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Operator
Thank you for standing by and welcome to the AIQ for 2022 and full year 2022 earnings results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there'll be a question and answer session. To ask a question at that time, please press star one one on your telephone. As a reminder, today's call is being recorded. I will now turn the conference over to your host, Mr. Steven Lambright, Chief Managing Officer. Please go ahead.
Steven Lambright
Good afternoon, and thank you for joining AI's fourth quarter and year-end 2022 earnings call. With me today are Matt Fish, Chief Executive Officer, and Bob Brown, Chief Financial Officer. Earlier today, we announced our financial results for the fourth quarter and full year 2022. A copy of our press release can be found on our website at investors.ai.ai. Before we begin, I would like to remind participants that today's discussion may include forward-looking statements as defined in the securities laws and regulations of the United States with reference to future events, future operating results, or financial performance. Forward-looking statements are based on our current expectations and assumptions regarding our business, the industry, and other conditions. These forward-looking statements are subject to inherent risks, uncertainties, and changes in circumstances that are difficult or impossible to predict. Our actual results may differ materially from those contemplated by these forward-looking statements. We caution you, therefore, against placing undue reliance on any of these forward-looking statements. You can find more information about the risks, uncertainties, and other factors in our reports filed from time to time with the Securities and Exchange Commission, including in our more recent periodic report. All information discussed today is as of March 15th, 2023, and we do not intend and undertake no obligation to update any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as may be required by law. In addition, today's discussion will include references to certain non-GAAP financial measures. These non-GAAP measures are presented for supplemental information purposes only and should not be considered as a substitute for financial information presented in accordance with GAAP. A reconciliation of the measures to the most directly comparable GAAP measures is available in our press release, and you should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures in our earnings release. Now, let me pass the call over to Matt.
Matt Fish
Thank you, Steve. Good afternoon and welcome to our fourth quarter in year-end 2022 earnings call. I'm Matt Fish, AI CEO. I am joined on the call today by our CFO, Bob Brown. I'll begin the call by introducing myself, sharing some insights into what I've learned in my first month on the job and some initial thoughts on where we go from here. I will then hand the call to Bob, who will review AI's financial performance for fourth quarter and full 2022 fiscal year, as well as a few comments on our 2023 outlook. Then we will open the call for questions. Let me start by telling you a bit about myself and why I'm thrilled to be here. Over the past 30 years, I have delivered transformational products that have supported the rapid evolution of the automotive and technology industries. I am excited about the opportunity for AI to become a premier sensing technology provider. To do this, I will leverage my extensive experience with systems, software, and scaling large product organizations as I did during my prior leadership roles at Gentherm, Harman, and Intel. I recently led the technology team at GenTherm, a $1.3 billion developer of thermal management technologies. Under my leadership, we delivered innovative products to the automotive market that aligned with the industry shift to electrification and created new value propositions with systems and software. At AI, our software-definable LiDAR is also at the center of this transformation. I will lead our team to enhance product ties and monetize AI's platform and product portfolio to power the next generation of advanced driver assistance systems and drive greater efficiency, productivity, and safety in smart infrastructure and other industrial markets. Throughout my career, I've consistently pursued opportunities that have the vision and capacity to change the world. to have an impact, to create opportunities that didn't previously exist. This is more than a passion. My track record shows I thrive and succeed when presented with the challenge of bringing revolutionary technologies to market. My greatest satisfaction and success comes from making a difference. And AI's technology has the potential to be transformative. I joined AI because I believe it has all the ingredients for commercial success. We have industry-leading technology, a unique and compelling business model, a healthy commercial pipeline, a stellar team, and exceptional business partners like Continental. Continental has the proven ability to deliver full-stack advanced driver assistance systems to the automotive and trucking markets. Over the years, they have delivered over 150 million sensors across dozens of product lines, making them one of the leading integrated ADAS solution providers in the world. For me, the most powerful market validation is that Continental selected AI's technology for productization and integration into their industry-leading ADAS product portfolio. And we continue to receive positive feedback from OEM customers regarding Continental's automotive production intent B sample, giving me great confidence that we have the right product market fit for the next generation of advanced driver assistance systems. In my first month at AI, I'm thoroughly impressed with the vitality and creativity of the team. The culture and energy here is remarkable. It has me excited about what's to come. My immediate task at hand is to set clear objectives and focus our efforts and remove impediments so that our team can successfully execute and achieve our goals. To that end, I've been working with the executive team to develop a go-forward plan that aligns our strengths with our objectives. We are well underway, but this takes time and careful consideration. My commitment to you is that we will come back to you in our May earnings call with my plan for the company and a timeline to which you will be able to hold me and the executive team accountable. We will align our innovative foresight platform with the most promising opportunities and focus on a set of achievable objectives that will define success for AI and its shareholders. I'm excited to be here. AI is well-positioned with exceptional technology and talent, and I look forward to sharing our vision for the next phase of AI's evolution at our earnings call this May. At this point, I will turn it over to Bob Brown to review the details of our financial performance last quarter and last year.
