908 DEVICES INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC ("2020 Form 10-K"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in "Item 1.A. Risk Factors" section of our 2020 Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We have developed an innovative suite of purpose-built handheld and desktop mass spectrometry, or Mass Spec, devices for the point-of-need. Leveraging our proprietary platform technology, we make the extraordinary analytical power of Mass Spec available in devices that are significantly smaller and more accessible than conventional laboratory instruments. Our Mass Spec devices are used at the point-of-need to interrogate unknown and invisible materials and provide quick, actionable answers to directly address some of the most critical problems in life sciences research, bioprocessing, industrial biotech, forensics and adjacent markets. We create simplified measurement devices that our customers can use as accurate tools where and when their work needs to be done, rather than overly complex and centralized analytical instrumentation. We believe the insights and answers our devices provide will accelerate workflows, reduce costs, and offer transformational opportunities for our end users. Front-line workers rely upon our handheld devices to combat the opioid crisis and detect counterfeit pharmaceuticals and illicit materials in the air or on surfaces at levels 1,000 times below their lethal dose. Our desktop devices are accelerating development and production of biotherapeutics by identifying and quantifying extracellular species in bioprocessing critical to cell health and productivity. They sit alongside bioreactors and fermenters producing drug candidates, functional proteins, cell and gene therapies, and synthetic biology derived products. We believe the insights and answers our devices provide accelerate workflows, reduce costs, and offer transformational opportunities for our end users. The term "products" as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" refers to the MX908, Rebel and ZipChip Interface. Since inception, we have focused substantially all our resources on designing, developing and building our proprietary Mass Spec platform and associated technologies, supporting software improvements and data analysis, organizing and staffing our company, planning our business, raising capital, and providing general and administrative support for these operations. To date, we have funded our operations primarily with proceeds from sales of preferred stock and borrowings under loan agreements and, most recently, with proceeds from our initial public offering, or IPO. OnDecember 22, 2020 , we completed our IPO, pursuant to which we issued and sold 7,475,000 shares of common stock, inclusive of 975,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares. We received net proceeds of$136.6 million after deducting underwriting discounts and commissions and other offering costs. Since our inception, we have incurred significant operating losses. Our ability to generate revenue sufficient to achieve profitability will depend on the successful further development and commercialization of our products. We generated revenue of$26.4 million and incurred net losses of$18.7 million for the nine months endedSeptember 30, 2021 . We generated revenue of$26.9 million and incurred net losses of$12.8 million for the year endedDecember 31, 2020 . As ofSeptember 30, 2021 , we had an accumulated deficit of$97.2 million . We expect to continue to incur net losses as we focus on growing commercial sales of our products in boththe United States and international markets, including growing our sales teams, scaling our manufacturing operations, continuing research and development efforts to develop new products and further enhance our existing products. Further, we expect to incur additional costs associated with operating as a public company. As a result, we will need substantial additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research and development expenses. 20
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Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Until such time, if ever, as we can generate substantial revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings, debt financings and strategic alliances. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations. We believe that our existing cash and cash equivalents, will enable us to fund our operating expenses, capital expenditure requirements and debt service payments into 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "Liquidity and Capital Resources."
COVID-19
InDecember 2019 , a novel strain of coronavirus, or COVID-19, emerged inWuhan ,Hubei Province ,China . Less than four months later, inMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic, and the virus has now spread to many other countries and regions and every state withinthe United States , includingMassachusetts , where our primary offices and manufacturing facility are located. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. In 2020, we had impacts to our business as a result of COVID-19 including disruptions to our manufacturing operations and supply chain caused by facility closures, reductions in operating hours, staggered shifts and other social distancing efforts, decreased productivity and unavailability of materials or components, limitations on our employees' and customers' ability to travel, and delays in product installations, trainings or shipments to and from affected countries and withinthe United States . In 2021, we are seeing an increase in desktop customer activity in the lab and customers enabling on site installations and trainings. However, we are continuing to experience extended lead times on our supply chain and limitations on travel, among other disruptions we experienced in 2020. We do not yet know the net impact that the COVID-19 pandemic may have on our business and cannot guarantee that it will not be materially negative. For example, in the nine months endedSeptember 30, 2021 , we recorded an increase to our allowance for doubtful accounts of$1.7 million for a customer in theMiddle East where due to the credit and economic conditions, including the impact of COVID-19, we determined that it is probable that collection will not occur. