convertible equity instruments having an aggregate principal amount of up to $40,000, a 3% accruing dividend (“accrued interest”), and a maturity date of October 31, 2021.

In connection with the Business Combination on August 16, 2021, all outstanding principal of $38,045 and unpaid accrued interest on the 2020 Notes were converted into AEye Technologies’ preferred stock and subsequently were converted into 20,778,097 shares of the Company’s Class A common stock. Accordingly, on each of June 30, 2022 and December 31, 2021, the convertible notes balance was $0.

Embedded Derivative Liability

As outlined in the indenture governing the 2020 Notes, the 2020 Notes are automatically convertible, contingent upon the occurrence of certain events, most notably a financing (a “Next Financing”), defined as the issuance and sale of additional preferred stock (“Financing Stock”). The redemption price is defined as a price per share equal to 90% of the price per share paid by the other purchasers of the Financing Stock sold in the Next Financing. The 2020 Notes are redeemable into the number of shares of Financing Stock needed to settle the aggregate amount of principal and unpaid interest owed to the holder of such notes, which is based on the ultimate price per share associated with the Financing Stock. Consequently, the 2020 Notes are considered stock settled debt.

This redemption feature embedded in the 2020 Notes is considered to be a derivative that is required to be separately accounted for at fair value and subsequently remeasured to fair value at each reporting date. Accordingly, upon issuance of the 2020 Notes, the Company recognized the fair value associated with the embedded derivative which resulted in an embedded derivative liability of approximately $1,520, with an equal and offsetting debt discount. Upon the closing of the Business Combination on August 16, 2021, the embedded derivative was settled. Accordingly, at June 30, 2022 and December 31, 2021, the fair value of the embedded derivative liability was $0.

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13. INTEREST EXPENSE AND OTHER

Interest expense and other for the three months ended June 30, 2022 and 2021 consisted of the following (in thousands):

Three months ended June 30,Six months ended June 30,
2022202120222021
Interest on term loan debt$— $269 $— $395 
Interest on PPP loan— — 11 
Interest on convertible note— 288 — 566 
Amortization of debt issuance costs— 426 — 437 
Amortization of debt discount— 276 — 543 
Amortization of premiums on marketable securities, net of accretion of discounts272 — 608 — 
Common stock purchase agreement costs28 — 28 — 
Other— 14 — 
Interest expense and other$307 $1,264 $650 $1,952 

14. STOCKHOLDERS’ EQUITY

Common Stock The Company is authorized to issue 300,000,000 shares of common stock, par value $0.0001 per share. As of June 30, 2022, the Company had 158,475,630 shares of common stock issued and outstanding.

Preferred Stock — The Company is authorized to issue up to 1,000,000 shares of preferred stock, each with a par value of $0.0001 per share. As of June 30, 2022, no shares of preferred stock were issued and outstanding.

Upon the Closing on August 16, 2021, all of the outstanding shares of preferred stock were cancelled and exchanged for shares of the surviving Company’s Class A common stock at the Exchange Ratio of 3.7208, the exchange rate established in the Merger Agreement.
August 16, 2021
(Closing)
Preferred stock sharesExchange ratioCommon stock shares
Series A Convertible preferred stock (pre-combination)9,226,734 3.7208 34,330,838 
Series B Convertible preferred stock (pre-combination)7,156,991 3.7208 26,629,736 
Total16,383,725 60,960,574 

Private and Public Warrants As of June 30, 2022, the Company had 166,666 Private Placement warrants and 7,666,656 Public warrants outstanding. Each warrant entitles the registered holder to purchase one share of the Company's common stock at a price of $11.50 per share.

Tumim Stone Common Stock Purchase Agreement — On December 8, 2021, the Company entered into a Common Stock Purchase Agreement (the “CSPA”) and a Registration Rights Agreement with Tumim Stone Capital LLC (“Tumim Stone”). Under the terms and subject to the conditions of the CSPA, the Company has the right, but not the obligation, to sell to Tumim Stone, and Tumim Stone is obligated to purchase up to the lesser of (i) $125,000 of the Company’s common stock, or (ii) the Exchange Cap, which is equal to 19.99% of the shares of the Company’s common stock outstanding immediately prior to the execution of the CSPA, unless the Company’s stockholders approve the issuance of shares in excess of the Exchange Cap, or the average price of all applicable sales of common stock to Tumim Stone under the CSPA equals or exceeds $4.9485. Upon the satisfaction of various commencement conditions, such as the filing of the registration statement which provides for the resale of such shares pursuant to the Registration Rights Agreement, the Company has sole discretion to initiate such sales of common stock over the period of 36 months commencing December 8, 2021. In all instances, the Company may not
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sell shares of its common stock to Tumim Stone under the CSPA if doing so would result in Tumim Stone beneficially owning more than 9.99% of its common stock.

The purchase price per share to be purchased by Tumim is equal to the volume-weighted average price for common stock on the applicable purchase date multiplied by 0.9615 (to be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split, or similar transaction). The maximum number of shares the Company may sell to Tumim Stone on any single business day is the lesser of (i) $20,000 divided by the closing sale price of the common stock on the trading day immediately preceding the purchase date, and (ii) 0.15 multiplied by the average daily trading volume in common stock for the three trading days preceding the purchase date.

    In connection with the CSPA, the Company issued to Tumim Stone 302,634 restricted common shares in the Company. At issuance, the 302,634 shares of common stock had a fair value of $1,583 and were recorded to Interest expense and other in the Company’s consolidated statements of operations and comprehensive loss. The Company determined that the right to sell additional shares represents a freestanding put option under ASC 815 Derivatives and Hedging, and as such, the financial instrument was classified as a derivative asset with a fair value of zero at inception of the CSPA on December 8, 2021.

On May 6, 2022, the Company filed a Registration Statement on Form S-1, which relates to the offer and resale of up to 30,865,419 shares of AEye's common stock by Tumim Stone, the selling stockholder. During the six months ended June 30, 2022, the Company issued 435,000 shares of its common stock under the CSPA for proceeds of $1,422.

15. NET LOSS PER SHARE

The following table sets forth the basic and diluted net loss per share attributable to common stockholders for the periods presented (in thousands, except per share data):

Three months ended June 30,Six months ended June 30,
2022202120222021
Numerator:
Net loss attributable to common stockholders$(26,467)$(11,075)$(51,348)$(22,584)
Denominator:
Weighted average common shares outstanding- Basic157,310,419 101,458,886 156,071,676 101,398,851 
Dilutive effect of potential common shares— — — — 
Weighted average common shares outstanding- Diluted157,310,419 101,458,886 156,071,676 101,398,851 
Net loss per share attributable to common stockholders - Basic and Diluted$(0.17)$(0.11)$(0.33)$(0.22)

Due to net losses for the six months ended June 30, 2022 and 2021, basic and diluted net loss per share were the same, as the effect of all potentially dilutive securities would have been anti-dilutive. The following table sets forth the anti-dilutive common share equivalents for the periods listed:

Six months ended June 30,
20222021
Common stock options issued and outstanding27,152,921 31,179,416 
Unvested restricted stock units13,203,133 — 
Warrants7,833,322 256,605 
Conversion of convertible notes— 21,901,302 
Total48,189,376 53,337,323 

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16. STOCK-BASED COMPENSATION

The Company has four equity incentive plans, the 2014 US LADAR Inc. Equity Incentive Plan (the “2014 Plan”), the 2016 Stock Plan (the “2016 Plan”), the 2021 Equity Incentive Plan (the “Incentive Plan”) and the 2022 Employee Stock Purchase Plan (the "ESPP"). On August 16, 2021, the Company’s 2014 Plan and 2016 Plan were terminated in connection with the Closing, but continue to govern the terms of outstanding equity awards that were granted prior to the termination of such plans.

2014 Plan and 2016 Plan

As of August 16, 2021, the Company no longer grants equity awards pursuant to the 2014 Plan or 2016 Plan. The Company had reserved 33,121,391 shares of common stock for issuance under the 2016 Plan and as of June 30, 2022, 1,741,689 RSUs were granted.

Under the 2016 Plan, options to purchase common stock generally vest over four years with 25% vesting at the end of the first year and the remainder vesting ratably over the next three years. RSUs generally vest 25% at the end of the first year with the remaining RSUs vesting ratably over the next three years or they vest ratably over the four years. Under the 2014 Plan, the vesting period for options to purchase common stock range from immediate to four years. Under each plan, the options expire ten years from the date of grant.

In connection with the Closing on August 16, 2021, $1,500 was paid to an executive as consideration for repurchasing 542,615 of his vested options under the Company’s 2016 Plan.

2021 Equity Incentive Plan

The Incentive Plan became effective immediately upon the Closing on August 16, 2021 and initially reserved 15,440,430 shares of common stock for issuance thereunder. The Incentive Plan includes an evergreen provision that provides for an annual increase in the number of shares of common stock available for issuance thereunder beginning on January 1, 2022 and ending on January 1, 2032, equal to 5% of the shares of the Company’s common stock outstanding on December 31, 2021 for the first year and by 3% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year for each year thereafter, or a lesser number of shares as determined by the Board of Directors. After January 1, 2022, the Board of Directors authorized the addition of 7,743,413 shares of common stock to be added to the Incentive Plan for issuance.

Under the Incentive Plan, RSUs vest depending on their vesting schedule. For newly hired employees, RSUs generally vest 25% during the month following the recipient’s one year anniversary of their start date. The remaining amounts generally vest quarterly over the next three years. For existing employees, these RSUs generally vest quarterly over three years. The fair value of the RSU is equal to the fair value of the Company’s common stock on the date of grant.

