Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The
objective of this Management’s Discussion and Analysis is to allow investors to view the Company from management’s perspective,
considering items that would have a material impact on future operations. The following discussion and analysis summarizes the significant
factors affecting our results of operations and financial condition as of and during the years ended December 31, 2021 and 2020 and should
be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This
discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties.
Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking
statements as a result of several factors, including those discussed in the section captioned “Risk Factors” included under
Part I, Item 1A and elsewhere in this report. See also the section captioned “Forward-Looking Statements” in this report.
Overview
We
are an autonomous vehicle (AV) technology company that is focused on addressing industrial uses for autonomous vehicles. We believe that
technological innovation is needed to enable adoption of autonomous industrial vehicles that will address the substantial industry challenges
that exist today. These challenges include labor shortages, lagging technological advancements from incumbent vehicle manufacturers, and
high upfront investment commitment.
36
Industrial
sites are typically rigid environments with consistent standards as opposed to city streets that have more variable environmental and
situational conditions and diverse regulations. These differences in operational design domains (ODD) will be major factors that make
proliferation of industrial AVs in private settings achievable with less time and resources than AVs on public roadways. Namely, safety
and infrastructure challenges are cited as roadblocks that have delayed AVs from operating on public roadways at scale. Our focus on industrial
AVs simplifies these challenges because industrial facilities (especially those belonging to a single end customer that operates
similarly at different sites) share much more in common than different cities do. Furthermore, our end customers own their infrastructure
and can make changes more easily than governments can on public roadways.
With
these challenges in mind, we are developing an EAS that leverages advanced in-vehicle autonomous driving technology and incorporates
leading supporting technologies like data analytics, fleet management, cloud, and connectivity. EAS provides a differentiated solution
that we believe will drive pervasive proliferation of industrial autonomy and create value for customers at every stage of their journey
towards full automation and the adoption of Industry 4.0.
EAS
is a suite of technologies and tools that we divide into three complementary categories:
1. DriveMod, our modular industrial vehicle autonomous driving software;
Legacy
automation providers manufacture specialized industrial vehicles with integrated robotics software for rigid tasks, limiting automation
to narrow uses. Unlike these specialized vehicles, EAS can be compatible with the existing vehicle assets in addition to new vehicles
that have been purpose built for autonomy by vehicle manufacturers. EAS is operationally expansive, vehicle agnostic, and compatible with
indoor and outdoor environments. By offering flexible autonomous services, we aim to remove barriers to industry adoption.
We
understand that scaling of autonomy solutions will require an ecosystem made up of different technologies and services that are enablers
for AVs. Our approach is to forge strategic collaborations with complementary technology providers that accelerate AV development and
deployment, provide access to new markets, and create new capabilities. Our focus on designing DriveMod to be modular will combine with
our experience deploying AV technology on diverse industrial vehicle form factors, which will be difficult for competitors to replicate.
We
expect our technology to generate revenue through two main methods: deployment and EAS subscriptions. Deploying our EAS requires us and
our integration partners to work with a new client to map the job site, gather data, and install our AV technology within their fleet
and site. We anticipate that new deployments will yield project-based revenues based on the scope of the deployment. After deployment,
we expect to generate revenues by offering EAS through a Software as a Service (SaaS) model, which can be considered the AV software component
of Robotics as a Service (RaaS). Although we have not offered, and have no present intention to offer, the robotic assets ourselves directly
to the end customer, our software can be part of a combined offering with third parties, such as an OEM.
RaaS
is a subscription model that allows customers to use robots/vehicles without purchasing the hardware assets upfront. We will seek to achieve
sustained revenue growth largely from ongoing SaaS-style EAS subscriptions that enable companies to tap into our ever-expanding suite
of AV and AI capabilities as organizations transition into full industrial autonomy.
