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, 2023 and 2022 and should be read in conjunction with
our consolidated financial statements and related notes included elsewhere in this Annual 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 Annual Report. See also the section captioned “Forward-Looking Statements” in this Annual Report.
Overview
We are an autonomous vehicle
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.
35
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 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 Enterprise Autonomy
Suite (“EAS”) that leverages advanced in-vehicle autonomous driving technology and incorporates leading supporting technologies
like data analytics, asset tracking, 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 facility, 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”).
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.
Although both the components and the combined solutions of EAS are
still under development, we have EAS licenses with paying customers and have piloted EAS for paid customer trial and pilot deployments.
We have not yet derived any significant recurring revenues from EAS but began marketing EAS to customers in 2022 with our first, paid
commercial deployment commencing in the first quarter of 2023. 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 exceed that of 2023. We also had limited paid deployments in 2023 that offset some of the ongoing
R&D costs of continually developing EAS. We target scaled deployments to begin in 2024.
36
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 more than 10 different vehicle form factors that range from
stockchasers and forklifts to 14-seat shuttles and 5-meter-long cargo vehicles demonstrating the extensibility of our AV building
blocks.
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.
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 consolidated
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 consolidated 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.
The Company considers costs to develop software, warrants and share-based
compensation to be critical accounting estimates and believes the associated assumptions and estimates to have the greatest potential
impact on our consolidated financial statements.
Costs to Develop Software
The Company incurs costs related to internally developed software.
Based on the nature of the software the Company capitalizes software costs under the following guidance.
37
Internal-Use Software
The Company capitalizes certain costs related to internal-use software,
primarily consisting of direct labor and third-party vendor costs associated with creating the software. Software development projects
generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage
(certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation/operation stage (all costs are
expensed as incurred). Costs capitalized in the application development stage include costs related to the design and implementation of
the selected software components, software build and configuration infrastructure, and software interfaces. Capitalization of costs requires
judgment in determining when a project has reached the application development stage, the proportion of time spent in the application
development stage, and the period over which the Company expects to benefit from the use of that software. Once the software is placed
in service, these costs are amortized on the straight-line method over the estimated useful life of the software, which is generally three
to five years. There is judgment involved in the determination of the useful life. Internal-use software is classified as property and
equipment in accordance with ASC 350, Intangibles – Goodwill and Other.
Costs to Develop Software to be Sold, Leased or Otherwise Marketed
The Company accounts for research costs of computer software to be
sold, leased or otherwise marketed as expense until technological feasibility has been established for the product. Once technological
feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment
is required in determining when technological feasibility of a product is established. We have determined that technological feasibility
for our software products is reached shortly after a working prototype is complete and meets or exceeds design specifications including
functions, features, and technical performance requirements. After technological feasibility is established, judgment is required to determine
the amount of payroll and stock-based compensation costs to be capitalized on the remaining development efforts. These costs will continue
to be capitalized until such time as when the product or enhancement is available for general release to customers. Computer software
to be sold, leased or otherwise marketed is classified as an intangible asset in accordance with ASC 985, Software.
Common Stock Warrants
The Company issued to its lead underwriter in the Company’s initial
public offering consummated in October 2021, (the “IPO”), warrants to purchase up to 140,000 shares of its common stock, exercisable
at a price per share of $9.373 and expiring on October 19, 2026. Additionally, in connection with the Private Placement offering completed
on April 29, 2022, the Company issued warrants to purchase 6,451,613 shares of its common stock, exercisable at a price per share of $2.98
and expiring on April 29, 2027. 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 agreements.
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, if any. The Company determines the fair value of stock options using
the Black-Scholes option pricing model, which is impacted by the fair value of the Company’s common stock, expected price volatility
of the common stock, expected term, risk-free interest rates, and expected dividend yield.
38
Results of Operations
Revenue
We currently derive revenue
from two sources. First, we enter into fixed-price NRE contracts related to trial projects that consist of several independent phases
and includes design, data gathering, hardware installation on an industrial vehicle, customer-specific configuration of the DriveMod software,
and demonstrations. The determination of the contract price is based on labor and hardware costs estimated to achieve the required milestones
specified in the contract. The purpose of these fully funded projects is to exhibit the feasibility of the Company’s technology
offering to the customer on additional vehicle types and provide a level of confidence to encourage the customer to enter into a multi-year,
commercial arrangement with the Company in the future. Revenue on these multi-phase contracts is generally recognized at the point in
time when the performance obligations of each independent phase have been completed and customer acceptance has been acknowledged. Contracts
often allow mutual termination without penalty. To the extent our actual costs vary from the fixed fee, we will generate more or less
profit or could incur a loss.
