Earnings Call Transcript - CYN Q4 2022

Ben Mimmack, Head of Investor Relations

Thank you, operator, and thank you to everyone on the call for joining us today. The press release announcing Cyngn's results for the fourth quarter and fiscal year ended December 31, 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 contains 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 with the Enterprise Autonomy Suite or EAS and its components; expectations regarding sales and/or 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 these 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 the 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 fourth quarter and fiscal year 2022. Lior will then return to make a few concluding remarks before opening the floor for questions. With that, I'll turn the call over to Lior.

Lior Tal, Chairman and CEO

Thanks, everyone, for joining us this afternoon. This earnings call is significant for Cyngn as we share our first quarterly revenue report since going public in October 2021. We are thrilled to move beyond the pre-revenue stage and mark another milestone in our journey. For those who may not be familiar with our company, I want to outline our mission and the investment opportunity we present. Cyngn aims to address global industry challenges, including the high cost of labor, labor shortages, and the expenses related to accidents caused by human error. Our proprietary software, the Enterprise Autonomy Suite, allows industrial organizations with vehicle fleets to shift their workforce to more valuable tasks while our self-driving solution, DriveMod, takes care of the driving. This enables companies to enhance safety, reduce variability, and achieve the productivity necessary to thrive in today's economy. We provide customers with the choice to retrofit their current industrial fleets using our DriveMod Kit or purchase new vehicles equipped with our integrated solution from OEM partners. Unlike many autonomous vehicle companies, we concentrate on automating industrial vehicles in non-public spaces, a rapidly growing market driven by the expansion of e-commerce. Our goal is to support customers in the industrial sector in automating their fleets, thereby increasing productivity, lowering operational costs, and enhancing safety. In 2022, we made noteworthy progress in launching the EAS to the market, achieving more than we anticipated. We will share a brief video highlighting our significant milestones and key events, showcasing our products in action. I hope the video generated excitement about our progress. Now, I'll provide further context on some of the accomplishments featured in the video. Earlier this year, we partnered with Columbia Vehicle Group to add Cyngn's autonomous driving capability to their stockchasers, a widely-used material handling vehicle. Customers can now choose to add autonomous functionality to their new vehicles or retrofit their existing fleets. This collaboration enables easier integration of autonomous vehicles into current operations. While we primarily develop self-driving software, we created the DriveMod Kit to allow companies to automate their existing fleets, enabling legacy vehicles to run our software. Our patent-pending DriveMod Kit is essential to our market strategy, offering scalable deployment for both new and existing vehicles. By providing an economical retrofit solution for older vehicles, our DriveMod Kit simplifies the transition to autonomy for firms that would otherwise face the challenge and cost of integrating new fleets. We continuously improve our software and leverage data from our fleets to enhance our artificial intelligence and support innovations in vehicle computing and sensing technologies. In July, we launched Version 8.0 of our Enterprise Autonomy Suite, which includes 138 new features and a 75% reduction in cloud computing expenses, with more improvements expected in 2023. In the third quarter, we broadened Cyngn's portfolio by adding an electric forklift as our second vehicle type through a multi-phase contract with a major building material manufacturer employing thousands of forklifts globally. Forklifts are the most common material handling vehicles worldwide, and we are eager to enable this customer to operate their forklift fleet autonomously, expanding our EAS offerings. In the fourth quarter, we secured our first commercial contract in November to deploy autonomous vehicles at a facility in Southern California. Last month, we also announced another multi-phase development contract to implement our AV technology for a third vehicle type in partnership with a major heavy machinery manufacturer for use in the mining sector. These three engagements span a wide range of industrial applications, demonstrating the versatility of our EAS and DriveMod solutions and allowing us to continue exploring opportunities to enhance our technology capabilities. Around the world, companies depend on vehicles to conduct business and serve customers. Typically, each of these vehicles requires one or more employees to operate. However, relying on human operators comes with substantial costs. The most urgent issue is a significant shortage of workers for these roles, which is projected to cost the U.S. manufacturing industry $1 trillion by 2030. Additionally, due to labor shortages and broader economic conditions, employment costs are rising. The Bureau of Labor and Statistics reported a 5.1% increase in civilian worker compensation costs for the year ending December 2022, following a previous 4% rise. This upward trend in wages and benefits is driving up vehicle operating costs year after year. Furthermore, industrial environments are inherently high-risk. Despite everyone's best efforts to minimize accidents, workplace incidents can have devastating effects on employees and can be extremely costly for companies. The estimated cost of preventable workplace accidents exceeded $170 billion in 2019. With rising interest in ESG factors, investors are increasingly focused on the measures companies take to protect their employees. This has led to a growing demand for autonomous solutions that enhance efficiency, enable employees to focus on higher-value tasks, and create safer working environments. The industrial sector is prime for early autonomous vehicle adoption due to slower decision-making processes, more defined environments, and the ability to develop consistent automated solutions despite weather variability. Workers are accustomed to working alongside vehicles, making them less vulnerable to unpredictable public interactions. These factors contribute to our belief that autonomous vehicle solutions should primarily begin in industrial settings. Cyngn's technology positions us well to leverage the fourth industrial revolution, offering large-scale adoption potential. Our initial work on public roads has resulted in a flexible and adaptable system that exceeds the autonomous requirements in industrial applications. The DriveMod Kit, produced by our contract manufacturer, enables companies to apply our technology across their entire existing fleet and any new vehicles acquired. Our advanced Cyngn Insight software allows companies to manage their vehicles through a unified system. We are excited about our current position and the opportunities ahead. In 2023, we will build on our commercial successes from 2022, expanding on our initial deployments and customer engagements. To support these endeavors, we recently appointed Chris Wright as our first Head of Sales. Chris has a strong background, having previously worked at Brain Corp, where he established partnerships with notable customers and OEM manufacturers to deploy thousands of automated robots, achieving over 100 billion square feet of autonomous coverage in 2021. Our second goal for the year is to meet development milestones for our forklift project, aiming for the mass release of the DriveMod Kit-enabled electric forklift following our fleet customer engagement. We have received positive feedback from customers so far, and we are enthusiastic about the potential for expansion into forklift automation. Lastly, we will continue to fulfill the requirements of our multi-stage development contract for heavy industrial vehicles. This project is in the early stages, but we seek to demonstrate the suitability of our technology for mining and heavy industrial environments this year, with plans for commercial availability next year.