As of June 30, 2022, 14,200,116 RSUs were granted to certain individuals under the Incentive Plan.

2022 Employee Stock Purchase Plan

On May 10, 2022, the Company's stockholders approved the 2022 Employee Stock Purchase Plan (the "ESPP"), authorizing 2,000,000 shares of common stock to be reserved for issuance under the ESPP. The first offering to the Company's employees to purchase shares under the ESPP will begin on November 1, 2022. Each employee who is a participant in the ESPP may purchase shares by authorizing contributions at a minimum of 1% up to a maximum of 10% of his or her compensation for each pay period, to a maximum of $15 per purchase period and $25 per year, which will then be used to purchase shares on the last business day of the purchase period at a price equal to 85% of the fair market value of common stock on the offering date or the exercise date, whichever is less.

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A summary of stock option activity related to the Plans as of June 30, 2022 is as follows:

Outstanding Stock OptionsWeighted Average Exercise PriceWeighted Average Contractual Life (Years)Aggregate Intrinsic Value
Balance at December 31, 202129,238,432 $0.48 7.35$127,345 
Granted— — 
Exercised(1,761,601)0.38 
Forfeited(323,910)0.57 
Expired— — 
Balance at June 30, 2022 27,152,921 $0.49 6.9$38,547 
Vested and expected to vest as of June 30, 202227,152,921 $0.49 6.9$38,547 
Vested and exercisable as of June 30, 202219,485,668 $0.44 6.4$28,691 

The aggregate intrinsic value is the difference between the current fair value of the underlying common stock and the exercise price for in-the-money stock options.

The following table summarizes the RSU award activity under the Plans:

SharesWeighted Average Grant date Fair Value per Share
Unvested at December 31, 20217,434,743 $5.80 
Granted8,028,045 4.46 
Forfeited(519,420)4.75 
Vested(1,740,235)5.23 
Unvested at June 30, 202213,203,133 $4.91 

The total fair value of RSUs that vested during the six months ended June 30, 2022 was $7,534.

Stock-Based Compensation Expense —The following table summarizes stock-based compensation expense recorded in each component of operating expenses in the Company’s consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2022 and 2021 (in thousands):

Three months ended June 30,Six months ended June 30,
2022202120222021
Cost of revenue$43$$43$
Research and development2,0457763,2681,397
Sales and marketing1,3324152,238773
General and administrative3,1371,4296,3482,060
Total stock-based compensation$6,557$2,620$11,897$4,230

No stock options were granted during the six months ended June 30, 2022 and 2021. As of June 30, 2022, the Company had $7,342 of unrecognized compensation expense for related stock option grants. This cost is expected to be recognized over an estimated weighted average period of 1.74 years. The total unrecognized compensation expense for RSUs was $60,463 as of June 30, 2022 which is expected to be recognized over an estimated weighted average period of 2.96 years.
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The Company estimates the fair value of its options on grant date using the Black-Scholes option pricing model, which requires the input of subjective assumptions as discussed below, including the expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award, and expected dividends. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group. Each of these inputs are based on highly subjective assumptions and require significant judgment. For the three and six months ended June 30, 2022, the Company granted no new options.

Expected Term—The expected term of options granted to employees is based on the expected life of the stock options, giving consideration to the contractual terms and vesting schedules.

Expected Volatility—Expected volatility was estimated based on the average historical volatility of comparable companies’ stock, as the Company does not have a sufficient trading history to determine historical volatility.

Risk-Free Interest Rate—The risk-free interest rates are based on US Treasury yields in effect at the grant date for notes with comparable terms as the awards.

Dividend Yield—The expected dividend-yield assumption is based on the Company’s current expectations about its anticipated dividend policy.

17. REVENUE

Sale of Prototypes

The Company recorded revenue for prototype sales of $195 and $530 in the three and six months ended June 30, 2022, respectively, and $228 and $461 in the three and six months ended June 30, 2021, respectively. These arrangements typically have one performance obligation which is satisfied at the point of delivery or shipment to the customer. The Company does not incur significant contract costs in fulfilling or obtaining their contracts with customers.

Development contracts

The Company has entered into research and development contracts with companies primarily in the automotive industry. Revenue from these contracts is recognized when the Company satisfies performance obligations in the contract, which can result in recognition at either a point in time or over time. The Company assessed the number of performance obligations associated with the promises under each agreement, primarily the delivery of customized 4SightTM perception-related goods and services, and recognized $511 and $1,258 in revenue for performance obligations satisfied during the three and six months ended June 30, 2022, respectively, in the consolidated statements of operations and comprehensive loss. The Company recognized $519 and $615 in revenue for performance obligations satisfied during the three and six months ended June 30, 2021, respectively, in the consolidated statements of operations and comprehensive loss.
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Disaggregation of Revenue

The Company recognized the following revenues by geographic area based on the primary billing address of the customer and by the timing of the transfer of goods or services to customers (point in time or over time), as it believes such criteria best depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. Total revenue based on the disaggregation criteria described above are as follows (in thousands):

Three months ended June 30,Six months ended June 30,
2022202120222021
Revenue by primary geographical market:
United States626 154 1,647 387 
Germany— 500 — 500 
Europe80 64 120 64 
Asia— 29 21 125 
Total
706 747 1,788 1,076 
Revenue by timing of recognition:
Recognized at a point in time214 720 750 1,033 
Recognized over time492 27 1,038 43 
Total
706 747 1,788 1,076 

Contract Liabilities

Contract liabilities consisted of the following as of June 30, 2022 (in thousands):

As of June 30, 2022
Contract liabilities, current$1,633 
Contract liabilities, noncurrent— 
Total$1,633 

Contract liabilities, noncurrent are included in other noncurrent liabilities on the consolidated balance sheet.

The following table shows the significant changes in contract liabilities balance as of June 30, 2022 and 2021 (in thousands):

Six months ended June 30,
20222021
Beginning balance $2,918 $660 
Revenue recognized that was included in the contract liabilities beginning balance(1,285)(543)
Increase due to cash received and not recognized as revenue and billings in excess of revenue recognized during the period— 155 
Ending balance $1,633 $272 
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Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied. It includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods and does not include contracts where the customer is not committed. The customer is not considered committed where they are able to terminate for convenience without payment of a substantive penalty under the contract. Additionally, as a practical expedient, the Company has not disclosed the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The contract liabilities balance represents the remaining performance obligations for contracts with an original duration of greater than one year.

18. INCOME TAXES

Prior to the Business Combination, AEye Technologies and CF III filed separate standalone federal, state, and local income tax returns. As a result of the Business Combination, the Company will file a consolidated income tax return. For legal purposes, CF III acquired AEye Technologies, and the transaction represents a reverse acquisition for federal income tax purposes. CF III will be the parent of the consolidated group with AEye Technologies as a subsidiary, but in the year of the closing of the Business Combination, AEye Technologies will file a full-year tax return with CF III joining in the return the day after the Closing.

For the three and six months ended June 30, 2022, the Company recorded $18 and $26 provision for income taxes, respectively. For the three and six months ended June 30, 2021, the Company recorded $0 and $0 provision for income taxes, respectively. The change in income tax provision was due to changes in pretax income (loss) in the U.S. and certain foreign entities and changes in tax rates. The income tax rates vary from the federal and state statutory rates due to the valuation allowances on the Company's net operating losses and foreign tax rate differences. The Company computes its quarterly income tax provision by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are to be reinvested indefinitely outside the U.S.

19. COMMITMENTS AND CONTINGENCIES

Legal matters

The Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Management is not currently aware of any matters that will have a material effect on the financial position, results of operations, or cash flows of the Company.

20. RELATED PARTIES

Since November 2016, the Company has employed a sibling of Mr. Dussan, the Company’s Chief Technology Officer, who held the position of Director, Human Resources and Sr. Manager of Human Resources at June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, Mr. Dussan’s sibling received total cash compensation of $89 and $58, respectively. For the six months ended June 30, 2022 and 2021, Mr. Dussan’s sibling was granted 22,500 and 1,860 RSUs, respectively. In addition, he participates in all other benefits that the Company generally offers to all of its employees.

21. SUBSEQUENT EVENTS

Management has evaluated subsequent events through August 12, 2022 and determined that there were no such events requiring recognition or disclosure in the financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains forward-looking statements that are based on current expectations, estimates, assumptions, and projections about our industry, business, and future financial results. Our actual results and the timing of events may differ materially from those described in or implied by these forward-looking statements due to a number of factors, including those discussed below and those set forth under “Risk Factors” herein and other filings we make with the SEC from time to time. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we,” “our,” “us,” and “AEye,” refer to the business and operations of AEye, Inc.

Overview

We are a provider of high-performance, active lidar system technology for vehicle autonomy, advanced driver-assistance systems, or ADAS, and robotic vision applications. With a sophisticated workforce of leaders and researchers, we have developed an artificial intelligence technology that enables adaptive “intelligent sensing,” differentiating us in the marketplace from our competition. Our proprietary software-definable 4SightTM Intelligent Sensing Platform combines solid-state active lidar, an optionally fused low-light HD camera, and integrated deterministic artificial intelligence to capture more intelligent information with less data, enabling faster, more accurate, and more reliable perception of the surroundings.

