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spk01: Welcome to the SEPTOM Incorporated Q3 2022 Business Update and Earnings Call. At this time, all participants are on a list and owning mode. Later, we will conduct a question and answer session. I'll now turn the call over to your host, Paul Hsu, Chief Financial Officer. Paul, you may begin.
spk03: Thank you and welcome everyone to SEPTOM's third quarter 2022 earnings call and business update. With me today is Jun Pei. co-founder and chief executive officer, and Mitch Ortini, 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'd 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're not undertaking any commitments to update these 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 a webcast replay of this call at investors.septom.com. Now I'd like to turn the call over to Jun.
spk06: Thank you, all, and good afternoon, everyone. Thank you for joining SEPTOM'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 one partner and current shareholder, Koito Manufacturing of Japan. This transaction marks Koito's third investment in SEPTA. and is a testament to COETO's continued commitment to our company and to the future of LiDAR. We're very appreciative of COETO's support as this will solidify SEPTOM's financial positions and further strengthen our partnership on series 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 LIDARs 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 engagement 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 SEPTON and COETO. 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. SEPTON found in COETO a partner who not only believed in the prospect of LiDAR, but also stood behind Septon's innovative technology, as well as investing in Septon for the future of automotive safety. Going forward, with this latest investment, Septon and COETO teams are sharply focused on the commercialization and scale manufacturing of our LiDAR products. Septon 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 SEPTON LiDAR integrated behind the windshield in a production vehicle. This marks a tremendous achievement for the company. SEPTON 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're in advanced discussions to extend this program further beyond. There are a number of other notable achievements for Septon this quarter. Septon's Nova LiDAR has been selected as the Automotive Sensor Hardware Solution of the Year in the third annual Autotech Breakthrough Award program. This shines a light on our emerging products that provide versatility for large-scale deployment in many different short-range LiDAR applications. In addition, Septon announced multiple collaboration partnerships, including with NVIDIA on their DriveSIM platform and LiDAR Swiss for high-fidelity mapping. From industry experts to emerging technology companies, Septon 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 take out our next generation ASIC. This new chip will be complementary with our current ASIC and will enable Septon'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 Septon 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.
spk04: Thank you, June. Starting with our automotive programs, SEPTOM'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, Coedo maintains a leadership position on lighting products, and the recognition of Coedo's value as a 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 solidifies their competitive position as the LiDAR winner in the industry. Unique to Septon is the ability for our MMT-based LiDAR 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 Septon 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 Coedo 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 toward 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 Paul.
spk03: 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 consists 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 worked through supply chain constraints. Gap net loss was $17.4 million, or $0.11 per share, basic and diluted. Non-gap 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-gap adjustments include stock-based compensation of $2.4 million and a $1.4 million loss on remeasurement of earned-out shares liability and a $0.1 million loss on re-measurement 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 a $100 million equity purchase commitment. With the recently signed $100 million investment from COIDO, our total available liquidity is expected to increase significantly at the 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 Coito. The investment is expected to close in the first quarter of 2023, subject to SEPTOM's shareholder approval. As part of the transaction, SEPTOM 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 $2.58 and will carry an annual dividend rate of 3.25% if paid in cash or 4.25% if paid in kind. The 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. Concurrently, with execution of the investment agreement, Cepton entered into a secure term loan agreement for 5.8 billion Japanese yen, or approximately 39 million U.S. dollars. 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 COIDO's support and looking forward to our continued collaboration towards series production and additional OEM wins. Now I'd like to open up the call for questions.
spk01: If you would like to ask a question, please press star 1 on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, to ask a question, please press star 1 on your phone now. Our first question comes from Sameek Chatterjee from JPMorgan Chase. Please state your question.
spk07: Hi, yes, this is Joe Cardoso on for Sameek Chatterjee. My first question is on the Kyoto 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 a 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.
spk09: And then I have a follow-up. This is Hal.
spk03: I'll take your question, Joe. So how do we plan on using COIDO's investment? I mean, primarily it's going to be for corporate purposes, right, to extend our runway, extend our liquidity as we execute the series production award and also in terms of winning new awards. How is it different from the prior investments? So in the prior investments, COIDO 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.
spk09: And then just...
spk07: Yeah, and then just, I have another one as well, but just the last part of that was just, you know, how should investors think about future funding from this partner?
spk06: Future, right. Yeah, maybe Junpei here, I'll take that question. You know, with this latest investment, we'll certainly have much higher levels of collaboration between COETO and SEPTON. You know, this will lead into a lot of things, including more synergy, operating efficiency, cost savings for our ultimate customers. All of the things will actually be converging. I do expect continuous support from Coito down the road.
spk03: Yeah, and this obviously extends our runway, you know, 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 from COIDO.
