OUSTER, INC. The following discussion of the results of operations and financial condition ofOuster, Inc. ("we," "us," "our," the "Company," "Ouster") should be read in conjunction with the information set forth in Ouster's condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q, as well as Ouster's audited consolidated financial statements and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Ouster's final prospectus dated and filed with theSecurities and Exchange Commission ("SEC") onAugust 19, 2021 . This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Ouster's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled "Risk Factors" in Ouster's final prospectus dated and filed with theSEC onAugust 19, 2021 . OnDecember 21, 2020 ,Ouster Technologies, Inc. ("OTI", prior to the Merger, namedOuster, Inc. ) entered into an Agreement and Plan of Merger (the "Merger Agreement") withColonnade Acquisition Corp. , aCayman Islands exempted company ("CLA"), andBeam Merger Sub, Inc. ("Merger Sub"), aDelaware corporation and subsidiary of CLA. OTI's and CLA's board of directors unanimously approved OTI's entry into the Merger Agreement, and onMarch 11, 2021 , the transactions contemplated by the Merger Agreement were consummated (all such transactions, the "Merger"), as further described below. Unless the context otherwise requires, references in this subsection to "we", "our" and "the Company" refer to the business and operations of OTI (formerly known asOuster, Inc. ) and its consolidated subsidiaries prior to the Merger and toOuster, Inc. (formerly known asColonnade Acquisition Corp. ) and its consolidated subsidiaries following the consummation of the Merger. Overview We are a leading provider of high-resolution digital lidar sensors that offer advanced 3D vision to machinery, vehicles, robots, and fixed infrastructure assets, allowing each to understand and visualize the surrounding world and ultimately enabling safe operation and autonomy. We design and manufacture digital lidar sensors that we believe are the highest-performing, lowest-cost lidar solutions available today across each of our four target markets: industrial automation; smart infrastructure; robotics; and automotive. We shipped sensors to approximately 600 customers in the twelve months endedSeptember 30, 2021 . Our digital lidar sensors leverage a simplified architecture based on two semiconductor chips and are backed by a suite of patent-protected technology. We have invested heavily in patents since our inception, pursuing comprehensive coverage of invention families and use cases, with broad international coverage. We believe that our extensive patent coverage creates material barriers to entry for anyone aiming to compete in the digital lidar space. Our product offering today includes three models of sensors in our OS product line: the ultra-wide field of view OS0, the mid-range OS1, and the long-range OS2. InJanuary 2020 we released new models in our OS product line, increasing the resolution of our OS1 model and introducing the OS0 and OS2 models. Within our OS sensor models, we offer numerous customization options, all enabled by embedded software. For each of our three models in the OS product line, we offer resolution options of 128 lines vertically ("channels"), 64 channels, or 32 channels, as well as many beam spacing options. We are currently developing our solid-state ES product line, which, when released, will consist of the long-range ES2 sensor. We believe the simplicity of our digital lidar design gives us a meaningful advantage in costs related to manufacturing, supply chain and production yields. The same digital lidar architecture underpins our entire product portfolio which we believe drives economies of scale in our supply chains and speeds time to market. With virtually unlimited software-defined products driving low-cost customization, we are able to increase stock keeping units ("SKUs") for industry-specific applications, expanding our product offering with minimal manufacturing or inventory changes. We currently have over 75 different software-defined product SKUs, all based on this common architecture and shared core componentry. Additionally, we are successfully expanding our manufacturing capacity by outsourcing to our manufacturing partner, Benchmark Electronics, Inc. ("Benchmark"). Benchmark manufactures our products at its facility inThailand , which we expect will reduce our product costs and allow us to rapidly scale production to meet our anticipated product demand. Based on cost quotes for our products in mass production, we believe our manufacturing costs to be lower than certain of our competitors, and we expect our manufacturing costs per unit to decrease further with higher volumes. We have won and are actively negotiating a number of additional, multi-year sales contracts which includes our Strategic Customer Agreements ("SCAs") which establish a multi-year purchase and supply framework for Ouster and the customer, and include details about customer programs and applications where the customer intends to use Ouster products. SCAs also include multi-year non-binding customer forecasts (typically of three to five years in length) giving Ouster visibility to the customer's 28 -------------------------------------------------------------------------------- Table of Contents long-term purchasing requirements, mutually agreed upon pricing over the duration of the agreement, and, in certain cases, include multi-year binding purchase commitments. We founded Ouster in 2015 with the invention of our high-performance digital lidar. Since then, we have grown to approximately 200 employees serving approximately 600 customers globally in the twelve months endedSeptember 30, 2021 . To continue to grow our business in the coming years, we have expanded and plan to continue to expand our sales and marketing efforts and our software development capabilities, and to accelerate sensor development efforts. We are headquartered inSan Francisco, CA. Merger Agreement withColonnade Acquisition Corp. andBeam Merger Sub, Inc. OnDecember 21, 2020 , OTI entered into the Merger Agreement with CLA, and Merger Sub, a subsidiary of CLA. OTI's and CLA's board of directors unanimously approved OTI's entry into the Merger Agreement, and onMarch 11, 2021 , the transactions contemplated by the Merger Agreement were consummated. Pursuant to the terms of the Merger Agreement, (i) CLA domesticated as a corporation incorporated under the laws of theState of Delaware (the "Domestication") and changed its name to "Ouster, Inc. " (with CLA after such domestication and the other transactions pursuant to the Merger Agreement being referred to as the "Company") and (ii) Merger Sub merged with and into OTI (the "Merger"), with OTI surviving the Merger. As a result of and upon the effective time of the Domestication, among other things, (1) each of the then issued and outstanding 5,000,000 CLA Class B ordinary shares, par value$0.0001 per share, of CLA (the "CLA Class B ordinary shares") converted automatically, on a one-for-one basis, into a CLA Class A ordinary share (as defined below), (2) immediately following the conversion described in clause (1), each of the then issued and outstanding 25,000,000 Class A ordinary shares, par value$0.0001 per share, of CLA (the "CLA Class A ordinary shares"), converted automatically, on a one-for-one basis, into a share of common stock, par value$0.0001 per share, of Ouster (the "Ouster common stock"), (3) each of the then issued and outstanding 10,000,000 redeemable warrants of CLA (the "CLA warrants") converted automatically into a redeemable warrant to purchase one share of Ouster common stock (the "Public warrants") pursuant to the Warrant Agreement, datedAugust 20, 2020 (the "Warrant Agreement"), between CLA andContinental Stock Transfer & Trust Company ("Continental"), as warrant agent, and (4) each of the then issued and outstanding units of CLA that had not been previously separated into the underlying CLA Class A ordinary shares and underlying CLA warrants upon the request of the holder thereof (the "CLA units"), were cancelled and entitled the holder thereof to one share of Ouster common stock and one-half of one Public warrant, and (5) each of the then issued and outstanding 6,000,000 private placement warrants of CLA (the "Private Placement warrants") converted automatically into a Public warrant pursuant to the Warrant Agreement. No fractional Public warrants were issued upon separation of the CLA units. Immediately prior to the effective time of the Merger, (1) each share of OTI's Series B Preferred Stock, par value$0.00001 per share (the "OTI Preferred Stock"), converted into one share of common stock, par value$0.00001 per share, of OTI (the "OTI common stock" and, together with OTI Preferred Stock, the "OTI Capital Stock") (such conversion, the "OTI Preferred Conversion") and (2) all of the outstanding warrants to purchase shares of OTI Capital Stock were exercised in full or terminated in accordance with their respective terms (the "OTI Warrant Settlement"). As a result of and upon the closing of the Merger, among other things, all shares of OTI Capital Stock (after giving effect to the OTI Warrant Settlement) outstanding immediately prior to the closing of the Merger together with shares of OTI common stock reserved in respect of options to purchase shares of OTI common stock and restricted shares of OTI common stock (together, the "OTI Awards") outstanding immediately prior to the closing of the Merger that were converted into awards based on Ouster common stock, were cancelled in exchange for the right to receive, or the reservation of, an aggregate of 150,000,000 shares of Ouster common stock (at a deemed value of$10.00 per share), which, in the case of OTI Awards, were shares underlying awards based on Ouster common stock, representing a fully-diluted pre-transaction. Upon the closing of the Merger, the Company received gross proceeds of$299.9 million from the Merger and private offering, offset by$8.5 million of pre-merger costs relating to CLA and offering costs of$26.6 million .
Sense Acquisition
OnOctober 5, 2021 , we announced our intent to acquire privately heldSense Photonics, Inc. ("Sense"), a lidar technology company for autonomous vehicles. OnOctober 22, 2021 , we completed the acquisition of Sense and formally establishedOuster Automotive , a new functional division of the Company focusing on driving mass-market adoption of digital lidar in consumer and commercial vehicles. Under the terms of the merger agreement, we acquired 100% of Sense and all of its property for approximately 10 million shares of Ouster common stock or approximately$63 million in equity value based on the closing price of$6.55 per share as of the day the transaction closed onOctober 22, 2021 , inclusive of 0.8 million shares 29 -------------------------------------------------------------------------------- Table of Contents underlying assumed options, after closing adjustments. This acquisition is expected to help Ouster expand its presence in the automotive vertical by executing on our hiring goals and product roadmap on a faster timeline. COVID-19 Impact Throughout 2020 and the nine months endedSeptember 30, 2021 , the worldwide spread of the pandemic caused by the novel coronavirus ("COVID-19") and the measures intended to contain the spread of COVID-19, including variants, have resulted in a global slowdown of economic activity and caused disruptions to our business. In particular, our headquarters are based in theSan Francisco Bay Area , which has been subject to ongoing government measures and orders such as quarantines and social distancing. During the second and third quarters of 2020 we slowed our operating and capital spending with the expectation that our revenue and ability to raise capital would be impacted by the global pandemic. We believe that our overall growth rate during 2020 and through the third quarter endedSeptember 30, 2021 was negatively impacted by the pandemic due in part to pandemic related supply chain issues, though, despite this impact, we were able to continue to grow our sales during 2021 and estimate that in the long-term the pandemic will act as a catalyst for wider adoption of automation and lidar technology. As aSan Francisco Bay Area based company, we were affected by the "shelter in place" order in the first and second quarter of 2020. While the majority of our employees were able to work remotely, some employees, especially manufacturing employees, were not able to work from home. The "shelter in place" order delayed order fulfillment and revenue recognition during the first and second quarters of 2020. We continued to pay employees during the "shelter in place" order whether or not they were able to work. Manufacturing and order fulfillment employees were able to return to work in the second quarter of 2020; however, the number of employees allowed on premises at one time was greatly reduced as a result of theCalifornia reduced capacity mandates, which also affected our ability to fulfill orders and recognize revenue. Some essential employees were paid hazard pay, and the hazard pay combined with underutilized employee pay increased our employee overhead and decreased gross margins in the first and second quarter of 2020. Manufacturing employees continued to work in a reduced capacity at ourSan Francisco facility until the second quarter of 2021. We have moved a large portion of our manufacturing to our contract manufacturer inThailand , which allowed us to satisfy demand for our digital lidar sensors in the first two quarters of 2021 and consequently allowing us to increase our year over year revenue. Our suppliers are located worldwide, and some of our key suppliers have been affected by the pandemic resulting in supply chain disruptions. We have experienced and continue to experience some unfavorable purchase price variance and situational expedite fees in order to meet production and delivery timelines. While we may see additional or new pressures on our supply chain both related and unrelated to the pandemic, we are actively taking steps to mitigate the impact of the materials shortages on our business. While we experienced quarter-over-quarter increases in revenue in 2020 and the first nine months of 2021, some customers have delayed orders and production schedules due to COVID-19. The pandemic continues to evolve, and the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, research and development costs and personnel-related costs, will depend on future developments that are highly uncertain, including new information that may emerge concerning COVID-19 and the actions taken to contain, prevent or treat COVID-19, rate and success of vaccination efforts, vaccine hesitancy, any resurgence of the pandemic in areas where we, Benchmark or our suppliers operate, and the economic impact on local, regional, national and international customers and markets. Going forward, the situation remains uncertain, rapidly changing and hard to predict, and the COVID-19 pandemic may have a material negative impact on our future results. Factors Affecting Our Performance Supply Chain Continuity. A recent surge in demand for electronics containing semiconductor chips and stockpiling of chips by certain companies has created disruptions in the supply chain, resulting in a global chip shortage impacting our industry. Some chip manufacturers are estimating this supply shortage may continue into 2022. These chip manufacturers are working to increase capacity in the future, and we are managing our inventory and working closely with our regular suppliers