Welcome to the Cepton Incorporated Q3 2022 Business Update and Earnings Call. At this all participants’ are in a listen-only mode. Later, we will conduct a question-and-answer session. I’ll now turn the call over to your host Hull Xu, Chief Financial Officer. Hull, you may begin..

Thank you, and welcome, everyone, to Cepton's third quarter 2022 earnings call and business update. With me today is Jun Pei, Co-Founder and Chief Executive Officer; and Mitch Hourtienne, Senior Vice President of Business Development. During the call, we may refer to our unaudited GAAP financials and non-GAAP measures in our earnings release.

The non-GAAP financial measures should not be considered as a substitute or superior to the measures of financial performance prepared in accordance with GAAP. Reconciliations for non-GAAP measures are included in our earnings release.

I would like to remind everyone that comments made in this conference call may include forward-looking statements regarding the company's expected operational and financial performance for the future periods. These statements are based on the company's current expectations and are subject to the safe harbor statements.

Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of factors. We are not undertaking any commitment to update those statements as a result of future events, except as required by law.

As a quick reminder, this call is being recorded, and you can find the earnings release and slides that accompany this call, as well as the webcast replay of this call at investors.cepton.com. Now I would like to turn the call over to Jun..

Thank you Hull, and good afternoon, everyone. Thank you for joining Cepton’s third quarter earnings call. We will provide a business update and review third quarter 2022 financial results with you. I would like to start our business update with an exciting announcement.

We recently entered into a binding agreement for a $100 million investment from our long-term automotive Tier 1 partner and current shareholder, Koito Manufacturing of Japan. This transaction marks Koito’s third investment in Cepton and is a testament to Koito continued commitment to our company and to the future of lidar.

We're very appreciative of Koito’s support as this will solidify Cepton’s financial positions and further strengthen our partnership on serious production execution, as well as collaboration efforts towards winning automotive OEM programs in addition to the General Motors design win we have already captured.

We founded the company with a market focus on building lidar’s as a safety device in everyday vehicles, specifically targeting the ADAS market to help save lives. This thesis has been the guiding principle of our development efforts and commercial engagements over the past six years.

We aim to create lidar sensors that achieve a balance of performance, cost and reliability for mainstream vehicles. 2017 marked the beginning of a successful long-term relationship between Cepton and Koito. And in the five years since, our teams have successfully collaborated to be selected as the lidar provider for General Motors Ultra Cruise System.

This development journey with General Motors has taken three years, the length and the extent of effort involved cannot be understated. Cepton founding Koito, a partner who not only believed in the prospect of lidar, but also stood behind Cepton’s innovative technology, as well as investing in Cepton for the future of automotive safety.

Going forward, with this latest divestment, Cepton and Koito teams are sharply focused on the commercialization and skilled manufacturing of our lidar products. Cepton is proud to support GM's vision of zero crashes, zero emissions and zero congestion with our intelligent lidar solutions being an integral part of the Ultra Cruise Program.

This quarter, we saw the first public review of Cepton lidar integrated behind the windshield in the production vehicle. This marks a tremendous achievement for the company. Cepton is proud to be enabling one of the first OEM deployments of in-vehicle lidar technology.

Looking further ahead, our series production award is secured up to model year 2027 and we are in advanced discussions to extend this program further beyond. There are a number of other notable achievements for Cepton this quarter.

Cepton’s Nova lidar has been selected as the automotive sensor hardware solution of the year in the third annual Auto Tech Breakthrough Award Program. This trend is a light on our emerging products that provide the versatility for large scale deployment in many different short range lidar applications.

In addition, Cepton announced the multiple collaboration partnerships, including with NVIDIA on their DRIVE Sim platform and lidar SWISS for high fidelity mapping.

From industry experts to emerging technology companies, Cepton has been the lidar provider and collaboration partner of choice for a wide variety of automotive and non-automotive use cases. Looking further ahead, we remain on track to tape out our next generation ASIC.