Steve
Bob? Thanks, Matt. Welcome, everyone. Revenue in the fourth quarter was $1.1 million, up 42% from the third quarter. Our development contract services revenue was stronger in the fourth quarter due to contract-specific progress in our automotive business. Revenue for the full year was $3.6 million, up 21% from the prior year. We managed our spending carefully throughout the year as we continued to focus our resources on the most impactful areas of our business. Gap operating expenses were $22 million in the fourth quarter, an increase of 2.9% from the prior quarter due to a favorable item in the third quarter that did not repeat in the fourth quarter. Our non-gap operating expenses were $16 million in the fourth quarter, up from $15.1 million in the third quarter. Net loss in the fourth quarter was $23.7 million on a GAAP basis, up slightly from a net loss of $23.6 million in the third quarter. GAAP EPS was a loss of 15 cents per share in the fourth quarter, which was flat relative to the prior quarter. Net loss on a non-GAAP basis in the fourth quarter was $17.5 million, and non-GAAP EPS was a loss of 11 cents, which was flat relative to non-GAAP EPS in the third quarter. Non-GAAP net loss for the full year was $73.8 million, which represented a substantial improvement relative to our initial expectations for a non-GAAP net loss of $100 million at the beginning of 2022. Net cash used in operating activities for the fourth quarter was $16.1 million, which improved from $22.4 million in the third quarter. The quarter over quarter improvement was primarily driven by cash used in the third quarter for working capital and for annual prepaid insurance costs that did not recur in the fourth quarter. We're continuing to manage our cash very carefully, especially in this environment, and we're focusing our cash outlays on critical areas that clearly support our strategy and product development. Our capital expenditures in the quarter were very modest at $800,000, reflecting our unique Capital Light model and our partnerships with manufacturers like Continental and Sanmina. We ended the year with $94.2 million of cash, cash equivalents, and marketable securities on our balance sheet. We believe this provides us with a solid financial base to support our business as we head into what's expected to be a challenging economic climate in 2023. We've received many questions over the last several days about our exposure to Silicon Valley Bank or SVB. The vast majority of our cash, cash equivalents and marketable securities are held in our account with a much larger bank, which was unaffected by SVB's issues. While we were also an SVB customer, we regained full access to our SVB accounts as of Monday morning. Turning to our external sources of funds, you may recall that we issued a convertible note in September, which provided us with $10 million of proceeds. Thus far, we have paid the monthly installments required under the note in cash rather than shares. We have the rights, subject to certain conditions, to issue another convertible note to the same investor in 2023 in the same amount and on the same terms. We also continue to have access to our equity line of credit facility as an additional source of liquidity. We did not issue any shares under that facility in the fourth quarter. Now let me address our near-term outlook. We are maintaining a cautious view on the business in the first quarter. We expect revenue for the first quarter to be in the range of $500,000 to $700,000. We have temporarily slowed production of our Foresight industrial product in Q1 as we complete the second phase of the transfer of production to our manufacturing partner and complete the planned validation of the product built in the production environment. While volumes are expected to be modest in the near term, we are continuing several proof of concept deployments of our LiDAR with key customers, particularly in the ITS market. In response to the uncertain environment we noted earlier, we have been managing our spending carefully. However, we expect our first quarter operating expenses to be up approximately 10 to 15% from the fourth quarter, based primarily on the timing of certain development projects. We expect our non-GAAP EPS to be a loss of approximately 13 cents in the first quarter. Let me conclude by saying that while we expect to feel the impacts of a potential recession and ongoing supply chain challenges in the near term, we are well positioned to navigate through this period. The secular backdrop for LIDAR adoption across the automotive and industrial markets remains compelling, and the feedback we're getting from OEM customers on Continental's automotive production and 10b sample continues to be very encouraging. With that, we'll open the line for questions. Operator,
Bob
We're slowing production, as we said, in Q1.
Steve
And this is really related to doing validation and testing on that product. So we've held off a bit on production here in Q1. So that's what you're seeing in the Q1 impact. So it's going to be very minor volumes here in Q1 as we work through that. So the hardware is in very good shape. So we've been getting good feedback from the field on how those hardware units are performing. in the field, but we are doing an update to the software. So we've got a pretty significant software revision that we wanna roll out. And as a result of that, we wanna do a formal testing on that and make sure we've got it rock solid before we start getting into further production. So we're not gonna give guidance for the full year. So we're really just guiding at Q1 at this point, Suji, but we do expect to have more production again here in Q2 when we get there. But Q1 is gonna be light because of those reasons. And Matt, I don't know if you want to comment further on what we're doing around the software side and how that relates to the production.