Donald Alvarez, CFO

Thanks, Lior. I'll now take you through a brief summary of our financials. But first, because we've had several questions about it over the past few days, I'd like to confirm that Cyngn's banking relationship is with Bank of America. Now with that out of the way, I'll turn to the financials. As Lior mentioned in his remarks, I'm very pleased to report that during the first quarter ended December 31, 2022, we reported our first revenue as a public company as we booked $262,000 in revenue, $250,000 of this amount was related to the completion of the first phase of one of two multiphase nonrecurring engineering development contracts signed in 2022. These NRE contracts with commercial partners will bring new vehicle types to the market and have a total contract value of $1.6 million. Total operating expenses for the fourth quarter were $5.8 million compared to $3.6 million in the same period of 2021. The increase was due in part to higher general and administrative expenses, stemming from company expansion and increased costs related to the requirements of operating as a public company. Research and development expenses were also higher in the fourth quarter of 2022 compared to the fourth quarter of 2021 as we incurred additional expenses related to the continued hiring of high-quality engineers, and other expenses related to managing a larger team. For the full year 2022, total operating expenses were $19.5 million compared to $9.4 million for 2021. The increase was due in part to a $4.5 million increase in research and development expenses related to the increase in engineering personnel mentioned above. We expect to continue to increase the size of our R&D team, and therefore, we expect these expenses to be higher year-over-year during 2023. General and administrative expenses were higher by $5.6 million in 2022 compared to the prior year due to the company expansion and additional compliance costs mentioned earlier as well as an increase in noncash stock-based compensation expense and additional costs related to the renewal of a lease that included the expansion of our facility. Fourth quarter net loss was $5.5 million or $0.16 per basic and diluted share compared to $2.1 million or $0.10 per basic and diluted share in the fourth quarter of 2021. On a full year basis, net loss was $19.2 million or $0.62 per share compared to a net loss of $7.8 million or $1.33 per basic and diluted share in 2021. Turning to the balance sheet. We ended the year with unrestricted cash and short-term investments totaling approximately $22.6 million, an increase from 2021 year-end cash balance of $21.9 million due to the private placement offering we completed in April of last year. Working capital at year-end was $22.4 million, up slightly from $22.1 million at the end of 2021. And 2022 year-end stockholders' equity was $24.1 million compared to $22.3 million at the end of 2021. Additional detail on these numbers can be found in our earnings press release that was issued earlier today and the 10-K that we anticipate filing with the SEC later this week.

