Cyngn Inc. Q3 FY2022 Earnings Call

Greetings, and welcome to the Cyngn Third Quarter 2022 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carolyne Sohn, Investor Relations for Cyngn. Thank you, Carolyne. You may begin.

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing Cyngn's results for the third quarter and 9 months ended September 30, 2022, is available at the Investors section of the company's website at investors.cyngn.com. A replay of this broadcast will also be made available on the website after the conclusion of this call. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contain certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook and will and include, among other things, statements regarding the company's continued development of the Enterprise Autonomy Suite or EAS and its components, expectations regarding sales and our revenues, growth strategy, ability to deliver sustainable long-term value, ability to respond to the changing environment and operational focus. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in Cyngn is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. On today's call, the company's Chairman and CEO, Lior Tal, will discuss recent operating highlights. Chief Financial Officer, Don Alvarez, will follow with a review of the company's financials for the third quarter and first 9 months of 2022. Lior will return to make a few concluding remarks before opening the floor for questions. With that, I will turn the floor over to Lior. Please go ahead.

Thank you, Carolyne. Good afternoon, everyone. Toward the end of the third quarter ending November, we announced several major developments that brought us further ahead of our go-to-market timeline since becoming a public company and closer to scale commercialization of our software offering. The first key development was the signing of a multiphase contract with a significant new customer that has chosen Cyngn as its technology partner to apply DriveMod to electric forklifts. The electric forklift will be the customer's first autonomous vehicle as it embarks on its electrification and automation strategy. This partnership marks Cyngn's expansion of DriveMod to its second vehicle platform that is geared towards commercialization. We're excited to have the opportunity to work with this customer, a multimillion dollar global manufacturer, producing a variety of building materials used in commercial and residential properties. We work closely with the customer's team to understand their operations, which will allow us to apply our Enterprise Autonomy Suite to create differentiated value propositions for their business. The second major development was our contracting with a U.S.-based manufacturer that will allow us to scale the production of DriveMod Kits more quickly for autonomous stockchasers, putting the kits in the hands of customers at a lower cost. This represents a significant opportunity for Cyngn as we look to leverage DriveMod Kit's ease of installation and scale deployment for a larger base of customers and vehicle fits. The ability to retrofit vehicles and operate heterogeneous fleets continues to be a key differentiator of Cyngn versus other companies, and we look forward to additional future opportunities to prove our unique AV technology value proposition to customers. In October, we announced a contract with HEVI, a manufacturer of electric industrial vehicles under Greenland Holding Corporation, whereby Cyngn will be the exclusive supplier of vehicle tracking systems to HEVI. Our asset tracking device, Infinitracker, will be installed on each purchased heavy vehicle as a value-added feature to their customers. We are pleased to be recognized by this industry incumbent for the value brought by key features offered by Infinitracker, such as location tracking using cell tower triangulation and extended battery life. This contract serves as a validation of the value of Infinitracker and location data for the Cyngn EAS offer. Through focus on efficient execution and despite the difficult macroeconomic circumstances, we surpassed some of the major milestones for 2022 that we had set forth for Cyngn a year ago when we went public. Our original goal for this year, communicated to investors during the IPO, was to deploy EAS at a single customer site with one vehicle type. We have executed multiple deployments at multiple sites and begun expanding DriveMod to our second vehicle type. In addition, we have made significant progress in recruiting and are close to having the team we need to get us to commercialization at scale. That being said, we do expect to make a few key personnel hires in the coming months. From an operational perspective, we recently completed the expansion of our Menlo Park headquarters, which includes an autonomous vehicle development and test facility. We're excited by our achievements this year and look forward to closing out 2022 on a strong note. With that, I'll turn it over to Don to review our financial results.