37
Although
EAS is not yet commercially available and both the components and the combined solution are still under development, components of EAS
have already been used for a paid customer trial and pilot deployments. We have not yet derived any recurring revenues from EAS and intend
to start marketing EAS to customers in 2022. We expect EAS to continually be developed and enhanced according to evolving customer needs,
which will take place concurrently while other completed features of EAS are commercialized. We expect annual R&D expenditures in
the foreseeable future to equal or exceed that of 2019 and 2020. We also expect that limited paid pilot deployments in 2022 and 2023 will
offset some of the ongoing R&D costs of continually developing EAS. We target scaled deployments to begin in 2024.
Our
go-to-market strategy is to acquire new customers that use industrial vehicles in their mission-critical and daily operations
by (a) leveraging the relationships and existing customers of our network of strategic partners, (b) bringing AV capabilities to
industrial vehicles as a software service provider, and (c) executing a robust in-house sales and marketing effort to nurture a pipeline
of industrial organizations. Our focus is on acquiring new customers who are either looking (a) to embed our technology into their vehicle
product roadmaps or (b) to apply autonomy to existing fleets with our vehicle retrofits. In turn, our customers are any organizations
that could utilize our EAS solution, including OEMs that supply industrial vehicles, end customers that operate their own industrial vehicles,
or service providers that operate industrial vehicles for end customers.
As
OEMs and leading industrial vehicle users seek to increase productivity, reinforce safer working environments, and scale their operations,
we believe we are uniquely positioned to deliver a dynamic autonomy solution via our EAS to a wide variety of industrial uses. Our long-term vision
is for EAS to become a universal autonomous driving solution with minimal marginal cost for companies to adopt new vehicles and expand
their autonomous fleets across new deployments. We have already deployed DriveMod software on nine different vehicle form factors that
range from stockchasers and stand-on floor scrubbers to 14-seat shuttles and 5-meter-long cargo vehicles demonstrating
the extensibility of our AV building blocks. These deployments were prototypes or part of proof-of-concept projects. Of these deployments,
two were at customer sites. For one deployment we were paid $166,000 and the other was part of our normal R&D activities.
Our
strategy upon establishing a customer relationship with an OEM, is to seek to embed our technology into their vehicle roadmap and expand
our services to their many clients. Once we solidify an initial AV deployment with a customer, we intend to seek to expand within the
site to additional vehicle platforms and/or expand the use of similar vehicles to other sites operated by the customer. This “land
and expand” strategy can repeat iteratively across new vehicles and sites and is at the heart of why we believe industrial AVs that
operate in geo-fenced, constrained environments are poised to create value.
Meanwhile,
over $16 billion has been invested into passenger AV development over the last several years with negligible revenues generated and constant
delays. The $200B annual industrial equipment market (projected by 2027) is substantial, but it does not justify billions of dollars of
annual research & development spend. These leading passenger AV companies will need to take the approach of first capturing the trillion-dollar markets
of passenger AV to achieve their desired returns.
Critical Accounting
Policies and Estimates and Judgements
Our
consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities,
disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. We continually evaluate our estimates and judgments. We base our estimates and judgments on historical experience
and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change
and additional information becomes known. Besides the estimates identified below that are considered critical, we make many other accounting
estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported
amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent liabilities. These estimates and judgments
are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different
results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed
critical.
38
We
believe the assumptions and
estimates associated with the following have the greatest potential impact on our consolidated financial statements.
Warrants
The
Company issued to its lead underwriter in the IPO, warrants to purchase up to 140,000 shares of its common stock. The Company accounts
for warrants in accordance with ASC 480, Distinguishing Liabilities from Equity, depending on the specific terms of the warrant
agreement. The Company determined the fair value of the warrants using the Black-Scholes
pricing model and treated the valuation as equity instruments in consideration of the cashless settlement provisions in the warrant agreement.
The Company also applied the
guidance in ASC 340-10-S99-1, Other Assets and Deferred Costs, that states specific incremental costs directly attributable to
a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering. The
Company treated the valuation of the warrants as directly attributable to the issuance of an equity contract and accordingly, classified
the warrants as additional paid-in capital.
