AKOYA BIOSCIENCES, INC. You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year endedDecember 31, 2020 included in the Prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those in the Prospectus, as referred to in the section titled "Risk Factors" under Part II, Item 1A below. Please also see the section titled "Special note regarding forward looking statements."
Overview
We are an innovative life sciences technology company delivering spatial biology
solutions focused on transforming discovery and clinical research. Our mission
is to deliver a revolutionary new class of spatially derived biomarkers that
empower life sciences researchers to better understand disease and clinicians to
improve patient outcomes. Spatial biology refers to a rapidly evolving
technology that enables academic and biopharma scientists to detect and map the
distribution of cell types and biomarkers across whole tissue samples at single
cell resolution, enabling advancements in their understanding of disease
progression and patient response to therapy. Through our CODEX and Phenoptics
platforms, reagents, software and services, we offer end-to -end solutions to
perform tissue analysis and spatial phenotyping across the full continuum, from
discovery through translational and clinical research.
Our spatial biology solutions measure cells and proteins by providing biomarker
data in its spatial context while preserving tissue integrity. Biomarkers are
objective measures that capture what is happening in a cell or tissue at a given
moment. Current genomic and proteomic methods, such as next-generation
sequencing (NGS), single-cell analysis, flow cytometry and mass spectrometry,
are providing meaningful data but require the destruction of the tissue sample
for analysis. While valuable and broadly adopted, these approaches allow
scientists to analyze the biomarkers and cells that comprise the tissue but do
not provide the fundamental information about tissue structure, cellular
interactions and the localized measurements of key biomarkers. Furthermore,
current non-destructive tissue analysis and histological methods provide some
limited spatial information, but only measure a minimal number of biomarkers at
a time and require expert pathologist interpretation. Our platforms address
these limitations by providing end-to-end solutions that enable researchers to
quantitatively interrogate a large number of biomarkers and cell types across a
tissue section at single cell resolution. The result is a detailed and
computable map of the tissue sample that thoroughly captures the underlying
tissue dynamics and interactions between key cell types and biomarkers, a
process now referred to as spatial phenotyping. We believe that we are the only
business with the breadth of platform capabilities that enable researchers to do
a deep exploratory and discovery study, and then further advance and scale their
study through translational and clinical phases, thereby helping to provide a
broad scope of understanding of human biology, disease progression and response
to therapy.
We offer two distinct platforms for spatial phenotyping, each designed to serve
the unique needs of our customers in the discovery, translational and clinical
markets. The first, CODEX, is an ultra-high parameter and cost-effective
platform ideally suited for discovery research with the ability to identify more
than 40 biomarkers in a tissue sample. The second, Phenoptics, is a high-
throughput platform with the automation and robustness needed for translational
and clinical applications. Both offer seamless and integrated workflow solutions
for our customers, including important benefits such as flexible sample types,
automated sample processing, scalability, comprehensive data analysis and
software solutions and dedicated field and applications support. With these
platforms, our customers are performing spatial phenotyping to further advance
their understanding of diseases such as cancer, neurological and autoimmune
disorders, and many other therapeutic areas.
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For the three and six months ended
As of
We focus a substantial portion of our resources on research and development, as well as on business development and sales and marketing. Our research and development efforts are geared towards developing new instruments and assay capabilities, as well as new reagent kits, to meet both our customers' needs and to address new markets. We intend to continue making significant investments in this area for the foreseeable future. We also intend to continue to make investments in building our sales team and marketing our products and services to potential customers. We generally outsource all of our production manufacturing. Design work, prototyping and pilot manufacturing are performed in-house before outsourcing to third party contract manufacturers. Our outsourced production strategy is intended to drive cost leverage and scale, and avoid the high capital outlays and fixed costs related to constructing and operating a manufacturing facility. The contract manufacturers of our systems and reagent kits are located inthe United States andAsia . Certain of our suppliers of components and materials are single source suppliers. We manufacture and assemble certain instrument components in-house. As of the date of this Quarterly Report on Form 10-Q, we have financed our operations primarily from the issuance and sale of convertible preferred stock and borrowings under our long-term debt agreement, and our IPO. We have incurred net losses in each year since our inception in 2015. Our net losses were$5.6 million ,$13.6 million ,$4.6 million and$6.7 million for the three and six months endedJune 30, 2021 and 2020, respectively. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
? attract, hire and retain qualified personnel, including the expansion of our
commercial capabilities and organizations;
? market and sell new and existing solutions and services;
? invest in processes and infrastructure to scale our business;
? support research and development to introduce new solutions;
? expand, protect and defend our intellectual property; and
? acquire complementary businesses or technologies to support the growth of our
business.