Second,
we derive revenue from EAS subscriptions. Revenue from these subscriptions is recognized monthly over the service contract life, beginning
at the time that a customer acknowledges acceptance of the service.
During 2023, the Company recognized $1.49 million of revenue, of which
$1.42 million was associated with NRE contracts and the remaining $0.07 million related to revenue from EAS subscriptions. During
2022, the Company recognized $0.26 million of revenue, of which $0.25 million was associated with NRE contracts and the remaining $0.01
million related to sales of Infinitracker devices.
Cost of Revenue
Cost of revenues consists
primarily of direct labor and related fringe benefits for internal engineering resources costs incurred for the completion of the contracts
and hardware costs.
During 2023, the company reported cost of revenue of $1.2 million consisting
primarily of fully burdened internal engineering development resources and hardware costs incurred for the completion of the final phases
of NRE contracts. During 2022, the Company reported cost of revenue of $0.2 million consisting primarily
of fully burdened internal engineering development resources and hardware costs incurred for the completion of the initial phases of NRE
contracts.
Research and Development
Research and development expense consists 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 incurred during NRE projects are capitalized and expensed when the associated NRE
revenue is recognized. All other research and development costs are expensed as incurred.
Research and development expense
for the year ended December 31, 2023 increased by $3.2 million or 34% to $12.7 million from $9.5 million for the year ended December 31,
2022. The increase is attributable to the increase in personnel engaged in the research and development of our AV technology in 2023 compared
to headcount levels in 2022, including provisions for non-cash stock-based compensation expense,
and external R&D contractors. The Company plans to continue to expand its level of engineering and other R&D personnel
to support its research and development efforts and expects research and development costs to increase over time.
General and Administrative
General, and administrative
expense consist primarily of personnel costs, facilities expenses, depreciation and amortization, travel, and advertising costs.
General
and administrative expenses increased by approximately $0.9 million or 9% to $10.9 million for the year ended December 31, 2023 from $10.0
million for the year ended December 31, 2022. The increase was attributed to an increase in personnel related costs, including provisions
for non-cash stock-based compensation expense, as the Company increased staff to support public company responsibilities, an increase
in marketing and advertising expenses, an increase in legal and professional fees associated with public filings and increases in other
general and administrative expenses.
39
Interest income, net
Interest income increased by $93.8 thousand to $137.9 thousand for
the year ended December 31, 2023 from $44.1 thousand for the year ended December 31, 2022. Interest income consists primarily of interest
earned of $149.9 thousand from the Company’s interest-bearing bank accounts, offset by interest expense of $12.0 thousand representing
amortization of the present value interest on the adoption of lease accounting guidelines under ASC 842, Leases, on right-of-use
assets and operating liabilities.
Other Income
Other income increased by
$276.7 thousand to $396.8 thousand for the year ended December 31, 2023 from $120.1 thousand for the year ended December 31, 2022. Other
income consists primarily of realized gains earned on the Company’s short-term investments.
Liquidity and Capital Resources
The Company’s principal
source of liquidity is its cash and current maturities of short-term investments. Short-term investments consist of placements in U.S.
government securities with original maturities between three to nine months. As of December 31, 2023, the Company had unrestricted cash
of approximately $3.6 million and short-term investments of $4.6 million. As of December 31, 2022, the Company had unrestricted cash of
$10.5 million and short-term investments of approximately $12.1 million. On April 29, 2022,
the Company received net proceeds of approximately $18.1 million from the sale of common stock and exercise of pre-funded warrants in
a private placement offering.
On May 31, 2023, the Company entered into an ATM Sales Agreement with
Virtu Americas LLC (the “ATM Sales Agreement”), under which the Company may, from time to time, sell shares of the Company’s
common stock at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under
the Securities Act of 1933, as amended. The ATM Sales Agreement and related prospectus are limited to sales of up to $8.8 million of shares
of the Company’s common stock. The ATM Sales Agreement expires at the earliest of 5 years after the date of the agreement or exhaustion
of the aggregate limit available under the ATM Sales Agreement. The Company pays Virtu Americas LLC up to 3.0% of the gross proceeds as
a commission. For the year ended as of December 31, 2023, a total of 3,731,524 shares of common stock were sold through Virtu Americas
LLC under the ATM Sales Agreement for net proceeds of $1,747,468 after payment of commission fees of $36,897 and other related expenses
of $60,465. As of December 31, 2023, the Company had $6.9 million of common stock remaining available for sale under the ATM Sales Agreement.
