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, 2024 and 2023 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.
37
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.
38
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 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 2024. We also had limited paid deployments in 2024 that offset some of the ongoing R&D costs of continually
developing EAS. We target scaled deployments to begin in 2025.
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.
39
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 9(1) shares of its common stock, exercisable at a price per share of $140,625(1)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 426(1) shares of its common stock, exercisable at a price per share of $40,650(1) 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.
The Company issued Series A warrants and Series B warrants in connection
with securities purchase agreement on December 20, 2024. 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 Monte Carlo pricing model and treated the valuation as a liability in consideration of the variable number of the
issuer’s equity shares in the warrant agreements.
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.
40
Results of Operations
Revenue
We currently derive revenue
from four sources. We enter into fixed-price NRE contracts related to trial projects that consist of several independent phases and include
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.
In addition, we derive revenue
from EAS subscriptions with relative add-on offerings such as hardware revenue and other revenue (i.e., deployment/set up costs). Revenue
from these subscriptions and add-ons are recognized monthly over the service contract life, beginning at the time that a customer acknowledges
acceptance of the service.
During 2024, the Company recognized
$0.4 million of revenue, substantially all related to EAS subscriptions and hardware revenue. During 2023, the Company recognized $1.5
million of revenue, of which $1.4 million was associated with NRE contracts and the remaining $0.1 million related to revenue from EAS
subscriptions.
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 2024, the Company reported
cost of revenue of $0.5 million consisting primarily of deployment costs, related to personnel costs, travel expenses and associated
hardware costs to specific customers. 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.
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, 2024 decreased by $1.4 million or 11.5% to $11.3 million from $12.7 million for the year ended December
31, 2023. The decrease is primarily attributable the capitalization of costs related to capitalized software and customer contract.
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 $0.5 million or 4.7% to $11.4 million for the year ended December 31, 2024 from $10.9 million for
the year ended December 31, 2023. The increase primarily relates to additional executive bonuses offset by a decreases in insurance, professional
fees and other general and administrative expenses.
41
Interest income (Expenses), net
Interest income (expense)
decreased by $1.3 million to ($1.1 million) for the year ended December 31, 2024 from $137.9 thousand for the year ended December 31,
2023. Interest income consists primarily of interest earned of $111.7 thousand from the Company’s interest-bearing bank accounts,
offset by interest expense of $1.3 million related to the Notes issued in November 2024.
Other Income (Expenses), net
Other income decreased by
$5.7 million to $5.3 million for the year ended December 31, 2024 from $396.8 thousand for the year ended December 31, 2023. Other income
(expense), net consists primarily of fair value measurement of $5.4 million for the warrant liability, realized gains earned on the Company’s
short-term investments of $113 thousand and interest earned of $40.4 thousand related to the office lease offset by the impairment charge
of $118.8 thousand related to expired international patents.
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, 2024, the Company had unrestricted cash
of approximately $23.6 million. As of December 31, 2023, the Company had unrestricted cash of approximately $3.6 million and short-term
investments of $4.6 million.
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. As of December 31, 2024, a total of 4,524(1), shares of common stock were sold through Virtu Americas LLC under
the ATM Sales Agreement for net proceeds of $8,597,957 after payment of commission fees of $175,468 and other related expenses of $60,465.
As of December 31, 2024, the Company had $0 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 2,222(1)
shares of common stock in a public offering, which included: (i) 764(1) shares of common stock, and (ii) pre-funded warrants
to purchase 1,458(1) shares of common stock. The Pre-Funded Warrants had a nominal exercise price of $0.00001. Each
share of common stock was sold at an offering price of $2,250(1), and each Pre-Funded Warrant was sold at an offering price
of $2,249.85(1). The Company received net proceeds of approximately $4.5 million, after deducting the estimated offering expenses
payable by the Company, including the placement agent fees.
On April 23, 2024, the Company
entered into an underwritten Agreement with Aegis Capital Corp. (“Aegis”), pursuant to which Aegis acted as the Company’s
underwriter on a firm commitment basis in connection with the sale by the Company of an aggregate of 3,333(1) shares
of common stock in a public offering, which included: (i) 1,320 (1) shares of common stock, and (ii) pre-funded warrants
to purchase 2,013(1) shares of common stock. The Pre-Funded Warrants had a nominal exercise price of $0.0015(2). Each
share of common stock was sold at an offering price of $1,500(1), and each Pre-Funded Warrant was sold at an offering price
of $1,499.85(1). The Pre-Funded Warrants are classified as a component of permanent stockholders’ equity within additional
paid-in capital and were recorded at the issuance date concluding the purchase price approximated the fair value. The offering closed
on April 25, 2024. On May 3 2024, the Company closed on the sale of an additional 136 (1) shares of common stock,
upon exercise by the underwriter of the over-allotment option. The Company received net proceeds of approximately $4.6 million, after
deducting the estimated offering expenses payable by the Company, including the placement agent fees.
42
On
November 12, 2024, the Company entered into a securities purchase agreement with certain investors pursuant to which we sold, in a private
placement, senior notes with an aggregate principal amount of $4,375,000 (the “Notes”), and received proceeds before expenses
of $3,500,000. As consideration for entering into the agreement, we issued a total of 2,701(2) shares of common stock of the
Company to the Purchasers on November 13, 2024. The principal amount of the Notes were repaid on December 23, 2024.