spk07: Got it. And then just my second question, you know, 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 are you thinking about industry consolidation going forward? And do you see a role for Septon 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 SEPTON perspective? Thank you.
spk06: Okay. Well, a lot of questions packed in there. Maybe I'll miss a couple. You can continue to follow up with these questions. So June 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, the effect of that is yet to be seen. For us, for Septon, 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, you know, specifically to this market, announcement I think the 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 and market and we believe and very naturally this is the big the biggest market the biggest opportunity in the coming We remain very much optimistic about the infrastructure as well, but for us, a focus on automotive and market is really the key. We don't expect any competitive pressure from this announcement since our focus is rather different.
spk03: Yeah, so I think, Joe, part of your other question is, is it too early for consolidation, right? Our view, at least my view, is that outside of automotive and market-focused ladder companies, we think it's not too early. There are a number of public ladder 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.
spk09: No, thanks. I appreciate all the color and answering that very long question. Thanks, guys. Appreciate it. Thank you.
spk01: Our next question comes from Joseph Speck from RBC Capital Markets. Please set your question.
spk05: Hey, good afternoon, everyone. A couple of questions. Maybe just to start to sort of better understand the quarter. If we back out the developmental revenue in the second quarter, then revenue is up actually a little bit of quarter over quarter. So I think last quarter you talked about maybe 400 units. So was it higher units in the third quarter, you know, sequentially? Or perhaps was there some movement in ASP, maybe took some pricing for some of the inflationary pressure?
spk03: Yeah, 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. You know, second quarter we had, I think, one fairly significant infrastructure shipment that was slightly below our normal.
spk05: Okay. And that pricing, 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?
spk03: It's primarily a mix issue. Okay. If we maybe look at the guidance, which you reiterated, and
spk05: 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 to effectively break even 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 and 65, does that include SBC or exclude it?
spk03: Yeah, 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, yes, we do expect to have a slightly positive gross margin as we become more efficient and also work out some of the kinks in terms of on the operational side. 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.
spk05: Okay. I mean, it was only... I mean, I guess I don't know exactly the split of SBC yet. 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?
spk03: Yeah, it's very modestly negative.
spk05: Yeah, 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, you know, a lot more unit potential obviously there than on infrastructure as you sort of – or non-auto as you sort of mentioned – And you have the GM award. But, you know, look, the Celestique, which is where the Ultra Cruise is starting, right? I think I could 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 you know, without the auto units coming in, it's hard to see, you know, how you get higher from that $2 million a quarter, you know, ex-developmental revenue run rate.
spk06: Yeah, I guess, you know, everybody would have very natural questions like, you know, where are the numbers and when are they coming in? This is just the beginning of this LiDAR industry. We're at the cusp of breaking through, and you actually saw pictures now with our engineers 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, you know, as I have said in the past many times, for sure, LIDAR will be happening. It will get into the vehicles. It's an evolutionary process for for a higher level of autonomy and safety. But at this moment, you know, just having things nailed down to the details is a little bit, you know, we're not at liberty to disclose everything.
spk04: Yeah, Joe, this is Mitch Hortini. I'll just add to June's comment. So Septon and Coedo are continuing to work on further vehicle platforms. You know it's kind of up to GM which which of those vehicles they begin to showcase at different times Yes, this summer it was the Celestique Completely agree with you. That's a luxury class vehicle volumes going to be pretty low But we can't you know we can't disclose ourselves 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 is continues to increase and it did this past quarter and we're continuing to work on that this quarter as well.
spk05: Okay, that's good to hear.
spk04: Yeah, just on your second point about, you know, 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 Coedo is will help us gain traction in the smart inframarket by lowering our costs and improving the delivery situation.
spk05: Okay. I guess maybe just to follow up on that point, I appreciate all the color, and completely get that, you know, you have sensitivity as to sort of, you know, what you can announce with your partners. But at least at a high level or at a – CEPDON specific level, when do you think you're gonna 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 years?
spk03: Hey Joe, I think at the beginning of next year when we only do 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, you can 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 this year.
spk09: Does that help? Okay. For infrastructure? For automotives.
spk05: But what you're shipping for automotive isn't serial production. So can you just help me understand that, right?
spk03: Yeah, well, SOP is next year, right? Startup production is 2023, next year. And we already have purchase orders from COIDO because we supply to COIDO, COIDO supplies to GM for the ultra-close program.
spk05: Okay, so you're saying there's a lead time issue, which is what, a quarter or so, or how should we think about that?
spk03: A couple of quarters.
spk05: A couple of quarters. Okay. I appreciate that.
spk09: Thank you. Yep.
spk01: Our next question comes from Gus Richard from Northland Securities. Please state your question.
spk11: 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.
spk04: Yeah, I think it's public. What Ford announced about the wind down of Argo 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, a couple of the Japanese OEMs. So it's a good thing for our product portfolio, our specs, our opportunities in the short term, definitely. Yeah, the AV space, 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.