Key factors affecting our results of operations and future performance
There are a number of factors that have impacted, and we believe will continue to impact, our business, results of operations and growth. Our ability to successfully address these factors is subject to various risks and uncertainties, including those described under the heading "Risk Factors."
Expansion of our installed base
We are focused on increasing sales of our CODEX and Phenoptics platforms to new
and existing customers. Our financial performance has historically been driven
by, and will continue to be impacted by, the volume of instrument sales.
Additionally, instrument sales are a leading indicator of future recurring
revenue from consumables and services. Our operating results and growth
prospects will be dependent in part on our ability to increase our instrument
installed
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base as we further penetrate existing markets and expand into, or offer new features and solutions that appeal to, new markets.
We believe our market is still evolving and relatively underpenetrated. As spatial biology is further validated through rapid acceleration of peer-reviewed publications and growing adoption by the life sciences research market, we believe we have an opportunity to significantly increase our installed base. In order to capitalize on this opportunity to drive adoption of our platforms across the entire market, we intend to expand our global sales and marketing organizations, increase the scale of our outbound marketing activities, invest in commercial channel infrastructure and deliver new, market-leading solutions to our customers. In addition, we regularly solicit feedback from our customers in order to enhance our solutions and their applications for life sciences research, which we believe will drive increased adoption of our platforms as they better serve our customers' needs.
Drive incremental pull through
We believe that expansion of our installed base to new and existing customers will drive an increase in our recurring reagent and instrument service revenue. In addition, as our research and development team identifies and launches new applications and biomarker targets, we expect to increase incremental pull through on our existing and new instrument installed base. Recurring revenue was 46%, 40%, 34%, and 35% of total revenue for the three and 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 installed base expands, we expect recurring revenue on an absolute basis to increase and become an increasingly important contributor to our revenue.
Improve revenue mix and gross margin
Our revenue is primarily derived from sales of our platforms, consumables, software, and services. Our revenue mix will fluctuate from period-to- period, particularly revenue generated from instrument sales. As our installed base grows, we expect consumables and instrument service revenue to constitute a larger percentage of total revenue.
Our margins are higher for those instruments and consumables that we sell directly to customers compared to those sold through distributors. While we do not currently intend to terminate our distributor relationships, we plan to increase our direct sales capabilities in certain geographies which we believe will improve our gross margins. Future instrument 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 instruments 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.
