Ouster, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted. Ouster provides digital lidar sensors and related software. Results include Velodyne from the February 10, 2023 merger, so year-over-year comparisons are not fully like-for-like.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $22.2 | $11.2 | $58.8 | $30.1 |
| Gross profit and margin | $3.1; 14% | $3.7; 33% | $2.9; 5% | $9.1; 30% |
| Operating loss | $(35.7) | $(36.0) | $(335.9) | $(103.4) |
| Net loss | $(35.1) | $(36.0) | $(335.1) | $(96.4) |
| Basic and diluted loss per share | $(0.89) | $(1.98) | $(9.39) | $(5.48) |
- Q3 revenue grew 98%, primarily from the Velodyne merger, higher OS sensor sales and REV7 launches. Cost of revenue rose faster, up 155%, and gross margin fell to 14% from 33%.
- Nine-month revenue increased 96%; cost of revenue increased 166%. The nine-month loss includes $166.7 million of goodwill impairment, recorded in the first half after declines in Ouster’s share price and market capitalization. No goodwill remained at September 30.
- Operating expenses for the first nine months were $338.8 million, including the impairment; research and development was $75.6 million, sales and marketing $33.1 million, and general and administrative $63.4 million. Stock-based compensation was $46.6 million.
- Cash, cash equivalents and short-term investments totaled $200.5 million at September 30 ($75.6 million cash and equivalents; $124.9 million short-term investments). Cash, cash equivalents and restricted cash were $77.2 million, down $47.1 million since year-end.
- Operating activities used $113.7 million of cash in the first nine months, compared with $83.3 million in 2022. Investing activities provided $63.5 million, largely reflecting investment transactions and cash acquired in the merger; financing activities provided $3.4 million.
- Debt carrying value was $40.4 million at September 30, including $40.0 million principal under the Hercules term loan. On October 25, Ouster borrowed $44.0 million under a UBS credit line of up to $45.0 million and used the proceeds to repay and terminate the Hercules loan. The UBS facility requires $52.0 million of minimum liquidity in specified accounts, expected to be reported as restricted cash.
- Current assets were $252.9 million and current liabilities $61.6 million at September 30. The filing reports management’s belief that available liquidity would fund operations for at least 12 months from the financial statements’ issuance date.
Changes, outlook and principal risks
- Merger and integration: Velodyne added products, software, customers and operating costs. Ouster reported $15.2 million of employee termination and related restructuring expenses in the first nine months and continued integration and manufacturing transitions.
- Margin and inventory pressure: Management cited product-transition and cancellation costs, excess and obsolete inventory charges, and anticipated continuing competitive pressure on average selling prices. Inventory write-downs were $7.2 million for the first nine months, versus $0.9 million a year earlier; cash-flow adjustments also included $8.2 million of inventory write-downs and purchase-commitment losses.
- Outlook: The filing gives no specific revenue, earnings or cash-flow guidance. Management expects results to fluctuate with customer commercialization timelines, sales volumes, pricing and product mix. It expects unit costs to decline over time with greater production volumes, while acknowledging ongoing integration and margin pressures.
- Liquidity and financing: The company has sustained operating losses and negative operating cash flow and says it may need additional equity or debt financing if losses continue; future financing is not assured. The UBS facility has variable-rate borrowing, collateral and account-maintenance requirements, covenants and restrictions on withdrawals. Management expects its cost to be substantially below the former Hercules facility.
- Customer and supplier exposure: Two customers accounted for 36% and 19% of accounts and unbilled receivables at quarter-end. Two customers generated 16% and 11% of Q3 revenue. Two suppliers represented 15% and 18% of Q3 purchases; one supplier accounted for 49% of accounts payable.
- Legal and regulatory matters: Ouster’s ITC patent-infringement investigation against Hesai was terminated after the Commission affirmed, with modification, a determination based on an arbitration agreement. Ouster disputed that it was bound and identified a possible appeal; related patent litigation was stayed, and Hesai also challenged patents before the PTAB. Ouster says it intends to defend related claims. The SEC informed Ouster in August 2023 that it had concluded an investigation and did not intend to recommend enforcement action.
- Internal controls: Management concluded disclosure controls were not effective at September 30 because of material weaknesses involving staffing and accounting expertise, period-end financial reporting and IT general controls. Remediation work is underway but requires continued validation and testing.
- Other commitments: At September 30, non-cancelable purchase commitments were approximately $24.9 million with contract manufacturers and $5.1 million with other vendors. The company also reported ordinary-course litigation and legacy Velodyne proceedings; it states that identified potential losses are immaterial in aggregate based on current assessments.
Important facts for investors to verify
- Whether merger integration, product transitions and manufacturing changes improve gross margins and produce the anticipated operating benefits.
- Cash burn and usable liquidity after the UBS facility’s $52.0 million minimum-liquidity and collateral requirements, as well as the facility’s actual interest cost and covenant compliance.
- Progress toward commercial production among customers, customer concentration, order timing and the sustainability of revenue growth.
- Inventory quality, purchase commitments and further obsolescence or margin charges.
- Developments in the Hesai arbitration, patent proceedings and any appeal, and their potential business impact.
- Whether management remediates the disclosed material weaknesses and demonstrates effective controls over a sustained period.
- Potential dilution from equity issuance and outstanding equity awards and warrants; common shares outstanding were 40.6 million at September 30 and 40.7 million as of November 9, 2023.