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, the ongoing effects of the COVID-19 pandemic and/or the precautionary measures that we have adopted may create operational and other challenges, any of which could harm our business and results of operations. While we maintain an inventory of finished products and raw materials used in our products, a prolonged pandemic could lead to shortages in the raw materials necessary to manufacture our products. If we experience a prolonged disruption in our manufacturing, supply chains or commercial operations, or if demand for our products or our customers' ability to make payments is significantly reduced as a result of the COVID-19 pandemic, we would expect to experience a material adverse impact on our business, financial condition, results of operations and prospects. Historically, a significant portion of our field sales, customer training events and other application services have been conducted in person, and the rollout of our new products has historically been supported by our participation at industry conferences. Currently, as a result of the work and travel restrictions related to the COVID-19 pandemic, and the precautionary measures that we have adopted, a significant portion of our field sales and professional services activities continue to be conducted remotely, which has resulted in a decrease in our travel expenditures. However, we have recently permitted certain of our employees to travel to our customers and industry conferences where permitted by local authorities, and expect that our travel expenditures will also begin to increase. Any prolonged restrictive measures put in place in order to control the spread of COVID-19, including new variants, or other adverse public health developments in any of our targeted markets may have a material and adverse effect on our business operations and results of operations. We do not yet know the extent of the negative impact of such restrictions and precautionary measures, including the lifting of our travel restrictions in limited circumstances, on our ability to attract new customers or retain and expand our relationships with existing customers over the near and long term. 21
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Factors Affecting Our Performance
We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and improve our results of operations. Our ability to successfully address the factors below is subject to various risks and uncertainties.
Device sales
Our financial performance has largely been driven by, and in the future will continue to be impacted by, the rate of sales of our handheld and desktop devices. Management focuses on device sales as an indicator of current business success and a leading indicator of likely future recurring revenue from consumables and services. We expect our device sales to continue to grow as we increase penetration in our existing markets and expand into, or offer new features and solutions that appeal to, new markets. We plan to grow our device sales in the coming years through multiple strategies including expanding our sales efforts domestically and globally and continuing to enhance the underlying technology and applications for life sciences research related to our Rebel and ZipChip Interface. We regularly solicit feedback from our customers and focus our research and development efforts on enhancing our devices and enabling our customers to use additional applications that address their needs, which we believe in turn helps to drive additional sales of our devices and consumables. Our sales process varies considerably depending upon the type of customer to whom we are selling. Historically, our handheld devices have been used by state, federal and foreign governments and governmental agencies. Our sales process with government customers is often long and involves multiple levels of approvals, testing and, in some cases, trials. Device orders from a government customer are typically large orders and can be impacted by the timing of their capital budgets. As a result, the revenue for our handheld devices can vary significantly from period-to-period and has been and may continue to be concentrated in a small number of customers in any given period. Our desktop devices are typically used by the pharmaceutical, biotechnology and academia markets. Our sales cycles within these markets tend to vary based on the size of the customer and the number of devices they purchase. Our shortest sales cycles are typically for small laboratories and individual researchers where, in some cases, we receive purchase orders from these customers within three months. Our sales process with other institutions can be longer with most customers submitting purchase orders within six to twelve months. Given the variability of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our desktop device sales on a period-to-period basis. Additionally, we have experienced and may continue to experience the impact of laboratory shutdowns related to COVID-19 on device and consumable sales to these markets.
Recurring revenue
We regularly assess trends relating to recurring revenue which includes consumables and services based on our product offerings, our customer base and our understanding of how our customers use our products. Consumables and service revenue was 18% and 16% of total product and service revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Consumables and service revenue was 21% and 11% of total product and service revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Our recurring revenue as a percentage of total product and service revenue will vary based upon new device placements in the period. As our device installed base expands, recurring revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our revenue. Revenue from the sales of consumables will vary by type of device. We expect that consumables and service revenue as a percentage of the original device price to be higher for our desktop devices (Rebel and ZipChip Interface) than for our handheld device (MX908). While we sell single-use swab samplers for MX908 to be used in liquid and solid materials analysis, there are a number of other applications that the MX908 can be used for that do not require consumables. Rebel and ZipChip Interface require consumables kits for all areas of operations. Currently, Rebel customers,who are actively utilizing the device, are consuming on average one 200-sample kit per month; however, Rebel is a new product and purchasing patterns related to our consumables kits are evolving. We expect that the number of kits sold per month will vary over the short term. In time, we expect Rebel consumables kits sales to become more consistent as our installed base grows and our customers establish usage patterns. At maximum potential capacity, with continuous operation, the Rebel can consume approximately one 200-sample kit per day. 22
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Revenue mix and gross margin
Our revenue is derived from sales of our devices, consumables and services. There will be fluctuations in mix between devices and consumables from period-to-period. Over time, as our device installed base grows and we see adoption of Rebel, we expect consumables revenue to constitute a larger percentage of product and service revenue. However, the percentage will be subject to fluctuation based upon our handheld sales in a period. In addition, our selling price and, consequently, our margins, are higher for those devices and consumables that we sell directly to customers as compared to those that we sell through distributors. While we expect the mix of direct sales as compared to sales through distributors to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies. Future device and consumable selling prices and gross margins may fluctuate due to a variety of factors, including the introduction by others of competing products and solutions. We aim to mitigate downward pressure on our average selling prices by increasing the value proposition offered by our devices and consumables, primarily by expanding the applications for our devices and increasing the quantity and quality of data that can be obtained using our consumables.