On December 8, 2023, the Company entered into a Placement
Agent Agreement with Aegis Capital Corp. (“Aegis”), pursuant to which Aegis acted as the Company’s placement agent,
on a reasonable best efforts basis, in connection with the sale by the Company of an aggregate of 33,333,333 shares of common stock
in a public offering, which included: (i) 11,466,733 shares of Common Stock, and (ii) pre-funded warrants to purchase 21,866,600 shares
of Common Stock. The public offering closed on December 12, 2023. The Company received gross proceeds of approximately $5 million before
deducting transaction related expenses payable by the Company. All commissions, qualified legal, accounting, registration and other direct
costs of $0.5 million related to the public offering were offset against the gross proceeds.
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 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 the existing balance of cash and short-term investments, management is of the opinion that the Company has insufficient funds for
sustainable operations, and it may not be able to meet its payment obligations from operations and related commitments, if the Company
is not able to complete the required funding transactions to allow the Company to continue as a going concern, for the next year. Based
on these factors, the Company has substantial doubt that it will be able to continue as a going concern for the 12 months following the
date that these interim financial statements were issued. These consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being
able to continue as a going concern.
40
Cash Flows
Operating activities
Net cash used in operating
activities for the year ended December 31, 2023 was $19.5 million, an increase of approximately $3.2 million or 20% compared to $16.3
million for the year ended December 31, 2022. The increase is primarily attributed to the level of increases in personnel and professional
services related to the Company’s research and development activities, as well as increases in general and administrative personnel-related
costs and professional services as the Company continues to grow, both of which led to the increase in the Company’s net loss for
the period.
Investing activities
Net cash provided by investing activities for the year ended December
31, 2023 was approximately $6.4 million, an increase of approximately $19.7 million compared to net cash used in investing activities
of approximately $13.3 million for the year ended December 31, 2022. The increase consists of additional investment maturities of $29.5
million, which were offset by purchases of short-term investments of approximately $21.5 million and approximately $1.6 million in purchases
of R&D-related hardware equipment, acquisition of intangible asset, capitalization of software and disposal of assets.
Financing activities
Cash provided by financing
activities for the year ended December 31, 2023 was $6.1 million, of which $6.1 million relate to the proceeds from the sale of common
stock. Cash provided by financing activities for the year ended December 31, 2022 was $18.2 million, which consisted of proceeds from
the April 2022 private placement offering of $18.1 million and $114.2 thousand related to stock option exercises.
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 Stockholders 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, 2023 and 2022, the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (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, 2023 and 2022, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States
of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant
losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2021.
San Francisco, California
March 7, 2024
PCAOB ID NUMBER 688
F-1
CYNGN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
Assets
Current assets
Liabilities and Stockholders’ Equity
Current liabilities
Non-current operating lease liability 317,344 -
Commitments and contingencies (Note 12)
Stockholders’ Equity
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
CYNGN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
Costs and expenses:
Other income, net
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 Capital Deficit Equity
Issuance of common stock in connection with issued RSUs - - 28,530 - - - -
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
CYNGN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Realized gain on short-term investments (443,392 ) (90,216 )
Changes in operating assets and liabilities:
Accrued expenses and other current liabilities 969,662 936,387
Cash flows from investing activities
Cash flows from financing activities
Proceeds from at-the-market equity financing, net of issuance costs 1,747,468 -
Proceeds from exercise of pre-funded warrants - 2,662
Issuance costs for stock dividend (16,182 ) -
Proceeds from exercise of stock options 8,528 114,169
Supplemental disclosure of cash flow:
Cash paid during the year for income taxes $ - $ -
Supplemental disclosure of non-cash 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
Cyngn Inc., together with its subsidiaries (collectively,
“Cyngn” or the “Company”), was incorporated in Delaware in 2013. The wholly owned subsidiaries are Cyngn Singapore
PTE. LTD., a Singaporean limited company organized in 2015 and Cyngn Philippines, Inc., a Philippine corporation incorporated in 2018
and dissolved as of December 31, 2023. The Company is headquartered in Menlo Park, CA.
Cyngn develops and
deploys scalable, differentiated autonomous vehicle technology for industrial organizations. Our full-stack autonomous driving
software, (“DriveMod”), can be integrated onto vehicles manufactured by Original Equipment Manufacturers (“OEM”)
either via retrofit of existing vehicles or by integration directly into vehicle assembly. The Enterprise Autonomy Suite (“EAS”)
is designed to be compatible with sensors and components from leading hardware technology providers and integrate our proprietary Autonomous
Vehicle (“AV”) software to produce differentiated autonomous vehicles.