Stock-based Compensation
The Company recognizes the
cost of share-based awards granted to employees and directors based on the estimated grant-date fair value of the awards. Cost is recognized
on a straight-line basis over the service period, which is generally the vesting period of the award. The Company recognizes stock-based
compensation cost and reverses previously recognized costs for unvested awards in the period forfeitures occur. The Company determines
the fair value of stock options using the Black-Scholes option pricing model, which is impacted by the fair value of common stock, expected
price volatility of common stock, expected term, risk-free interest rates, and expected dividend yield.
Research and Development Expense
Research and development expense
consist primarily of outsourced engineering services, internal engineering and development expenses, materials, labor and stock-based
compensation related to development of the Company’s products and services. Research and development costs are expensed as incurred.
General, and Administrative Expense
General, and administrative
expense consist primarily of personnel costs, facilities expenses, depreciation and amortization, travel, and advertising costs.
Results of Operations
Revenue
The
Company has not generated any revenue for the years ended December 31, 2021 and 2020.
Research and Development
Research
and development expense for the year ended December 31, 2021 decreased by $0.1 million or 2.5% to $5.0 million from $5.1 million for the
year ended December 31, 2020. The decrease is primarily attributable to the decrease in personnel engaged in the research and development
of our AV technology in 2021 compared to pre-COVID-19 headcount levels in 2020. The Company plans to continue to restore the appropriate
level of engineering and other personnel to support its research and development efforts and expects research and development costs to
increase over time.
39
General and Administrative
General
and administrative expenses increased by approximately $1.2 million or 36.5% to $4.4 million for the year ended December 31, 2021 from
$3.2 million for the year ended December 31, 2020. The majority of the increase was attributed to the increase in stock-based compensation
expense, legal and professional fees, and personnel related costs as the Company increased staff to support being a public company during
the year ended December 31, 2021, compared to the year ended December 31, 2020.
Other Income, net
For the
year ended December 31, 2021, other income, net, increased by approximately $1.6 million to $1.6 million from approximately $35,000 for
the year ended December 31, 2020. The increase is attributed to the increase in other income of $1.6 million representing gains recognized
on the forgiveness of the PPP Notes by the SBA during the fourth quarter of 2021 and the disposal of assets, offset by the increase in
interest expense recognized on the second PPP Note for the year ended December 31, 2021 compared to interest expense on a single PPP Note
for the year ended December 31, 2020.
Liquidity and Capital
Resources
In recent years, we have devoted
substantially all of our efforts toward the development of EAS and toward raising capital. We have financed our operations primarily through
the issuance and sale of equity securities for cash consideration and through bank debt. At December 31, 2021, we had working capital
of $22.1 million, compared to working capital of $6.1 million at December 31, 2020. The increase in working capital is primarily due to
the IPO proceeds of $23.3 million in October, 2021. As of December 31, 2021 and 2020, the Company had cash and cash equivalents of approximately
$21.9 million and $6.1 million respectively. As of December 31, 2021, we had an accumulated deficit of $116.5 million. Largely as a result
of significant research and development activities related to our advanced technology, we have incurred significant operating losses and
negative cash flows from operations since inception. We have incurred net losses of $7.8 million and $8.3 million for the years ended
December 31, 2021 and 2020, respectively.
The
Company’s liquidity is based on its ability to enhance its operating cash flow position, obtain capital financing from equity interest
investors and borrow funds to fund its general operations, research and development activities and capital expenditures. The Company’s
ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan, which includes
increasing revenue while controlling operating costs and expenses to generate positive operating cash flows and obtaining funds from outside
sources of financing to generate positive financing cash flows.
Based
on cash flow projections from operating and financing activities and existing balance of cash and cash equivalents, management is of the
opinion that the Company has sufficient funds for sustainable operations and it will be able to meet its payment obligations and commitments
from operations for at least one year from the issuance date of this report. Based on the above considerations, the Company’s consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities
during the normal course of operations (see Initial Public Offering above).