spk06: Yeah, Gus, Jun here. I want to just 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've got to have the reliability. And also, not to mention, you absolutely have to hit the cost target. So as we always have promoted ourselves and mentioned in the past that the disbalance is where the key technology MMT from Septon hit the sweet spot. And that's where we actually, you know, one of the fundamentals, we captured the design win. So, yeah, you know, the spec for AVs versus ADAS are rather different. And, you know, we actually are happy to work here on something that's going to be scaled to a large volume.
spk03: Yeah, and then I'll just add one anecdote, Gus, to this industry trend. We've seen, as we address the RFIs on our fuse, we've seen OEM pulling in the timeline for deployment. So I can't share which OEM that is, but it's a global top 10 OEM.
spk11: 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?
spk04: Yeah. 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, you know, 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, you know, that's a rubber stamp on all of those elements. and a committed launch schedule and commercial.
spk11: Got it. Got it. That's very helpful. And then the last one I always like to ask the 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?
spk03: Yes, we will answer that. For the GM UltraClose program, based on our own estimates, which is fairly conservative at this point, it's well over a billion dollars with the current contract.
spk09: With existing projects?
spk03: With existing awarded vehicles.
spk11: Okay. Got it. Got it. And, you know, these two OEMs, you're working with any sense of how big those contracts could be?
spk04: They will be the same.
spk09: At least one of them will be the same or larger. Perfect. Got it. All right. Very good. Thank you so much. Yep. Thanks.
spk01: Our next question comes from Matthew Galenko from Maxim Group. Please say your question.
spk02: Hey, well, thanks for taking my questions and congrats on some of the inertia you're building in automotive. I guess maybe just another way of asking the funding question, but does this investment on the preferred shares know sort of allow you to extend a little bit more uh and be more opportunistic on the non-automotive side or um you know allow you to uh to engage with more automotive oems or just can you talk about is there a fairly direct connection to activity you're seeing
spk03: Yeah, I'd say both, right? We remain pretty opportunistic on the 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 on ADAS, and we actually do need to increase resources to focus on, to have even more focus on automotive to meet the needs of the OEMs as they kind of accelerate timeline and everything. So this does give us a lot more resources financially to do all of these things.
spk09: Got it. Thank you. And then my follow-up is...
spk02: 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 sensor option that OEMs might have at their disposal now? Is it a more competitive environment today than it was you know, a couple years ago when you were, you know, working towards the GM award, or does it feel a little, you know, just what does the competitive dynamic seem like today?
spk04: 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 and automotive, but The number of competitors is, you know, you can count on one hand now versus, you know, even two years ago, it was still a couple dozen companies. So when you talk about top 10 automotive companies, it's down to, you know, definitely one hand, maybe just a couple of companies.
spk03: Yeah, and also say that, you know, OEMs want to see track record of execution, right? And that track record, it can only get, you know, with time. So kind of echoing Mitch's statement of the number of LIDAR companies, the number of competitors becoming less, that part of it is because only a handful has been able to execute on real OEM programs over time.
spk06: And you're already seeing basically the companies with automotive design wins will continue to have automotive design wins.
spk09: Got it. Thank you.
spk01: Our next question comes from Richard Shannon from Craig Holland Capital Group. Please say your question.
spk10: 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, if any, competitors are still remaining in those processes?
spk04: Yeah, just, hey, Richard, this is Mitch. Just to clarify, what's your first question? You said, do we know what they are? Yeah, do you know how many competitors? Yeah, we know exactly the competitors at each of the three. So one of the three, there is no competitor. And the other two, there's two or three competitors.
spk10: Okay. All right, great. That's helpful. And then the second question is the other bullet here from the press release you talked about is the new top 10 automotive away and program added to advanced engagement stage. What does that mean? Is that, I mean, how do you fit that in the nomenclature or RFI or Q where does that fit? And can you describe that a little bit more, please?
spk04: Yeah. Um, so there, that one, uh, is a new opportunity that, that, uh, 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 sought out Septon, 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.
spk03: Yeah, and Richard, if you remember back when we shared our forecast, we have awarded a We have advanced engagement and then different, you know, the other less advanced categories, right? So, advanced engagement, this, you know, means, you know, very close to being awarded.
spk09: Okay, perfect then. I think that's all for me then, guys. Thank you very much.
spk08: Once again, if you would like to ask a question, please press star 1 on your phone now. At this time, we have no further questions.
spk06: Okay, so thank you all for joining us at today's conference. We appreciate your time and questions. Certainly it's an exciting landscape. A lot of things are happening, and SEPTON is continuing to execute well, and we will continue to report on our progress in the focused automotive industry, and we'll talk again in a quarter. Thank you, Erica.
spk01: This concludes today's conference call. Thank you for attending.
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