The Company has been operating autonomous vehicles
in production environments and in 2023 began licensing EAS commercially. Built and tested in difficult and diverse real-world environments,
DriveMod, the fleet management system and our proprietary Software Development Kit (“DriveMod Kit”) combine to create a full-stack
advanced autonomy solution designed to be modular, extendable, and safe. The Company operates in one business segment.
Liquidity and Going Concern
The Company has incurred losses from operations since inception. The
Company incurred net losses of approximately $22.8 million and $19.2 million for the years ended December 31, 2023 and 2022, respectively.
Accumulated deficit amounted to approximately $160.0 million and $135.7 million as of December 31, 2023 and December 31, 2022, respectively.
Net cash used in operating activities was approximately $19.5 million and $16.3 million for the year ended December 31, 2023 and 2022,
respectively.
The Company’s liquidity is based on its
ability to increase its operating cash flow position, obtain capital financing from equity interest investors and borrow money 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 and obtaining funds from outside sources to generate positive financing cash flows. As of December
31, 2023, the Company’s unrestricted cash balance was $3.6 million, and its short-term investments balance was $4.6 million.
As of December 31, 2022, the Company’s cash balance was approximately $10.5 million, and the short-term investments balance was
$12.1 million.
Based on cash flow projections from operating, investing and financing
activities and the existing balance of cash and short-term investments, management is of the opinion that the Company has insufficient
funds for sustainable operations, and it may not be able to meet its payment obligations from operations and related commitments, if the
Company is not able to complete the required funding transactions to allow the Company to continue as a going concern. Based on these
factors, the Company has substantial doubt that it will continue as a going concern for the 12 months following the date these financial
statements were issued. These consolidated financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going
concern.
The Company’s plan to alleviate the going
concern issue is to increase revenue while controlling operating costs and expenses and obtaining funds from outside sources of financing
to generate positive financing cash flows. While management is optimistic about its ability to raise substantial funds to continue as
a going concern for one year following the financial statement issuance date, there can be no assurance that any such measures will be
successful. We currently do not generate substantial revenue from product sales. Accordingly, we expect to rely primarily on equity and/or
debt financings to fund our continued operations. The Company’s ability to raise additional funds will depend, in part, on the success
of our product development activities, and other events or conditions that may affect the share value or prospects, as well as factors
related to financial, economic and market conditions, many of which are beyond our control. There can be no assurances that sufficient
funds will be available to us when required or on acceptable terms, if at all. Accordingly, management has concluded that these
plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
F-6
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements
as of and for the years ended December 31, 2023 and 2022 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, 2023 and 2022, and operating results and cash flows for the periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of Cyngn
Inc. and its wholly owned subsidiaries, including the dissolved subsidiary Cyngn Philippines, Inc. The Company investigated economic viability
in the Philippines and determined it cost more to operate the subsidiary than any profit it could generate. Consequently, the subsidiary
was shut-down, which had minimal impact on our consolidated financial statements. 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 consolidated 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 internal-use software and developed software to be sold, leased or marketed, warrants and share-based compensation. Management bases
its estimates 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.
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist of cash, which is placed with high-credit-quality financial institutions and at times
exceeds federally insured limits.
Cash maintained with domestic financial institutions
generally exceed the Federal Deposit Insurance Corporation insurable limit. To date, the Company has not experienced any losses on its
deposits of cash. Cyngn invests in U.S. Treasury securities and carries these at amortized cost and recognizes gains and losses when realized.
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, 2023 and December 31, 2022.
F-7
Cash, Restricted Cash and Short-term Investments
The Company considers its bank accounts and all
highly liquid investments that are both readily convertible to cash with minimal risk of changes in value due to changes in interest rates,
to be cash. As of December 31, 2023 and December 31, 2022, the Company had approximately $3.6 million and $10.5 million of cash, respectively.
The Company considers short-term investments to include marketable
U.S. government securities that it intends to hold until maturity and redeem within one year. The Company treated its U.S. government
treasury bill placements as held-to-maturity securities in accordance with the Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification Topic (“ASC”) 320, Investments – Debt and Equity Securities, and recorded these
securities at amortized cost on the accompanying consolidated balance sheets as of December 31, 2023 and December 31, 2022.
Accounts Receivable
Accounts receivables are recorded at the invoiced
amount and do not bear interest. The Company provides for probable uncollectible amounts based upon its assessment of the current status
of the individual receivables and after using reasonable collection efforts. The allowance for doubtful accounts was zero as of December
31, 2023 and December 31, 2022.
Fair Value Measurements
The accounting guidance under ASC Topic 820, Fair Value Measurement,
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.
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, and share-based compensation measured at fair value upon
initial recognition.