Lior Tal, Chairman and CEO

2022 was a transformational year for Cyngn and all of us who work here. We made amazing progress on our mission to bring autonomous vehicles to use across the industrial space and met or exceeded all the milestones we set for ourselves at the end of 2021, and we're not slowing down. During 2023, we'll work tirelessly to introduce our stockchasers in as many locations as possible while also bringing to market our autonomous forklift solution and developing our heavy industrial products. I look forward to keeping you updated on all of these projects throughout the year. Now I'd like to open the call up for analyst questions.

Theodore O'Neill, Analyst

So you guys have multiple paths to commercialization for the DriveMod stack. You've got the stockchaser, the forklift, the mining equipment and it can come as a retrofit or OEM product. I was wondering, is it too early to tell us which one looks more promising for 2023 or 2024? And a follow-up to that is, are you discovering any interesting pricing information as you explore these multiple paths?

Lior Tal, Chairman and CEO

Hi, Theo. This is Lior. So they might look like different paths, but what our product really is EAS, it's the software, right? It's the software that allows us to automate these vehicles and replace the human on the vehicle. It's the management tools that allow the customer to observe the fleet and manage it and even take over the fleet. These different applications, whether it's inside the warehouse on a stockchaser or out in the mine or to support construction material, logistics or different implementation of the software in different vehicles through our partnership with these OEMs. If you have followed the milestones that we've been releasing throughout the year, you will see that the stockchasers, and the focus on logistics and manufacturing is the most advanced in its readiness for commercialization. This is where Chris Wright, our new Head of Sales, is going to focus most of these efforts in really taking that one across the line to customers with our ability to manufacture and integrate, like you said, either new vehicles off the line using our contract manufacturer. The other two initiatives that you announced, both in the mining and the heavy industry are in the research and development phase. They're both paid projects that over time will evolve into the same stage the stockchasers are today, which will allow us to then commercialize them. So one of the things that we talked about earlier is that with the market conditions, we accelerated some initiatives that otherwise we would have been planning to do in '24 and '25 and pulled them forward. And that's what created these three threads, but their timelines are slightly different. The stockchasers are in sales mode at the moment and the other two are in development and are probably going to become available next year.

Ben Landen, Executive Team Member

Yes, we have announced our first commercial win with U.S. Continental. This is a significant validation of the pricing we established based on the data shared during our IPO and the market opportunity related to the cost of human labor for operating these vehicles. The initial conversion is promising, and we anticipate further validation from ongoing customers that Chris Wright and the sales team are working with to continue deploying the commercially available stockchaser solution.

Rommel Dionisio, Analyst

I just wanted to follow up on something you had said earlier; you delved a little into the opportunity in mining and materials handling sector. Obviously, a lot of that industry occurs overseas. So I just wondered, do you feel that could be a significant opportunity for you to expand internationally? And how do you guys think about preparing or building an international sales force to be able to address those opportunities, specifically in the mining and materials handling sector?

Lior Tal, Chairman and CEO

Hi, Rommel, thank you for joining us today. Being a software company and working in collaboration with OEMs is really what allows us to take advantage of the fact that they have the footprint close to their customers, they have the relations and they have the entire support system for having our technology installed on their vehicles and whatever is installed on top of them where we can remain a smaller, more leveraged company as a software company. The other important component is our focus on the industrial applications and our insistence on staying away from public roads means that the regulatory space is much more accommodating and the implications of working cross-border is less of a consideration for us. So the combination of these two working with the OEMs, having the global presence and our ability to remain in private spaces really allows us to expand globally through these relationships and throughout their own deployment. We're less impacted than anything on the road, anything automotive, be it robotaxi or truck that has to go through the local regulations or meet equivalent standards and through the complicated regulatory hurdles.

Ben Landen, Executive Team Member

Sure. This is Ben, Rommel. Yes, we are consistent in terms of the EAS offering that we have been touting since the IPO to Lior's point earlier, we really see EAS as that umbrella that captures all of the value that we bring to customers ranging from vehicles that drive themselves to various assets throughout their business that give them additional data insight, let them see more about the work that they're doing, learn more, automate that and provide the types of value propositions that would be expected from this data revolution and automation. So we see Infinitracker as a natural fit into that much more than as its own standalone product. It's an opportunity to cross-sell when the vehicles are working alongside assets that need to be tracked. We expect to maintain consistent efforts to have its overlap and really Infinitracker is an additional peripheral opportunity to create value for customers that dovetails with EAS.