Product adoption
We monitor our customers' stage of adoption of our products to provide insight into the timing of future potential sales and to help us formulate financial projections. Typical stages of adoption include testing, trials, pilot and deployment as follows:
Testing-a customer is actively engaged with internal or external testing of our
? products. This may include an onsite or virtual demonstration with a
salesperson, a customer submitting samples for testing in one of our facilities
or testing by a third party.
Trials-a customer has committed to a trial of one of our products, which may
? include a defined period to assess functionality of the device in their
operational environment (in the field or onsite within the customer's
facility).
Pilot-a customer commits to the purchase of an initial quantity of devices to
? deploy in their operational environment to assess a broader opportunity that
may grow to tens or hundreds of devices.
Deployment-a customer has completed testing, a trial, and/or a pilot and
? intends to roll out the technology across their enterprise (either at a site or
throughout the entire organization).
Key Business Metrics
We regularly review the number of product placements and cumulative product placements as key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions. We believe that these metrics are representative of our current business; however, we anticipate these will change or may be substituted for additional or different metrics as our business grows.
During the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Product Placements:
MX908 164 71 301 280
Rebel 13 7 34 18
ZipChip Interface 7 7 18 21
Total placements 184 85 353 319
The number of product placements vary considerably from period-to-period due to
the type and size of our customers and concentrations among larger government
customers as described above. We also have been impacted by laboratory shutdowns
related to COVID-19, especially with our ZipChip Interface device. We expect
continued fluctuations in our period-to-period number of product placements.
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Our cumulative product placements consist of the following number of devices:
As of
September 30, 2021
Cumulative Product Placements:
MX908 1,459
Rebel 80
ZipChip Interface 175
Cumulative Product Placements 1,714
Components of Our Results of Operations
Revenue
Product and Service Revenue
We generate product and service revenue from the sale of our devices and recurring revenue from the sale of consumables and services. Device sales accounted for 82% and 84% of our product and service revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Consumables and service revenue accounted for 18% and 16% of our product and service revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Device sales accounted for 79% and 89% of our product and service revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Consumables and service revenue accounted for 21% and 11% of our product and service revenue for the nine months endedSeptember 30, 2021 and 2020, respectively.
Our current device offerings include:
? Handheld devices-MX908; and
? Desktop devices-Rebel and ZipChip Interface.
We sell our devices directly to customers and through distributors. Each of our device sales drives various streams of recurring revenue comprised of consumable product sales and service revenue.
Our consumables consist of:
? MX908-accessories and swabs;
? Rebel-consumables kit with a microfluidic chip and standards; and
? ZipChip Interface-microfluidic chip, reagent and assay kits.
Rebel and ZipChip Interface consumables can only be used with our devices and there are no alternative after-market options that can be used as a substitute. Each chip is used for a defined number of samples (or runs). We recognize revenue from the sale of consumables as the consumable products are shipped. We also offer our customers extended warranty and service plans. Our extended warranty and service plans are offered for periods beyond the standard one-year warranty that all of our customers receive. These extended warranty and service plans generally have fixed fees and terms ranging from one additional year to four additional years. We recognize revenue from the sale of extended warranty and service plans over the respective coverage period, which approximates the service effort provided by us.
We expect consumables and service revenue to increase in future periods as our installed base grows and we are able to generate recurring sales.