This new chip will be complementary with our current ASIC and will enable Cepton’s next generation product line targeting both automotive and non-automotive customers, while featuring performance benefits and cost efficiencies. Further out, in January 2023, we are expected to unveil our next generation product at CES.

Please subscribe to Cepton social media to watch a short teaser to be released in the coming weeks. On digital media, we launched our new branding video and we invite you to our website to learn more about our company and our vision. Next, I'll turn it over to Mitch..

Thnak you, Jun. Starting with our automotive programs, Cepton’s position to win additional automotive ADAS business has improved significantly since our last update. We completed the RFI process at two top 10 global OEMs and are in prime position to continue toward RFQ and eventual business awards.

At both target OEMs, Koito maintains a leadership position on lighting products, and the recognition of Koito’s value as the Tier 1 is gaining traction among top automotive companies in North America and Japan. Furthermore, we added one more major automotive program to our advanced engagement stage.

This immediate program opportunity is another testament to the commercial validation of our lidar technology and solidified their competitive position as The Lidar winner in the industry. Unique to Cepton is the ability for our MMT-based lidat to enable and transcend all levels of autonomy from L2 plus systems to L3 and beyond.

In the automotive industry, we've seen OEMs allocate additional resources to accelerate development of ADAS versus full autonomy, which puts Cepton at an advantageous position to leverage our major program win at GM to capture additional large series production programs in the near future.

With the added financial resources from the Koito investment, we expect very positive outcomes in both OEM sourcing and smart infrastructure deployments. The lidar landscape has really begun to crystallize over the past three months.

As such, we're redoubling our efforts on major automotive lidar opportunities and we'll keep an opportunistic approach towards smart infrastructure opportunities. Our lidar solutions have been designed into major airports across the United States and we expect to see significant deployments of our products in the coming year.

Tolling and smart airports are two use cases continuing to emerge as the most promising applications for lidar within this space. Next, I'll turn it back to Hull..

Thank you, Mitch. Starting with our third quarter results, total revenue for the quarter was $1.8 million, down 5% year-over-year and 30% sequentially and consistent almost entirely of product revenue.

Third quarter product revenue was $1.8 million, up 171% compared to the prior year period and 23% sequentially, driven by increased product sales to customers. We had minimal development revenue this quarter due to timing of various planned milestones on outstanding projects.

Our gross profit was slightly negative for the quarter as a result of revenues being solely from products and no development revenue almost. As compared to the prior quarter, our product revenue gross margin improved meaningfully, largely due to less elevated component costs as we work through supply chain constraints.

GAAP net loss was $17.4 million or $0.11 per share basic and diluted. Non-GAAP net loss was $13.2 million or $0.08 per share basic and diluted. Weighted average shares outstanding for the third quarter was 155.7 million shares, both basic and diluted.

Non-GAAP adjustments include stock-based compensation of $2.4 million and $1.4 million loss on remeasurement of earnout shares liability and a $0.1 million loss on remeasurement of our warrant liabilities. Non-GAAP adjusted EBITDA for the quarter was negative $12.7 million.

As of September 30, 2022, we had available liquidity of approximately $120 million. Total available liquidity consists of approximately $21.6 million in cash and short-term investments and the remaining $98 million from Lincoln Park Capital on $100 million equity purchase commitment.

With the recently signed $100 million investment from Koito, our total available liquidity is expected to increase significantly at close of the transaction in the first quarter of 2023. On the full-year 2022, we are maintaining our prior revenue guidance of between $7 million and $9 million.

On the cost side, we maintain our full-year operating expense guidance between $55 million and $65 million. Lastly, I'll summarize the key terms of the investment agreement with Koito. The investment is expected to close in the first quarter of 2023, subject to Cepton shareholder approval.

As part of the transaction, Cepton will sell 100,000 shares of Series A convertible preferred stock at $1,000 each share for a total purchase price of $100 million.

The preferred stock will be convertible beginning one year after the issuance date at an approximate initial conversion price of $2.585 and will carry an annual dividend rate of 3.25% if paid in cash or 4.25% if paid in kind.