Suji
Yeah, thanks, Bob. Just to give a little bit of color to that, one of the things we're learning as we're going through this manufacturing transition is that there are some differences and requirements between the industrial and the automotive markets. Just to make it very clear, an example of that being 24 by 7 operation of the LIDAR system that's required in industrial or as that requirement does not exist in such a strong form in the automotive space. So that's an example of the learnings that we're having as we're doing this transition outside of automotive and to other markets. And the good news here is that what we're finding is that because of the foundation of software programmability of our platform, we're able to address these issues without having to redesign the product essentially.
Bob
Okay, great. And then maybe my next question could be on the visibility here. You talked about the pipeline, the number of engagements, and maybe weave into that continental and the next steps with the partner there.
Suji
Yeah, I'll take that one. So we have line of sight at this point in time into six very clear automotive OEM engagements. Look, I've been in the automotive business for several years and have some very good insight at this point into the signals of how these deals are going. And based on that, I feel very confident that before the end of this year, we're going to get some clear decisions on a subset of those for sure.
Bob
Okay, great. Maybe last question for Matt. Matt, since you've come in, can you talk about the AI product and the LIDAR market and the technology differentiation? From your perspective, what you're hearing from customers and what you think is going to resonate as you do compete, it's a crowded LIDAR market, but I'd love to hear your thoughts coming out of the gate here.
Suji
Absolutely. I think first and foremost, we have best-in-class distance, long-distance detection of objects, and this is really an essential piece of higher levels of autonomous driving. That's really a key piece of differentiation, and also what I've really been impressed by is the actual design of the product, which minimizes the size and number of moving parts, mechanically speaking. That's going to be a clear advantage as we get further down the road, especially into the design validation testing and reliability testing that's required of the automotive industry. This is really going to be a key hurdle and challenge for everyone. And our design, I would say, is about as close as you can get to solid state at this point. The flexibility and the programmability of the design, for example, being able to change scan patterns, which allows us to deal with a wide range of issues or learnings that we're having in the field. Those are the top three that really stood out to me and drove my choice to join this company. I think it's fantastic.
Bob
Okay, great. I appreciate the call, Matt. Thanks. Thanks, guys. Thanks, Suji.
Operator
Thank you. One moment, please. Our next question comes from the line of Joseph Osha of Guggenheim Partners. Your line is open.
Joseph Osha
Hello. Can you hear me? There was some echo there. We can. Hi, Joe.
Steve
Okay.
Joseph Osha
Hey, best of luck, Bob, with the next venture. And go blue, of course.
Steve
Thank you, Joe.
Joseph Osha
So, you know, in 2000, you finished your career. about $95 million in cash, which is a lot of money, and you've earned about $71 million. So understanding, of course, that the plan is still coming together, you know, how much runway do you guys feel like you need to have before the business begins to support itself? Because, you know, if you operate the business like it's been running for the last, year, you're going to run out of money early in 2024. So I'm just wondering what sort of initial signposts you can give us for thinking about how you're going to manage the company's remaining cash.
Steve
Yeah, absolutely. Thanks for the question, Joe. So yeah, as you said, we had $94 million in cash at 1231. So from where we're staying today, we feel confident we've got at least a year's worth of cash on the balance sheet from today. So we're in reasonably good shape from that perspective. We do intend to raise more capital in the future. So you'll see that in our 10K that we mentioned that when that is published here shortly. But as you know, given the cash balance, we do have some flexibility on timing. So there's not an urgency to do something, although we do intend to raise some capital at some point here. So we'll see more about that in the future. We're not going to guide further than that at this moment. Given Matt's only been in the chair for 30 days here, I think I want to give Matt a chance to finish his strategic analysis here. And then I think we'll come back in May with some further thoughts about how we're going to take the company forward and what that implies for the cash.
Suji
And I'll just add one thing to that. I've been digging into especially the customer engagements. Over the last 30 days, there's definitely opportunity for focus and looking at those signals that I mentioned earlier. I think we can get more focused. That's really a key initiative from my end.
Joseph Osha
Okay. Thank you very much.
Operator
Thanks, Jill. Thank you. One moment, please. Our next question comes from the line of Tom Diffley of DA Davidson. Your line is open.
Bob
Hi. This is Liz.
Liz
Can you hear me?
Bob
Yes.
Liz
This is Linda with your Davidson on behalf of some deeply congratulations on your progress and thank you for letting us ask questions and welcome Matt and best of luck with the next steps Bob. So, my 1st question, if I remember correctly, you expected some supply chain challenges to last longer and I was wondering if you could provide any update on the ramps with foresight given those supply chain challenges. And then if you could give us some color on how the order bookings look like at the moment, and then the growth trajectory there throughout next year.