Licenses and contract revenue
License and contract agreements are arrangements whereby we provide engineering services for the development of our technology platform for specific programs or new and expanding applications of our technologies for future commercial endeavors. Our license and contract agreements are with theU.S. government and commercial entities (who may be contracting with the government). Contracts typically include compensation for labor effort and materials incurred related to the deliverables under the contract. Our license and contract revenue was primarily related to one customer during the three and nine months endedSeptember 30, 2021 and 2020. 24 Table of Contents
During the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Product and service revenue:
Device sales revenue $ 10,075 $
4,884
2,210 943 5,390 2,078
Total product and service revenue 12,285 5,827 25,557 18,844
License and contract revenue 260
221 808 2,333
Total revenue $ 12,545 $ 6,048 $ 26,365 $ 21,177 Our product and service revenue is comprised of sales of our handheld and desktop devices and related consumables and service contracts to end-users in the government, pharmaceuticals/biotechnology and academia markets as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Government $ 9,505 $ 4,062 $ 18,018 $ 14,475
Pharmaceutical/Biotechnology 2,766 1,748 7,475 4,100
Academia 14 17 64 269
Total product and service revenue $ 12,285 $ 5,827 $ 25,557 $ 18,844
We sell our products primarily in the United States ; however, we are expanding
our global sales efforts as we see traction in our products and assess global
market needs. The majority of our international sales are through a distribution
channel.
Cost of Revenue, Gross Profit and Gross Margin
Product cost of revenue primarily consists of costs for raw material parts and associated freight, shipping and handling costs, royalties, contract manufacturer costs, salaries and other personnel costs, overhead and other direct costs related to those sales recognized as product revenue in the period.
Cost of revenue for services primarily consists of salaries and other personnel
costs, travel related to services provided, facility costs associated with
training, warranties and other costs of servicing equipment on a
return-to-factory basis and at customer sites. License and contract cost of
revenue primarily consists of salaries and other personnel costs, materials,
travel and other direct costs related to the revenue recognized in the period.
The license and contract cost of revenue will vary based upon the type of
contract, including whether it is primarily for development services or for both
materials and development services.
We expect that our cost of revenue will increase or decrease to the extent that
our revenue increases and decreases and depending on how many contracts we have
ongoing at any given point in time and the stage of those contracts.
Gross profit is calculated as revenue less cost of revenue. Gross profit margin
is gross profit expressed as a percentage of revenue. Our gross profit in future
periods will depend on a variety of factors, including: market conditions that
may impact our pricing, sales mix among devices, sales mix changes among
consumables, excess and obsolete inventories, our cost structure for
manufacturing operations relative to volume, and product warranty obligations.
Our gross profit in future periods will vary based upon our channel mix and may
decrease based upon our distribution channels and the potential to establish
original equipment manufacturing channels for certain components of our
technology platform which would have a lower gross margin.
We expect that our gross profit margin for product and service will increase
over the long term as our sales and production volumes increase and our cost per
unit decreases due to efficiencies of scale. We intend to use our design,
engineering and manufacturing capabilities to further advance and improve the
efficiency of our manufacturing, which we believe will reduce costs and increase
our gross margin. We expect that our gross profit margin for license and
contract will remain consistent for our contracts that are cost reimbursement
contracts.
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Operating Expenses
Research and development expenses
Research and development expenses consist primarily of costs incurred for our research activities, product development, hardware and software engineering and consultant services and other costs associated with our technology platform and products, which include:
employee-related expenses, including salaries, related benefits and stock-based
? compensation expense for employees engaged in research and hardware and
software development functions;
? the cost of maintaining and improving our product designs, including third
party development costs for new products and materials for prototypes;
? research materials and supplies; and
? facilities, depreciation and other expenses, which include direct and allocated
expenses for rent and maintenance of facilities and insurance.
We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales and marketing, finance, legal, human resources and general management, as well as professional services, such as legal, audit and accounting services. We expect selling, general and administrative expenses to increase in future periods as the number of sales, sales application specialists and marketing and administrative personnel grows and we continue to introduce new products, invest in demonstration equipment, broaden our customer base and grow our business. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Other Income (Expense) Interest expense
Interest expense consists of interest expense associated with outstanding borrowings under our loan and security agreements and the amortization of deferred financing costs and debt discounts associated with such arrangements.
Other income (expense), net
Other income (expense), net consists primarily of the change in fair value of our redeemable convertible preferred stock warrants. We classified warrants for the purchase of shares of our redeemable convertible preferred stock as a liability on our condensed consolidated balance sheets as these warrants were freestanding financial instruments that may have required us to transfer assets upon exercise. The warrant liability was initially recorded at fair value upon the date of issuance of each warrant and was subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability were recognized as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss. OnDecember 22, 2020 , immediately prior to the closing of our IPO, the warrants to purchase preferred stock were converted into warrants to purchase common stock, and the fair value of the warrant liability at that time was reclassified to additional paid-in capital. As a result, subsequent to the closing of our IPO, we no longer remeasure the fair value of the warrant liability at each reporting date.
Other income (expense), net also consists of miscellaneous other income and expense unrelated to our core operations.
