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Operator
Good day, and thank you for standing by. Welcome to the AI fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 1-1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Lee Bannister. Please go ahead.
Lee Bannister
Good afternoon, and thank you for joining AI's fourth quarter 2023 earnings call. With me today are Matt Fish, Chief Executive Officer, and Connor Tierney, Chief Financial Officer. Earlier today, we announced our financial results for the fourth quarter 2023. 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 most recent periodic report. All information discussed today is as of March 26, 2024, 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
Thanks, Lee. And thank you all for joining us for the AI fourth quarter in 2023 year-end conference call. On today's call, I will provide a high-level review of 2023 and also speak to the trends we are seeing in the LIDAR marketplace. Before delving into our review of 2023, I'm pleased to share that we have recently signed a letter of intent with a global Tier 1 automotive ADAS sensor supplier to begin a collaboration focused on OEM ADAS opportunities. These opportunities have already begun to materialize. The LOI aligns with the heightened OEM engagement we are observing as evidenced by a recent influx of RFI and RFQ activity. Additionally, we are excited to announce the inaugural member of our Foresight Flex family, which we call Apollo. You may recall that we announced the Foresight Flex automotive reference design in November of last year. With Apollo, we present OEMs with a compact, ultra-long-range LiDAR sensor that also facilitates diverse mounting options, including unparalleled performance when mounted behind the windshield. Apollo demonstrates the power of 1550 nanometer LiDAR technology and is capable of a 50% range improvement and a 10 times resolution increase compared to our first generation product. Our plan is to unveil the first samples of Apollo to automotive OEMs in Q2. These achievements underscore the scalability of our software-defined architecture. Overall, 2023 was a year of product maturation and strategic realignment for AI. Emerging from the Consumer Electronics Show and the interest we saw in our technology, it is evident that LiDAR remains a cornerstone for enhancing safety and autonomy in the future of mobility. Despite its undeniable potential, broader market conditions have precipitated delays for LIDAR adoption within OEM vehicle programs. However, we remain optimistic and are encouraged by the increased interest in ongoing discussions we are having with OEMs. Our collaboration with NVIDIA resulted in significant advances in high-speed, long-range detection performance, and we believe we are ultimately on track for future integration with their Hyperion platform. At the conclusion of our work with Continental in the fourth quarter, we significantly hardened our HRL 131 product and supply chain, which enabled HRL 131 to be quoted to a major OEM by Continental last year. Most notably, as we end our collaboration, we anticipate obtaining from Continental a full set of design collateral and any of the remaining intellectual property rights to the HRL 131 product and appreciate the ongoing support we are receiving. The current task at hand is to establish a last mile with our next tier one partner in quoting this year's RFQs with OEMs. In tandem with our technological advancements, we also made significant strides in fortifying our financial foundation. We continue to focus on our capital light business model in 2023, which is not only expected to extend our cash runway well into 2025, but also enables us to weather current industry headwinds. Our Capital Light model has been an underpinning of our Tier 1 partnership model, and we believe it gives us the flexibility we'll need to reach the production stage in the automotive space. As we venture into 2024, our primary focus remains on market-leading product performance and go-to-market via Tier 1 partners. By leveraging the maturity of our products and pre-existing supply chain infrastructure, we expect that the integration of new partners will be low friction. AI has effectively created a plug and play model for tier one partnerships, which will enable an efficient transition for new commercial relationships. Now, I'll turn the call over to Connor to discuss our financial performance.