Cash Flows
Operating activities
Net cash used in operating
activities for the year ended December 31, 2021 was $8.6 million, an increase of $0.7 million or 9.1% compared to $7.9 million for the
year ended December 31, 2020. The increase is primarily attributed to the level of increases in administrative personnel-related costs
and professional services as the Company increased staff to support being a public company.
40
Investing activities
Net
cash used in investing activities for the year ended December 31, 2021 was approximately $20,000, consisting of $62,000 in purchases of
equipment and fixtures offset by $42,000 in asset disposals.
Financing activities
Cash
provided by financing activities for the year ended December 31, 2021 was $24.2 million consisting of proceeds from the IPO of $23.3 million,
the February 2021 PPP Note proceeds of $0.9 million from the SBA, and stock option exercises of approximately $14,000. The Company expects
to experience increases in proceeds from option exercises to supplement the public listing of its common stock shares in future periods.
Emerging Growth Company
Status
We
are an “emerging-growth company”, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company,
we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging
growth companies, including, but not limited to, not being required to have our independent registered public accounting firm audit our
internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our 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. As an emerging growth company
we can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend
to avail ourselves of these options. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging
growth company.
We
will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the
initial public offering; (ii) the first fiscal year after our annual gross revenue are $1.07 billion or more; (iii) the date on which
we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv)
the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of
the end of the second quarter of that fiscal year. We cannot predict if investors will find our common stock less attractive if we choose
to rely on these exemptions. If, as a result of our decision to reduce future disclosure, investors find our common shares less attractive,
there may be a less active trading market for our common shares and the price of our common shares may be more volatile.
We
are also a “smaller reporting company”, meaning that the market value of our stock held by non-affiliates plus the aggregate
amount of gross proceeds to us as a result of the IPO is less than $700 million and our annual revenue was less than $100 million
during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value
of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during
the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we
are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain
disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose
to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging
growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
As a “Smaller Reporting
Company”, this Item and the related disclosure is not required.
41
Item 8. Financial Statements and Supplementary
Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders and Board of Directors of
Cyngn Inc.
Opinion on the Financial
Statements
We have audited the accompanying
consolidated balance sheets of Cyngn Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and
the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021
and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards
of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion.
/s/ Marcum LLP
We have served as the Company’s auditor since 2021.
San Jose, California
March 24, 2022
PCAOB ID Number 688
F-1
CYNGN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
Assets
Current assets
Prepaid expenses and other current assets 525,304 48,852
Liabilities and Stockholders’ Equity
Current liabilities
Accrued expenses and other current liabilities 295,156 307,402
Note payable, Paycheck Protection Program - 695,078
Commitments and contingencies (Note 12)
Stockholders’ Equity
Common stock warrants 170,397 -
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
CYNGN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
Revenue $ - $ -
Operating expenses:
Other income, net
Paycheck Protection Program Note forgiveness 1,602,936 -
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
CYNGN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
Shares Amount Shares Amount Warrants Capital Deficit Equity
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
CYNGN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on disposal of asset (31,356 ) -
Gain on forgiveness of Paycheck Protection Program Notes (1,602,936 ) -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (476,452 ) 33,774
Accrued expenses and other current liabilities 3,496 137,535
Cash flows from investing activities
Purchase of property and equipment (62,204 ) -
Disposal of assets 42,189 -
Net cash used in investing activities (20,015 ) -
Cash flows from financing activities
Proceeds from Paycheck Protection Program Notes 892,115 695,078
Proceeds from exercise of stock options 14,220 623
Supplemental disclosure of cash flow:
Cash paid during the year for taxes $ 16,719 $ 10,813
Supplemental disclosure of non-cash financing activities:
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CYNGN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Description of Business
Headquartered in Menlo Park,
California, CYNGN Inc., together with its subsidiaries (collectively, “Cyngn” or the “Company”), was incorporated
in Delaware in 2013. Cyngn Singapore PTE. LTD., a Singaporean limited company organized in 2015 and Cyngn Philippines, Inc., a Philippine
corporation incorporated in 2018 are wholly owned subsidiaries. The Company is in the process of dissolving these subsidiaries.