Provision for Income Taxes
We have not recorded anyU.S. federal or state income tax benefits for the net operating losses we have incurred in each year or for the research and development tax credits we generated inthe United States , as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As of 26 Table of ContentsDecember 31, 2020 , we hadU.S. federal and state net operating loss carryforwards of$59.2 million and$35.9 million , respectively, which may be available to offset future taxable income and begin to expire in 2032 and 2025, respectively, of which$24.8 million of federal net operating losses do not expire. As ofDecember 31, 2020 , we also hadU.S. federal and state research and development tax credit carryforwards of$4.1 million and$2.3 million , respectively, which may be available to offset future tax liabilities and begin to expire in 2032 and 2029, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.
Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended September 30,
2021 2020 Change
(in thousands)
Revenue:Product and service revenue $ 12,285 $ 5,827$ 6,458 License and contract revenue 260 221 39 Total revenue 12,545 6,048 6,497 Cost of revenue: Product and service cost of revenue 5,656 2,080 3,576 License and contract cost of revenue 77
132 (55)
Total cost of revenue 5,733 2,212 3,521
Gross profit 6,812 3,836 2,976
Operating expenses:Research and development 3,302 1,951 1,351 Selling, general and administrative 8,786 3,178 5,608 Total operating expenses 12,088 5,129 6,959 Income (loss) from operations (5,276) (1,293) (3,983) Other income (expense): Interest expense (31) (245) 214 Other income (expense), net 122 (184) 306 Total other income (expense), net 91
(429) 520
Net loss $ (5,185) $ (1,722) $ (3,463) Revenue, Cost of Revenue and Gross Profit
Product and service
Our product and service revenue is comprised of revenue from sales of devices and related consumables and service as follows:
Three Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Product and service revenue $ 12,285 $ 5,827 $ 6,458 111 %Product and service cost of revenue 5,656
2,080 3,576 172 %
Gross profit $ 6,629 $ 3,747 $ 2,882 77 %
Gross profit margin 54 % 64 % (10) %
Three Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Device sales revenue $ 10,075 $ 4,884 $ 5,191 106 %Consumables and service revenue 2,210 943 1,267 134 % Total product and service revenue $ 12,285
$ 5,827$ 6,458 111 % 27 Table of Contents Product and service revenue increased by$6.5 million , or 111%, for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . Device sales accounted for 82% and 84% of our product and service revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Consumables and service revenue accounted for 18% and 16% of our product and service revenue for the three months endedSeptember 30, 2021 and 2020, respectively. The increase in device sales of$5.2 million was primarily due to an increase of$4.4 million in handheld device sales driven by approximately 100 MX908's delivered to a government customer in the third quarter of 2021 and a$0.8 million increase in device sales in the three months endedSeptember 30, 2021 related to our desktop products. Consumables and service revenue increased by$1.3 million primarily due to an increase in consumable revenue of$0.8 million related to Rebel kit sales and initial sales of the Aero module, a new accessory for our handheld, and to an increase in service revenue of$0.5 million . Product and service cost of revenue increased by$3.6 million , or 172%, for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The increase in product and service cost of revenue was primarily related to a$1.9 million increase in material costs related to higher product and service revenue, a$0.5 million increase in warranty and royalty costs with the higher product sales and a$0.6 million increase in personnel and facility related costs as we build out the capacity within operations and service resources. Product and service gross profit increased by$2.9 million , or 77%, and gross profit margin decreased by 10 percentage points for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 , primarily due to the increased investments in 2021 in operations and service personnel, facility and travel costs and smaller growth for the mix of revenues within devices and sales channel comparable to the increased investments. License and contract Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) License and contract revenue $ 260 $ 221$ 39 18 % License and contract cost of revenue 77
132 (55) (42) %
Gross profit $ 183 $ 89 $ 94 106 %
Gross profit margin 70 % 40 % 30 %
License and contract revenue was relatively flat for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The license and contract revenue during the three months endedSeptember 30, 2021 was primarily related to activities under our subcontract agreement with a commercial entity that holds aU.S. government prime contract, while the license and contract revenue in the prior year period was mainly related to two smaller contracts that have been completed in 2020. License and contract cost of revenue decreased$0.1 million , or 42% for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 due to the mix of license and contract where the three months endedSeptember 30, 2021 was primarily related to lower contribution activities under our subcontract agreement with a commercial entity that holds aU.S. government prime contract. License and contract gross profit increased by$0.1 million , or 106%, and gross profit margin increased by 30 percentage points for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 , primarily due to the mix in contract deliverables during the quarter endedSeptember 30, 2021 . Operating Expenses Research and development Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Research and development expenses $ 3,302 $
1,951 $ 1,351 69 %
Percentage of total revenue 26 % 32 %
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Our research and development expenses were $3.3 million for the three months
ended September 30, 2021 , an increase of $1.4 million from research and
development expenses of $2.0 million for the three months ended September 30,
2020 . The increase was due primarily to a $0.7 million increase in personnel
costs due to increased headcount, a $0.2 million increase in materials spend
related to product enhancement initiatives for our MX908 and Rebel and a $0.2
million increase related to facility allocations due to the increase in
headcount and additional costs incurred in the quarter ended September 30, 2021 .