and customers to minimize the potential impacts of any supply shortages including by securing additional inventory. While we do not expect the shortage to have a material near-term impact on our ability to meet existing demand for our current products, the shortage has adversely impacted our gross margins for the nine months endedSeptember 30, 2021 and may continue to do so. We anticipate fluctuation in our cost of goods sold over the next 12-18 months as a result of ongoing supply chain constraints. These constraints have caused and may in the future cause us to implement certain temporary price surcharges. Over time, we expect our overall average selling prices to decline as our volume increases. If our mitigating efforts are not 30 -------------------------------------------------------------------------------- Table of Contents successful or the shortage continues or worsens in ways we did not anticipate, our ability to supply or improve our current products as well as our development and rollout of future products could also be adversely affected. Commercialization of Lidar Applications. We believe that lidar is approaching its inflection point of adoption across our target end market applications, and that we are well-positioned to capitalize on this market adoption. However, as our customers continue research and development projects to commercialize semi-autonomous solutions that rely on lidar technology, it is difficult to estimate the timing of ultimate end market and customer adoption. As a result, we expect that our results of operations, including revenue and gross margins, will fluctuate on a quarterly and annual basis for the foreseeable future. As the market for lidar solutions matures and more customers reach a commercialization phase with solutions that rely on our technology, the fluctuations in our operating results may become less pronounced. Nonetheless, our revenue may not grow as we expect unless and until more customers commercialize their products and lidar technology becomes more prevalent across our target end markets. Number of Customers in Production. For certain strategic customers and markets, our products must be integrated into a broader platform, which then must be tested, validated, and achieve system-level performance and reliability thresholds that enable commercial production and sales. The time necessary to reach commercial production varies from six months to seven years, based on the market and application. For example, the production cycle in the automotive market tends to be substantially longer than in our other target markets, including industrial automation, smart infrastructure and robotics. It is critical to our future success in each of our target end markets that our customers reach commercial production and sales and that they select our products in their commercial production applications. Because the timelines to reach production vary significantly and the revenue generated by each customer in connection with commercial production and sales is unpredictable, it is difficult for us to reliably predict our financial performance. Customers' Sales Volumes. Our customer base is diversified and we will continue to penetrate into diverse end markets to increase our sales volumes. Ultimately widespread adoption of our customers' products that incorporate our lidar solutions will depend on many factors, including the size of our customers' end markets, end market penetration of our customer's products that incorporate our digital lidar solutions, our end customers' ability to sell their products, and the financial stability and reputation of the customers. We believe our sales volume by customer depends on the end market demand for our customers' products that incorporate our digital lidar solutions as well as our ability to grow our sales force. Average Selling Prices ("ASPs"), Product Costs and Margins. Our product costs and gross margins depend largely on the volumes of sensors sold and the number and variety of solutions we provide to our customers. We expect that our selling prices will vary by target end market and application due to market-specific supply and demand dynamics. We expect to continue to experience some downward pressure on margins from signing anticipated large multi-year agreements (including our SCAs) in the near term with multi-year negotiated pricing, as well as supply chain constraints discussed above. We expect these customer-specific selling price fluctuations combined with our volume-driven product costs may drive fluctuations in revenue and gross margins on a quarterly basis. However, notwithstanding any short-term price surcharge on our products, we expect that over time our volume-driven product costs will lead to gross margin improvement as our sales volume increases. Competition. Lidar is an emerging market, and there are competitors for the growing market. This has created downward pressure on our ASPs, particularly in theAsia and Pacific region. We expect this pressure to continue to push our ASPs lower in the coming years. However, we believe that because of our complementary metal-oxide-semiconductor, "CMOS", digital lidar technology, we are in the position to scale more rapidly than our analog competitors and leverage our scale to deliver positive gross margins.Continued Investment and Innovation. We believe that we are a leading digital lidar provider. Our financial performance is significantly dependent on our ability to maintain this leading position which is further dependent on the investments we make in research and development. We believe it is essential that we continue to identify and respond to rapidly evolving customer requirements, including successfully realizing our product roadmap. If we fail to continue our innovation, our market position and revenue may be adversely affected, and our investments in that area will not be recovered. Market Trends and Uncertainties. We anticipate robust demand for our digital lidar solution. We estimate a multibillion dollar total addressable market ("TAM") for our solutions in the near future. We define our TAM as automation applications in the industrial, smart infrastructure, robotics and automotive end markets where we actively engage and maintain customer relationships. Each of our target markets is potentially a significant global opportunity, and these markets have historically been underserved by limited or inferior technology or not served at all. We believe we are well positioned in our market as a leading provider of high-resolution digital lidar sensors. Although increasing adoption of semi-autonomous solutions that rely on lidar technology may generate higher demand, we may not be able to take advantage of demand if we are unable to anticipate regulatory changes and adapt quickly enough to 31 -------------------------------------------------------------------------------- Table of Contents meet such new regulatory standards or requirements applicable to us or to our customers' products in which our digital lidar sensors are used. Market acceptance of semi-autonomous solutions and active safety technology depend upon many factors, including cost, performance, safety performance, regulatory requirements and international taxes or tariffs related to such technologies. These factors may impact the ultimate market acceptance of our lidar technology. International Expansion. We view international expansion as an important element of our strategy to increase revenue and achieve profitability. We continue to position ourselves in geographic markets that we expect to serve as important sources of future growth. We have an existing presence in three regions:North and South America ;Asia and Pacific; andEurope ,Middle East andAfrica . We intend to expand our presence in these regions over time including