COVID-19 Impact
InMarch 2020 , COVID-19 was declared a global pandemic by theWorld Health Organization . In the following weeks, many states and counties acrossthe United States responded by implementing a number of measures designed to prevent its spread, including stay-at -home or shelter-in- place orders, quarantines and closure of all non- essential businesses. While conditions appear to be improving, particularly as more people get vaccinated, 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. Impacts in 2020 and 2021 to our business as a result of COVID-19 include 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 light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers and 27 Table of Contents the communities in which we operate, including temporarily closing our offices to visitors and limiting the number of employees in our offices to those that are deemed essential for manufacturing and research purposes beginning in Spring 2020. As COVID-19 related restrictions ease and more people get vaccinated, we have begun the process of transitioning those personnelwho are comfortable working in an office setting back to our corporate office facility, but a significant number of our personnel continue to work from home. We also expect that customer, employee and industry events may return in-person if COVID-19 related restrictions continue to ease. Disruptions in our customers' operations have impacted and may continue to impact our business. For example, laboratory shutdowns and reduced capital spend by our customers have negatively impacted our instrument and reagent sales. We are focused on navigating the challenges presented by COVID-19, with a primary focus on preserving our liquidity and managing our cash flows by taking preemptive action to enhance our ability to meet our short-term liquidity needs. To address actual and expected reductions in revenue and cash flows, we reduced our discretionary spending. 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. 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 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. As a result of the COVID- 19 pandemic, and the precautionary measures that we have adopted, substantially all of our field sales and professional services activities have been conducted remotely for over a year, which has resulted in a decrease in our travel expenditures. However, we expect our travel expenditures to increase in the future as COVID-19 restrictions ease, which could negatively impact our financial condition and results of operations. As of the date of this Quarterly Report on Form 10-Q, 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. The length of time and full extent to which the COVID-19 pandemic may directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain, subject to change and difficult to predict. License Agreements InNovember 2015 , we entered into an exclusive (equity) agreement withStanford , pursuant to whichStanford granted us an exclusive, worldwide, sublicensable (subject to certain requirements) license under certain patent rights to make, use, import and commercialize products for diagnostic, industrial and research and development purposes. We agreed to pay annual license maintenance fees ranging from$20 thousand to$50 thousand for the royalty-bearing license to certain patents. We also issued a total of 91,559 shares of Class B common stock pursuant to the agreement in 2015, which were recorded at fair value at the date of issuance. We are required to pay royalties on net sales of products that are covered by patent rights under the agreement at a rate of 2.25%, subject to reductions and offsets in certain circumstances, as well as a portion of any of our sublicensing income. InSeptember 2018 , in connection with the acquisition of the Phenoptics technology from PKI, we entered into a license and royalty agreement withPKI, Cambridge Research & Instrumentation, Inc. , andVisEn Medical Inc. , pursuant to which such parties granted us an exclusive, nontransferable, sublicensable (subject to certain conditions) license under certain patent rights and know-how to make, use, import and commercialize Phenoptics products and services. We are required to pay royalties on net sales of products and services that are covered by patent rights under the agreement at a rate ranging from 1.0% to 7.0%. 28 Table of Contents Key Business Metrics We regularly review the number of instrument placements and cumulative instrument placement as key metrics to evaluate our business, measure our performance, identify trends affecting our business, develop 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 Six months ended
June 30, June 30,
2021 2020 2021 2020
Instrument Placements: 31 25 68 57
Our instruments are sold globally to leading biopharma companies and top
research institutions and medical centers. Our quarterly instrument placements
fluctuate considerably from period-to-period due to the type and size of our
customers and their procurement and budgeting cycles. We expect continued
fluctuations in our quarterly period-to-period number of instrument placements.
We believe our instrument placements are important metrics to measure our
business because together they are driven by our ability to secure new customers
and drive adoption of our CODEX and Phenoptics platforms and provide insights
into anticipated recurring revenue for consumables and instrument services.Components of results of operations
Revenue
Product Revenue
We generate product revenue from the sale of our instruments, consumables and software products. Instrument sales accounted for 58%, 63%, 72% and 73% of our product revenue for the three and six months endedJune 30, 2021 and 2020, respectively. Consumables revenue accounted for 40%, 33%, 24% and 24% of our product revenue for the three and six months endedJune 30, 2021 and 2020, respectively. Our current instrument offerings include our CODEX platform and our Phenoptics platform. Our sales process with customers is often long and involves multiple levels of approvals. As a result, the revenue for our platforms 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. We sell our instruments directly to customers and through distributors. Each of our instrument sales drives various streams of recurring revenue comprised of consumable product sales and instrument services.
Service and Other Revenue
We primarily generate service and other revenue from instrument service, which
generally consists of sales of extended service contracts, in addition to
installation and training, as well as from our laboratory services operation,
where we provide sample testing services to customers utilizing our in-house lab
operation.
We offer our customers extended warranty and service plans for our platforms.