We were founded in 2013 by Luis Dussan, our Chief Technology Officer, to create a deterministic AI-driven sensing system that performs better than the human eye and visual cortex. Mr. Dussan’s experience developing mission-critical targeting systems for fighter jets and ground troops on behalf of the U.S. military provided him with the background to develop a differentiated approach to visual sensing. While traditional sensing systems passively collect data, our active 4SightTM Intelligent Sensing Platform leverages principles from automated targeting systems and biomimicry to scan the environment, while intelligently focusing on what matters in order to enable safer, smarter, and faster decisions in complex scenarios. From our inception, our culture has drawn from esteemed scientists and electro-optics engineers from the National Aeronautics and Space Administration, or NASA, Lockheed Martin Corporation, Northrop Grumman Corporation, the U.S. Air Force, and the Defense Advanced Research Projects Agency, or DARPA, to create the highest performing sensing and perception system for the most challenging situations, ensuring the highest levels of safety for autonomous driving.

As a result, our adaptive lidar is designed to enable higher levels of autonomy and functionality — SAE Levels 2 through 5 — with the goal of optimizing performance and power, and reducing cost. Our 4Sight Intelligent Sensing Platform is software-definable and network-optimized, and leverages deterministic artificial intelligence at the edge. We have made substantial investments in our R&D processes and deliver value to our customers through a combination of sales and direct channels. We perform the majority of our R&D activities in our 56,549 square foot corporate headquarters in Dublin, California. Our modular design facilitates product hardware updates as technologies evolve, and its small size and modest heat dissipation enable very flexible placement options on the interior or exterior of a vehicle. 4Sight also leverages a common architecture to create application-specific products across the Automotive, Mobility and Industrial markets.

Our systems-based approach encourages partnership from the well-established automotive supply chain, including original equipment manufacturers, or OEMs, as well as Tier 1 and Tier 2 suppliers. There is strong alignment between us and our partners given what is required to produce a high-performance automotive grade product at scale, including quality, reliability, and affordability. Our Tier 1 partners will add value with OEM customers through industrialization, manufacturing, integration, sales, marketing, product liability, and warranty. Our Tier 2 partners will provide automotive-grade sub-components, which are used not only in automotive lidar for ADAS use cases, but also for our products to be sold in the Industrial and Mobility markets. We expect the result will be a high-quality, high-performance product at a low cost, which we believe to be a key enabler in accelerating adoption of lidar across various markets in the Automotive market and beyond.

In pursuing this strategy, we have partnered with leading Tier 1 automotive suppliers including Continental AG, HELLA GmbH & Co. KG aA, Aisin Corporation, and ZKW Group GmbH (an affiliate of LG Electronics Inc.). One of our Tier 1 partners is currently in the process of bidding for long range lidar series production awards with OEMs that are expected to represent a substantial portion of our 2026 forecasted revenues. The main markets for lidar, including Automotive, Industrial, and Mobility, are projected to see significant growth in both the near and long term. We believe this expected growth will allow us to achieve greater market share as well as pursue specialization opportunities like highway autonomous driving applications that benefit from our products. We expect that lidar will be a required sensing solution across many end markets, and we intend to be the leading solutions
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provider in these spaces.

All dollar amounts expressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands of dollars, except for per share amounts and unless otherwise specified.

Business Combination and Public Company Costs

As a result of the Business Combination, which closed on August 16, 2021, a subsidiary of CF Finance Acquisition Corp III, or CF III, Meliora Merger Sub, Inc., merged with and into AEye, Inc., then known as AEye Technologies, Inc., or AEye Technologies, with AEye Technologies continuing as the surviving entity as a wholly owned subsidiary of CF III, and CF III thereafter operating under the new name AEye, Inc., or AEye, or the combined entity.

The Business Combination was accounted for as a reverse recapitalization, in accordance with U.S. GAAP. Under this method of accounting, AEye Technologies was treated as the accounting acquirer, meaning CF III was treated as the acquired company for financial reporting purposes. This determination is primarily based on AEye Technologies’ stockholders comprising a majority of the voting power of the combined entity and having the ability to nominate the majority of the governing body of the combined entity. Additionally, AEye Technologies’ senior management comprise the senior management of the combined entity and AEye Technologies’ operations comprise the ongoing operations of the combined entity. Accordingly, for accounting purposes, the financial statements of the combined entity will represent a continuation of the financial statements of AEye Technologies, and the Business Combination will be treated as the equivalent of AEye Technologies issuing stock for the net assets of CF III, accompanied by a recapitalization. The most significant change in AEye Technologies’ financial position and results of the business combination was an increase in cash of $256,811, before transaction costs. Total non-recurring transaction costs incurred for this transaction were $52,661.

Upon the closing of the Business Combination, our common stock and warrants began trading under the symbols “LIDR” and “LIDRW,” respectively, on the Nasdaq Stock Market LLC, or Nasdaq. We anticipate that we will continue to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect 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.

COVID-19 Impact

The extensive impact of the pandemic caused by the COVID-19 pandemic has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world, despite the reports of declines in severity.The continued impact of the COVID-19 pandemic on our operational and financial performance will depend on various future developments, including the duration and spread of the outbreak and impact on our customers, suppliers, and employees, all of which is uncertain at this time. We expect the COVID-19 pandemic may adversely impact our future revenue and results of operations, but we are unable to predict at this time the size and duration of this adverse impact. For more information on our operations and risks related to epidemics, including COVID-19, please see the section of this Quarterly Report on Form 10-Q entitled “Risk Factors.”

Key Factors Affecting Our Operating Results

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 the risk factors described in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors.”

We are subject to those risks common in the technology industry and also those risks common to early stage companies including, but not limited to, the possibility of not being able to successfully develop or commercialize our products; attract new customers and retain our existing customers; develop and protect our intellectual property; comply with existing and new or modified laws and regulations applicable to our business; maintain and enhance the value of our reputation and brand; hire, integrate, and retain talented people at all levels of our organization; and successfully develop new solutions to enhance the experience of, and deliver value to, our customers.

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Market Trends and Uncertainties

We anticipate growing demand for our 4SightTM Intelligent Sensing Platform across three major markets - Automotive, Industrial, and Mobility. We also anticipate that the total addressable market for lidar-based perception technology will grow to $42 billion by 2030. Within those markets, we are targeting attractive segments, including advanced driver-assistance systems, or ADAS, autonomous driving, commercial trucking, robo-taxis, and various Industrial and Mobility market segments such as mining, aerospace, defense, shuttles, railway, and intelligent transportation systems, or ITS. This provides us with multiple opportunities for sustained growth by enabling new applications and product features across these market segments. However, as our customers continue R&D projects to commercialize solutions that rely on lidar technology, it is difficult to estimate the timing of ultimate end market and customer adoption. In the Automotive market for example, which accounted for 64% and 70% of our revenue in the six months ended June 30, 2022 and 2021, respectively, our growth and financial performance will be heavily influenced by our ability to successfully integrate into OEM programs that require years of development, testing, and validation. Because of the size and complexity of these OEM programs, we see our existing Tier 1 partnerships as a substantial competitive advantage given their large scale, mass-production capabilities, and existing OEM customer relationships. Our primary focus in the Automotive market is on ADAS for passenger and commercial vehicle autonomy, particularly highway autonomy applications. We believe that growth in that market is driven by both more stringent safety regulations and consumer demand for vehicles offering increased safety. We will need to anticipate and adapt to any changes in the regulatory environment, as well as changes in consumer demand in order to take advantage of this opportunity.

Additionally, we are increasing our investments in international operations and partnerships that will position us to expand our business globally and meet growing demand in international markets. This is an important part of our core strategy and may expose us to additional factors such as foreign currency risk, additional operating costs, and other risks and challenges that may impact the ability to meet projected sales and margin targets.

Partnerships and Commercialization

Our technology is designed to be a key enabler of autonomous solutions for Automotive, Industrial, and Mobility market applications. Because our technology must be integrated into a broader solution by our customers, it is critical that we achieve design wins with these customers. The timing of these design wins varies based on the market and application. Achieving a design win with an OEM within the Automotive market may take considerably longer than a design win with customers in the Industrial or Mobility markets. We consider design wins to be critical to our future success, although the revenue generated by each design win and the time necessary to achieve such a win can vary significantly, making it difficult to predict our financial performance.

We believe our revenue and profitability will be also be dependent upon our success in licensing our technology to Tier 1 automotive suppliers, such as Continental, which represented 64% and 13% of our revenue in the six months ended June 30, 2022 and 2021, respectively, that intend to use our technology in volume production of lidar sensors for OEMs. Delays of autonomy programs by OEMs that we are currently or will be working with through our Tier 1 partners could result in us being unable to achieve our revenue and profitability targets in the timeframe we anticipate. Our overall revenue and profitability will also be dependent upon both our success in selling our lidar solutions to customers in the Industrial and Mobility markets.

Gross Margin Improvement

Our gross margins will depend on numerous factors, including, among others, the selling price of our products, pricing of our development contracts with customers, royalty rates on licenses we grant to our customers, unit volumes, product mix, component costs, personnel costs, contract manufacturing costs, overhead costs, and product features. In the future, we expect to generate attractive gross margins from licensing our lidar technology and software to our Tier 1 partners in the Automotive market. We also sell our own lidar solutions to customers in the Industrial and Mobility markets utilizing low-cost components that are sourced from the Tier 2 automotive supply chain and assembled by our contract manufacturing partners. If our Tier 1 partners in the Automotive market do not achieve the volumes that we expect, then the cost of the components we use to address the Industrial and Mobility markets may be higher than we currently anticipate and may impact our gross margins and our ability to achieve profitability.

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To date, our revenue has been generated through development contracts with OEMs and Tier 1 suppliers, as well as unit sales of our products. These development contracts primarily focus on customization of our proprietary 4Sight capabilities to our customers’ applications, typically involving software implementation to assist with sensor connection and control, customization of scan patterns, and enhancement of particular perception capabilities to meet specific customer needs. In general, development contracts that require more complex configurations have higher prices. We expect development contracts to represent a smaller share of our total revenue over time, as we increase our focus on technology licensing and product sales. We expect our gross margins from the sale of products to improve over time as we outsource volume production of our lidar sensors to contract manufacturers, which we anticipate will both increase unit volumes and reduce the cost per unit. In September 2021, we commenced our transition process to contract manufacturers which we expect to be complete in late 2022.