Tier 1
Thanks, Matt. Welcome, everyone. I would like to reiterate that despite the recent Continental announcement, AI remains firmly committed to its Capital Light partnership model with established Tier 1s. We believe that the recipe for success in this industry is to leverage the established manufacturing infrastructure of Tier 1 partners to scale production and keep costs low, which allows us to focus on designing great technology. The road safety crisis continues to worsen worldwide. In the US alone, pedestrian fatalities increased by nearly 80% from 2010 to 2021 to reach a 40-year high, according to the Governor's Highway Safety Association. The current technology does not appear to be working, which is why LiDAR needs to be deployed quickly and at scale. Established Tier 1s have the capabilities to do this and have done this in the past with radar, cameras, and other ADAS components. In turn, AI's technology is differentiated in terms of size, reliability, ultra-long range, and software-defined performance at a highly competitive price point. I'll repeat again, we believe commercializing LiDAR at scale requires an established Tier 1 plus AI's technology. In the current tough macro environment with high costs of capital, AI's Capitalite model positions us to weather the storm. Our cash burn is expected to be up to 10 times lower than our peers, who will require tremendous amounts of capital to industrialize their products and cover product warranty obligations. Despite all the bluster out there, to date we are aware of no high-volume LiDAR program awards that have ramped to mass production. The industry is still arguably in the research and development phase. The next one to two years will be a challenging time for the industry, given the scarcity of capital and resources needed to bridge to commercialization. This is where AI has the advantage. Before we address our financial results, I would like to highlight that in December 2023, the company affected a reverse stock split and that all the financial information to be presented has been adjusted to account for the revised share count numbers. Now turning to our fourth quarter financial results. First and most importantly, I am pleased to report that we reduced our net cash burn by an additional $3.4 million to $9.4 million from the prior quarter's cash burn of $12.8 million. This is our third consecutive quarter of cash burn reductions. Fourth quarter revenues were $69,000 compared to $188,000 in the prior quarter. The reduction was expected as our team continues to focus their efforts on key automotive milestones under our Automotive First strategy. Quarter-over-quarter gross margins have decreased because of lower revenue as well as increased non-cash inventory write-downs of $2.2 million over the prior quarter, primarily due to the wind-down of our current industrial product line, as discussed on last quarter's earnings call. Fourth quarter gap operating expenses were $21.8 million, up 69% from the prior quarter, due primarily to cash restructuring charges of $1.9 million, resulting from this quarter's reduction in force and non-cash impairment charges of $9.9 million on our long-lived assets. The majority of these are related to the right of use assets and related leasehold improvements for our Dublin headquarters and our property and equipment. Non-GAAP operating expenses were $6.5 million down sequentially from $8.5 million last quarter due primarily to our continued cost reduction initiatives. We reported a fourth quarter GAAP net loss of $27.8 million versus a GAAP net loss of $17 million last quarter. The increase in GAAP net loss was mainly due to the impairment of long-lived assets, inventory write-downs, and associated reduction in force initiatives discussed previously. On a non-GAAP basis, our net loss was $6.9 million, or $1.10 per share, in the fourth quarter, compared to a non-GAAP net loss of $9.5 million, or $1.55 per share, in the prior quarter. The expense reductions we made in the third quarter and further realized in the fourth quarter have set us up for success in the future, which is why we beat our non-GAAP EPS guidance provided last quarter by 10 cents. Despite this, we did fall short of meeting our GAAP EPS guidance of $3 provided last quarter, due primarily to the impairment of long-lived assets discussed previously. We continue to manage our cash carefully and net cash used for operating activities decreased to $9.2 million in the fourth quarter from $11.2 million in the third quarter. We close the fourth quarter with $36.5 million of cash, cash equivalents and marketable securities and no debt. As an additional source of liquidity, we have access to our equity line of credit facility and our shelf registration statement, which allows us to raise up to $200 million over the next two and a half years. Now turning to our guidance for 2024. Thanks to our various cost reduction initiatives, we expect cash burn to be in the range of $20 to $25 million for the full year 2024. This puts us on track to a 75% reduction in our cash burn rate when compared to Q1 2023. I'm excited about the opportunities in front of us. In particular, the signed letter of intent with a global tier one automotive ADAS sensor supplier which opens a path to stay competitive on upcoming RFQ nominations. As Matt mentioned, we continue to bring innovative products to the market, such as Apollo, which not only delivers ultra long range performance, but we believe is also the most compact sensor available. I'm pleased with our continued financial discipline, including further reductions to fixed operating costs, which we expect will extend our cash runway well into 2025. We are bullish about the future and are well positioned to optimize the significant opportunity we see with our OEM partners. With that, I'll pass it back to Matt to wrap things up.
Matt
Since joining AI, I continue to be impressed with the technical depth and relentless commitment of our employees and remain confident that our technology and products provide meaningful differentiation for the automotive industry. Together, we were able to evolve AI from a research-focused company to a product-driven organization. While the road ahead will present its share of challenges, we approach the future with confidence and a commitment to driving our product entry into the automotive industry. We look forward to continuing to update you as we progress with our go-to-market efforts. I would like to thank the whole AI team and our board of directors for their continued support. With that, we'll open up the call for questions. Operator?
Operator
Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. We also ask that you wait for your name and your company to be announced before you proceed with your question. One moment while we compile the Q&A roster. Our first question will be coming from John Roy of Water Tower Research. Your line is open.
John Roy
Thank you. So, Matt, I was curious. You announced Foresight Plex back in November. It's been four months. Can you walk us through how you guys were able to turn that around into a product in just four months?
Matt
Hey, John, welcome back. Yeah, absolutely. I think really there's a couple of key points here. First and foremost, It's the power of our software-defined LIDAR architecture. When you're mostly focused on making software updates and changes, things go very quickly. And of course, we can't do that without an incredibly strong technical engineering product and operations teams. These guys have been outstanding and driving hard and committed since back then in November. So what we have at the end of the day is what we believe to be the most compact design now in this ultra long range performance category, which allows us to do things like seamlessly integrate into behind the windshield type designs, get the bump out of the roof, get a nice quiet and compact solution inside the cabin. And the performance delivered by our 1550 technology in this case is incredible.