through distribution partnerships. Expanded global reach will require continued investment and may expose us to additional foreign currency risk, international taxes and tariffs, legal obligations and additional operational costs, risks and challenges that may impact our ability to meet our projected sales volumes, revenue and gross margins. Components of Results of Operations Revenue The majority of our revenue comes from the sale of our digital lidar sensors and accessories both directly to end users and through distributors both domestically and internationally. We recognize revenue from product sales when the performance obligation of transferring control of the product to the customer has been met, generally when the product is shipped. The company also recognizes revenue by performing services related to product development and validation, and shipping; however, we do not expect product development and validation and license and services to be material components of revenue, cost of revenue or gross margin in the foreseeable future. Performance obligations related to services are generally recognized over time, based on cost-to-cost input basis or straight-line over time. Amounts billed to customers related to shipping and handling are classified as revenue, and we have elected to recognize the cost of shipping activities that occur after control has transferred to the customer as a fulfillment cost rather than a separate performance obligation. All related costs are accrued and recognized within cost of revenue when the related revenue is recognized. Most of our customers are currently in the evaluation or early R&D stage with our products. Currently, our product revenue consists of both customers ordering small volumes of our products that are in an evaluation phase and customers that order larger volumes of our products and have more predictable long-term production schedules. However, we are still at the very beginning of the lidar adoption curve, and some customers are still learning their ramp rates which can impact the timing of purchase orders quarter to quarter. As we grow our business we expect to improve predictability into our customers' needs and timelines, and expect the timing of orders will have a less notable impact on our quarterly results. Over the coming years, as more of our customers move into their respective production phases, we expect the majority of our product revenue to shift to larger volume orders based on predictable production schedules. We also expect more of our revenue to come from international customers, and anticipate that our sales from regions outside ofNorth and South America will grow over the long-term to approximately two-thirds of our total revenue. Cost of Revenue Cost of revenue consists of the manufacturing cost of our digital lidar sensors, which primarily consists of sensor components, personnel-related costs directly associated with our manufacturing organization, and amounts paid to our third-party contract manufacturer and vendors. Our cost of revenue also includes depreciation of manufacturing equipment, an allocated portion of overhead, facility and IT costs, stock-based compensation for manufacturing personnel, reserves for estimated warranty expenses, excess and obsolete inventory and shipping costs. Gross Profit and Gross Margin Our gross profit equals total revenues less our total cost of revenues, and our gross margin is our gross profit expressed as a percentage of total revenue. We experienced negative gross margins from the fourth quarter of 2018 until we turned gross margin positive during 2020 primarily due to increased unit volumes which improved our ability to absorb fixed costs and lowered material costs by increasing our buying power and a shift to outsourced mass production of our sensors to Benchmark, who has leverage for greater volume discounts and lower overhead costs. Subject to quarterly fluctuations and volatility, we expect actual costs to improve as we manufacture higher unit volumes of sensors and a greater portion of our sensors are produced by our contract manufacturer inThailand . 32 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Research and Development Expenses Research and development ("R&D") activities are primarily conducted at ourSan Francisco based headquarters and consist of the following activities: •Design, prototyping, and testing of proprietary electrical, optical, and mechanical subsystems for our digital lidar products; •Robust testing for industrial and autonomous vehicle safety certifications; •Development of new products and enhancements to existing products in response to customer requirements including firmware development and software development of lidar integration products; •Custom system-on-a-chip ("SoC") design for Ouster's digital lidar products; and •Development of custom manufacturing equipment. R&D expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly involved in R&D activities, third-party engineering and contractor costs, and prototype expenses. R&D costs are expensed as they are incurred. Our investment in R&D will continue to grow as we invest in new lidar technology and related software. Our absolute amount of R&D expense will grow over time; however, we expect R&D as a percentage of revenue to decrease annually as our business grows. Sales and Marketing Expenses Our business development, customer support and marketing teams are located in offices worldwide. Selling and marketing expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, for all personnel directly involved in business development, customer support, and marketing activities, and marketing expenses including trade shows, advertising, and demonstration equipment. Our investment in sales and marketing will continue to grow as we continue to expand our sales team globally, and our absolute amount of sales and marketing expenses will grow over time. We expect sales and marketing spend as a percentage of revenue to decrease over time as our business grows. General and Administrative Expenses General and administrative expenses consist of personnel-related expenses, including salaries, benefits, and stock-based compensation, of our executives and members of the board of directors, finance, human resource, IT, and legal departments as well as fees related to legal fees, patent prosecution, accounting, finance and professional services as well as insurance, and bank fees. Our absolute amount of general and administrative expense will grow over time; however, we expect the general and administrative spend as a percentage of revenue to decrease annually as our business grows. Near term increases in general and administrative expenses are expected to be related to hiring more personnel and consultants to support our growing international expansion and compliance with the applicable provisions of the Sarbanes-Oxley Act ("SOX") and otherU.S. Securities and Exchange Commission ("SEC") rules and regulations as a result of becoming a public company following the Merger. Stock-Based Compensation We measure and recognize stock-based compensation expense for stock-based awards over the requisite service periods based on the estimated grant date fair value using the Black-Scholes-Merton option pricing model. Interest Income, Interest Expense, and Other Income (Expense), Net Interest income consists primarily of income earned on our cash and cash equivalents. These amounts will vary based on our cash and cash equivalents balances and market rates. Interest expense consists primarily of interest on our debt and convertible notes and amortization of debt issuance costs and discount. Other income (expense), net consists primarily of realized and unrealized gains and losses on foreign currency transactions and balances, the change in fair value of financial instruments, including warrants issued in connection with a debt agreement, and Private Placement warrants acquired as part of the Merger. 