Investment and Innovation

Our proprietary adaptive, intelligent lidar technology delivers industry-leading performance that helps to solve the most difficult challenges in delivering partial or full autonomy. While traditional sensing systems passively collect data, our active 4Sight Intelligent Sensing Platform leverages principles from automated targeting systems and biomimicry to scan the environment, while intelligently focusing on what matters most in order to enable safer, smarter, and faster decisions in complex scenarios.

We believe our financial performance is significantly dependent on our ability to maintain a technology leadership position. This is further dependent on the investments we make in R&D. It is essential that we continually identify and respond to rapidly evolving customer requirements, develop and introduce innovative new products, enhance and service existing products, and generate strong market demand for our products. If we fail to do this, our leading market position and revenue may be adversely affected, and our investments in that area will not be recovered.

Basis of Presentation

We currently conduct our business through one operating segment.

Components of Results of Operations

Total Revenues

We categorize our revenue as (1) prototype sales and (2) development contracts. In 2022 and 2021, our prototype sales revenue primarily related to unit sales of the company’s 4Sight M product. Revenue from prototype sales is typically recognized at a point in time when the control of goods is transferred to the customer, generally upon delivery or shipment to the customer.

Development contracts represented the majority of our total revenues in 2022 and 2021. Revenue from development contracts are earned from R&D activities and collaboration with OEMs and Tier 1 suppliers. These contracts primarily focus on customization of our proprietary 4Sight capabilities to our customers’ applications, typically involving software implementation to assist with sensor connection and control, customization of scan patterns, and enhancement of perception capabilities to meet specific customer needs. Revenue from development contracts is recognized when we satisfy performance obligations in the contract, which can result in recognition at either a point in time or over time. This assessment is made at the outset of the arrangement for each performance obligation.

Cost of Revenue

Cost of revenue includes the costs directly associated with the production of prototypes and certain costs associated with development contracts. Such costs for prototypes are direct materials, direct labor, indirect labor, warranty expense, and allocation of overhead. Costs associated with development contracts include the direct costs and allocation of overhead costs involved in the execution of the contracts.

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Operating Expenses

Research and Development

Our research and development, or R&D, efforts are focused primarily on hardware, software, and system engineering related to the design and development of our advanced lidar solutions. R&D expenses include:

personnel-related expenses, including salaries, benefits, bonuses, and stock-based compensation expense;
third-party engineering and contractor costs;
lab equipment;
new hardware and software expenses; and
allocated overhead expenses.

R&D costs are expensed as they are incurred. We expect our investment in R&D will continue to grow over time because we believe that investment in R&D is essential to maintain our position as a provider of one of the most advanced lidar solutions available.

Sales and Marketing

Our sales and marketing, or S&M, efforts are focused primarily on sales, business development, and marketing programs in pursuit of revenue contracts from potential and existing customers. S&M expenses include:

personnel-related expenses, including salaries, benefits, bonuses, and stock-based compensation expense;
demonstration equipment;
trade shows expenses, advertising, and promotions expenses for press releases and other public relations services; and
allocated overhead expenses.

We expect our S&M expenses to grow over time as we continue to expand our sales and marketing efforts to support the anticipated growth of our business.

General and Administrative

Our general and administrative, or G&A, spending supports all business functions. G&A expenses include:

personnel-related costs, including salaries, benefits, bonuses, and stock-based compensation for executive, finance, legal, human resources, technical support, and other administrative personnel;
consulting, accounting, legal, and professional fees;
insurance premiums, software and computer equipment costs, general office expenses; and
allocated overhead expenses.

We expect our G&A expenses to increase for the foreseeable future as we increase our headcount to support the growth of our business, and as a result of operating as a public company, including additional costs and expenses associated with compliance with the rules and regulations of the SEC, as well as legal, audit, insurance, investor relations, and other administrative and professional services.

Change in Fair Value of Warrant Liabilities

Change in fair value of warrants are non-cash changes and primarily consists of changes in fair value related to the warrant liabilities. The warrant liabilities are classified as marked-to-market liabilities pursuant to ASC 480 and the corresponding increase or decrease in value impacts our net loss.

Interest Income, Interest Expense and Other

Interest income consists primarily of interest earned on our cash, cash equivalents, and marketable securities. These amounts will vary based on our cash and cash equivalents balances and market rates. Interest expense consisted primarily of interest on our borrowings and convertible notes and amortization of debt issuance costs and discount.

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Upon the closing of the Business Combination, our borrowings were repaid with any remaining debt issuance costs and discounts expensed. The pre-combination convertible notes and accrued interest were settled and converted to Class A common stock. See additional discussion in Note 2 to our condensed consolidated financial statements.

Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this report. The following table sets forth our consolidated results of operations data for the three months ended June 30, 2022 and 2021 (in thousands, except for percentages):

Three Months Ended June 30,ChangeChange
20222021$%
Prototype sales    $195 $228 $(33)(14)%
Development contracts511 519 (8)(2)%
Total revenues     706 747 (41)(5)%
Cost of revenue     1,427 454 973 214 %
Gross (loss) profit(721)293 (1,014)(346)%
Research and development    10,762 5,726 5,036 88 %
Sales and marketing    5,323 1,911 3,412 179 %
General and administrative    9,827 4,750 5,077 107 %
Total operating expenses    25,912 12,387 13,525 109 %
Loss from operations (26,633)(12,094)(14,539)120 %
Change in fair value of embedded derivative and warrant liabilities141 (16)157 (981)%
Gain on PPP loan forgiveness— 2,297 (2,297)(100)%
Interest income and other    350 348 17,400 %
Interest expense and other    (307)(1,264)957 (76)%
Total other income (expense), net    184 1,019 (835)(82)%
Provision for income tax expense18 $— $18 100 %
Net loss$(26,467)$(11,075)$(15,392)139 %

Revenue

Prototype Sales

Prototype sales revenue decreased by $33, or 14%, to $195 for the three months ended June 30, 2022 from $228 for the three months ended June 30, 2021. This decrease was primarily due to lower average selling prices in the current quarter offered on our existing prototype as we prepare to release our new product in the coming months.

Development Contracts

Development contracts revenue decreased by $8, or 2%, to $511 for the three months ended June 30, 2022, from $519 for the three months ended June 30, 2021. The decrease was primarily due to the mix of development contracts changing between the periods in comparison.

Cost of Revenue

Cost of revenue increased by $973, or 214%, to $1,427 for the three months ended June 30, 2022, from $454 for the three months ended June 30, 2021. This increase was primarily due to the cost of revenue associated with the Tier 1 automotive supplier contract in the current period as compared to the cost of revenue on development contracts in 2021 as well as increased labor and warranty costs.

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Operating Expenses

Research and Development

Research and development expenses increased by $5,036, or 88%, to $10,762 for the three months ended June 30, 2022, from $5,726 for the three months ended June 30, 2021. This increase was primarily driven by increases in personnel costs of $2,483, stock-based compensation expense of $1,269, consumption of parts from inventory of $399, third party research and development work of $230, information technology expense of $197, and travel expense of $157.

Sales and Marketing

Total sales and marketing expenses increased by $3,412, or 179%, to $5,323 for the three months ended June 30, 2022, from $1,911 for the three months ended June 30, 2021. This increase was primarily due to increases in personnel costs of $1,393, stock-based compensation expense of $917, marketing program spend of $491, travel expense of $247, and consultant expense of $122.

General and Administrative

Total general and administrative expenses increased by $5,077, or 107%, to $9,827 for the three months ended June 30, 2022, from $4,750 for the three months ended June 30, 2021. This increase was primarily due to an increase in stock-based compensation expense of $1,708, directors' and officers' insurance of $1,267, professional accounting and legal fees of $937, personnel costs of $781, and travel expense of $200.

Change in Fair Value of Embedded Derivative and Warrant Liabilities

Change in fair value of embedded derivative and warrant liabilities increased by $157, or 981%, to a gain of $141 for the three months ended June 30, 2022, from a loss of $16 for the three months ended June 30, 2021. This increase was primarily due to a decrease in the fair value of the private warrant liabilities in the current period compared to prior period warrant liability.

Gain on PPP Loan Forgiveness

Gain on PPP loan forgiveness decreased by $2,297 to $0 for the three months ended June 30, 2022, from $2,297 for the three months ended June 30, 2021. In June 2021, the full principal and interest of the PPP loan was forgiven.

Interest Income and Other

Interest income and other increased by $348 to $350 for the three months ended June 30, 2022, from $2 for the three months ended June 30, 2021. This increase was primarily due to the interest earned on our marketable securities.

Interest Expense and Other

Interest expense and other decreased by $957, or 76%, to $307 for the three months ended June 30, 2022, from $1,264 for the three months ended June 30, 2021. This decrease was primarily due to $1,264 of prior period interest expense not recurring in the current year given the Company no longer has outstanding debt. This is offset by $272 of amortization of premiums on marketable securities, net of accretion of discounts, in the current period.

Provision for Income Tax Expense

Provision for income tax expenses increased to $18 for the three months ended June 30, 2022, from $0 for the three months ended June 30, 2021. This increase is due to changes in pretax income (loss) in the U.S. and certain foreign entities and changes in tax rates.

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Net Loss

Net loss increased by $15,392, or 139%, to $26,467 for the three months ended June 30, 2022, from $11,075 for the three months ended June 30, 2021. This increase was primarily due to an increase in operating expenses.