On November 12, 2024, the Company implemented a cost reduction plan in
order to reduce its average monthly cash burn from approximately $1.8 million per month to approximately $1 million per month for
90 days. This included reducing staff from approximately 80 people to approximately 60 people, temporarily suspending certain non-essential
operations and reducing or eliminating all discretionary expenses. With the additional capital raised in December 2024, the Company has
resumed normal operations.
On December 20, 2024, the
Company entered into a securities purchase agreement for the sale and issuance of (i) 20,507(2) units at a public offering
price per Unit of $241.50(2) with each Unit consisting of one share of common stock, par value $0.00001 per share, one Series
A warrant to purchase one share of Common Stock at an exercise price of $301.875(2) per share and one Series B warrant to
purchase one share of Common Stock at an exercise price of $301.875(2) and (ii) 62,309(2) pre-funded units at a
public offering price of $241.485 (2) per Pre-Funded Unit, with each Pre-Funded Unit consisting of one pre-funded warrant
exercisable for one share of Common Stock at an exercise price of $0.015(2) per share, one Series A Warrant and one Series
B Warrant. The net proceeds to the Company from the Offering were approximately $18.2 million, after deducting placement agent’s
fees and the payment of other offering expenses associated with the offering that were payable by the Company.
On December 30, 2024, the
“Company entered into a securities purchase agreement pursuant to which the Company agreed to sell and issue, in a registered direct
offering, 44,333(2) shares of its common stock, par value $0.015(2) per share at a purchase price of $90(2)
per share and 55,667(2) pre-funded warrants to purchase shares of Common Stock, at a purchase price of $89.985(2)
per Pre-Funded Warrant. The Company received net proceeds of approximately $8.1 million from the Offering, after deducting the
estimated offering expenses payable by the Company, including the placement agent fees.
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.
Cash
Flows
Operating
activities
Net cash used in operating
activities for the year ended December 31, 2024 was $9.5 million, a decrease of approximately $10 million or 51% compared to $19.5 million
for the year ended December 31, 2023. The decrease is primarily attributed to increase costs for customer deployment, an increase in inventory
related to the DriveMod Kits, an increase in lease payments due to the lease extension and the fair value remeasurement of the warranty
liabilities.
Investing
activities
Net cash provided by investing
activities for the year ended December 31, 2024 was $2.9 million, a decrease of approximately $3.4 million or 54% compared to $6.4 million
for the year ended December 31, 2023. The decrease consists of smaller investment maturities of $12.2 million, which were offset by purchases
of short-term investments of approximately $7.6 million and approximately $1.7 million in purchases of R&D-related hardware equipment,
acquisition of intangible asset, capitalization of software and disposal of assets.
43
Financing
activities
Net cash provided by financing
activities for the year ended December 31, 2024 was $26.6 million, an increase of approximately $20.5 million compared to $6.1 million
for the year ended December 31, 2023. The increase is due to the following net proceeds:
The
increase in cash from financing activities from the above transactions were offset by the repayment of the senior notes in the amount
of $4,375,000 and the portion of the proceeds allocated to the warrant liabilities for the securities purchase agreement on December
20, 2024.
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.
Item
8. Financial Statements and Supplementary Data
44
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, 2024 and 2023, the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States
of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated 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 consolidated 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
We have served as the Company’s auditor since 2021.
San Francisco, California
March 6, 2025
PCAOB ID NUMBER 688
F-1
CYNGN
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31, December 31,
ASSETS
CURRENT ASSETS
NON-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 (expense), net
Change in fair value of warrant liability (5,359,780 ) -
The
accompanying notes are an integral part of these consolidated financial statements.
F-3
CYNGN
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Preferred Stock Common Stock Additional Paid in Accumulated Total Stockholders’
Shares Amount Shares(1) Amount(1) Capital(1) 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
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 (113,072 ) (443,392 )
Change in fair value of warrant liability 5,359,780 –
Accretion of interest and amortization of debt issuance costs 1,177,174 –
Changes in operating assets and liabilities:
CASH FLOWS FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the Notes, net of issuance costs 1,801,265 –
Repayment of the Notes (4,375,000 ) –
Proceeds from exercise of stock options – 8,528
Issuance costs for stock dividend and restricted stock units (597 ) (16,182 )
Supplemental disclosure:
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 $29.3 million and $22.8 million for the years ended December 31, 2024
and 2023, respectively. Accumulated deficit amounted to approximately $189.3 million and $160.0 million as of December 31, 2024 and December
31, 2023, respectively. Net cash used in operating activities was approximately $9.5 million and $19.5 million for the year ended December
31, 2024 and 2023, 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, 2024, the Company’s unrestricted cash balance was $23.6 million. As of December
31, 2023, the Company’s cash balance was approximately $3.6 million, and the short-term investments balance was $4.6 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 may have 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 generate revenue or 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, 2024 and 2023 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, 2024 and 2023, 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, 2024 and December 31, 2023.
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, 2024 and December 31, 2023, the Company had approximately
$23.6 million and $3.6 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, 2024 and December 31, 2023.
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 credit losses was zero as of December 31, 2024 and December 31, 2023. In addition, the Company utilizes current and historical collection data as well as assesses current economic conditions in order to determine expected trade credit losses on a prospective basis. No credit losses were recorded as of December 31, 2024 and December 31, 2023.
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. Testing equipment includes production costs and costs
of materials used in the development of the Company’s autonomous driving software. Assets are held as testing equipment until placed