33 -------------------------------------------------------------------------------- Table of Contents Income Taxes Our income tax provision consists of federal, state and foreign current and deferred income taxes. Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in the quarter. Our effective tax rate differs from theU.S. statutory tax rate primarily due to valuation allowances on its deferred tax assets as it is more likely than not that some, or all, of our deferred tax assets will not be realized. We continue to maintain a full valuation allowance against its net deferred tax assets. Income tax provision for the three and nine months endedSeptember 30, 2021 and 2020, respectively, was not material to the Company's condensed consolidated financial statements. Results of Operations: The following table sets forth our condensed consolidated results of operations data for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (dollars in thousands) (dollars in thousands) Revenue Product revenue$ 7,755 $ 5,934 $ 21,726 $ 10,524 Service revenue - 13 - 2,004 Total revenue 7,755 5,947 21,726 12,528 Cost of revenue(1) Cost of product revenue (1) 5,879 4,884 16,212 12,962 Cost of services - - - 26 Total cost of revenue 5,879 4,884 16,212 12,988 Gross profit (loss) 1,876 1,063 5,514 (460) Operating expenses (1): Research and development 8,390 8,876 19,576 19,028 Sales and marketing 6,737 2,394 14,777 6,305 General and administrative 14,073 4,512 36,177 11,856 Total operating expenses 29,200 15,782 70,530 37,189 Loss from operations (27,324) (14,719) (65,016) (37,649) Other (expense) income: Interest income 165 1 305 24 Interest expense - (521) (504) (2,196) Other income (expense), net 14,490 (4,376) (422) (9,799) Total other expense, net 14,655 (4,896) (621) (11,971) Loss before income taxes (12,669) (19,615) (65,637) (49,620) Provision for income tax expense - - - - Net loss and comprehensive loss$ (12,669) $
(19,615)
34
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The following table sets forth the components of our condensed consolidated
statements of operations and comprehensive loss data as a percentage of revenue
for the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(% of total revenue) (% of total revenue)
Revenue
Product revenue 100 % 100 % 100 % 84 %
Service revenue - 0 - 16
Total revenue 100 100 100 100
Cost of revenue (1)
Cost of product 76 82 75 103
Cost of services - 0 - -
Total cost of revenue 76 82 75 104
Gross profit (loss) 24 18 25 (4)
Operating expenses (1):
Research and development 108 149 90 152
Sales and marketing 87 40 68 50
General and administrative 181 76 167 95
Total operating expenses 377 265 325 297
Loss from operations (352) (248) (299) (301)
Other (expense) income:
Interest income 2 - 1 -
Interest expense - (9) (2) (18)
Other income (expense), net 187 (74) (2) (78)
Total other expense, net 189 (82) (3) (96)
Loss before income taxes (163) (330) (302) (396)
Provision for income tax expense - - - -
Net loss and comprehensive loss (163) % (330) % (302) % (396) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in thousands) (dollars in thousands)
Cost of revenue $ 206 $ 505 $ 457 $ 606
Research and development 2,063 4,889 4,305 5,177
Sales and marketing 1,717 319 2,702 408
General and administrative 3,161 1,543 11,093 1,700
Total stock-based compensation $ 7,147 $
7,256
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Table of Contents Comparison of the three months endedSeptember 30, 2021 and 2020 Revenue Three Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Revenue Product revenue$ 7,755 $ 5,934 $ 1,821 31 % Service revenue - 13 (13) (100) Total revenue$ 7,755 $ 5,947 $ 1,808 30 % Revenue by geographic location: United States$ 4,037 $ 2,283 $ 1,754 77 % Americas, excluding United States 147 87 60 69 Europe, Middle East and Africa 1,614 2,091 (477) (23) Asia and Pacific 1,957 1,486 471 32 Total$ 7,755 $ 5,947 $ 1,808 30 % Product Revenue Product revenue increased by$1.8 million , or 31%, to$7.8 million for the three months endedSeptember 30, 2021 from$5.9 million for the comparable period in the prior year. The increase in product revenue was driven by a 127% increase in volume which we attribute primarily to the expansion of our sales team and the increase of high volume, long-term agreements as some of our customers begin to move into a production stage with their autonomous products. Our average selling price declined by 42% as we moved towards long-term, high volume negotiated customer pricing. As our volumes increase we expect further reductions in our average selling price. Service Revenue Services revenue decreased by$13 thousand . This decrease in revenue was due to there being no non-recurring engineering work in the three months endedSeptember 30, 2021 . Geographic Locations Revenue inEurope , theMiddle East andAfrica decreased by$0.5 million in the three months endedSeptember 30, 2021 , compared to the prior year period. The revenue decrease was mainly attributable to average selling price decrease asEurope , theMiddle East andAfrica sold more units in the three months endedSeptember 30, 2021 than in the prior year period. Average selling prices have decreased over the past year as we moved towards long-term, high volume negotiated customer pricing. Revenue inthe United States ;Americas excludingthe United States ; andAsia and Pacific increased by$1.8 million ,$0.1 million ,$0.5 million , respectively, in the three months endedSeptember 30, 2021 compared to the prior year period. The revenue increases inthe United States andAmericas excludingthe United States , andAsia and Pacific were a result of focused sales expansion in those regions. We hired a President of Field Operations inApril 2021 as well as sales and sales support staff to expand our coverage ofthe United States andAmericas and all regions. 36 -------------------------------------------------------------------------------- Table of Contents Cost of Product Revenue and Gross Margin Three Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Cost of revenue Cost of product $ 5,879$ 4,884 $ 995 20 % Cost of services - - - - Total $ 5,879$ 4,884 $ 995 20 % Cost of Product Revenue and Gross Margin Cost of product revenue increased by$1.0 million , or 20%, to$5.9 million for the three months endedSeptember 30, 2021 from$4.9 million for the comparable period in the prior year and cost per unit decreased by 47%. The increase in cost of product revenue was primarily due to increases of$2.9 million in material costs due to volume which was offset by$2.0 million in per unit savings in material cost and an increase of$0.8 million in other product costs which was primarily due to$1.3 million in additional costs associated with securing materials during the global supply chain crisis. The increases were partially offset by a decrease of$0.8 million in manufacturing overhead costs as we built more units than we sold and freight. Product gross margin increased from 18% for the three months endedSeptember 30, 2020 to 24% for the three months endedSeptember 30, 2021 . The improvement in product gross margin is due to the 47% decrease in cost per unit partially offset by a 4% decrease in average selling price. Operating Expenses Three Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Operating expenses: Research and development$ 8,390 $ 8,876 $ (486) (5) % Sales and marketing 6,737 2,394 4,343 181 General and administrative 14,073 4,512 9,561 212 Total operating expenses:$ 29,200 $ 15,782 $ 13,418 85 % Research and Development Research and development expenses decreased by$0.5 million , or 5%, to$8.4 million for the three months endedSeptember 30, 2021 from$8.9 million for the comparable period in the prior year. The