Our extended warranty and service plans are offered for periods beyond the
standard one-year warranty that all customers receive. These extended warranty
and service plans generally have fixed fees and terms ranging from one to four
additional years. We recognize revenue
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from the sale of extended warranty and service plans over the respective coverage period, which approximates the service effort provided by us.
The Company records shipping and handling billed to customers as service and other revenue and the related costs in cost of service and other revenue in the consolidated statement of operations.
During the three and six months ended
Three months ended Six months ended
June 30, June 30,
($ in thousands) 2021 2020 2021 2020
Revenue:
Product revenue $ 10,719 $ 6,186 $ 20,682 $ 15,115
Service and other revenue 2,352 2,374 4,601 4,466
Total revenue $ 13,071 $ 8,560 $ 25,283 $ 19,581 We sell our products globally. We sell directly to end customers in
Cost of Goods Sold, Gross Profit and Gross Margin
Product cost of revenue primarily consists of costs for finished goods (both instruments and reagents) produced by our contract manufacturers, and associated freight, shipping and handling costs for products shipped to customers, salaries and other personnel costs, and other direct costs related to those sales recognized as product revenue in the period. Cost of goods sold for services and other primarily consists of salaries and other personnel costs, travel related to services provided, costs of servicing equipment at customer sites, and all personnel and related costs for our laboratory services operation. We expect that our cost of goods sold will increase or decrease to the extent that our revenue increases and decreases and depending on the mix of revenue in any specific period. Gross profit is calculated as revenue less cost of goods sold. Gross 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 instruments, sales mix changes among consumables, excess and obsolete inventories, costs we pay our contract manufacturers for their services, our cost structure for lab service operations relative to volume, and product warranty obligations. Our gross profit in future periods will also vary based upon our channel mix and may decrease based upon our distribution channels.
Gross profit was
Operating expenses
Research and development. Research and development costs primarily consist of
salaries, benefits, engineering/design costs, laboratory supplies, and materials
expenses for employees and third parties engaged in research and product
development. We expense all research and development costs in the period in
which they are incurred.
We plan to continue to invest in our research and development efforts, including
hiring additional employees, to enhance existing products and develop new
products. As a result, we expect that our research and development expenses will
continue to increase in absolute dollars in future periods. We expect these
expenses to vary from period to period as a percentage of revenue.
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Selling, general and administrative. Our selling, general and administrative expenses primarily consist of salaries and benefits for employees in our executive, accounting and finance, legal expenses related to intellectual property, sales and marketing, operations, and human resource functions as well as professional services fees, such as consulting, audit, tax and legal fees, general corporate costs, commercial sales functions, marketing, travel expenses, facilities, IT, and allocated overhead expenses. We expect that our sales, general and administrative expenses will continue to increase in absolute dollars after our IPO, primarily due to increased headcount to support anticipated growth in the business and due to incremental costs associated with operating as a public company. Additionally, we expect an increase in absolute dollars as we expand our commercial sales, marketing and business development teams, increase our presence globally and increase marketing activities to drive awareness and adoption of our platform. We expect these expenses to vary from period to period as a percentage of revenue. Change in fair value of contingent consideration. OnSeptember 28, 2018 , the Company acquired substantially all the assets of the Quantitative Pathology Solutions ("QPS") division of PKI. As part of the acquisition, onSeptember 28, 2018 , the Company entered into a License Agreement (the "Ancillary Agreements") with PKI. Under the terms of the License Agreement, the Company agreed to pay PKI certain royalties as a percentage of future sales of products from the QPS division, in exchange for a perpetual license of the right to produce and sell QPS products. This contingent consideration is subject to remeasurement. Depreciation and amortization. Depreciation and amortization expenses primarily consist of depreciation of property and equipment and amortization of acquired intangibles. Other income (expense)
Interest expense. Interest expense consists primarily of interest related to borrowings under our debt obligations.