Selling, general and administrative expenses
Three Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)Selling, general and administrative expenses $ 8,786 $
3,178 $ 5,608 176 %
Percentage of total revenue 70 % 53 %
Our selling, general and administrative expenses were$8.8 million for the three months endedSeptember 30, 2021 , an increase of$5.6 million from selling, general and administrative expenses of$3.2 million for the three months endedSeptember 30, 2020 . The increase was due primarily to a$3.3 million increase in salaries and related costs as a result of expanding our headcount, as well as an increase in commissions and bonus expense, and an increase in stock-based compensation. The remaining$2.3 million increase during the three months endedSeptember 30, 2021 , related to a$0.8 million increase in insurance, a$0.5 million increase in consulting and related fees, a$0.5 million increase related to marketing activities, a$0.3 million increase in travel expenses and$0.2 million related to all other selling, general and administrative expenses.
Other Income (Expense)
Interest expense
Interest expense for the three months endedSeptember 30, 2021 decreased to an immaterial amount from interest expense of$0.2 million for the three months endedSeptember 30, 2020 .
Change in Fair Value of Preferred Stock Warrant Liability
The change in the fair value of our preferred stock warrant liability in the three months endedSeptember 30, 2020 was due primarily to the changes in the fair value of our preferred stock during that period. OnDecember 22, 2020 , immediately prior to the closing of our IPO, the warrants to purchase preferred stock were converted into warrants to purchase common stock, and the fair value of the warrant liability at that time was reclassified to common stock. As a result, subsequent to the closing of our IPO, we no longer remeasure the fair value of the warrant liability at each reporting date.
Other income (expense), net
Other income (expense), net included interest income of
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Comparison of the Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended September 30,
2021 2020 Change
(in thousands)
Revenue:Product and service revenue $ 25,557$ 18,844 $ 6,713 License and contract revenue 808 2,333 (1,525) Total revenue 26,365 21,177 5,188 Cost of revenue: Product and service cost of revenue 12,062 8,121 3,941 License and contract cost of revenue 204
712 (508)
Total cost of revenue 12,266 8,833 3,433
Gross profit 14,099 12,344 1,755
Operating expenses:
Research and development 9,322 5,953 3,369Selling, general and administrative 23,318 8,320 14,998 Total operating expenses 32,640 14,273 18,367 Loss from operations (18,541) (1,929) (16,612) Other income (expense): Interest expense (446) (732) 286 Other income (expense), net 283 68 215 Total other expense, net (163) (664) 501 Net loss$ (18,704)
$ (2,593) $ (16,111)
Revenue, Cost of Revenue and Gross Profit
Product and service
Our product and service revenue is comprised of revenue from sales of devices and related consumables and service as follows:
Nine Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)Product and service revenue$ 25,557 $ 18,844 $ 6,713 36 % Product and service cost of revenue 12,062 8,121 3,941 49 % Gross profit$ 13,495 $ 10,723 $ 2,772 26 % Gross profit margin 53 % 57 % (4) % Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Device sales revenue$ 20,167 $ 16,766 $ 3,401 20 % Consumables and service revenue 5,390 2,078 3,312 159 % Total product and service revenue$ 25,557 $
18,844$ 6,713 36 %
Product and service revenue increased by$6.7 million , or 36%, for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . Device sales accounted for 79% and 89% of our product and service revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Consumables and service revenue accounted for 21% and 11% of our product and service revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in device sales of$3.4 million was primarily due to an increase of$1.9 million in device sales related to our desktop products primarily due to a 16 unit increase in Rebel sales in the nine months endedSeptember 30, 2021 , partially offset by a decrease in sales of our ZipChip Interfaces. The increase in device sales was also due to an increase of$1.5 million in handheld device sales, representing a 21 unit increase, 30
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primarily driven by an increase in international placements. Consumables and service revenue increased by$3.3 million primarily due to a$1.3 million increase in service revenue and a$1.1 million increase in desktop consumables, mainly from Rebel kit sales. Product and service cost of revenue increased by$3.9 million , or 49%, for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The increase in product and service cost of revenue was primarily related to a$1.8 million increase in personnel and facility related costs as we build out the capacity within operations and service resources and$1.5 million and$0.2 million increases related to higher cost of revenue, and warranty and royalties, respectively, due to higher product volume. Product and service gross profit increased by$2.8 million , or 26%, and gross profit margin decreased by 4 percentage points for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 , primarily due to higher personnel and facility related costs, offset in part by the higher product volume. License and contract Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands)