decrease was primarily attributable to a$3.2 million decrease in stock-based compensation expense, which was offset by a$1.9 million increase in payroll-related expenses, a$0.2 million increase in recruiting and a$0.6 million decrease in product development, equipment and depreciation. Sales and Marketing Sales and marketing expenses increased by$4.3 million , or 181%, to$6.7 million for the three months endedSeptember 30, 2021 from$2.4 million for the comparable period in the prior year. The increase was primarily attributable to an increase of$3.7 million in payroll and personnel-related costs driven by the addition of sales personnel in all our global regions,$1.4 million of which was stock-based compensation related,$0.2 million for marketing and sales consulting, and$0.4 million in facility and business expenses related to opening and expanding sales offices around the world. General and Administrative General and administrative expenses increased by$9.6 million , or 212%, to$14.1 million for the three months endedSeptember 30, 2021 from$4.5 million for the comparable period in the prior year. The increase is primarily due to an increase of$3.7 million in accounting and professional services (primarily audit and legal), increase of$1.8 million relating to D&O insurance expense,$1.6 million in stock-based compensation expense,$1.3 million in payroll related expense,$0.5 million in 37 -------------------------------------------------------------------------------- Table of Contents office expenses and depreciation,$0.2 million in facility expense,$0.2 million in equipment,$0.1 million in consultants, and$0.2 million in public relations and investor relations. Interest Income, Interest Expense and Other Income (Expense), Net Three Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Interest income$ 165 $ 1$ 164 16400 % Interest expense - (521) 521 100 Other income (expense), net 14,490 (4,376) 18,866 431 The increase in interest income was primarily related to an increase in our cash and cash equivalent balances after the Merger closed onMarch 11, 2021 . The decrease in interest expense was primarily due to the conversion of convertible notes in the second quarter of 2020 and the repayment of bank debt in the third quarter of 2020 and inMarch 2021 . Other income (expense), net was$14.5 million for the three months endedSeptember 30, 2021 compared to$(4.4) million for the comparable period in the prior year. During the three months endedSeptember 30, 2021 , we recorded other income of$14.5 million for the decrease in fair value of private placement warrant liability. In the three months endedSeptember 30, 2020 we recorded other expense of$6.0 million for the increase in fair value of the warrant liability offset by a$1.6 million gain from extinguishment of tranche liability. We were subject to income taxes inthe United States ,Hong Kong ,Thailand andChina for the three months endedSeptember 30, 2021 and 2020. Our income tax expense for three months endedSeptember 30, 2021 and 2020 was not material to our condensed consolidated financial statements. Comparison of the nine months endedSeptember 30, 2021 and 2020 Revenue Nine Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Revenue Product revenue$ 21,726 $ 10,524 $ 11,202 106 % Service revenue - 2,004 (2,004) (100) Total revenue$ 21,726 $ 12,528 $ 9,198 73 % Revenue by geographic location: United States$ 8,463 $ 6,349 $ 2,114 33 % Americas, excluding United States 675 194 481 248 Europe, Middle East and Africa 7,684 3,351 4,333 129 Asia and Pacific 4,904 2,634 2,270 86 Total$ 21,726 $ 12,528 $ 9,198 73 % Product Revenue Product revenue increased by$11.2 million , or 106%, to$21.7 million for the nine months endedSeptember 30, 2021 from$10.5 million for the comparable period in the prior year. The increase in product revenue was driven by an increase in volume of 205%, which we attribute primarily to the expansion of our sales team and the increase of high volume, long-term deals as some of our customers begin to move into a production stage with their autonomous products. Our average selling price declined by 32% as we moved towards negotiated customer pricing with customers reaching the production stage with their autonomous products and we expect reductions in the cost of goods sold as we grow our volumes. 38 -------------------------------------------------------------------------------- Table of Contents Service Revenue Service revenue decreased by$2.0 million or 100% for the nine months endedSeptember 30, 2021 from$2.0 million for the comparable period in the prior year. This revenue represented engineering work in relation to our new product release in early 2020. Geographic Locations Revenue inthe United States ;Americas excludingthe United States ;Europe , theMiddle East andAfrica ; andAsia and Pacific increased by$2.1 million ,$0.5 million ,$4.3 million ,$2.3 million , respectively, in the nine months endedSeptember 30, 2021 compared to the prior year period. The revenue increase was mainly attributable to investments in additional sales staff. The revenue increases in the geographic regions ofAsia and Pacific andEurope , theMiddle East andAfrica were a result of recent sales expansion in those regions. We opened sales offices in these regions beginning in late 2019 and have since continued to invest in expanding globally. Additionally, we hired a President of Field Operations inApril 2021 as well as sales and sales support staff to expand our coverage world-wide. Cost of Product Revenue and Gross Margin Nine Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Cost of revenue Cost of product revenue $ 16,212$ 12,962 $ 3,250 25 % Cost of services - 26 (26) (100) % Total $ 16,212$ 12,988 $ 3,224 24.8 % Cost of Product Revenue and Gross Margin Cost of product revenue increased by$3.3 million , or 25%, to$16.2 million for the nine months endedSeptember 30, 2021 from$13.0 million for the comparable period in the prior year and cost per unit decreased by 59%. The increase in cost of product revenue was primarily due to increases of$7.3 million in material costs due to volume which was offset by$3.8 million in savings due to reduction in material costs per unit and an increase of$1.3 million in other product costs associated with securing materials during the global supply chain crisis. The increases were partially offset by a decrease of$1.5 million in other product costs due to lower allowances for excess and obsolete inventory. Product gross margin increased from (23)% for the nine months endedSeptember 30, 2020 to 25% for the nine months endedSeptember 30, 2021 . The improvement in product gross margin is due to the 59% decrease in cost per unit slightly offset by the 32% decrease in average selling price referenced above. Services Cost of Revenue and Gross Margin Services cost of revenue decreased by$26 thousand . This decrease in cost of revenue was due to there being no non-recurring engineering work in the nine months endedSeptember 30, 2021 . Operating Expenses Nine Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Operating expenses: Research and development $ 19,576$ 19,028 $ 548 3 % Sales and marketing 14,777 6,305 8,472 134 General and administrative 36,177 11,856 24,321 205 Total operating expenses: $ 70,530$ 37,189 $ 33,341 90 % 39