Conversion price represented a one day premium of 13.4% or 14.4% premium to a 30-day VWAP and a 25.5% to a 90-day VWAP of Cepton’s common stock. Currently, with execution of the investment agreement Cepton entered into a secured term loan agreement for JPY5.8 billion or approximately $39 million.

The proceeds will be used to repay the Trinity Loan and for general corporate purposes. The term loan has a fixed annual interest rate of 1% and is to be paid back at the close of the convertible preferred stock transaction.

We are very appreciative of Koito’s support and looking forward to our continuous collaboration towards series production and additional OEM wins. Now, I'd like to open up the call for questions..

[Operator Instructions] Our first question comes from Samik Chatterjee from J.P. Morgan Chase. Please state your question..

Hi. Yes. This is Joe Cardoso on for Samik Chatterjee. My first question is on the Koito investment of $100 million.

Can you help us think about how you plan to leverage this funding? And more specifically, is there anything different from this investment relative to prior investments? And then the second part to that is, as you discussed, this would mark the third investment from this partner? How should investors think about future funding materializing from them? Thank you.

And then I have a follow-up..

So this is Hull. I'll take your question, Joe. So how do we plan on using Koito investment? I mean, primarily it's going to be for corporate purposes, right? As to extend our runway, external liquidity, as we execute the series production award and also in terms of winning new awards.

How is it different from their prior investments? So in the prior investments, Koito essentially subscribed to common shares, so they bought common shares. And this one is CPS, so convertible preferred shares. So these will be preferred shares that's convertible into common and they're eligible to convert one year from the issuance date..

And then just, yes, and then just I have another one as well.

But just -- and the last part of that was just, you know, how should investors think about future funding from this partner?.

Yes. Maybe, Jun Pei here, I'll take that question. With this latest investment will certainly have much higher levels of collaboration between Koito and Cepton. This will lead into a lot of things including more synergy, operating efficiency, cost savings for our ultimate customers.

So all of the things will actually be converging, I do expect continued support from Koito down the road..

Yes, and this obviously extends our runway quite a bit, right? And in addition to this pending transaction, we also have the Lincoln Park facility that's still available for us. So in the near-term, we don't expect additional investment funding or fund from Koito..

Got it. And then just my second question, two of your peers in the space announced a merger this morning.

Just curious to hear your thoughts on that specific merger? And then maybe more broadly, how you're thinking about industry consolidation going forward? And do you see a rule for Cepton to be a consolidator? And then maybe even touch on do you think it's too early to see consolidation from both an industry and/or Cepton perspective? Thank you..

Okay. Well, lot of questions packed in there. Maybe I'll miss a couple. You can continue to follow-up with these questions. Jun here, I will answer your questions. Well, the latest news, it appears to make sense for the non-auto market even though that market, the non-auto market is rather fragmented.

And this consolidation is the effect of that is yet to be seen. For us, as for Cepton, we certainly believe the future scaling of our automotive lidar product will promote more reasonable prices that will lead into more adoption into the non-auto area. But specifically to this announcement, I think the -- like I said, the effect is yet to be seen.

Well, what's our role in terms of future consolidations and possibilities? We always have our eyes open, but for us, we're very focused on automotive end market and we believe and very naturally this is the biggest market, the biggest opportunity in the coming decade. We remain very much optimistic about the infrastructure as well.

But for us our focus on automotive end market is really the key. We don't expect any competitive pressure from this announcement since our focus is rather different. And you want to --.

Ues, so I think, Joe, your other -- your part of your other question is, is it too early for consolidation, right? You know, our view, at least my view is that outside of automotive end market, you know, focused auto companies, we think it's not too early. There are a number of public lidar companies addressing the non-auto market.

We know that, that market is very fragmented and we actually think consolidation helps in terms of driving adoption..

No. Thanks. Appreciate all the color and answering that very long question. Thanks, guys. Appreciate it..

Thank you..

Our next question comes from Joseph Spak from RBC Capital Markets. Please state your question..