License and contract revenue 808 $ 2,333$ (1,525) (65) % License and contract cost of revenue 204 712 (508) (71) % Gross profit$ 604 $ 1,621$ (1,017) (63) % Gross profit margin 75 % 69 % 6 % License and contract revenue decreased by$1.5 million , or 65%, for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The decrease in license and contract revenue was primarily related to decreased activities under our subcontract agreement with a commercial entity that holds aU.S. government prime contract. License and contract cost of revenue decreased$0.5 million , or 71% for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 due to the decrease in activities under the subcontract agreement and the mix within the subcontract where the nine months endedSeptember 30 , 202 had higher material costs within the contract deliverables. License and contract gross profit decreased by$1.0 million , or 63%, and gross profit margin increased by 6 percentage points for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 , primarily due to the mix in contract deliverables, including a higher mix of materials during the nine months endedSeptember 30, 2020 which resulted in a lower gross profit margin. Operating Expenses Research and development Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Research and development expenses $ 9,322
$ 5,953$ 3,369 57 % Percentage of total revenue 35 % 28 %
Our research and development expenses were$9.3 million for the nine months endedSeptember 30, 2021 , an increase of$3.4 million from research and development expenses of$6.0 million for the nine months endedSeptember 30, 2020 . The increase was due primarily to a$1.8 million increase in personnel costs due to increased headcount, a$0.6 million increase related to facility allocations due to the increase in headcount and additional costs incurred related to workforce safety during the COVID-19 pandemic in the nine months endedSeptember 30, 2021 , a$0.5 million increase in materials spend related to product enhancement initiatives for our MX908 and Rebel and a$0.3 million shift in resources focused on internal research and development activities rather
than
funded contract development.
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Selling, general and administrative expenses
Nine Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Selling, general and administrative expenses $ 23,318 $ 8,320$ 14,998 180 % Percentage of total revenue 88 % 39 %
Our selling, general and administrative expenses were$23.3 million for the nine months endedSeptember 30, 2021 , an increase of$15.0 million from selling, general and administrative expenses of$8.3 million for the nine months endedSeptember 30, 2020 . The increase was due primarily to a$7.6 million increase in salaries from growing headcount, as well as an increase in commissions and bonus expense, recruiting fees and stock-based compensation. The increase was also due to a$1.7 million related to our allowance for bad debts for a customer in theMiddle East , where due to the credit and economic conditions, including the impact of COVID-19, the Company had determined during the second quarter of 2021 that it was probable that collection will not occur. The remaining$5.7 million increase during the nine months endedSeptember 30, 2021 was due primarily to a$1.9 million increase in insurance, a$1.6 million increase in consulting and related fees, a$0.7 million increase related to marketing activities, a$0.5 million increase in audit and legal fees, a$0.5 million increase in travel expenses and a$0.5 million increase related to all other selling, general
and administrative expenses. Other Income (Expense) Interest expense Interest expense was$0.4 million for the nine months endedSeptember 30, 2021 , a decrease of$0.3 million from interest expense of$0.7 million for the nine months endedSeptember 30, 2020 . Interest expense for the nine months endedSeptember 30, 2021 included a loss on extinguishment of debt of$0.2 million .
Change in Fair Value of Preferred Stock Warrant Liability
The change in the fair value of our preferred stock warrant liability in the nine months endedSeptember 30, 2020 was due primarily to the changes in the fair value of our preferred stock during that period. OnDecember 22, 2020 , immediately prior to the closing of our IPO, the warrants to purchase preferred stock were converted into warrants to purchase common stock, and the fair value of the warrant liability at that time was reclassified to common stock. As a result, subsequent to the closing of our IPO, we no longer remeasure the fair value of the warrant liability at each reporting date.