-------------------------------------------------------------------------------- Table of Contents Research and Development Research and development expenses increased by$0.5 million , or 3%, to$19.6 million for the nine months endedSeptember 30, 2021 from$19.0 million for the comparable period in the prior year. The increase was primarily attributable to a$1.0 million increase in stock-based compensation expense, a$0.5 million increase in recruiting, a$0.2 million increase in payroll and personnel-related expense, and a$0.5 million increase in depreciation expense which was partially offset by a$1.7 million reduction in prototype and equipment costs related to product development. Sales and Marketing Sales and marketing expenses increased by$8.5 million , or 134%, to$14.8 million for the nine months endedSeptember 30, 2021 from$6.3 million for the comparable period in the prior year. The increase was primarily attributable to an increase of$6.9 million in payroll and personnel-related costs driven by the addition of sales personnel in all our global regions, of which$2.2 million was stock-based compensation related,$1.0 million for additional branding and public relations expenses related to the Merger, marketing and consultants,$0.2 million in recruiting expenses, and$0.6 million in facility, office and related expenses related to opening and expanding sales offices around the world. The increases were partially offset by$0.2 million decrease in marketing expenses not associated with the Merger. General and Administrative General and administrative expenses increased by$24.3 million , or 205%, to$36.2 million for the nine months endedSeptember 30, 2021 from$11.9 million for the comparable period in the prior year. The increase was primarily due to an increase of$9.4 million of stock-based compensation, a$1.4 million increase in payroll-related expense, an increase of$7.0 million in legal, accounting and professional services fees, an increase of$4.1 million in insurance premiums, an increase of$0.7 million of recruiting expenses relating to executive search and hiring, an increase of$1.2 million in facilities and office related expense, an increase of$0.2 million in public relations expense and$0.3 million in depreciation. Interest Income, Interest Expense and Other Income (Expense), Net Nine Months Ended September 30, Change Change 2021 2020 $ % (dollars in thousands) Interest income $ 305$ 24 $ 281 1171 % Interest expense (504) (2,196) 1,692 77 Other expense, net (422) (9,799) 9,377 96 Interest income was$0.3 million for the nine months endedSeptember 30, 2021 compared to$0.024 million for the comparable period in the prior year. This increase in interest income was primarily related to an increase in our cash and cash equivalent balances after the Merger closed onMarch 11, 2021 . Interest expense was$0.5 million for the nine months endedSeptember 30, 2021 compared to$2.2 million for the comparable period in the prior year. The decrease was primarily due to the conversion of convertible notes in the second quarter of 2020 and the repayment of bank debt in the third quarter of 2020 andMarch 2021 . Other expense, net was$0.4 million for the nine months endedSeptember 30, 2021 compared to$9.8 million for the comparable period in the prior year. During the nine months endedSeptember 30, 2021 , we recorded a loss of$8.8 million for the fair value change of redeemable convertible preferred stock warrant liability and a gain of$8.4 million for the fair value change of Private Placement warrant liability. During the nine months endedSeptember 30, 2020 , we recorded losses of$5.3 million for the fair value change of derivative liability related to our convertible notes and$6.1 million for the fair value change of the warrant liability, partially offset by a$1.6 million gain from extinguishment of tranche liability which was recorded as other income. Income Taxes We were subject to income taxes inthe United States ,Hong Kong ,Thailand andChina for the nine months endedSeptember 30, 2021 and 2020. Our income tax expense for nine months endedSeptember 30, 2021 and 2020 was not material to the Company's condensed consolidated financial statements. 40 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we develop and grow our business. Prior to the Merger, we primarily funded our operations from the net proceeds from sales of our preferred convertible stock and convertible notes, borrowing under our loan and security agreement withRunway Growth Credit Fund, Inc. and product revenue. Subsequent to the Merger, our principal sources of liquidity have been and are expected to be our cash and cash equivalents and product revenues. As ofSeptember 30, 2021 we had an accumulated deficit of$275.0 million and cash and cash equivalents of$221.6 million . We have experienced recurring losses from operations, and negative cash flows from operations, and we expect to continue operating at a loss and to have negative cash flows from operations for the foreseeable future. We believe our cash and cash equivalents on hand, together with cash we expect to generate from future operations, will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Quarterly Report on Form 10-Q. However, because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide. We are likely to require additional capital to respond to technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. In particular, the widespread COVID-19 pandemic, including variants, has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.PIPE Investment OnDecember 21, 2020 , concurrently with the execution of the Merger Agreement, CLA entered into subscription agreements with certain institutional and accredited investors (collectively, the "PIPE Investors "), pursuant to which thePIPE Investors agreed to purchase, in the aggregate, 10,000,000 shares of Ouster common stock at$10.00 per share for an aggregate commitment amount of$100,000,000 (the "PIPE Investment "), a portion of which was funded by certain affiliates ofColonnade Sponsor LLC , CLA's sponsor (the "Sponsor").The PIPE Investment was consummated substantially concurrently with the closing of the Merger. Financing Arrangements OnNovember 27, 2018 , we entered into a Loan and Security Agreement withRunway Growth Credit Fund, Inc. ("Runway Loan and Security Agreement") and borrowed$10.0 million per the terms of that agreement with a loan maturity date ofNovember 15, 2021 . The loan carried an interest rate equal to LIBOR plus 8.50%. We repaid$3.0 million of the loan inAugust 2020 . OnMarch 26, 2021 we terminated the Runway Loan and Security Agreement and repaid the$7.0 million principal amount outstanding as well as interest and fees amounting to$0.4 million . We incurred no prepayment fees in connection with the termination and all liens and security interests securing the loan made pursuant to the Runway Loan and Security Agreement were released upon termination. As ofSeptember 30, 2021 andDecember 31, 2020 , the outstanding principal balance of the loan was nil and$7.0 million , respectively. Cash Flow Summary Nine Months Ended September 30, 2021 2020 (dollars in thousands) Net cash provided by (used in): Operating activities$ (45,106) $ (34,631) Investing activities (1,774) (2,394) Financing activities 257,826 38,543 41