Comparison of the Six Months Ended June 30, 2022 and 2021

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this report. The following table sets forth our consolidated results of operations data for the three months ended June 30, 2022 and 2021 (in thousands, except for percentages):

Six Months Ended
June 30,
ChangeChange
20222021$%
Prototype sales    $530 $461 $69 15 %
Development contracts1,258 615 643 105 %
Total revenues     1,788 1,076 712 66 %
Cost of revenue     2,909 1,071 1,838 172 %
Gross (loss) profit(1,121)(1,126)(22,520)%
Research and development    19,338 11,562 7,776 67 %
Sales and marketing    9,939 3,498 6,441 184 %
General and administrative    21,157 7,760 13,397 173 %
Total operating expenses    50,434 22,820 27,614 121 %
Loss from operations (51,555)(22,815)(28,740)126 %
Change in fair value of embedded derivative and warrant liabilities109 (119)228 (192)%
Gain on PPP loan forgiveness— 2,297 (2,297)(100)%
Interest income and other    774 769 15,380 %
Interest expense and other    (650)(1,952)1,302 (67)%
Total other income (expense), net    233 231 %
Provision for income tax expense26 $— $26 100 %
Net loss$(51,348)$(22,584)$(28,764)127 %

Revenue

Prototype Sales

Prototype sales revenue increased by $69, or 15%, to $530 for the six months ended June 30, 2022 from $461 for the six months ended June 30, 2021. This increase was primarily due to an increase in 4Sight M unit sales.

Development Contracts

Development contracts revenue increased by $643, or 105%, to $1,258 for the six months ended June 30, 2022, from $615 for the six months ended June 30, 2021. The increase was primarily due to revenue recognized in the current year from a large Tier 1 automotive supplier contract.

Cost of Revenue

Cost of revenue increased by $1,838, or 172%, to $2,909 for the six months ended June 30, 2022, from $1,071 for the six months ended June 30, 2021. This increase was primarily due to the increase in prototype sales and the cost of revenue associated with the Tier 1 automotive supplier contract.

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Operating Expenses

Research and Development

Research and development expenses increased by $7,776, or 67%, to $19,338 for the six months ended June 30, 2022, from $11,562 for the six months ended June 30, 2021. This increase was primarily driven by increases in personnel costs of $4,446, stock-based compensation expense of $1,871, consumption of parts from inventory of $708, information technology expenses of $597, facilities expense of $332, travel expense of $193, and lab equipment expense of $122, partially offset by a decrease in third party research and development work of $668.

Sales and Marketing

Total sales and marketing expenses increased by $6,441, or 184%, to $9,939 for the six months ended June 30, 2022, from $3,498 for the six months ended June 30, 2021. This increase was primarily due to increases in personnel costs of $2,914, stock-based compensation expense of $1,465, marketing program spend of $934, travel expense of $533, information technology expense of $246, consultant expense of $144, and facilities expense of $133.

General and Administrative

Total general and administrative expenses increased by $13,397, or 173%, to $21,157 for the six months ended June 30, 2022, from $7,760 for the six months ended June 30, 2021. This increase was primarily due to increases in stock-based compensation expense of $4,288, professional accounting and legal fees of $3,309, directors' and officers' insurance of $2,526, personnel costs of $2,450, investor agency and stock-related expenses of $429, and travel expense of $330.

Change in Fair Value of Embedded Derivative and Warrant Liabilities

Change in fair value of embedded derivative and warrant liabilities increased by $228, or 192%, to a gain of $109 for the six months ended June 30, 2022, from a loss of $119 for the six months ended June 30, 2021. This increase was primarily due to a larger decrease in the fair value of the warrant liabilities in the current period compared to prior period.

Gain on PPP Loan Forgiveness

Gain on PPP loan forgiveness decreased by $2,297 to $0 for the six months ended June 30, 2022, from $2,297 for the six months ended June 30, 2021. In June 2021, the full principal and interest of the PPP loan was forgiven.

Interest Income and Other

Interest income and other increased by $769 to $774 for the six months ended June 30, 2022, from $5 for the six months ended June 30, 2021. This increase was primarily due to the interest earned on our marketable securities of $774.

Interest Expense and Other

Interest expense and other decreased by $1,302, or 67%, to $650 for the six months ended June 30, 2022, from $1,952 for the six months ended June 30, 2021. This decrease was primarily due to a decrease of $1,952 in interest expense in connection with the repayment of the Company's outstanding debt partially offset by $608 of amortization of premiums on marketable securities, net of accretion of discounts, in the current period.

Provision for Income Tax Expense

Provision for income tax expenses increased to $26 for the six months ended June 30, 2022, from $0 for the six months ended June 30, 2021. This increase is primarily due to changes in pretax income (loss) in the U.S. and certain foreign entities and changes in tax rates.

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Net Loss

Net loss increased by $28,764, or 127%, to $51,348 for the six months ended June 30, 2022, from $22,584 for the six months ended June 30, 2021. This increase was primarily due to an increase in operating expenses.



Liquidity and Capital Resources

Sources of Liquidity

Our capital requirements will depend on many factors, including sales volume, the timing and extent of spending to support R&D efforts, investments in information technology systems, the expansion of sales and marketing activities, increased costs as we continue to hire additional personnel, and market adoption of new and enhanced products and features. As of June 30, 2022, our cash, cash equivalents, and marketable securities totaled $125.8 million.

To date, our principal sources of liquidity have been proceeds received from the issuance of equity. In December 2021.we entered into a Common Stock Purchase Agreement, or CSPA, with Tumim Stone Capital LLC, or Tumim Stone, whereby we will have the right, but not the obligation, to issue and sell to Tumim Stone, over a 36-month period, up to $125,000,000 of the Company’s common stock. On May 6, 2022, the Company filed a Registration Statement on Form S-1, which related to the offer and resale of up to 30,865,419 shares of our common stock to be purchased by Tumim Stone, pursuant to the CSPA. As of June 30, 2022, 435,000 shares were issued under this CSPA. Until we can generate sufficient revenue from the sale of our products to cover operating expenses, working capital, and capital expenditures, we expect the funds raised in the Business Combination, PIPE financing, as well as any future funds from the CSPA, to fund our near-term cash needs.

If we are required to raise additional funds by issuing equity securities, dilution of stockholders will likely result. Any debt securities issued may also have rights, preferences, and privileges senior to those of holders of our common stock. The terms of debt securities or borrowings could impose significant restrictions on our operations. The credit market and financial services industry have in the past, and may in the future, experience periods of uncertainty that could impact the availability and cost of equity and debt financing.

For the six months ended June 30, 2022 and 2021, we had a net loss of $51,348 and $22,584, respectively. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development, selling and marketing, and general and administrative expenses will continue to be significant and, as a result, we may need additional capital resources to fund our operations. We believe that the net proceeds from the Business Combination and CSPA with Tumim Stone, together with our existing cash, cash equivalents, and marketable securities, will enable us to fund our operating expenses, working capital, and capital expenditure requirements for a period of at least twelve months from June 30, 2022. Our plans for the use of cash in the long-term (beyond the twelve months indicated above) are similarly related to funding operating expenses, working capital, and capital expenditure requirements as we continue to scale the business. For additional information regarding our cash requirements from lease obligations and contractual obligations, see Notes 7 and 19 to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Cash Flow Summary

Six months ended June 30,
20222021
(in thousands)
Net cash provided by (used in):
Operating activities$(33,112)$(18,339)
Investing activities$24,475 $(245)
Financing activities$(1,310)$15,463 

Operating Activities

For the six months ended June 30, 2022, net cash used in operating activities was $33,112. Factors
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affecting our operating cash flows during this period were a net loss of $51,348, offset by stock-based compensation of $11,897, depreciation and amortization of $463, inventory write-downs of $335, and amortization of premiums on marketable securities, net of changes in accrued interest, of $826. Within operating activities, the net changes in operating assets and liabilities were cash provided of $4,170, primarily driven by decreases in prepaids and other current assets of $900 and accounts receivable of $4,033, and increases in accrued expenses and other current liabilities of $1,354 and accounts payable of $932, offset by an increase in inventories of $1,316 and a decrease in contract liabilities of $1,285.

For the six months ended June 30, 2021, net cash used in operating activities was $18,339. Factors affecting our operating cash flows during this period were net loss of $22,584 and a gain on PPP loan forgiveness of $2,297, offset by stock-based compensation of $4,230, depreciation and amortization of $498, and amortization of debt issuance costs of $437. Within operating activities net changes in operating assets and liabilities were cash provided of $526, primarily driven by an increase in accounts payable of $1,513 and accrued expenses and other current liabilities of $1,953, offset by an increase in inventories of $1,813.

Investing Activities

For the six months ended June 30, 2022, net cash provided by investing activities was $24,475. The primary factor affecting net cash provided by investing activities during this period were the proceeds from redemption of marketable securities of $26,234.

For the six months ended June 30, 2021, net cash used in investing activities was $245, due to the purchase of lab and testing equipment, test vehicles, and computer equipment of $245 associated with growth of our employee base.

Financing Activities

For the six months ended June 30, 2022, net cash used in financing activities was $1,310. The primary factors affecting our financing cash flows during this period were payments for taxes related to net settlement of equity awards of $3,400, partially offset by proceeds from the exercise of stock options of $668 and proceeds from the exercise of the CSPA of $1,422.