Cyngn develops autonomous
driving software that can be deployed on multiple vehicle types in various environments. The Company has been operating autonomous vehicles
(“AV”) in production environments since 16 Built and tested in difficult and diverse real-world environments, the self-driving
system (DriveMod), fleet management system, and Software Development Kit combine to create a full-stack advanced autonomy solution designed
to be modular, extendable, and safe. The Company operates one business segment.
Initial Public Offering
On October 22, 2021,
the Company closed the initial public offering (the “IPO”) of 3,500,000 shares of its authorized common stock at an offering
price of $7.50 per share. Simultaneous with the closing of the IPO, the common stock began trading on the NASDAQ Capital Market under
the symbol “CYN.” The IPO generated net proceeds of $23.3 million after deducting underwriting discounts, commissions and
offering expenses. The Company also granted its underwriters the election to exercise a 45-day over-allotment option to purchase an additional
525,000 shares of common stock at the IPO offering price, less underwriting discounts. The underwriters elected not to exercise the over-allotment
option in whole or in part. No price stabilization activities have been carried out since the IPO, and due to the stock’s share
price performance, the underwriters have, as stabilizing manager on behalf of the Company, decided to end the stock trading stabilization
period.
Simultaneous with the closing
of its IPO, the Company also issued 140,000 warrants (the “Warrant”) to its underwriters. Each Warrant entitles its holder
the option to purchase at a future exercise date, one share of common stock at an initial exercise price of $9.375 per share, subject
to certain adjustments and restrictions relating to subsequent resale and transfers. The Purchase Warrants are exercisable six (6) months
after the IPO and expire five (5) years thereafter.
At the completion of the
IPO, all shares of the Company’s outstanding convertible preferred stock shares automatically converted to shares of common stock
(see Note 7. Capital Structure).
Immediately after the IPO,
the Company filed an amended and restated certificate of incorporation, which became effective on October 22, 2021. The amended and restated
certificate of incorporation authorized 110,000,000 shares consisting of 100,000,000 shares of common stock, at a par value of $0.00001,
and 10,000,000 shares of preferred stock at a par value of $0.00001. The rights of the holders of common stock are subject to and qualified
by rights of the holders of the preferred stock.
Additionally, the
Company recognized $1.1 million of stock-based compensation expense related to stock options granted to employees with time-based
vesting conditions.
Liquidity
The Company has incurred losses
from operations since inception. The Company incurred net losses of $7.8 million and $8.3 million for the year ended December 31, 2021
and 2020, respectively. Accumulated deficit amounted to $116.5 million and $108.7 million as of December 31, 2021 and 2020, respectively.
Net cash used in operating activities was $8.6 million and $7.9 million for the year ended December 31, 2021 and 2020, respectively.
F-6
The Company’s liquidity
is based on its ability to enhance its operating cash flow position, obtain capital financing from equity interest investors and obtain
funds from outside sources of financing to fund its general operations, research and development activities and capital expenditures.
The Company’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business
plan, which includes generating progressive revenue streams while controlling operating costs and expenses, to then result in positive
operating cash flows. The Company’s unrestricted balance of cash and cash equivalents was $21.9 million and $6.1 million as
of December 31, 2021 and 2020, respectively.
