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 of 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$13.8 million and incurred net losses of$13.5 million for the six months endedJune 30, 2021 . We generated revenue of$26.9 million and incurred net losses of$12.8 million for the year endedDecember 31, 2020 . As ofJune 30, 2021 , we had an accumulated deficit of$92.0 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. 21
Table of Contents
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 three months endedJune 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, the Company 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, substantially all of our field sales and professional services activities are being conducted remotely, which has resulted in a decrease in our travel expenditures. However, we expect our travel expenditures to increase in the future, which could negatively impact our financial condition and results of operations. We do not yet know the extent of the negative impact of such restrictions and precautionary measures on our ability to attract new customers or retain and expand our relationships with existing customers over the near and long term.
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
22
Table of Contents
that we must successfully address in order 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 22% and 5% of total product and service revenue for the three months endedJune 30, 2021 and 2020, respectively. Consumables and service revenue was 24% and 9% of total product and service revenue for the six months endedJune 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. 23
Table of Contents
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 six months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Product Placements:
MX908 84 186 137 209
Rebel 12 8 21 11
ZipChip Interface 7 7 11 14
Total placements 103 201 169 234
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.
24
Table of Contents
Our cumulative product placements consist of the following number of devices:
As of
June 30, 2021
Cumulative Product Placements:
MX908 1,295
Rebel 67
ZipChip Interface 168
Cumulative Product Placements 1,530
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 78% and 95% of our product and service revenue for the three months endedJune 30, 2021 and 2020, respectively. Consumables and service revenue accounted for 22% and 5% of our product and service revenue for the three months endedJune 30, 2021 and 2020, respectively. Device sales accounted for 76% and 91% of our product and service revenue for the six months endedJune 30, 2021 and 2020, respectively. Consumables and service revenue accounted for 24% and 9% of our product and service revenue for the six months endedJune 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 six months endedJune 30, 2021 and 2020. 25 Table of Contents
During the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands)
Product and service revenue:
Device sales revenue $ 6,181 $ 9,894 $ 10,092 $ 11,882
Consumables and service revenue 1,734 484 3,180 1,135
Total product and service revenue 7,915 10,378 13,272 13,017 License and contract revenue 362 750 548 2,112 Total revenue$ 8,277 $ 11,128 $ 13,820 $ 15,129 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Product and Service Revenue by Device: Handheld$ 5,278 $ 8,827$ 8,518 $ 10,367 Desktop 2,637 1,551 4,754 2,650 Total product and service revenue$ 7,915 $
10,378$ 13,272 $ 13,017 Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) Product and Service Revenue by Market: Government$ 5,279
$ 8,968
2,609 1,169 4,709 2,352
Academia 27 241 50 252
Total product and service revenue $ 7,915 $ 10,378 $ 13,272 $ 13,017 We sell our products primarily inthe United States ; however, we are expanding our global sales efforts as we see traction in our products and assess 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.
26
Table of Contents
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. 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.
27
Table of Contents
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 income (loss). On
December 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 ofDecember 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 June 30,
2021 2020 Change
(in thousands)
Revenue:Product and service revenue $ 7,915$ 10,378 $ (2,463) License and contract revenue 362 750
(388)
Total revenue 8,277 11,128
(2,851)
Cost of revenue: Product and service cost of revenue 3,846 4,471
(625)
License and contract cost of revenue 52 247
(195)
Total cost of revenue 3,898 4,718 (820)
Gross profit 4,379 6,410 (2,031)
Operating expenses:
Research and development 3,055 1,846 1,209Selling, general and administrative 8,779 2,436
6,343
Total operating expenses 11,834 4,282
7,552
Income (loss) from operations (7,455) 2,128
(9,583)
Other income (expense):
Interest expense (39) (246) 207
Other income (expense), net 70 213 (143)Total other income (expense), net 31 (33)
64
Net income (loss) $ (7,424) $ 2,095 $ (9,519)
28
Table of Contents
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 June 30, Change
2021 2020 Amount %
(dollars in thousands)
Product and service revenue $ 7,915 $ 10,378 $ (2,463) (24) %
Product and service cost of revenue 3,846 4,471 (625) (14) %
Gross profit $ 4,069 $ 5,907 $ (1,838) (31) %
Gross profit margin 51 % 57 % (6) %
Three Months Ended June 30, Change
2021 2020 Amount %
(dollars in thousands)
Device sales revenue $ 6,181 $ 9,894 $ (3,713) (38) %
Consumables and service revenue 1,734 484 1,250 258 %
Total product and service revenue $ 7,915 $ 10,378 $ (2,463) (24) %
Product and service revenue decreased by $2.5 million , or 24%, for the three
months ended June 30, 2021 , compared to the three months ended June 30, 2020 .