For the six months ended June 30, 2021, net cash provided by financing activities was $15,463. The primary factor affecting our financing cash flows during this period were the proceeds from a bank loan of $10,000 and the issuance of convertible notes of $8,045, partially offset by payments of deferred financing costs of $1,287, payments of debt issuance costs of $717, and principal payments of bank loans of $667.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are in accordance with U.S. GAAP. We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods, fair value measures, and the related disclosures in the condensed consolidated financial statements. Our actual results could differ significantly from these estimates due to changes in judgments, assumptions, and conditions as a result of unforeseen events or otherwise, which could have a material impact on our financial position and results of operations. We believe our critical accounting policies involve the greatest degree of judgment and complexity and have the greatest potential impact on our condensed consolidated financial statements.

During the six months ended June 30, 2022, there were no significant changes in our critical accounting policies and estimates as compared to those previously disclosed in "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2021 Annual Report on Form 10-K.

Emerging Growth Company Status

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

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, and we have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. Following the closing of the Business Combination, our Post-Combination Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of common stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which the Company has total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which the Company has issued more than $1.0 billion in non-convertible debt in the prior three-year period, or (iv) December 31, 2025. We expect to continue to take advantage of the benefits of the extended transition period, although we may decide to adopt such new or revised accounting standards early to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.

Recent Accounting Pronouncements

See Note 1 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations, or financial condition.

Interest Rate Risk

As of June 30, 2022, we had cash, cash equivalents, and marketable securities of $125,762, which consisted primarily of deposits in our bank accounts, money market funds, and marketable securities. Such interest-earning instruments carry a degree of interest rate risk. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. We invest in highly rated securities, while limiting the amount of credit exposure to any one issuer, other than the U.S. government. A hypothetical 10% change in interest rates would not have a material impact on our financial condition or results of operations due to the short-term nature of our cash, cash equivalents, and marketable securities.

Credit Risk

Our concentration of credit risk is determined by evaluating each customer and each vendor that accounts for more than 10% of our accounts receivable and accounts payable, respectively. As of June 30, 2022, there were two customers each accounting for 10% or more of our accounts receivable and two vendors accounting for 10% or more of our accounts payable.

We perform credit evaluations as needed and generally do not require collateral for our customers. We analyze accounts receivable, historical percentages of uncollectible accounts, and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts for potential credit losses on customers’ accounts. At June 30, 2022 and 2021, we did not have write-offs and did not record an allowance for doubtful accounts on the consolidated balance sheets.

Foreign Currency Exchange Risk

Our foreign currency exchange gains and losses have been generated primarily from fluctuations in the
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euro versus the U.S. dollar, and the Japanese yen versus the U.S. dollar. The functional currency of all our entities is the U.S. dollar. Monetary assets and liabilities and transactions denominated in currencies other than an entity’s functional currency are remeasured into its functional currency using current exchange rates, whereas non-monetary assets and liabilities are remeasured using historical exchange rates. We recognize gains and losses from such remeasurements within interest income and other, or interest expense and other, as applicable on the consolidated statements of operations and comprehensive loss in the period of occurrence. We have in the past experienced, and in the future expect to experience, foreign currency exchange gains and losses on our non-functional currency-denominated balances. Foreign currency exchange gains and losses could have a material adverse effect on our business, operating results, and financial condition. To date, we have not engaged in exchange rate hedging activities, and we do not expect to do so in the foreseeable future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the fiscal quarter ended June 30, 2022. Based on this review, our principal executive officer and principal financial officer have concluded that these disclosure controls and procedures were not effective as of June 30, 2022 due to the material weakness in our internal controls over financial reporting that was disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "2021 Annual Report").

Management’s Report on Internal Controls Over Financial Reporting

As discussed in the 2021 Annual Report, we completed the Business Combination on August 16, 2021. Prior to the Business Combination, we were a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. As a result, previously existing internal controls are no longer applicable or comprehensive enough as of the assessment date as our operations prior to the Business Combination were insignificant compared to those of the Post-Combination Company. The design and implementation of internal controls over financial reporting for the Post-Combination Company has required and will continue to require significant time and resources from management and other personnel. Because of this, the design and ongoing development of our framework for implementation and evaluation of internal controls over financial reporting is in its preliminary stages. As a result, management was unable, without incurring unreasonable effort or expense, to complete an assessment of our internal controls over financial reporting as of December 31, 2021.

Based on an initial assessment, we concluded that our internal controls over financial reporting were not effective as of December 31, 2021 because of the material weakness described below. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with our financial statement close process for the year ended December 31, 2021, we identified a material weakness in our internal controls over financial reporting resulting from a lack of a sufficient number of qualified personnel within our accounting and IT functions who possessed an appropriate level of expertise to effectively perform the following functions:

identify, select, and apply GAAP sufficiently to provide reasonable assurance that transactions were being appropriately recorded; and
assess risk and design appropriate control activities over information technology systems and financial and reporting processes necessary to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.
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Our management continues to be actively engaged in remediating the material weakness through the development and implementation of systems, processes, and controls over the financial close and reporting process, and has hired additional accounting and finance personnel with technical public company accounting and financial reporting experience. We have also engaged external consultants to assist us in designing, implementing, and monitoring an appropriate system of internal controls. We will also continue to evaluate our IT systems and related processes to enhance our financial statement close process, reduce the number of manual journal entries, and facilitate review controls related to our significant classes of transactions. While we have made progress, the material weakness will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Controls Over Financial Reporting

Our management continued to take action to remediate the material weakness during the quarterly period ended June 30, 2022. However, the material weakness will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective.

Beginning January 1, 2022, we implemented ASC 842, Leases. We implemented changes to our processes and control activities related to recognizing operating lease right-of-use assets and operating lease liabilities with lease terms of more than 12 months.

Other than as described above, there was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II
Item 1. Legal Proceedings
From time to time, we may become involved in actions, claims, suits, and other legal proceedings arising in the ordinary course of our business, including assertions by third parties relating to intellectual property infringement, breaches of contract or warranties, or employment-related matters. We are not currently a party to any actions, claims, suits or other legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate have a material effect on our business, financial condition, and results of operations.

Item 1A. Risk Factors
In conducting our business, we may face risks and uncertainties that may interfere with our business objectives. You should carefully consider the following risk factors, as well as all of the other information contained in this Quarterly Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report. The risks and uncertainties below are not the only ones that we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. The occurrence of any of the following risks, or others specified below, could materially and adversely affect our business, strategies, prospects, financial condition, results of operations, and cash flows. In such case, the market price of our common stock could decline, and you could lose all or part of your investment.

Summary of Risk Factors

As noted above, our business is subject to numerous risks and uncertainties, including those highlighted in this “Risk Factors” section, that represent challenges that we face in connection with the successful implementation of our strategy and growth of our business. The occurrence of one or more of the events or circumstances described in the section titled “Risk Factors,” alone or in combination with other events or circumstances, may have an adverse effect on our business, financial condition, results of operations, and prospects. Such risks include, but are not limited to:

We are an early stage company with a history of losses and we expect to incur significant expenses and continuing losses through at least 2024.

Our business could be materially and adversely affected by the current global COVID-19 pandemic, other epidemics or outbreaks, as well as other global events and macroeconomic factors, like the war in Ukraine.

Our limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter.

We continue to implement strategic initiatives designed to grow our business. These initiatives may prove more costly than we currently anticipate and we may not succeed in increasing our revenue in an amount sufficient to offset the costs of these initiatives and to achieve and maintain profitability.

If our deterministic artificial intelligence-driven sensing system is not selected for inclusion in autonomous driver-assistance systems, or ADAS, by any automotive OEMs or their suppliers, our business will be materially and adversely affected.

Our products require key components and critical raw materials and our inability to reduce and control the cost of such components and raw materials could negatively impact the adoption of our products and accordingly, our financial condition and operating results.

We expect to incur substantial R&D costs and devote significant resources to identifying and commercializing new products, which could significantly reduce our profitability and may never result in revenue to us.

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Although we believe that lidar is an essential technology for autonomous vehicles and other emerging applications, market adoption of lidar is uncertain. If market adoption of lidar does not continue to develop, or adoption is deferred, or otherwise develops more slowly than we expect, our business will be adversely affected.

We rely on third-party suppliers and because some of the raw materials and key components in our products come from limited or single source suppliers, we are susceptible to supply shortages, longer than anticipated lead times for components, and supply changes, any of which could disrupt our supply chain and could delay deliveries of our products to customers.

The complexity of our products could result in unforeseen delays or expenses from undetected defects, errors, or reliability issues in our hardware or software which could reduce the market adoption of our products, damage our reputation with current or prospective customers, expose us to product liability and other claims, and thereby adversely affect our operating costs.

The average selling prices of our products or our fees or royalties from technology licenses could decrease rapidly over the life of the product or license term, which may negatively affect our revenue and gross margin.

We are substantially relying on our relationship with Continental AG; our business could be materially and adversely affected if our relationship with Continental was terminated, or if we, through our relationship with Continental, are unable to obtain a sufficient number of design wins and successfully enter into definitive agreements or other commercial arrangements with automotive OEMs with respect to such design wins.

Risk Factors Relating to Our Business and Industry

We are an early stage company with a history of losses and we expect to incur significant expenses and continuing losses through at least 2024.

We have incurred net losses in each year since our inception. In the six months ended June 30, 2022 and 2021, we incurred net losses of approximately $51.3 million and $22.6 million, respectively. We expect that we will continue to incur significant losses through at least 2024 as we:

continue to utilize our third-party partners for design, testing, and commercialization;

expand our operations and supply chain capabilities to produce our lidar solutions, including costs associated with outsourcing the production of our lidar solutions, which, in some instances, requires significant upfront payments by us;

expand our design, development, and servicing capabilities;

build up inventories of parts and components for our lidar solutions;

produce an inventory of our lidar solutions, and potentially significant negative impacts to revenues and margins on existing products as we introduce new products;

increase our sales and marketing activities and develop our distribution infrastructure; and

increase our general and administrative spending to meet the requirements of operating as a public company.