Thanks, Lior. I'll quickly go over the financial highlights for the third quarter and 9 months ended September 30, 2022, covering both R&D and G&A expenses, which make up our total operating expenses. Additional details can be found in our financial press release that was issued earlier today as well as in the Form 10-Q, which we anticipate filing with the SEC this week. Total operating expenses for the third quarter ended September 30, 2022, were $5.3 million compared to $2.1 million in the same quarter of the prior year. The increase was primarily due to a $1.6 million increase in R&D expenses related to noncash stock-based compensation, costs incurred for additional engineering staff and contractors, allocated occupancy costs, and R&D-related travel costs. We expect these costs to continue to increase as we continue to invest in building our engineering team to further our R&D efforts. G&A expense also increased by $1.6 million, which was largely related to increased noncash stock-based compensation, expenses incurred for additional personnel and professional services to support our status as a public company. We reported a net loss of $5.3 million for the third quarter of 2022 compared to a net loss of $2.1 million in the prior year quarter as a result of the increased total expenditures. Net loss per share on a basic and diluted basis was $0.16 based on approximately 33.6 million weighted average shares outstanding for the quarter ended September 30, 2022. This compares to a net loss per share on a basic and diluted basis of $2.17 based on approximately 1 million weighted average shares outstanding in the prior year quarter. For the 9 months ended September 30, 2022, total operating expenses were $13.7 million compared to $5.8 million in the prior year period. This was due to a $3.7 million increase in R&D expense and a $4.2 million increase in G&A expense. Net loss was $13.7 million for the 9 months ended September 30, 2022, compared to a net loss of $5.7 million in the prior year period. Net loss per share on a basic and diluted basis was $0.45, based on approximately 30.4 million weighted average shares outstanding compared to net loss per share on a basic and diluted basis of $5.94 based on approximately 1 million weighted average shares outstanding in the prior year period. Turning to the balance sheet, we had $27.7 million in cash and short-term investments at September 30, 2022, which compares to $22 million at the end of 2021. Our working capital was $27.3 million compared to $22.1 million at the end of 2021, and total stockholders' equity was $28.8 million compared to $22.2 million at December 31, 2021.

Thank you, Don. It has been a very exciting year for Cyngn so far. We're in a unique position in the industrial autonomy space and are working hard to be the first company to reach scale commercialization with our AV technology. The recent developments we announced are setting the stage for an eventful 2023 and beyond. We look forward to continuing to work closely with our partners and customers, expanding and leveraging these relationships to get us recurring revenue streams via Software-as-a-Service, robotics-as-a-service model and commercialization at scale. With that, operator, let's open it up for questions and answers.

Our first question is from Theodore O'Neill with Litchfield Research.

I was wondering, in your prepared remarks here at the beginning, you cited 3 important recent developments in terms of the electric forklift market and scaling production of the DriveMod and the contract with HEVI. And I was wondering if you could give us any milestones that we could look forward to related to these contracts either in the phases they're going through or what other monetary aspects of it or production aspects that we might expect to see over the next 12 months.

This is Lior. The three topics are distinct. Regarding EAS DriveMod and its application with Columbia Stockchasers, our focus has been on effectively bringing the technology to customers with the help of our partners, ensuring support throughout the deployment process. We accelerated our timeline and added several features to our initial plan to explore how these stockchasers can be used in different applications. We have deployed them in a 3PL facility as well as in manufacturing sites. The upcoming steps involve examining larger deployments and transitioning some of these to commercial contracts after the initial pilot phase. Concerning the HEVI, it marks the first distribution of Infinitracker via a partner channel. HEVI vehicles will be delivered from the factory with the Infinitracker included. Initially, there will be a few dozen trackers, and this will increase over time as HEVI begins offering these services to their customers. We are also developing additional sales channels and working on direct B2B sales for the company. Is there anything else related to your question?

What about the forklift side?

Yes. Okay. It's a good question. So the electric forklift is something that's really ahead of its time in the sense that our plan was really to move forward with the stockchasers and get them to commercial deployment before taking on a second vehicle. However, the specific company presents a very interesting opportunity for us. This project is more of a non-recurring engineering project. It is a bring-up of a new vehicle that's specifically needed for their purposes. Once we've successfully completed the R&D and pilot phase, improve the applicability of DriveMod and EAS over forklift to the operation, then we will discuss continued commercial engagement. So at the moment, we're going to keep the disclosure to what was already published. Once we start clearing more of these milestones, we'll go back and update on the status of that project.

Okay. And I was under the impression on the Q2 call that there had been a large increase in R&D employees, and I sort of expected that number to grow significantly in the operating expense from Q2 to Q3, which it didn't really change very much. Is there any expectation that this number is going to grow significantly before the end of the year, the R&D expense?

Theo, this is Don. The thing is that our R&D expenses will continue to increase, but they will not increase as dramatically as they did between Q1 and Q2. But we definitely anticipate that they are going up. I think that we had a couple of specific positions that are fairly high-paying that we had planned for Q3 that did not materialize and will probably split into Q4, maybe even Q1, and that might be a good thing actually, given the market.

Our next question is from Rommel Dionisio with Aegis Capital.

Sort of a question on labor R&D, which Don, you just touched on. Obviously, we're seeing pretty big headlines about significant layoffs in the tech sector. Is that providing any sort of ease to the labor cost pressure that you've seen here in that market for the last couple of years? Or is it maybe too early to tell that just yet?

So it definitely creates a flood of candidates that are relevant to us, especially companies that have people that are experienced in developing AI and those who have worked on robotics and self-driving. However, it's going to probably take a quarter or two until there's really going to be a change in compensation and compensation structure. Immediately, what we're already seeing is a bigger pool of candidates and a much easier ability to be selective and hire the right people we need. So we're already starting to see the benefits of that, but I think the real impact is going to take some time. As Don said, we're aware of the environment. We're trying to be conservative as much as we can and not in a position like other companies where we will need to consider layoffs later. We would prefer to slow down recruiting and focus on bringing in critical roles, and then grow the function of commercial traction as we start seeing customers come in and revenues grow.