Hi, good afternoon, everyone. A couple of questions, Hull, maybe just to start to sort of to better understand the quarter, if we back out the developmental revenue in the second quarter, then revenue was up actually a little bit quarter-over-quarter. So I think last quarter you talked about maybe 400 units.

So is -- was it higher units in the third quarter sequentially or perhaps was there some movement in ASP, maybe took some pricing for some of the inflationary pressure?.

Yes, it's a little bit of both, Joe. So in terms of units, we did ship more units than the second quarter. Also ASP were higher in the third quarter than the second quarter. Second quarter we had I think one fairly significant infrastructure shipment that was slightly below our normal..

Okay.

And that pricing, is that more -- is that just a mix issue or are you sort of taking some pricing for some of the costs that you've seen in the world?.

It's primarily a mix issue..

Okay. If we maybe look at the guidance, which you reiterated and we could sort of get some implied fourth quarter numbers here. A couple of things, one, how much developmental revenue, if any, do you expect in the fourth quarter? You got the gross margins effectively breakeven in the third quarter.

I think in the past you sort of talked about potentially positive in the fourth quarter.

I was wondering if that's still on the table? And then just remind me on guidance that OpEx $55 million and $65 million, does that include SBC or exclude it?.

Yes. So that includes SBC and the fourth quarter, yes, we do expect some development revenue. We're planning for some of the milestones to be achieved. So we can factor that into it.

And then on gross margin, we do expect to have a slightly positive gross margin as we become more efficient as also work out some of the kinks in terms of on the operational side, right? So this quarter's negative gross margin, if we were to take out some of the inventory discounts and all that, it would have been slightly positive..

Okay. I mean, it was only, I mean, I guess, I don't know exactly the split of SBC at time, I'm sure we'll get that, but it seems like it was only modestly negative adjusting for some of those factors this quarter.

Is that right?.

Yes, it's very modestly negative..

Yes. Okay. I guess the last question is, you know Jun, I appreciate you sort of talking about the opportunity from auto. It's obviously there's a lot more unit potential obviously there than infrastructure as you sort of or non-auto as you sort of mentioned.

But -- and you have the GM award, but like the [indiscernible], which is where the Ultra Cruise is starting, right? I think I should count on all my digits, the number that are going to be made next year.

So I know you're not giving ’23 guidance now, but maybe at a high level, can you talk about how you expect the industry and your business to evolve going into next year? Because without the auto units coming in, it's hard to see how you get higher from that $2 million a quarter ex-developmental revenue run rate?.

Yes. I guess, everybody would have very natural questions like where are the numbers and when are they coming in? This is just the beginning of this lidar industry where at the cusp of breaking through and you actually saw pictures now with our lidar in the vehicles. It's actually more real, much more real than, compared to even one year ago.

So slowly, surely these numbers will actually start to get into a form that we can start to talk and disclose. It's not -- as I have said in the past many times, for sure, lidar will be happening. It will get into the vehicles. It's evolutionary process for a higher level of autonomy and safety.

But at this moment, just having things nailed down to the details is a little bit -- we're not at liberty to disclose everything..

Yes. Joe, this is Mitch Hourtienne. I'll just add to Jun’s comment. So, Cepton and Koito are continuing to work on further vehicle platforms, you know, it's kind of up to GM, which of those vehicles, they begin to showcase at different times.

Yes, this summer, it was the [indiscernible] completely agree with you that the luxury class vehicle volume is going to be pretty low. But we can't, you know, we can't disclose our cells unilaterally the exact number of additional vehicle platforms or the classes.

But this work continues and I can safely say that our overall expected contract value continues to increase than it did this past quarter, and we're continuing to work on that this quarter as well..

Okay. That's good to hear..

Yes, just on your second point about what does that mean for smart infrastructure? Yes, we've made inroads in the smart infrastructure market.

However, if you look at that market, there's still some cost sensitivities and we believe having the automotive production line in place with Koito will help us gain traction in the Smart Infra market by lowering our costs and improving the delivery situation..