As of June 30, 2022, we had an accumulated deficit of approximately $203.1 million. Even if we are able to increase sales or licensing of our products, there can be no assurance that we will be commercially successful. Since we will incur the costs and expenses from these efforts prior to receiving incremental revenues with respect thereto, our losses in future periods will be significant. If our products do not achieve sufficient market acceptance, we will not become profitable. If we fail to become profitable, or if we are unable to fund our continuing losses, we may be unable to continue our business operations. There can be no assurance that we will ever achieve or sustain profitability.

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Our limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter.

We have been focused on developing our deterministic artificial intelligence-driven sensing system for vehicle autonomy, ADAS, and industrial applications since 2013. This relatively limited operating history makes it difficult to evaluate our future prospects and the risks and challenges we may encounter, which include our ability to:

develop and commercialize our products;

produce and deliver lidar and software products meeting acceptable performance metrics;

forecast our revenue and budget for and manage our expenses;

attract new customers and retain existing customers;

develop, obtain, or progress strategic partnerships;

comply with existing and new or modified laws and regulations applicable to our business;

plan for and manage capital expenditures for our current and future products, and manage our supply chain and supplier relationships related to our current and future products;

anticipate and respond to macroeconomic changes as well as changes in the markets in which we operate;

maintain and enhance the value of our reputation and brand;

effectively manage our growth and business operations, including the impacts of the COVID-19 pandemic on our business as well as other macroeconomic factors, such as the war in Ukraine;

develop and protect our intellectual property;

hire, integrate, and retain talented people at all levels of our organization; and

successfully develop new solutions to enhance the experience of customers.

If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere in this “Risk Factors” section, our business, financial condition, and results of operations could be adversely affected. Further, because we have limited historical financial data and operate in a rapidly evolving market, any predictions about our future revenue and expenses may not be as accurate as those predictions would be if we had a longer operating history or operated in a more predictable market. We have encountered in the past, and will continue to encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition, and results of operations could be adversely affected.

Our business could be materially and adversely affected by the current global COVID-19 pandemic or other epidemics and outbreaks.

The ongoing COVID-19 pandemic has disrupted and affected our business operations, which has led to business and supply chain disruptions. For example, our offices and R&D and manufacturing locations have been, and continue to be, impacted due to national and regional government declarations requiring closures, quarantines, and travel restrictions, although those government-imposed restrictions have begun to ease in some parts of the world. However, given the unpredictable nature of COVID-19 and its variants, including Delta, Omicron, and other subvariants, it is difficult, if not impossible, to predict, whether those government-imposed restrictions will be reimposed at previous levels or enhanced in one or more ways impacting our business operations or those of third parties upon which we rely. The ongoing COVID-19 pandemic, including associated business interruptions and recovery, as well as other possible epidemics or outbreaks of other contagions could result in a material adverse impact on our or our current or anticipated customers’ or suppliers’ business operations, including reduction or
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suspension of operations in the U.S. or other parts of the world. Our design and engineering operations, among others, cannot all be conducted remotely and often require on-site access to materials and equipment. We have customers, suppliers, and partners with international operations, and our customers, suppliers, and partners also depend on suppliers and manufacturers worldwide, which means that our business and prospects could be affected by the continuation or worsening of the COVID-19 pandemic anywhere in the world. Depending upon the duration of the ongoing COVID-19 pandemic and the associated business interruptions, our customers, suppliers, manufacturers, and partners may suspend or delay their engagement with us. We and our customers’ and suppliers’ response to the ongoing COVID-19 pandemic may prove to be inadequate and they may be unable to continue their respective operations in the manner they had prior to the outbreak or the worsening of the outbreak, and we may consequently endure interruptions, reputational harm, delays in our product development, and shipments, all of which could have an adverse effect on our business, operating results, and financial condition. In addition, when the pandemic subsides, we cannot assure you as to the timing of any economic recovery, which could have a material adverse effect on our target markets and our business.

We continue to implement strategic initiatives designed to grow our business. These initiatives may prove more costly than we currently anticipate and we may not succeed in increasing our revenue in an amount sufficient to offset the costs of these initiatives or to achieve and maintain profitability.

We continue to make investments and implement initiatives designed to grow our business, including:

investing in R&D;

expanding our sales and marketing efforts to attract new customers and strategic partners;

investing in new applications and markets for our products;

further enhancing our manufacturing processes and partnerships;

protecting our intellectual property; and

investing in legal, accounting, and other administrative functions necessary to support our operations as a public company.

These initiatives may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue, if at all, in an amount sufficient to offset these higher expenses or to achieve and maintain profitability. The market opportunities we are pursuing are at an early stage of development, and it may be many years before the end markets we expect to serve generate demand for our products at scale, if at all. Our revenue may be adversely affected for a number of reasons, including the development and/or market acceptance of new technology that competes with our products, if automotive original equipment manufacturers, or automotive OEMs, Tier 1 automotive suppliers, or other market participants change their view towards autonomous vehicles or ADAS technologies or strategies, the failure of our customers to commercialize autonomous systems that include our solutions, our inability to effectively manage or outsource the management of our inventory, manufacturing, or contract manufacturing of products at scale, our inability to enter new markets or to help our customers adapt our products for new applications, or our failure to attract new customers or secure production orders from existing customers currently analyzing our solutions, or increasing competition. Furthermore, it is difficult to predict the size and growth rate of our target markets, customer demand for our products, commercialization timelines, developments in autonomous sensing, developments in ADAS and related technologies, the entry of competitive products, or the success of existing competitive products and services. For these reasons, we do not expect to achieve profitability over the near term. If our revenue does not grow over the long term, our ability to achieve and maintain profitability may be adversely affected, and the value of our business may significantly decrease.

If our deterministic artificial intelligence-driven sensing system is not selected for inclusion in ADAS technology by automotive OEMs or their suppliers, our business will be materially and adversely affected.

Automotive OEMs and their suppliers design and develop ADAS technology over several years. These automotive OEMs and suppliers undertake extensive testing or qualification processes prior to placing orders for large quantities of products, such as our active lidar products, because such products will function as part of a larger system or platform and must meet specifications that we do not control or dictate. We have spent, and will continue to spend, significant time and resources to have our products selected by automotive OEMs and their suppliers, which, when successful, we refer to as a “design win.” In the case of autonomous driving and ADAS technology, a
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design win means our active lidar product has been selected for use in a particular vehicle model or models. If we do not achieve a design win with respect to a particular vehicle model, we may not have an opportunity to supply our products to that automotive OEM or its supplier for that vehicle model for a period of many years. In many cases, this period can be as long as five to seven years (or more). If our products are not selected by an automotive OEM or our suppliers for one vehicle model or if our products are not successful in that vehicle model, it is less likely that our product will be deployed in other vehicle models of that automotive OEM. If we fail to obtain design wins for a significant number of vehicle models from one or more automotive OEMs or their suppliers, our business, results of operations, and financial condition will be materially and adversely affected. Our business model for the Automotive market is based on our relationships with Tier 1 suppliers. If these relationships do not materialize, automotive OEMs may be less inclined to select our products for use in their vehicle models. The period of time from a design win to implementation is long and we are subject to the risks of cancellation or postponement of the contract or unsuccessful implementation.

Our forward-looking estimates of certain financial metrics may prove inaccurate.

We use various estimates in formulating our business plans. We base our estimates upon a number of assumptions that are inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond our control. Our estimates therefore may prove inaccurate, causing the actual amount to differ from our estimates. These factors include, without limitation:

the extent to which we meet contractual terms and conditions;

the extent to which our technology is successfully integrated into our customers’ vehicles;

the timing of when our customers adopt our technology into their vehicles on a commercial basis which could be delayed for regulatory, safety or reliability issues unrelated to our technology;

undetected or unknown errors, defects, or reliability issues in our hardware or software which could reduce the market adoption of our products;

loss of business with respect to, the failure or lack of commercial success of a vehicle model for which we are a significant supplier for reasons unrelated to our technology;

a decline, for any reason, in the production levels of our customers, particularly with respect to models which incorporate our technology;

customer cancellations of their contracts;

if our products are included as part of a vehicle option package, the extent to which end customers select it; and

other risk factors set forth in this Quarterly Report.

Our products require key components and critical raw materials and our inability to reduce and control the cost of such components and raw materials could negatively impact the adoption of our products and accordingly, our financial condition and operating results.

The production of our components is dependent on sourcing certain key components and raw materials at acceptable price levels. We have experienced, and may continue to experience, supply chain-induced shortages of key components, leading to either a scarcity of such components, or a limited availability of such components at greatly inflated prices, or both. If we or our licensees or contract manufacturers are unable to adequately reduce and control the costs of such key components, we will be unable to realize manufacturing costs targets, which could reduce the market adoption of our products, damage our reputation with current or prospective customers, and have an adverse effect on our brand, business, prospects, financial condition, and operating results.

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Continued pricing pressures, automotive OEM and Tier 1 supplier cost reduction initiatives, and the ability of automotive OEMs and Tier 1 suppliers to re-source or cancel vehicle or technology programs may result in lower than anticipated revenues, or cause substantial losses, which may adversely affect our business.