Okay. And maybe just a follow-up if I could. I think you touched on this in the comments, Lior, but you've obviously had some very strong initial success signs, some pretty meaningful customers right off the bat, maybe with the initial product here. I wonder if you could just talk a little bit more about the opportunity of bringing them into your ecosystem, bringing them with one product line with this DriveMod and the forklift. But obviously, that's a $5 billion company. I mean, obviously, there's significant opportunities just with that one client alone and with others. I wonder if you could just talk about the evolution of getting onto the customer but also just building with them over time once they're in your ecosystem.

Okay. Let me hand this over to Ben, who can answer that.

Rommel, yes, that's a great question. There's only so much that I can disclose given the early stages. But what you're alluding to is exactly what we have preached about the vehicle-agnostic approach that we have. So we alluded to electric forklifts being the first and most prominent of vehicles that this customer wants to automate and electrify in their new rollout of an automated and electric vehicle strategy. It is representative, though, of what we have been preaching, which is that electric forklifts are not the only vehicles in their fleet. We see it as a first opportunity for meaningful success out of the gates with the most impactful vehicle in the electric forklift. Part of the reason for our selection and what we see as the long-term vision that grows this from being a customer for a vehicle is that we really do see it growing into a larger rollout across other vehicle form factors within their global fleet, which is a substantial vehicle fleet growing with that customer and bringing to fruition the sensibility that we have been touting about the way that we've built the technology, which is that automating that second vehicle, that third vehicle becomes a de facto solution with Cyngn as opposed to with a different automation supplier. It is really that first meaningful step in what we see being, as long as we continue to be successful, a larger rollout into multiple vehicles with a very meaningful customer.

Following up on that, to what extent does successfully achieving that create a barrier to entry with that customer and potentially others?

Do you mean for our competitors?

The competitors, obviously. Right, right, exactly. Yes.

That is our expectation that once we understand the customer's operation and we've done a first vehicle for them, our marginal costs for rolling out additional vehicles beyond that reduce, whereas any new competitor that would come and try to bid to automate those types of vehicles would incur marginal costs that are higher that we already incurred and are in the process of reducing. We're witnessing firsthand that this strategy, which we have been pitching about the ability to automate different types of vehicle form factors by being more software-centric, by being a more software-defined vehicle and vehicle agnostic is really coming to fruition and getting us the most difficult selection of winning that first vehicle and winning the next one becomes iteratively easier and easier for us. On the flip side, trying to capture those becomes more and more difficult for our competitors.

Our next question is from an indistinct source.

First of all, congratulations on a successful quarter. I'm really happy to see you following through on your plan. The question that I have is in regards to Infinitracker. So right now, it seems like you're doing in-house sales and you have partnerships with HEVI, etc. Have you thought about reaching out to perhaps some MVNOs or maybe primary service providers or, in general, other sorts of providers who already have their own sales teams? I'm sort of asking, like, could you outsource all that sales and maybe accelerate that revenue generation? And then maybe just to broaden the question to the SaaS space and what you're doing with RaaS and SaaS, maybe that as well, like do a lot of SaaS companies, the first $1 million, $2 million, $5 million is very difficult. So maybe just to jump-start that revenue growth, I think you got my question.

Yes. The simple answer is yes. We are doing a combination of traditional B2B sales, if you will, that is in-house, but we are also looking for leveraged opportunities, whether it be through different distribution channels, value-add resellers that allow us to lean on other sales teams and channels that go beyond our own organic efforts and spending to grow the reach of Infinitracker. Infinitracker very much does target onboarding and familiarization with our tools and by extension an earlier introduction of revenues than the EAS product, which is a larger ticket price, but with a longer sales cycle. Infinitracker certainly does try to create a springboard in that regard, both from a revenue and customer engagement and onboarding perspective.

I appreciate that. Maybe I should just ask if you have actually reached out to service providers that focus on industrial applications both in the U.S. and internationally. Since you have a 15-year battery life, I believe you compete very well against your competitors. What about contacting them directly?

Yes. Again, the simple answer is yes. We do see the telecom providers as one of the most meaningful partner opportunities for Infinitracker. And it's one that certainly is in our consideration.

There are no further questions at this time. I would like to turn the floor back over to Lior Tal for closing comments.

Thank you for your time today. We're always looking at conversation with investors and welcome you to visit us in our newly-renovated office in Silicon Valley where you can witness our vehicle technology and meet the team. Please feel free to reach out to us with any additional questions. Thank you all very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.