Darin Tuttle, Analyst

Congrats on a great quarter, everyone. I have a question regarding the non-recurring engineering contract revenues forecasted to be around $1.6 million. Is that related to pilot vehicles, or does it encompass a full fleet of vehicles for some of your latest partners?

Ben Landen, Executive Team Member

The reason that we are categorizing that as NRE is that those contracts, specifically the work that is under contract is engineering development work. It is a precursor, as Lior described, to bringing vehicles to a commercial-ready state so that they can be offered as a general release on the EAS platform. What we're really seeing come to fruition is what I would say is the flywheel between R&D and deployment and sales, which is to find lead customers that can help be sponsor customers to justify the work that we do for a new opportunity. Oftentimes, that opportunity is driven by the type of vehicle that's needed to do certain types of work. Through landing that validation customer, generating revenues along the way, we share that cost burden and validate what one of our leading customers would be so that when we reach that commercial release, we transition from NRE, from engineering development into a saleable commercially ready solution as we have done to this point with the stock chaser. What you're seeing play out is the first steps in what we expect to largely be a repeatable process. That generates revenues while we prepare other vehicles for commercial readiness to be offered on EAS.

Darin Tuttle, Analyst

Okay. I got you. And then in terms of the mining contract, so for that one, is that specific location? Is that indoor or outdoor? Or will that be like multi-use for a vehicle that is working in that mining sector? Just trying to determine the scope of the potential for the specific use case of those vehicles?

Ben Landen, Executive Team Member

Sure. I'm somewhat constrained in the amount of information that I am allowed to share here. But I can say that this first application is targeting outdoor, primarily open-pit type of mining applications. That's about as much as I can share at this stage.

Darin Tuttle, Analyst

Got it. Okay. And then just last question for me. Any guidance or expectation on cash to end the first quarter here of 2023? Any guidance on existing cash balances. I know that that banking relationship with Bank of America, but any guidance on cash left over at the end of this quarter?

Donald Alvarez, CFO

Yes, it's great to have you on the call, Darin. By the end of the year, we had $22.6 million. Without going into specifics for each quarter, we feel confident that this amount is sufficient for the year. You can estimate what the quarterly figures would be based on that. Our cash burn rate in the first quarter is not expected to be significantly different from that of the fourth quarter.

Brian Dobson, Analyst

Congratulations on the contract with U.S. Continental. I suppose, as you're spreading that news around, what's the feedback been like from potential customers that you're speaking with? And would you expect similar announcements later this year?

Ben Landen, Executive Team Member

We have definitely gotten positive responses. Of course, you have a whole swath in the adoption curve of customers ranging from your early adopters who are excited about being the first to use technology like our friends at USC, to those who are slightly more risk-averse and want to see that a brand they know or somebody in their domain is using it before they want to be a second mover, and all the way into people who are going to be late to adopt. So we're now making our way through that adoption curve. We're finding our early adopters. We've knocked over that first domino, per se, with USC, and we are seeing that absolutely have a positive impact from the feedback that we're getting, from the request to come on-site and see demos, and we're setting up hopefully more exciting opportunities to enable customers, certainly all over the United States, potential customers to have streamlined and easier opportunities to come see the vehicles at work at various facilities. Yes, what our focus for sales for the commercially available stockchaser is to hopefully be sharing additional success stories along the lines of USC with you throughout this year.

Brian Dobson, Analyst

Yes. Great color. So there's been discussion in the industry about the use of vehicle automation to replace or supplement conveyor belt technology. I guess as you're thinking about the coming years, do you see this as a key area of opportunity for Cyngn?

Lior Tal, Chairman and CEO

One of the advantages of implementing stockchasers on a manufacturing line or large logistics facility is the flexibility and configurability they provide, which is challenging with a conveyor system. Throughout the day, workflows can change, and during peak times, it's necessary to adjust the workflow in a way that’s difficult with a large conveyor that is fixed in place. We believe that autonomy in these large industrial environments offers significant flexibility, enabling adaptation to the constantly evolving needs of facilities without requiring additional investment.

Ben Landen, Executive Team Member

To provide some additional context, this isn't necessarily an either/or situation, which I believe relates to your question. We have engaged in several discussions with customers operating large facilities that use extensive conveyor systems. A key application for a vehicle like a stockchaser is to assist in optimizing the conveyor belt repair process by transporting parts and maintenance personnel to the areas needing attention. As you can imagine, this operation is often time-sensitive. Utilizing autonomous vehicles can significantly reduce downtime. We are also identifying additional opportunities arising from these solutions.

Operator, Operator

There are no further questions at this time. And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.