Cost-cutting initiatives adopted by our customers may result in continued downward pressure on pricing. Our agreements and partnerships with automotive OEMs and Tier 1 suppliers may require step-downs in pricing over the term of the agreement or partnership, or if commercialized, over the period of production. In addition, our automotive OEM and Tier 1 suppliers often reserve the right to terminate their supply contracts for convenience, which enhances their ability to obtain price reductions. Automotive OEMs and Tier 1 suppliers also possess significant leverage over their suppliers, including us, because the automotive component supply industry is highly competitive, serves a limited number of customers, and has a high fixed cost base. See also the risk factor entitled, “We operate in a highly competitive market involving emerging technology. We compete against a number of competitors, some of whom have substantially greater resources than us,” below.

Accordingly, we expect to be subject to substantial and continuing pricing pressure from automotive OEMs, Tier 1 suppliers, and lidar competitors, which may impact the revenue we receive from licensing our product designs or selling our products. It is possible that pricing pressures beyond our expectations could intensify as automotive OEMs, Tier 1 suppliers, and lidar competitors pursue restructuring, consolidation, and cost-cutting initiatives. If we are unable to identify sufficient design cost savings to meet the expectations of automotive OEMs and Tier 1 suppliers, our revenue and profitability would be adversely affected.

We expect to incur substantial R&D costs and devote significant resources to identifying and commercializing new products, which could significantly reduce our profitability and may never result in revenue to us.

Our future growth depends on penetrating new markets, adapting existing products to new applications and customer requirements, and introducing new products that achieve market acceptance. We plan to incur substantial and increasing R&D costs as part of our efforts to design, develop, manufacture, and commercialize new products and enhance existing products. Our R&D expenses were approximately $19.3 million and $11.6 million during the six months ended June 30, 2022 and 2021, respectively, and are likely to grow in the future. Because we account for R&D as an operating expense, these expenditures will adversely affect our results of operations in the future. Further, our R&D program may not produce successful results, and our new products may not achieve market acceptance, create additional revenue, or become profitable.

Although we believe that lidar is an essential technology for autonomous vehicles and other emerging applications, market adoption of lidar is uncertain. If market adoption of lidar does not continue to develop, or adoption is deferred, or otherwise develops more slowly than we expect, our business will be adversely affected.

While our artificial intelligence-driven lidar-based sensing system can be applied to different use cases across end markets, approximately 64% and 70% of our revenue during the six months ended June 30, 2022 and 2021, respectively, was generated from automotive applications with a few customers in the aerospace, delivery, shuttle, railway, mining, and aviation sectors. Despite the fact that the automotive industry has expended considerable effort to research and test lidar products for ADAS and autonomous driving applications, the automotive industry may not introduce lidar products in commercially available vehicles on a timeframe that matches our expectations, or at all. We continually study emerging and competing sensing technologies and methodologies and we may incorporate new sensing technologies to our product portfolio over time. However, lidar products remain relatively new and it is possible that other sensing modalities, or a new disruptive modality based on new or existing technologies, including a combination of technologies, will achieve acceptance or leadership in the ADAS and autonomous driving space. Even if lidar products are used in initial generations of autonomous driving technology and ADAS products, we cannot guarantee that lidar products will be designed into or included in subsequent generations of such commercialized technology. In addition, we expect that initial generations of autonomous vehicles will be focused on limited applications, such as robo-taxis and shuttles, and that mass market adoption of autonomous technology may lag significantly behind these initial applications. The speed of market adoption and growth for ADAS or autonomous vehicles is difficult, if not impossible, to predict, and it is more difficult to predict this market’s future growth in light of the economic consequences of the COVID-19 pandemic and other macroeconomic factors. Although we currently believe we have a differentiated market leading technology for the autonomous vehicle market, by the time mass market adoption of autonomous vehicle technology is achieved, we expect competition among providers of sensing technology based on lidar and other modalities to increase substantially. If, by the time autonomous vehicle technology achieves mass market adoption, commercialization of lidar products is not successful, or not as successful as we or the market expects, or if other sensing modalities gain acceptance by developers of ADAS products, automotive OEMs, regulators, safety
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organizations, or other market participants, our business, results of operations, and financial condition will be materially and adversely affected.

We are investing in and pursuing market opportunities outside of the Automotive market, including in the aerospace and defense, shuttle, delivery vehicle, drone, railway, intelligent transport, and mining sectors. We believe that our future revenue growth, if any, will depend in part on our ability to expand within new markets such as these and to enter new markets as they emerge. Each of these markets presents distinct risks and, in many cases, requires that we address the particular requirements of that market.

Addressing these requirements can be time-consuming and costly. The market for lidar technology is relatively new, rapidly developing, and unproven in many markets or industries. Many of our prospective customers are still in the testing and development phases and we cannot be certain that they will commercialize products or systems with our lidar products, or at all. We cannot be certain that lidar will be sold into these markets, or that lidar will be sold into any markets at scale. Adoption of lidar products, including our products, will depend on numerous factors, including whether the technological capabilities of lidar and lidar-based products meet users’ current or anticipated needs, whether the benefits associated with designing lidar into larger sensing systems outweighs the costs, complexity, and time needed to deploy such technology or replace or modify existing systems that may have used other modalities, such as cameras and radar, whether users in other applications can move beyond the testing and development phases and proceed to commercializing systems supported by lidar technology and whether lidar developers such as us can keep pace with the expected rapid technological change in certain developing markets, and the global response to the COVID-19 pandemic, and other macroeconomic factors, and the length of any associated economic recovery. If lidar technology does not achieve commercial success, or if adoption of lidar is deferred or the market otherwise develops at a pace slower than we expect, our business, results of operations, and financial condition will be materially and adversely affected.

We may experience difficulties in managing our growth and expanding our operations.

We expect to experience significant growth in the scope and nature of our operations. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial, and management controls, legal and compliance programs, and reporting systems. We may not be able to implement improvements in an efficient or timely manner and may discover deficiencies in existing controls, programs, systems, and procedures, which could have an adverse effect on our business, reputation, and financial results.

We rely on third-party suppliers and because some of the raw materials and key components in our products come from limited or single source suppliers, we are susceptible to supply shortages, longer than anticipated lead times for components, and supply changes, any of which could disrupt our supply chain and could delay deliveries of our products to customers.

Most of the components that go into the manufacturing of our solutions are sourced from third-party suppliers. To date, we have produced our products in relatively limited quantities for use in R&D programs. Although we do not have any experience in managing our supply chain to manufacture and deliver our products at scale, our future success will depend on our ability to do so. Some of the key components used to manufacture our products come from limited or single source suppliers. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. We have a global supply chain and the COVID-19 pandemic, other epidemics and outbreaks, and other macroeconomic factors may adversely affect our ability to source components in a timely or cost-effective manner from our third-party suppliers due to, among other things, work stoppages or interruptions. For example, our products depend on lasers. Any shortage of these lasers could materially and adversely affect our ability to manufacture our solutions. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. While we have entered into agreements with some suppliers for the supply of certain components at set prices, such quantities are limited given we are not yet producing at scale. Therefore, we have in the past experienced, and may in the future experience, component shortages and price fluctuations of key components and materials, and the predictability of the availability and pricing of these components may be limited. Component shortages or pricing fluctuations could be material in the future, which could be exacerbated by employee retention issues at any of our suppliers. In the event of a component shortage, supply interruption, or a material pricing change from suppliers of these components, we may not be able to develop alternate sources in a timely manner, or at all, especially in the case of sole or limited source items. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly and we may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our requirements or to fill customer orders in a timely manner. Any interruption or delay in the supply of any
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of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would adversely affect our ability to meet our scheduled product deliveries to our customers. This could adversely affect our relationships with our customers and channel partners and could cause delays in shipment of our products and adversely affect our operating results. In addition, increased component costs could result in lower gross margins. Even where we are able to pass increased component costs along to our customers, there may be a lapse of time before we are able to do so such that we will be required to absorb some or all of the increased cost. If we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver products to our customers, which may result in such customers using competitive products instead of our products.

Because our sales have been primarily to customers making purchases for R&D projects and customers’ current orders are project-based, we expect our results of operations to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.

Our quarterly results of operations have fluctuated in the past and may vary significantly in the future. As such, historical comparisons of our operating results may not be meaningful. In particular, because our sales to date have primarily been to customers making purchases for their own R&D, sales in any given quarter can fluctuate based on the timing and success of our customers’ development projects. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control and may not fully reflect the underlying performance of our business. These fluctuations could adversely affect our ability to meet our expectations or those of securities analysts, ratings agencies, or investors. If we do not meet these expectations for any period, the value of our business and our securities, could decline significantly. Factors that may cause these quarterly fluctuations include, without limitation, those listed below:

the timing and magnitude of orders and shipments of our products in any quarter;

decreases in pricing we may adopt to drive market adoption or in response to competitive pressure;

our ability to retain our existing customers and strategic partners and attract new customers and strategic partners;

our ability to develop, introduce, manufacture, and ship, in a timely manner, products that meet customer requirements;

disruptions in our sales channels or termination of our relationships with important channel partners;

delays in customers’ purchasing cycles or deferments of customers’ purchases in anticipation of new products or updates from us or our competitors;

fluctuations in demand for our products;

the mix of products sold or licensed by us in any given quarter;

the duration or worsening of the global COVID-19 pandemic and the time it takes for economic recovery;

the duration or worsening of the military conflict in Ukraine and the time it will take for the economic recovery for such impact to occur;

the timing and rate of broader market adoption of ADAS or autonomous systems utilizing our solutions across the automotive and other market sectors;

the timing and scale of the market acceptance of lidar generally;

further technological advancements by our competitors and other market participants;

the ability of our customers and strategic partners to commercialize systems that incorporate our products;

any change in the competitive dynamics of our markets, including consolidation of competitors, regulatory developments, and new market entrants;
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our ability to effectively manage or outsource management of our inventory;