Okay. I guess maybe just to follow-up on that point, I appreciate all the color and completely get that sensitivity as to sort of what you can announce with your partners.

But at least at a high level or at a Cepton specific level, when do you think you're going to be in a little bit of a better position to educate the market as to sort of how the trajectory looks here over the next couple of years?.

Hey, Joe. I think the -- at the beginning of next year when we went into our full-year summary and update, we'll be able to provide more color.

But for now, I think, in terms of unit volume, for automotive, if you think of next year, even the first quarter, we will be able to ship more units probably twice as much units as we will have shipped in this year.

Does that help?.

Okay.

But for infrastructure?.

For automotive?.

But what you're shipping for automotive isn't serial product? So can you help me understand that, right, because --.

Yes. Well, SOP is next year, right? Start up production is 2023 next year. And we already have purchase orders from Koito, because we supply to Koito and supply to GM for the Ultra Cruise program..

Okay.

So there -- you're saying there's a lead time issue of which is what a quarter or so or how should we think about that?.

It’s a couple of quarters..

Couple of quarters. Okay, I appreciate that. Thank you..

Yes..

Our next question comes from Gus Richard from Northland Securities. Please state your question..

Yes. Thanks for taking the question. I think you made a comment earlier in the call that OEMs are starting to focus more on ADAS than autonomy.

I was just wondering how that changes the specifications that they're looking for in your competitive position?.

Yes, I think it's public, you know what Ford announced about the wind down of ARCO and then they said they're increasing their investments in ADAS specifically. That definitely plays into our market focus. We've spent three or four years working with General Motors, we've spent just as much time working with Ford, couple of the Japanese OEMs.

So it's a good thing for our product portfolio, our specs, our opportunities in the short-term definitely. Yes, the AV space has -- they require longer range, 250, 300 meters in some cases, we have tech that can support L4. But right now, the shift to L2 plus L3 focus is a really good thing for our immediate opportunities..

Yes. Gus, Jun here. I want to just to add on that for the ADAS field, having the design focus from the very beginning is a key in terms of getting the specifications. And this specification is not only on the performance part that you get to see how far, you get to see with whatever resolution.

You also have to consider this is a everyday vehicle automotive safety part. So you got to have the reliability. And also, not to mention, you ask where you have to hit the cost target.

So as we always have promoted ourselves and mentioned in the past that these balances were the key technology MMT from Cepton hit the sweet spot and that's where we actually -- one of the fundamentals we capture the design win. So yes, the spec for AVs versus ADAS are rather different.

And we actually are happy to work here on something that's going to be scaled to a large volume..

Yes. And then I'll just add one anecdote, Gus to this industry trend. We've seen as we address the RFIs and our FUSE, we've seen OEM polling in the timeline for deployment. So I can't share which OEM that is, but is a global top 10 OEM..

Yes. Got it. And that was actually leads me to the next question you mentioned, you had two OEMs that you moved from the RFI process to the RFQ.

And I'm just wondering, you know, what exactly does that mean? What does it look like? You know, what added activities are there with these two OEMs?.

Yes. I mean, these are two OEMs we've worked with for multiple years. So it's really about solidifying the specification for the exact target vehicles that they have planned.

Whereas a few years ago it may have been more proof-of-concept data collection activities, now it's more about vehicle integration where does the part go on the car, exact cost, commercials, nailing down the timing. That's all done in the RFI phase.

RFQ, you just -- that's a rubber stamp on all of those elements and a committed launch schedule in commercial..

Got it. Got it. That's very helpful. And then the last one I was like to ask a question, nobody -- somebody won't answer.

Can you give us a sense of your overall contract value where you think that stands at this point?.

Yes. We will answer that, befor that for the GM Ultra Cruise, program we based on our own estimates, which is fairly conservative at this point. It’s well over $1 billion with the current contract..

With existing projects?.

With existing awarded that -- awarded vehicles..

Got it. Got it.