The carrying amounts of the Company’s cash and accounts receivable
are reasonable estimates of their fair values due to their short-term nature. 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.
F-8
Property and Equipment
Property and equipment is stated at cost less
accumulated depreciation and amortization. Construction work in progress includes production costs and costs of materials used in the
development of the Company’s autonomous driving software. Assets are held as construction work in progress until placed into service,
at which date depreciation commences over the estimated useful lives of the respective assets. Depreciation is recorded on a straight-line
basis over each asset’s estimated useful life. Repair and maintenance costs are expensed as incurred.
Property and Equipment Useful life
Internal-use software 3 to 5 years
Computer and equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Shorter of 3 years or lease term
Vehicles 5 years
Operating Lease
The Company accounts for leases in accordance
with ASC Topic 842 (“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 recognized
a right-of-use asset and lease liability in the consolidated balance sheets under ASC 842 on the office space lease that was amended
and renewed until May 2025. Lease expense will be recognized on a straight-line basis over the remaining term of the lease. Operating
leases are recognized on the balance sheet as right-of-use assets, and operating lease liabilities.
Costs to Develop Software
The Company incurs costs related to internally developed software.
Based on the nature of the software, the Company capitalizes software costs under the following guidance.
Internal-Use Software costs
The Company determined when to capitalize its
internal-use software after planning and design efforts are successfully completed. Management has implicitly authorized funding and the
software is expected to be completed and used as intended. The Company determines the amount of internal software costs to be capitalized
based on the amount of time spent by the developers on projects in the application stage of development. There is judgment involved in
estimating time allocated to a particular project in the application stage. Costs associated with building or significantly enhancing
the internally built software platform for internal use is capitalized, while costs associated with planning new developments and maintaining
the internally built software platforms are expensed as incurred. Capitalized costs include certain payroll and stock compensation costs,
as well as subscription server and consulting costs.
Internal-use software is classified as property and equipment and is
amortized on a straight-line basis over their estimated useful life of three to five years. There is judgment involved in the determination
of the useful life. Amortization of the software asset will begin when the software is substantially complete and ready for its intended
use. No amortization has begun for the internal use software, as the projects are still in the application development phase. Management
evaluates the useful lives of these assets on a quarterly basis and tests for impairment whenever events or changes in circumstances occur
that could impact the recoverability of these assets. No impairment charges were associated with the Company’s internal-use software
for the year ended December 31, 2023.
Costs to Develop Software to be Sold, Leased or Otherwise Marketed
The Company accounts for research costs of computer
software to be sold, leased or otherwise marketed as expense until technological feasibility has been established for the product.
Once technological feasibility is established, certain payroll and stock compensation, occupancy, and professional service costs that
are incurred to develop functionality for the Company’s software and internally built software platforms, as well as certain upgrades
and enhancements that are expected to result in enhanced functionality are capitalized. Judgment is required in determining when technological
feasibility of a product is established. Management has determined that technological feasibility is established when a working model
is complete.
F-9
Computer software to be sold, leased or otherwise
marketed is classified as an intangible asset. Capitalized software development costs are amortized using the greater of (a) the amount
computed using the ratio that current gross revenue for a product bear to total of current and anticipated future gross revenue for that
product or (b) the straight-line method, beginning upon commercial release of the product, and continuing over the remaining estimated
economic life of the product, not to exceed three years to five years and recorded as cost of revenue. Amortization will begin when the
product or enhancement is available for general release to customers. No amortization has begun for externally sold software, as the software
enhancement is still in development. Management evaluates the useful lives of these assets on a quarterly basis and tests for impairment
whenever events or changes in circumstances occur that could impact the recoverability of these assets. No impairment charges were associated
with the Company’s sold, leased or otherwise marketed software for the year ended December 31, 2023.
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.
On April 1, 2022, the Company entered into an
agreement for exclusive rights to certain hardware and software products and the rights to subsequently sell the software products and
accompanying services. The Company paid a purchase price of $100,000 for these rights. The Company evaluated if substantially all of the
assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets to determine if the transaction
should be accounted for as an asset acquisition. Since the only substantive assets acquired pertained to rights to intellectual property,
the entire purchase price was allocated to intellectual property and accounted for as intangible assets with a useful life of 15 years.
In accordance with ASC 805-50, “Business Combination”, the agreement was treated as an asset acquisition rather than
a business combination.
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. For
the year ended December 31, 2023 the Company determined the existence of an impairment associated with the Company’s intangible
asset “Right to intellectual property” and accordingly recorded an impairment charge of $30,000. No impairment charge was
associated with the Company’s intangible assets for the year ended December 31, 2022. (See Note 7. Intangible Assets).
Income Taxes