Steve
Yeah, you bet. Thank you, Linda. So in terms of the supply chain challenges, some of those problems are still there. So there are still some key parts that we would classify as long lead time types of parts. So it's taking longer to get those. There are also still some PPV challenges where parts are still priced above where you would normally see them priced if there were not the supply chain challenges in place. I'd say it's getting better. So we are seeing some improvement, but I would say those issues are still lingering. So it's not hurting us too much in terms of the production at this point. As we said for Q1, the key issue there is just doing this software revision and the testing and validation. So I don't think that'll be a big limiter in terms of production for this year. You know, we are working closely with customers. As we said in the prepared remarks, you know, we are focusing and we're going to spend quite a bit of time in that space in systems. So there'll be a lot of focus around that area this year. So Matt, I don't know if you want to add further in terms of the customer engagements and visibility from what you've seen so far.
Suji
All right. No, I think it's a good summary, Bob. And as we're looking at things right now, it's the software and getting those updates done.
Bob
That's really on the critical path.
Liz
I appreciate the color. And then last quarter you had mentioned some successes in tracking and I was wondering where at the moment you're sitting with that. Have you seen any more engagement there? How are you looking at it?
Suji
Right. I had alluded to the OEM engagements in general earlier, but specifically for the announcement I think you're referring to, we did have a press release out in October of last year And for strategic reasons, we did agree with the trucking platform partner to delay disclosing their identity until a later date. So we don't have an update on that today, but you can refer to that press release that came out in October.
Liz
Sounds good. And then my last question, so I might have missed it, but besides the impacts of the manufacturing conditions in 1Q, could you provide any context for what the revenue run rate looks like for this year beyond 1Q?
Steve
Yeah, we think there's an opportunity for modest growth this year. You know, that won't be, you know, easy from where we're starting, right? It's a slow start to the year, as you see, in terms of the guidance. But, you know, we feel like we've got the opportunity to generate some modest growth this year. So that's what we're going to be working towards on the top line.
Bob
Got it.
Operator
I appreciate it. Thank you. Thank you. One moment, please. Our next question comes from the line of John Roy of Watertower Research. Your line is open.
John Roy
Hey, can you hear me okay? I'm hearing an echo.
Steve
Yeah, we can hear you okay, John. No echo on our end.
John Roy
Great. So, Matt, you know, the signals that you're seeing from the automotive industry, I wonder if you can give in your background, could you give us maybe a little more color and related to your experience as to how that might play out? And as a corollary to that, I'm also curious, In your new role, how are you going to engage with customers? Are you going to be really out there on the forefront trying to make it rain? And what is your thinking there?
Suji
Yeah, absolutely. Why don't I take on the second part of the question first? Getting out and hearing firsthand what customers are saying, and especially the various components of our partnership with Conti. First and foremost, for me, I'm already booking travel. to make those arrangements. But especially given that we're in this go-to-market phase right now and a little bit of my or a lot of bit of my technical background weighing in, it's super important to really understand what the friction points, the constraints, and the problems that customers are trying to solve. And bringing that perspective back into the company and translating that to a set of objectives for the team and priority and focus, that's a key part of the game plan here. Just as an example, now getting back to the first part of your question, I recently worked for a tier one provider in the automotive space called Gentherm. And we had a pretty deep engagement with General Motors, that's public now, bringing a new category of product into market with one of their new vehicles. So I've been on the front lines of that for the last three years. and seeing the moving parts of what those signals are, if you will, that tell us, hey, the customer is really engaged with us in a very material and meaningful way, leading indicator towards success on a series production award. I just experienced that firsthand with a new category of product this last three years in my most recent assignment. So I'm definitely making those connections to what's going on with AI's engagements with our customers. We're in the mix.
John Roy
It sounds good. You had mentioned that software is going to be a key point going forward in terms of development. Do you guys feel like you need to staff up a little more, given that you might be putting a lot more effort into the software?
Suji
So software has always been a critical priority for the company. It's deeply woven into the product architecture and value proposition. Look, as the automotive industry is embracing more of the software-defined vehicle concept, I think this is going to be a catalyst for pulling in LiDAR as a solution beyond autonomous driving, if you will. Certainly, I believe that there will be a pull for LiDAR early on. We've got to get the hardware in the vehicle so the data collection can begin. As soon as we start talking about data collection and analysis, to feed into autonomous driving, even a huge amount of software involved in that. So we're on it and staffing and investing appropriately.
John Roy
Great, Matt. Thank you so much. And Bob, congratulations. And we'll talk to you soon.
Steve
Great. Thanks. Thanks very much, John. Appreciate it.
Operator
Thank you. I'm sure no further questions at this time. I'm going to turn the call back over to Matt Fish, CEO, for any closing remarks.
Suji
I want to thank everybody for joining our call today. In closing, I believe AI is well-positioned with exceptional technology, talent, and partners. And I look forward to your vision for the next phase of AI's evolution in our earnings call.
Operator
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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