Change in fair value of warrant liability. Prior to our IPO, we classified our outstanding warrant to purchase shares of our Series D redeemable convertible preferred stock as a liability on our balance sheets at its estimated fair value since the underlying redeemable convertible preferred stock was classified as temporary equity. At the end of each reporting period, changes in the estimated fair value during the period were recorded as a component of other income (expense). In connection with our IPO, this warrant was adjusted to become a warrant to purchase shares of our common stock and met the criteria to be classified within stockholders' equity; therefore, the warrant was no longer subject to liability accounting. Accordingly, the fair value of the warrant liability was reclassified to stockholders' equity.
Gain on extinguishment of debt. Gain on extinguishment of debt relates to forgiveness of our PPP loan.
Other expense, net. Other expense, net consists primarily of franchise tax and foreign currency exchange gains and losses.
Benefit (provision) for income taxes
Our benefit (provision) for income taxes consists primarily of foreign taxes and state minimum taxes inthe United States . As we expand the scale and scope of our international business activities, any changes inthe United States and foreign taxation of such activities may increase our overall provision for
income taxes in the future.
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Results of operations
The results of operations presented below should be reviewed in conjunction with
the consolidated financial statements and notes included elsewhere in the
Quarterly Report on Form 10-Q. The following tables set forth our results of
operations for the periods presented:
Three months ended Six months ended
June 30, June 30,
($ in thousands) 2021 2020 2021 2020
Product revenue $ 10,719 $ 6,186 $ 20,682 $ 15,115
Service and other revenue 2,352 2,374 4,601 4,466
Total revenue 13,071 8,560 25,283 19,581
Cost of goods sold:
Cost of product revenue $ 3,180 $ 2,538 $ 6,787 $ 6,004 Cost of service and other revenue 1,757 752
2,957 1,611
Total cost of goods sold 4,937 3,290 9,744 7,615
Gross profit 8,134 5,270 15,539 11,966
Operating expenses:Selling, general and administrative 10,066 5,105 18,245 11,454 Research and development 2,947 2,420 6,139 4,792 Change in fair value of contingent consideration 400 655
826 (906)
Depreciation and amortization 1,099 922 2,108 1,821
Total operating expenses 14,512 9,102 27,318 17,161
Loss from operations (6,378) (3,832) (11,779) (5,195)
Other income (expense):
Interest expense, net (757) (658) (1,508) (1,295)Change in fair value of warrant liability (858) - (2,728) - Gain on extinguishment of debt 2,476 - 2,476 - Other expense, net (52) (56) (118) (161) Loss before benefit (provision) for income taxes (5,569) (4,546) (13,657) (6,651) Benefit (provision) for income taxes 6 (39)
12 (77)
Net loss $ (5,563) $ (4,585) $ (13,645) $ (6,728) Comparison of the three months ended
Revenue
Three months ended
June 30 , Change($ in thousands, except percentages) 2021 2020 Amount
% Product revenue$ 10,719 $ 6,186 4,533 73 % Service and other revenue 2,352 2,374 (22) (1) % Total revenue$ 13,071 $ 8,560 4,511 53 % Product revenue increased by$4.5 million , or 73%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 . The increase was primarily driven by a$2.8 million increase in consumable revenue resulting from a larger installed base of 618 systems as ofJune 30, 2021 , as compared to 489 systems as ofJune 30, 2020 , and a$1.8 million increase in instrument revenue resulting from 31 new system placements during the three months endedJune 30, 2021 , compared to 25 new system placements for the three months endedJune 30, 2020 . Service and other revenue remained fairly flat for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 . The change was primarily due to a$0.4 million decrease relating to lab services operations, offset by a$0.3 increase from instrument service, primarily driven by the increase in our installed base and customers renewing their service and warranty contracts, and a$0.1 increase to shipping revenue. 32
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Costs of Goods Sold, Gross Profit and Gross Margin
Three months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount
%
Cost of product revenue$ 3,180 $ 2,538 $ 642 25 % Cost of service and other revenue 1,757 752 1,005
134 % Total cost of goods sold$ 4,937 $ 3,290 $ 1,647 50 % Gross profit$ 8,134 $ 5,270 $ 2,864 54 % Gross margin 62 % 62 % Cost of product revenue increased by$0.6 million , or 25%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 . The increase in cost of product revenue was primarily driven by costs associated with increased instrument and consumable sales, partially offset by a change of mix in instrument revenue as compared to consumables revenue. Cost of service and other revenue increased by$1.0 million , or 134%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 . The increase was primarily due to increases in costs of shipping associated with higher instrument sales, as well as increases in extended warranty costs as there were higher customer renewals due to the maturity of the installed base. Gross profit increased by$2.9 million , or 54%, and gross margin remained consistent for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , primarily due to a higher mix of consumables revenue driven by a higher install base. Additionally, the Company recorded a$0.2 million reduction to cost of goods sold in the three months endedJune 30, 2021 , associated with the employee retention credit.