John Roy
Interesting. So on a second element, I mean, obviously the tier one announcement is key for all of us here. Can you give us any more color around the announcement? Are they going to use Apollo? I mean, any kind of information would be helpful.
Matt
Absolutely. We'll hit the last part first. I think that our partners committed to entire product range. And the key thing here is what we've been doing is looking outside what I'll call this traditional monolithic, very large tier one space, and instead turning our attention to more focused tier one partners. And in this case, we really found great synergy with a partner that's focused on delivering ADAS solutions. And the other part of their charter is to leverage heavily into innovation and new technology to grow their business. There's actually, we're seeing quite a few guys out there like that now that are hungry and moving ahead. We're already working with this particular partner on inbound RFI and RFQs. So we're already jumped in and working together on that. I really hope to have a bit more information. So we expect to be sharing more information and details on that soon. The other thing I wanted to point out is that we do have multiple engagements in the space. Is this, I'll call it technology-driven, more focused in growing their business through technology and innovation. We have multiple of these engagements ongoing right now and hope to talk more about those also in the not-too-distant future.
John Roy
Great. Well, we'll be definitely listening for those. Thanks so much.
Operator
Thank you. One moment while we proceed with the next question. And our next question will be coming from Kevin Garrigan of West Point Capital. Your line is open.
Kevin Garrigan
Yeah. Hey, good afternoon, Matt and Connery. Congrats on the LOI. A two-part question. Have you structured the LOI with the Tier 1 similar to Continental where you're going to get royalties and you'll receive collateral if they decide to discontinue the program? And then for the second part, can you just explain a little bit the timeline so you know how that commitment with the Tier 1, you know, what tests need to be done at the Tier 1 facility, how long does that take, kind of things like that?
Matt
All right. A couple things here on that, just maybe we'll kind of take it in reverse order. But, you know, in sort of testing and integration, those type of tasks, we actually did a lot through our work with Continental. And they've been, even though the relationship has ended effectively, they've really been great at transitioning collateral and information over time. So this thing, this, you know, aspect of things takes a lot of the, you know, start from ground zero type of work over again. We're already jump in working very deeply together. We expect testing to happen very quickly. And again, we're using the work that we did with Continental as a baseline. So again, we expect that to happen very quickly here. I'm sorry, what was the first part of the question again?
Kevin Garrigan
It was just whether you, The first one was just whether you structured the LOI just similar to Continental where you're going to get royalties and receive collateral, which you pretty much answered. Yeah. And then you actually have the second.
Matt
Yeah, yeah, look, let me hit that real quick. Yeah, we expect to see a similar type of structure. I'll call it a revenue sharing based structure. It fits right into our capital light model. I wouldn't say we're heading for it to be exactly the same as Conti, but it'll be similar.
Kevin Garrigan
Okay, perfect, perfect. And then just as a follow-up, I'd love to get your thoughts on how you kind of see the LIDAR market playing out in 2024. I mean, I'm sure you've heard a few of your competitors think this is kind of the year of series production awards, which I know we heard the same thing last year and things keep getting pushed out. So just kind of wondering what your thoughts are on the LIDAR market series production agreements for 2024, whether you kind of think this might be the year where a lot get awarded.
Matt
Yeah, look, I want to be careful about the crystal ball here. As we all know, the market's been tricky. But the one thing that I can share with certainty is the activity that we're seeing in Q1. And I was coming at Office ES and into the new year, given all the delays that we had from last year, we're going, okay, is it going to be real quiet? Is it going to be noisy? And there's been quite a bit of activity. And I think that's one thing I can speak to definitively. I'm relieved to see through this activity that LIDAR is still very important and relevant when it comes to ADAS safety first and foremost, and then also autonomous driving, which we know has been sort of part of the underpinnings of some of the delays that we've seen. And I'm going to stay cautiously optimistic at this point based on the larger than expected RFI and RFQ activity we've already seen in Q1.
spk01
Hey, Kevin, just to add to that, I think the other thing to mention is just the progress we've made in general on the execution side. If you think about everything that we've delivered, and we alluded to this on the earnings call, if you think about the progress we've made on Apollo, the fact that we now have an LOI with a Tier 1, and we've all done that at a very cost-competitive cost structure. And I think we deserve some credit for that, the fact that we've been able to go out and execute, and we've done that while keeping our costs low.
Kevin Garrigan
Yeah, absolutely. That makes a ton of sense. Okay, great. That was all I had. Thanks, guys, and congrats again.
Operator
Thanks, Kevin. Thank you. At this time, there are no more questions in the queue. Thank you all for joining the call. This does conclude today's conference call. You all have a great evening.
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