Based on cash flow projections
from operating and financing activities and existing balances of cash and cash equivalents, management is of the opinion that the Company
has sufficient funds for sustainable operations and it will be able to meet its payment obligations and commitments from operations for
at least one year from the issuance date of this report. Based on the above considerations, the Company’s consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during
the normal course of operations.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated
financial statements as of and for the years ended December 31, 2021 and 2020 have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) and pursuant to applicable rules and regulations of the Securities and Exchange
Commission (“SEC”). The consolidated financial statements include all normal adjustments necessary for a fair presentation
of the Company’s financial position at December 31, 2021 and 2020, and operating results and cash flows for the periods presented.
These consolidated financial
statements should be read in conjunction with the following: i) audited consolidated financial statements as of and for the years ended
December 31, 2020 and 2019; ii) the discussion under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and’ iii) our final prospectus (the “Prospectus”), filed with the Securities and Exchange
Commission or the SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended or the Securities Act), on October 21, 2021.
Principles of Consolidation
The consolidated financial
statements include the accounts of CYNGN Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated
upon consolidation.
Foreign Currency Translation
The functional and reporting
currency for Cyngn is the U.S. dollar. Monetary assets and liabilities denominated in currencies other than U.S. dollar are translated
into the U.S. dollar at period end rates, income and expenses are translated at the weighted average exchange rates for the period and
equity is translated at the historical exchange rates. Foreign currency translation adjustments and transactional gains and losses are
immaterial to the consolidated financial statements.
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well
as reported amounts of revenue and expenses during the reporting period. The Company’s significant estimates and judgments include
but are not limited to underwriter’s warrants and share-based compensation. Estimates are based on historical experience and on
various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results could differ from those estimates.
F-7
Concentration of Credit Risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. The Company’s cash is placed
with high-credit-quality financial institutions and at times exceeds federally insured limits. The Company has not experienced any credit
loss relating to its cash equivalents.
Concentration of Supplier Risk
The Company generally utilizes
suppliers for outside development and engineering support. The Company does not believe that there is any significant supplier concentration
risk as of December 31, 2021 and 2020.
Cash and Cash Equivalents and Restricted
Cash
The Company considers all
highly liquid money market placements with a remaining maturity of three months or less to be cash equivalents. The Company had $21.9
million and $6.1 million of unrestricted cash and cash equivalents as of December 31, 2021 and 2020, respectively.
In addition, the Company
had $50,000 and $400,000 in restricted cash as of December 31, 2021 and 2020, respectively, which is reported separately as current assets
on the consolidated balance sheet. The Company’s restricted cash consists of cash not available for immediate use that the Company
is obligated to maintain in accordance with the terms of its credit card spending arrangement.
The following table provides
a reconciliation of cash and cash equivalents and restricted cash to amounts shown in the consolidated statements of cash flows:
December 31,
Total Cash and cash equivalents and Restricted cash $ 21,995,981 $ 6,456,190
Fair Value Measurements
The accounting guidance under
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, defines fair value, establishes a consistent
framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. Fair value is defined as an exit price representing the amount that would be received to sell an asset
or paid to transfer a liability (an exit price) in an orderly transaction between market participants. As such, fair value is considered
a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
The Company uses the following fair value hierarchy
prescribed by U.S. GAAP, which prioritizes the inputs used to measure fair value as follows:
Level
1—Unadjusted quoted prices in active markets for identical assets or liabilities.
Level
2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
F-8
Assets and liabilities are
considered to be fair valued on a recurring basis if fair value is measured regularly. However, if the fair value measurement of an instrument
does not necessarily result in a change in the amount recorded on the consolidated balance sheets, assets and liabilities are considered
to be fair valued on a nonrecurring basis. This typically occurs when accounting guidance requires assets and liabilities to be recorded
at the lower of cost or fair value, or on certain nonfinancial assets and liabilities. Nonfinancial assets and liabilities that are measured
at fair value on a nonrecurring basis include certain long-lived assets, intangible assets, share-based compensation and underwriter
warrants measured at fair value upon initial recognition.