Operating Expenses
Selling, General and Administrative
Three months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount
%
Selling, general and administrative
97 % Selling, general and administrative expense increased by$5.0 million , or 97%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 . The increase was primarily due to a$2.2 million increase in professional fees and other third-party fees, which are largely incremental costs of operating a public business, including increased marketing, legal, accounting, insurance, and other consulting costs. Additionally, there was a$1.5 million increase in personnel-related expenses due to an increase in headcount to support the growth in our overall operations in anticipation of and subsequent to our IPO, net of$1.6 million credit associated with the employee retention credit. Remaining increases are due to higher costs in recruiting, facilities, supplies, software licenses and subscriptions, and other related costs. Research and development Three months endedJune 30 , Change
($ in thousands, except percentages) 2021 2020 Amount
% Research and development$ 2,947 $ 2,420 $ 527 22 %
Research and development expense increased by$0.5 million , or 22%, for the three months endedJune 30, 2021 , compared to the year endedJune 30, 2020 . The increase was primarily due to a$0.6 million increase in third-party consulting and lab supplies consumed as the Company has ramped up its efforts in anticipation of and subsequent to the IPO. Additionally, net of the impact of the employee retention credit of$1.0 million , current period personnel-related expenses were approximately flat quarter-over-quarter. On a gross basis there was an increase in personnel-related expenses resulting from increased headcount. 33 Table of Contents
Change in fair value of contingent consideration
Three months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020
Amount %
Change in fair value of contingent consideration
Change in fair value of contingent consideration decreased by
Depreciation and amortization
Three months ended
June 30 , Change($ in thousands, except percentages) 2021 2020 Amount
% Depreciation and amortization$ 1,099 $ 922 $ 177 19 % The$0.2 million increase in depreciation and amortization expense was primarily related to an increase in property and equipment as ofJune 30, 2021 as compared toJune 30, 2020 . Interest expense Three months ended June 30, Change
($ in thousands, except percentages) 2021 2020 Amount
% Interest expense$ 757 $ 658 $ 99 15 %
Interest expense increased by
The increase was primarily due to increased debt levels as of
Change in fair value of warrant liability
Three months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount % Change in fair value of warrant liability$ 858 $ - $
858 100 % Change in fair value of warrant liability increased by$0.9 million , or 100%, for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 due to current period remeasurement.
Gain on extinguishment of debt
Three months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount
%
Gain on extinguishment of debt
100 %
Gain on extinguishment of debt increased by
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Other expense, net
Three months ended
June 30 , Change($ in thousands, except percentages) 2021 2020 Amount
% Other expense, net$ 52 $ 56 $ (4) (7) %
Other expense, net decreased by
Comparison of the six months ended
Revenue
Six months ended
June 30, Change
($ in thousands, except percentages) 2021 2020 Amount %
Product revenue $ 20,682 $ 15,115 5,567 37 %
Service and other revenue 4,601 4,466 135 3 %
Total revenue $ 25,283 $ 19,581 5,702 29 %
Product revenue increased by$5.6 million , or 37%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The increase was primarily driven by a$3.3 million increase in consumable revenue resulting from a larger installed base as of 618 systems as ofJune 30, 2021 , as compared to 489 systems as ofJune 30, 2020 , a$2.0 million increase in instrument revenue resulting from 68 new system placements during the six months endedJune 30, 2021 , compared to 57 new system placements for the six months endedJune 30, 2020 , as well as a$0.3 million increase in standalone software products due to incremental third party software sales completed during the six months endedJune 30, 2021 . Service and other revenue increased by$0.1 million , or 3%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The growth was primarily due a$0.9 increase from instrument service during the six months endedJune 30, 2021 , primarily driven by the increase in our installed base and customers renewing their service and warranty contracts, offset by a$0.9 million decrease relating to our lab services operations.
