Ouster, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Ouster designs and sells digital lidar sensors for industrial automation, smart infrastructure, robotics, and automotive applications. Financial figures below are in U.S. dollars; millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11.2 | $7.8 | $30.1 | $21.7 |
| Gross profit / margin | $3.7 / 33% | $1.9 / 24% | $9.1 / 30% | $5.5 / 25% |
| Operating expenses | $39.8 | $29.2 | $112.5 | $70.5 |
| Operating loss | $(36.0) | $(27.3) | $(103.4) | $(65.0) |
| Net loss | $(36.0) | $(12.7) | $(96.4) | $(65.6) |
| Net loss per share | $(0.20) | $(0.08) | $(0.55) | $(0.53) |
- Q3 revenue rose 44% year over year, driven by 31% higher volume and an 11% increase in average selling price. Nine-month revenue rose 39%, with volume up 40% and average selling price down 1%.
- Q3 gross margin improved to 33%, and nine-month gross margin to 30%. Management attributed the improvement to pricing and lower unit costs, while citing inflation and supply constraints as cost pressures.
- Research and development spending rose 105% in Q3 and 150% for the nine-month period, in part reflecting product investment and headcount from the Sense Photonics acquisition. Total operating expenses increased 36% and 60%, respectively.
- At September 30, cash and cash equivalents were $133.2; total current assets were $171.9 and current liabilities $25.7. Cash, cash equivalents, and restricted cash totaled $134.5. Stockholders’ equity was $205.3.
- Operating activities used $83.3 of cash in the first nine months, versus $45.1 a year earlier. Investing activities used $2.1; financing activities provided $35.4.
- Debt had a $19.2 carrying value at quarter-end, representing $20.0 principal borrowed under the Hercules facility. The company drew a further $20.0 on October 17, 2022, after quarter-end. The facility permits a further $10.0 draw subject to conditions.
- The company sold shares through its ATM program for $15.8 net proceeds through September 30, then suspended sales in September. Approximately $133.2 of program capacity remained. Shares outstanding were 184.2 million at quarter-end.
Material changes and unusual items
- Q3 net loss widened from the prior-year quarter despite higher revenue and gross margin, as operating expenses increased. The prior-year quarter included a $14.5 warrant-valuation loss; Q3 2022 included a $0.2 gain. For the nine months, the $7.1 of other income was largely driven by a $7.4 gain from revaluing private placement warrant liabilities.
- Inventory rose to $20.8 from $7.4 at year-end 2021. It included $2.2 of write-downs for obsolete, scrap, or returned inventory. Non-cancelable purchase commitments totaled approximately $33.5.
- Goodwill was $51.2. An interim impairment test found reporting-unit fair value only about 4% above carrying value; no impairment was recorded.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects significant operating losses and negative operating cash flows to continue, with ongoing investment in product development and sales and marketing. It expects unit costs and gross margins to improve over time with greater volume, but notes quarterly results may fluctuate as customers’ commercialization schedules and orders vary.
- Management concluded funds were sufficient to continue as a going concern for the 12 months following issuance of the financial statements, while noting continued operations depend on revenue growth, financing, and/or spending reductions. Its assessment considered the proposed Velodyne merger, which was not assured of closing.
- On November 4, 2022, Ouster announced an all-stock merger agreement with Velodyne. Each Velodyne common share is to convert into 0.8204 Ouster shares; each company’s shareholders were expected to own approximately 50% of the combined company. Closing was expected in the first half of 2023, subject to customary conditions, including both companies’ stockholder approvals.
- Ouster launched its REV7 sensor line on October 19, 2022, reporting performance upgrades and new product options.
- Key risks include semiconductor and supply-chain constraints, inflation, rising interest rates, uncertain lidar adoption and customer production timelines, competitive pricing, and the need for additional capital. The company relies on a contract manufacturer; one supplier represented 29% of Q3 purchases.
- The Hercules facility carries variable interest and is secured by substantially all company and guarantor assets. A post-quarter amendment would replace a revenue covenant with a minimum $60.0 liquidity covenant, contingent on closing the Velodyne merger.
- Ouster disclosed an SEC investigation and subpoena concerning projected financial information in the predecessor transaction’s registration statement. It also reported patent litigation and an ITC proceeding with Velodyne, alongside Ouster’s countersuit; the parties agreed to cooperate on dismissal steps, but dismissal was not assured.
- Disclosure controls and procedures were deemed ineffective at September 30 due to material weaknesses in staffing and accounting expertise, period-end reporting controls, and IT general controls. Remediation was underway and required further validation and testing.
Important facts for investors to verify
- Whether the Velodyne merger receives required approvals, closes on schedule, and achieves expected benefits; assess the exchange ratio, dilution, costs, and amended Hercules covenant.
- Cash runway and financing needs after the subsequent $20.0 Hercules draw, including borrowing conditions, interest costs, covenants, and any further equity issuance.
- Whether revenue growth converts into sustained production volumes and improved margins despite supply constraints, pricing pressure, and customer delays.
- Progress in resolving the SEC inquiry and Velodyne-related litigation, and any related costs or changes in exposure.
- Remediation and independent testing of the disclosed material weaknesses, and whether the narrow goodwill valuation cushion changes.