And, you know, these two OEMs, you're working with any sense of how big those contracts could be?.

They will be the same -- at least one of them will be the same or larger..

Perfect. Got it. Alright, very good. Thank you so much..

Yes. Thanks..

Our next question comes from Matthew Galinko from Maxim Group. Please state your question..

Hey, Hull..

Hey, Matt.

Thank you for taking my questions and congrats on some of the nurture you're building in automotive. I guess, maybe just another way of asking the funding question.

But does the investment on the preferred shares, sort of, allow you to expand a little bit more and be more opportunistic on the non-automotive side or allow you to engage with more automotive OEMs? Or just can you talk about, is there a fairly direct connection to activity you're seeing?.

Yes, I'd say both, right. We remain pretty opportunistic on smart infrastructure side. We want to see that there's real programs and real valid deployments and we also want to see profitability on that side in the near-term.

For the automotive side of things, as you see the recent focus us on ADAS, and we actually do need to increase resources to focus on -- to even more focused on automotive to meet the needs of the OEMs as they can accelerate timeline and everything. So this does give us a lot more resources financially to do all of these things..

Got it. Thank you. And then my follow-up is, I guess with respect to the comments on OEMs, refocusing on ADAS. Any changes to the competitive landscape, whether it's within lidar, automotive focused lidar or non-lidar, you know, sensor option that OEMs might have at their disposal now.

Is it a more competitive environment today than it was a couple of years ago, when you were working towards the GM award? Or does it feel a little -- just what is the competitive dynamic seem like today?.

Sure. I can start that one, Matt. This is Mitch, so I never want to say it's becoming less competitive. It's always competitive in automotive. But the number of competitors is you can count on one hand now versus even two years ago, it was still a couple dozen companies.

So when you talk about top 10 automotive companies, it's down to definitely one hand, maybe just a couple of companies..

Yes. I'd also say that OEMs want to see track record of execution, right? And that track record you can only get, you know, with time.

So kind of outgoing niches, statement of the number of lidar companies and number of competitors becoming less that is part of it is, because of only a few handful has been able to execute on real OEM programs over time. And you're already seeing basically the companies with automotive design wins will continue to have automotive design wins..

Got it. Thank you..

Our next question comes from Richard Shannon from Craig Hallum Capital Group. Please state your question..

Hi, guys. Thanks for taking my questions as well.

I think I'm going to follow-up on the topic of the two completed RFI processes that move on to RFQ? Do you know what they are? And can you talk about what the -- what if any competitors are still remaining in those processes?.

Yes. Hey Richard, this is Mitch.

Just to clarify, what's your first question? You said, what do we know what they are competitors are?.

Yes, do you know how many competitors?.

Yes, we know exactly the competitors at each of the three. So one of the three, there is no competitors. And the other two, there's two or three competitors..

Okay. Alright, great. That's helpful. And then the second question is the other bullet here from the press release you talked about is a new top 10 automotive OEM program added to advanced engagement stage.

What does that mean? Is that mean, how do you fit that in a nomenclature RFI, RFQ? Where does that fit? And can you describe that a little bit more, please?.

Yes. So that one is a new opportunity that we discovered in Q3 or that came to us in Q3. And that's actually the one where I mentioned that there really isn't a competitor. They thought outcept on very familiar with our part from past engagements. And so there isn't really -- there is no RFI phase, it's just updated commercials and timing..

Yes. Richard, if you remember back when we shared our forecast, we have awarded, we have advanced engagement and then different -- the other less advanced categories, right? So advanced engagement just means very close to being awarded..

Okay. Perfect then. I think that's all for me guys. Thank you very much..

[Operator Instructions] At this time, we have no further questions..

Okay. So thank you all for joining us today's conference. We appreciate your time and questions. Certainly, it's an exciting landscape, a lot of things are happening and Cepton is continuing to execute well and we will continue report on our progress in the focused automotive industry, and we'll talk again in the quarter..

Thank you, Erica..

This concludes today's conference call. Thank you for attending..