Device sales accounted for 78% and 95% of our product and service revenue for
the three months ended June 30, 2021 and 2020, respectively. Consumables and
service revenue accounted for 22% and 5% of our product and service revenue for
the three months ended June 30, 2021 and 2020, respectively. The decrease in
device sales of $3.7 million was primarily due to a decrease of $4.3 million in
handheld device sales driven by 150 MX908's delivered to a government customer
in June 2020 , partially offset by a $0.6 million increase in device sales in the
three months ended June 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 decreased by $0.6 million , or 14%, for the
three months ended June 30, 2021 , compared to the three months ended June 30,
2020 . The decrease in product and service cost of revenue was primarily related
to a $1.1 million decrease in costs related to lower product and service
revenue, partially offset by a $0.5 million increase in personnel and facility
related costs as we build out the capacity within operations and service
resources.
Product and service gross profit decreased by $1.8 million , or 31%, and gross
profit margin decreased by 6 percentage points for the three months ended June
30, 2021 as compared to the three months ended June 30, 2020 , primarily due to
reduced MX908 sales volume which leveraged our fixed costs related to our
manufacturing facility, and to a lesser extent our investments in 2021 in
operations and service personnel.
License and contract
Three Months Ended June 30, Change
2021 2020 Amount %
(dollars in thousands)License and contract revenue $ 362 $ 750$ (388) (52) % License and contract cost of revenue 52
247 (195) (79) %
Gross profit $ 310 $ 503 $ (193) (38) %
Gross profit margin 86 % 67 % 19 %
License and contract revenue decreased by $0.4 million , or 52%, for the three
months ended June 30, 2021 , compared to the three months ended June 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 a
U.S. government prime contract.
29
Table of Contents
License and contract cost of revenue decreased
License and contract gross profit decreased by$0.2 million , or 38%, and gross profit margin increased by 19 percentage points for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , primarily due to the mix in contract deliverables during the quarter endedJune 30, 2021 . Operating Expenses Research and development Three Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands)
Research and development expenses
37 % 17 %
Our research and development expenses were $3.1 million for the three months
ended June 30, 2021 , an increase of $1.2 million from research and development
expenses of $1.8 million for the three months ended June 30, 2020 . The increase
was due primarily to a $0.7 million increase in personnel costs due to increased
headcount, a $0.1 million increase in materials spend related to product
enhancement initiatives for our MX908 and Rebel and a $0.2 million increase
related to facility allocations due to the increase in headcount and additional
costs incurred related to workforce safety during the COVID-19 pandemic in the
quarter ended June 30, 2021 .
Selling, general and administrative expenses
Three Months Ended June 30, Change
2021 2020 Amount %
(dollars in thousands)Selling, general and administrative expenses$ 8,779 $
2,436$ 6,343 260 % Percentage of total revenue 106 % 22 %
Our selling, general and administrative expenses were$8.8 million for the three months endedJune 30, 2021 , an increase of$6.3 million from selling, general and administrative expenses of$2.4 million for the three months endedJune 30, 2020 . The increase was due primarily to a$2.5 million increase in salaries and related costs as a result of expanding our headcount, as well as an increase in commissions and bonus expense, an increase in recruiting fees and an increase in stock-based compensation. Additional increase of$1.7 million related to the provision to increase our allowance for bad debts related to a customer in theMiddle East , where due to the credit and economic conditions, including the impact of COVID-19, the Company has determined during the second quarter of 2021 that it is probable that collection will not occur. The remaining$2.1 million increase during the three months endedJune 30, 2021 , related to a$0.5 million increase in insurance, a$0.3 million increase in audit and legal fees, a$0.8 million increase in consulting and related fees, a$0.2 million increase in travel expenses and a$0.2 million increase related to marketing activities. Other Income (Expense) Interest expense
Interest expense was less than$0.1 million for the three months endedJune 30, 2021 , a decrease of$0.2 million from interest expense of$0.2 million for the three months endedJune 30, 2020 .