Other income (expense), net
Other income (expense), net included interest income of
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily with proceeds from sales of redeemable preferred stock, borrowings under loan agreements and revenue from sales of our products and services and license and contract revenue and, most recently, with proceeds from our IPO. As ofSeptember 30, 2021 , we had cash and cash equivalents of$138.8 million . We believe that our existing cash and cash equivalents will enable us to fund our operating expenses, capital expenditure requirements and debt service payments into 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Our future funding requirements will depend on many factors, including:
? market uptake of our products, including the Rebel, which we launched
commercially in the fourth quarter of 2019;
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? the cost and timing of establishing additional sales, marketing and
distribution capabilities;
? the cost of our research and development activities and timely launch of new
features and products
? the success of our existing collaborations and our ability to enter into
additional collaborations in the future;
? the effect of competing technological and market developments; and
? the level of our selling, general and administrative expenses.
OnMarch 11, 2021 , we entered into an Amended and Restated Loan and Security Agreement, or the 2021 Revolver, with Signature Bank, or the Lender, to replace our 2019 Loan and Security Agreement, or the 2019 Loan. The 2021 Revolver created a revolving line of credit totaling$25.0 million and eliminated the existing term loan. Borrowings under the revolving line of credit bear interest at an annual rate equal to the greater of (i) one-half percent (0.5%) above the prime rate or (ii) 4.0% and mature onMarch 11, 2024 . Borrowings are collateralized by substantially all of our property, excluding intellectual property, which is subject to a negative pledge. The 2021 Revolver subjects us to various customary covenants, including requirements as to financial reporting and financial covenants (including an unrestricted minimum cash level of$10.0 million ), and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or make other distributions on capital stock other than dividends payable solely in capital stock, to redeem capital stock, to enter into in-bound licensing agreements, to engage in transactions with affiliates, and to encumber our intellectual property. Events of default under the 2021 Revolver include failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to us. Upon the occurrence of an event of default and until such event of default is no longer continuing, the annual interest rate will be 5.0% above the otherwise applicable rate.
The terms of the 2021 Revolver required that the existing term loan outstanding
under the 2019 Loan be repaid with an advance under the line of credit.
Accordingly, on
We may seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants, in addition to our existing covenants, restricting our operations or our ability to incur additional debt or potentially limiting our ability to obtain new debt financing or the refinance of our existing debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations.
Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Nine Months Ended September 30,
2021 2020
(in thousands)
Cash provided by (used in) operating activities $ (19,862) $ 1,799
Cash provided by (used in) investing activities (683) (9)
Cash provided by (used in) financing activities 193 9
Net increase (decrease) in cash, cash equivalents and
restricted cash $ (20,352) $ 1,799
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Operating Activities
During the nine months endedSeptember 30, 2021 , net cash used in operating activities was$19.9 million , primarily resulting from our net loss of$18.7 million and net cash used by changes in our operating assets and liabilities of$5.4 million , partially offset by noncash charges of$4.2 million . Net cash used by changes in our operating assets and liabilities for the nine months endedSeptember 30, 2021 consisted primarily of an increase in inventory of$4.4 million , a$3.2 million increase in accounts receivable, and an increase in prepaid expenses and other current and non-current assets of$2.6 million , partially offset by an increase in deferred revenue of$3.6 million and an increase in accounts payable and accrued expenses of$1.4 million . During the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$1.8 million , primarily consisting of net cash provided by changes in our operating assets and liabilities of$3.8 million and non-cash charges of$0.6 million , partially offset by our net loss of$2.6 million . Net cash provided by changes in our operating assets and liabilities for the nine months endedSeptember 30, 2020 consisted primarily of an increase in deferred revenue of$7.2 million and an increase in accounts payable and accrued expenses of$1.1 million , partially offset by a$4.3 million increase in accounts receivable, a$0.3 million increase in prepaid expenses and other current and non-current assets and a less than$0.1 million decrease in the net effect of our right-of-use operating assets and operating lease liabilities.
Investing Activities
During the nine months ended
During the nine months ended
Financing Activities
Cash provided by financing activities during the nine months endedSeptember 30, 2021 , was$0.2 million , consisting primarily of payments of offering costs related to our IPO, partially offset by proceeds from issuance of common stock upon option exercise. We also received net proceeds from borrowings under the 2021 Revolver of$15.0 million . We used proceeds of$14.5 million from the revolving line of credit to repay our previously outstanding borrowings under our loan and security agreement. Prior to repayment of our loan and security agreement, we had made principal payments of$0.5 million . During the nine months endedSeptember 30, 2020 , net cash provided by financing activities was less than$0.1 million , consisting of proceeds from issuance of common stock upon option exercise. We also received proceeds from a Paycheck Protection Program loan of$2.2 million , which we then fully repaid in the same period.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States , or GAAP. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates from those disclosed in our consolidated financial statements and the related notes and other financial information included in our 2020 Form 10-K.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSecurities and Exchange Commission . 34
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Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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