The carrying amounts of the
Company’s cash and cash equivalents, accounts payable and notes payable are reasonable estimates of their fair values due to the
short-term nature of these accounts. The fair values of the Company’s share-based compensation and underwriter warrants were based
on observable inputs and assumptions used in Black-Scholes valuation models derived from independent external valuations.
Property and Equipment
Property and equipment is
stated at cost less accumulated depreciation. Repair and maintenance costs are expensed as incurred. Depreciation is recorded on a straight-line
basis over each asset’s estimated useful life.
Property and Equipment Useful life
Machinery and equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Shorter of 3 years or lease term
Automobile 5 years
Leases
The Company accounts for
leases in accordance with ASC 842, Leases. All contracts are evaluated to determine whether or not they represent a lease. A lease
conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases are classified
as finance or operating in accordance with the guidance in ASC 842. The Company does not hold any finance leases. The Company has elected
to adopt the short-term lease exemption in ASC 842 and as such has not recognized a “right of use” asset or lease liability
in the consolidated balance sheets as of December 31, 2021 and 2020.
Long-Lived Assets and Finite Lived Intangibles
The Company has finite lived
intangible assets consisting of patents and trademarks. These assets are amortized on a straight-line basis over their estimated remaining
economic lives. The patents and trademarks are amortized over 15 years.
The Company reviews its long-lived
assets and finite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. The events and circumstances the Company monitors and considers include significant decreases in the market price of
similar assets, significant adverse changes to the extent and manner in which the asset is used, an adverse change in legal factors or
business climate, an accumulation of costs that exceed the estimated cost to acquire or develop a similar asset, and continuing losses
that exceed forecasted costs. The Company assesses the recoverability of these assets by comparing the carrying amount of such assets
or asset group to the future undiscounted cash flow it expects the assets or asset group to generate. The Company recognizes an impairment
loss if the sum of the expected long-term undiscounted cash flows that the long-lived asset is expected to generate is less than the
carrying amount of the long-lived asset being evaluated. An impairment charge would then be recognized equal to the amount by which the
carrying amount exceeds the fair value of the asset.
F-9
Income Taxes
The Company accounts for
income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis.
A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s lack
of earnings history, the net deferred tax assets have been fully offset by a valuation allowance as of December 31, 2021 and 2020 (see
Note 11. Income Taxes).
There are no uncertain tax
positions that would require recognition in the financial statements. If the Company were to incur an income tax liability in the future,
interest on any income tax liability would be reported as interest expense and penalties on any income tax would be reported as income
taxes. Management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based
upon ongoing analysis of or changes in tax laws, regulations and interpretations thereof as well as other factors.
Convertible Preferred Stock
The Company has applied the guidance
in ASC 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities and has classified
all of its outstanding convertible preferred shares as permanent equity. The Company records shares of convertible preferred stock at
their respective issuance price, net of issuance costs. The Company’s convertible preferred stock share’s redemption and conversion
provisions are not exclusively at the option of the holder and are contingent on certain deemed liquidation events within the Company’s
control (see Note 7. Capital Structure).
Warrants
The Company issued to its lead
underwriter in the Company’s IPO warrants to purchase up to 140,000 shares of the Company’s common stock. The Company accounts
for warrants in accordance with ASC 480, Distinguishing Liabilities from Equity. The Company determined the fair value
of the warrants using the Black-Scholes pricing model and treated the valuation as equity instruments in consideration of the cashless
settlement provisions in the warrant agreement.
The Company also applied
the guidance in ASC 340-10-S99-1, Other Assets and Deferred Costs, that states specific incremental costs directly attributable
to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering.
The Company treated the valuation of the warrants as directly attributable to the issuance of an equity contract and accordingly, classified
the warrants as additional paid-in capital.