Change in Fair Value of Preferred Stock Warrant Liability
The change in the fair value of our preferred stock warrant liability in the three months endedJune 30, 2020 was due primarily to the changes in the fair value of our preferred stock during that period. 30
Table of Contents
OnDecember 22, 2020 , immediately prior to the closing of our IPO, the warrants to purchase preferred stock were converted into warrants to purchase common stock, and the fair value of the warrant liability at that time was reclassified to common stock. As a result, subsequent to the closing of our IPO, we no longer remeasure the fair value of the warrant liability at each reporting date.
Other income (expense), net
Other income (expense), net included interest income of
Comparison of the Six Months Ended
The following table summarizes our results of operations for the six months
ended
Six Months Ended June 30,
2021 2020 Change
(in thousands)
Revenue:Product and service revenue$ 13,272 $ 13,017 $
255
License and contract revenue 548 2,112
(1,564)
Total revenue 13,820 15,129
(1,309)
Cost of revenue: Product and service cost of revenue 6,406 6,041
365
License and contract cost of revenue 127 580
(453) Total cost of revenue 6,533 6,621 (88) Gross profit 7,287 8,508 (1,221) Operating expenses: Research and development 6,020 4,002 2,018
Selling, general and administrative 14,532 5,142
9,390 Total operating expenses 20,552 9,144 11,408 Loss from operations (13,265) (636) (12,629) Other income (expense): Interest expense (415) (487) 72 Other income (expense), net 161 252 (91) Total other expense, net (254) (235) (19) Net loss$ (13,519) $ (871) $ (12,648)
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:
Six Months Ended June 30, Change
2021 2020 Amount %
(dollars in thousands)
Product and service revenue $ 13,272 $ 13,017 $ 255 2 %Product and service cost of revenue 6,406 6,041 365 6 % Gross profit$ 6,866 $ 6,976 $ (110) (2) % Gross profit margin 52 % 54 % (2) % 31 Table of Contents Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Device sales revenue$ 10,092 $ 11,882 $ (1,790) (15) % Consumables and service revenue 3,180 1,135 2,045 180 % Total product and service revenue$ 13,272 $
13,017$ 255 2 % Product and service revenue increased by$0.3 million , or 2%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . Device sales accounted for 76% and 91% of our product and service revenue for the six months endedJune 30, 2021 and 2020, respectively. Consumables and service revenue accounted for 24% and 9% of our product and service revenue for the six months endedJune 30, 2021 and 2020, respectively. The decrease in device sales of$1.8 million was primarily due to a decrease of$2.9 million in handheld device sales, representing a 72 unit decrease, primarily driven by the 150 MX908's delivered to a government customer inJune 2020 . Partially offsetting the decrease was a$1.1 million increase in device sales related to our desktop products primarily due to a ten unit increase in Rebel sales in the six months endedJune 30, 2021 , partially offset by a decrease in sales of our ZipChip Interfaces. Consumables and service revenue increased by$2.0 million primarily due to a$0.9 million increase in service revenue and a$0.7 million increase in desktop consumables, mainly from Rebel kit sales. Product and service cost of revenue increased by$0.4 million , or 6%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The increase in product and service cost of revenue was primarily related to a$0.7 million increase in personnel and facility related costs as we build out the capacity within operations and service resources, offset in part by lower cost of revenue due to product volume. Product and service gross profit decreased by$0.1 million , or 2%, and gross profit margin decreased by 2 percentage points for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , primarily due to higher personnel and facility related costs. License and contract Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands)
License and contract revenue$ 548 $ 2,112$ (1,564) (74) % License and contract cost of revenue 127
580 (453) (78) %
Gross profit $ 421 $ 1,532 $ (1,111) (73) %
Gross profit margin 77 % 73 % 4 %
License and contract revenue decreased by$1.6 million , or 74%, for the six months endedJune 30, 2021 , compared to the six months endedJune 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 78% for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 due to the decrease in activities under the subcontract agreement. License and contract gross profit decreased by$1.1 million , or 73%, and gross profit margin increased by 4 percentage points for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , primarily due to the mix in contract deliverables during the six months endedJune 30, 2021 . 32 Table of Contents Operating Expenses Research and development Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands)
Research and development expenses
44 % 26 %
Our research and development expenses were $6.0 million for the six months ended
June 30, 2021 , an increase of $2.0 million from research and development
expenses of $4.0 million for the six months ended June 30, 2020 . The increase
was due primarily to a $1.1 million increase in personnel costs due to increased
headcount, a $0.3 million increase in materials spend related to product
enhancement initiatives for our MX908 and Rebel and a $0.4 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
six months ended June 30, 2021 .