-------------------------------------------------------------------------------- Table of Contents Operating Activities During the nine months endedSeptember 30, 2021 , operating activities used$45.1 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$65.6 million , impacted by our non-cash charges of$24.8 million primarily consisting of stock-based compensation of$18.6 million , a$0.4 million change in fair value of warrant liabilities, depreciation and amortization of$3.4 million , change in right-of-use asset of$1.3 million , and interest expense and amortization of debt issuance costs and debt discount of$0.3 million . The changes in our operating assets and liabilities of$4.3 million were primarily due to a decrease in operating lease liability of$1.8 million , a decrease in accounts payable of$2.7 million , an increase in accounts receivable of$4.4 million , an increase in inventory of$2.6 million and an increase in accrued and other liabilities of$7.1 million . During the nine months endedSeptember 30, 2020 , operating activities used$34.6 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$49.6 million , impacted by our non-cash charges of$24.1 million primarily consisting of a$5.3 million change in fair value of derivative liability, interest expense and amortization of debt issuance costs and debt discount of$1.2 million , depreciation and amortization of$2.7 million , change in right-of-use asset of$1.4 million , and stock-based compensation of$7.9 million . The changes in our operating assets and liabilities of$9.1 million were primarily due to an increase in inventories of$4.1 million , and an increase in accounts receivable of$2.0 million , a decrease in accounts payable of$0.6 million , and a decrease in accrued and other current liabilities of$2.0 million . Investing Activities During the nine months endedSeptember 30, 2021 , cash used in investing activities was$1.8 million , which was related to purchases of property, plant and equipment. During the nine months endedSeptember 30, 2020 , cash used in investing activities was$2.4 million , which was related to purchases of property, plant and equipment. Financing Activities During the nine months endedSeptember 30, 2021 , cash provided by financing activities was$257.8 million , consisting primarily of$291.5 million of proceeds (net of$8.4 million of pre-Merger costs relating to CLA) from the Merger andPIPE Investment offset by offerings costs of$27.1 million , and proceeds from exercise of stock options of$0.5 million , partially offset by repayment of debt of$7.0 million . There were promissory notes to related parties of$5.0 million that were issued and repaid during the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2020 , cash provided by financing activities was$38.5 million , which was mainly related to the proceeds from issuance of Series B redeemable convertible preferred stock. Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , we did not have any off-balance sheet arrangements, that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows. Contractual Obligations There have been no material updates to our contractual obligations from those disclosed in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2021 . Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. 42 -------------------------------------------------------------------------------- Table of Contents There were no material changes to our critical accounting policies and estimates as of and for the three and nine months endedSeptember 30, 2021 , as compared to the critical accounting policies and estimates described in "Critical Accounting Policies and Estimates" in our final prospectus dated and filed with theSEC onAugust 19, 2021 . Recent Accounting Pronouncements Please refer to Note 2 in our unaudited condensed consolidated financial statements contained 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. Based on our public float as ofJune 30, 2021 , we expect to become a large accelerated filer, and lose emerging growth company status, as ofDecember 31, 2021 . As ofDecember 31, 2021 , we will be required to adopt new or revised accounting standards when they are applicable to public companies that are not emerging growth companies. Item 3. 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. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange 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 ofSeptember 30, 2021 , we had cash and cash equivalents of approximately$221.6 million , out of which$219.3 million consisted of institutional money market funds, which carries a degree of interest rate risk. 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 investment portfolio. Foreign Currency Exchange Risk Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Substantially all of our revenue is generated inU.S. dollars. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily inthe United States , and to a lesser extent inAsia andEurope . Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Item 4. Controls and Procedures Limitations on effectiveness of controls and procedures We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Evaluation of disclosure controls and procedures Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our 43 -------------------------------------------------------------------------------- Table of Contents principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as ofSeptember 30, 2021 due to the material weaknesses in our internal control over financial reporting described below. Material Weaknesses and Remediation Plan We identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control 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. We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience, and training commensurate with our accounting and reporting requirements. This material weakness contributed to the following additional material weaknesses: •We did not design and maintain effective controls over the period-end financial reporting process to achieve complete, accurate and timely financial accounting, reporting and disclosures, including segregation of duties and adequate controls related to journal entries and certain other business processes, and verifying transactions are properly classified in the financial statements. This material weakness resulted in adjustments to several account balances and disclosures in the consolidated financial statements for the years endedDecember 31, 2019 and 2018, and adjustments to the equity and warrant liabilities accounts and related disclosures in the condensed consolidated financial statements for the three months endedMarch 31, 2021 . •We did not design and maintain effective controls over certain information technology ("IT") general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain (i) program change management controls to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately and (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to our financial applications, programs and data to appropriate personnel. This material weakness did not result in a material misstatement to the consolidated financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Additionally, each of these material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. We have begun the process of, and are focused on, designing and implementing effective internal control measures to improve our internal control over financial reporting and remediate the material weaknesses. Our efforts include a number of actions: •We are actively recruiting additional personnel, in addition to engaging and utilizing third party consultants and specialists to supplement our internal resources and segregate key functions within our business processes, where appropriate. •We also continue to take actions to improve our IT general controls, segregation of duties controls, period-end financial reporting controls, and journal entry controls. •We are implementing comprehensive access control protocols for our enterprise resource planning environment to implement restrictions on user and privileged access to certain applications, establishing additional controls over the preparation and review of journal entries, establishing additional controls to verify transactions are properly classified in the financial statements, implementing controls to review the activities for those users who have privileged access and program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately. While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period, we are committed to continuous improvement and will continue to diligently review our internal control over financial reporting. 44
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Table of Contents Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter endedSeptember 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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