Stock-based Compensation
The Company recognizes the
cost of share-based awards granted to employees and directors based on the estimated grant-date fair value of the awards. Cost is recognized
on a straight-line basis over the service period, which is generally the vesting period of the award. The Company recognizes stock-based
compensation cost and reverses previously recognized costs for unvested awards in the period forfeitures occur. The Company determines
the fair value of stock options using the Black-Scholes option pricing model, which is impacted by the fair value of common stock, expected
price volatility of common stock, expected term, risk-free interest rates, and expected dividend yield (see Note 9. Stock-based Compensation
Expense).
F-10
Net Loss Per Share Attributable to Ordinary Shareholders
The Company computes loss per
share attributable to ordinary shareholders by dividing net loss attributable to ordinary shareholders by the weighted-average number
of ordinary shares outstanding. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts
to issue shares were exercised into shares. In calculating diluted net loss per share, the numerator is adjusted for the change in the
fair value of the shares (only if dilutive) and the denominator is increased to include the number of potentially dilutive common shares
assumed to be outstanding (see Note 8. Net Loss per Share Attributable to Common Stockholders).
Research and Development Expense
Research and development
expense consist primarily of outsourced engineering services, internal engineering and development expenses, materials, labor and stock-based
compensation related to development of the Company’s products and services. Research and development costs are expensed as incurred.
Selling, General, and Administrative Expense
Selling, general, and administrative
expense consist primarily of personnel costs, facilities expenses, depreciation and amortization, travel, and advertising costs.
Commitments
The Company recognizes a
liability with regard to loss contingencies when it believes it is probable a liability has occurred and the amount can be reasonably
estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range,
the Company accrues that amount. When no amount within the range is a better estimate than any other amount the Company accrues the minimum
amount in the range. There have been no such liabilities recorded by the Company as of December 31, 2021 and 2020.
Segment Reporting
The Company’s chief
operating decision maker, its Chief Executive Officer, manages operations and business as one operating segment for the purposes of allocating
resources, makes operating decisions and evaluates financial performance.
Revenue Recognition
On January 1, 2019, the Company
adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic
606”) and recognizes revenue upon the transfer of goods or services in an amount that reflects the expected consideration received
in exchange for those goods or services. The Company has not generated any revenue for the years ended December 31, 2021 and 2020.
Recent Accounting Pronouncements
There were no significant updates
to the recently issued accounting standards. Although there are several other new accounting standards issued or proposed by the Financial
Accounting Standards Board (“FASB”), the Company does not believe any of those accounting standards have had or will have
a material impact on its financial position or operating results.
3. Balance Sheet Components
Property and Equipment, Net
Property and equipment is
comprised of the following:
December 31, December 31,
Depreciation expense for
the year ended December 31, 2021 and 2020 was $82,389 and $88,170, respectively.
F-11
Accrued Expenses and Other Current Liabilities
Accrued expenses and other
current liabilities are comprised of the following:
December 31, December 31,
Total accrued expenses and other current liabilities $ 295,156 $ 307,402
On March 27, 2020, the United
States Congress passed the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) in response to the economic
impact of the coronavirus (“COVID-19”) pandemic in the United States (see Note 13. Risks and Uncertainties). Section 2302
of the CARES Act allowed employers to defer the remittance and payment of the employer’s share of social security taxes that were
otherwise required to be remitted between March 27 and December 31, 2020, and to pay the deferred taxes in two installments — with
the first half due on December 31, 2021, and the remainder by December 31, 2022. As of December 31, 2021, the Company remitted $67,958
in social security taxes due that were deferred between May 1 and December 31, 2020.
Section 2301 of the CARES
Act also provided refundable employee retention credits (the “ERC”) against certain employment taxes. The Company is
currently evaluating its eligibility to claim the ERC and the impact of the credits on its consolidated statement of operations.
4. Leases
The Company leases its office
space under a recurring lease agreement which expired in February 2022 and was subsequently renewed and amended (see Note 14. Subsequent
Events). Monthly payments are approximately $15,500 while future minimum payments under the primary terms of the lease in effect at December
31, 2021 are approximately $31,000 in 2022 until the expiration of the lease in February 2022.