Selling, general and administrative expenses
Six Months Ended June 30, Change
2021 2020 Amount %
(dollars in thousands)
Selling, general and administrative expenses
105 % 34 %
Our selling, general and administrative expenses were$14.5 million for the six months endedJune 30, 2021 , an increase of$9.4 million from selling, general and administrative expenses of$5.1 million for the six months endedJune 30, 2020 . The increase was due primarily to a$4.3 million increase in salaries and related costs as a result of expanding our headcount, as well as an increase in commissions and bonus expense, an increase in recruiting fees and an increase in stock-based compensation. Additional increase of$1.7 million related to the provision to increase our allowance for bad debts related to a customer in theMiddle East , where due to the credit and economic conditions, including the impact of COVID-19, the Company has determined during the second quarter of 2021 that it is probable that collection will not occur.The remaining$3.4 million increase during the six months endedJune 30, 2021 , related to a$1.1 million increase in insurance, a$1.1 million increase in consulting and related fees, a$0.6 million increase in audit and legal fees, a$0.2 million increase in travel expenses and a$0.2 million increase related to marketing activities.
Other Income (Expense)
Interest expense
Interest expense was
Change in Fair Value of Preferred Stock Warrant Liability
The change in the fair value of our preferred stock warrant liability in the six months endedJune 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
33
Table of Contents
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 ofJune 30, 2021 , we had cash and cash equivalents of$141.3 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;
? 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.
34
Table of Contents
Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Six Months Ended June 30,
2021 2020
(in thousands)
Cash used in operating activities $ (16,938) $ (6,398)
Cash used in investing activities (625) (184)
Cash provided by (used in) financing activities (290) 4
Net decrease in cash, cash equivalents and restricted cash
Operating Activities During the six months endedJune 30, 2021 , net cash used in operating activities was$16.9 million , primarily resulting from our net loss of$13.5 million and net cash used by changes in our operating assets and liabilities of$6.6 million , partially offset by noncash charges of$3.1 million . Net cash used by changes in our operating assets and liabilities for the six months endedJune 30, 2021 consisted primarily of an increase in inventory of$3.9 million , an increase in prepaid expenses and other current and non-current assets of$3.3 million , and a$0.2 million increase in accounts receivable, partially offset by an increase in deferred revenue of$0.5 million and an increase in accounts payable and accrued expenses of$0.5 million . During the six months endedJune 30, 2020 , operating activities used$6.4 million of cash, primarily resulting from our net loss of$0.9 million and net cash used by changes in our operating assets and liabilities of$6.0 million , partially offset by noncash charges of$0.5 million . Net cash used by changes in our operating assets and liabilities for the six months endedJune 30, 2020 consisted primarily of a$10.0 million increase in accounts receivable partially offset by an increase in deferred revenue of$3.2 million , a decrease in inventory of$0.8 million and an increase in accounts payable and accrued expenses of$0.4 million .
Investing Activities
During the six months ended
During the six months ended
Financing Activities
Cash used in financing activities during the six months endedJune 30, 2021 , was$0.3 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 six months endedJune 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.
35
Table of Contents
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 .
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.
© Edgar Online, source