Costs of Goods Sold, Gross Profit and Gross Margin
Six months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount % Cost of product revenue
$ 6,787 $ 6,004 $ 783 13 % Cost of service and other revenue 2,957 1,611 1,346
84 % Total cost of goods sold$ 9,744 $ 7,615 $ 2,129 28 % Gross profit$ 15,539 $ 11,966 $ 3,573 30 % Gross margin 61 % 61 % Cost of product revenue increased by$0.8 million , or 13%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The increase in cost of product revenue was primarily driven by costs associated with increased instrument and consumable sales, partially offset by a change of mix in instrument revenue as compared to consumables revenue. Cost of service and other revenue increased by$1.3 million , or 84%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 . The increase was primarily due to increases in costs of shipping associated with higher instrument sales, as well as increases in extended warranty costs as there were higher customer renewals due to maturity of the installed base.
Gross profit increased by
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revenue driven by a higher install base. Additionally, the Company recorded a$0.2 million reduction to cost of goods sold in the six months endedJune 30, 2021 , associated with the employee retention credit.
Operating Expenses
Selling, General and Administrative
Six months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount %
Selling, general and administrative
Selling, general and administrative expense increased by$6.8 million , or 59%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2021 . The increase was primarily due to a$2.7 million increase in professional fees and other third-party fees, which are largely incremental costs of operating a public business, including increased marketing, legal, accounting, insurance, and other consulting costs. Additionally, there was a$2.7 million in personnel-related expenses due to an increase in headcount to support the growth in our overall operations in anticipation of our IPO, net of$1.6 million associated with the employee retention credit. Remaining increases due to higher costs in recruiting, facilities, supplies, software licenses and subscriptions, and other related costs. Research and development Six months endedJune 30 , Change
($ in thousands, except percentages) 2021 2020 Amount % Research and development
$ 6,139 $ 4,792 $ 1,347 28 %
Research and development expense increased by$1.3 million , or 28%, for the six months endedJune 30, 2021 , compared to the year endedJune 30, 2020 . The increase was primarily due to a$0.7 million increase in lab supplies consumed as the Company has ramped up its efforts in anticipation of and subsequent to our IPO, a$0.2 million increase in personnel- related expenses, resulting from increased headcount, which was partially offset by$1.0 million associated with the employee retention credit, as well as other immaterial increases.
Change in fair value of contingent consideration
Six months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount % Change in fair value of contingent consideration$ 826 $ (906)
$ 1,732 (191) %
Change in fair value of contingent consideration increased by$1.7 million , or 191%, for the six months endedJune 30, 2021 , compared to the six months endedJune 30, 2020 due to current period remeasurement. Depreciation and amortization Six months endedJune 30 , Change
($ in thousands, except percentages) 2021 2020 Amount % Depreciation and amortization
$ 2,108 $ 1,821 $ 287 16 % The$0.3 million increase in depreciation and amortization expense was primarily related to an increase in property and equipment as ofJune 30 , in 2021 as compared toJune 30, 2020 . 36 Table of Contents Interest expense Six months ended June 30, Change
($ in thousands, except percentages) 2021 2020 Amount % Interest expense
$ 1,508 $ 1,295 $ 213 16 %
Interest expense increased by
The increase was primarily due to increased debt levels as of
Change in fair value of warrant liability
Six months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020
Amount %
Change in fair value of warrant liability
Change in fair value of warrant liability increased by
Gain on extinguishment of debt
Six months ended
June 30 , Change
($ in thousands, except percentages) 2021 2020 Amount
%
Gain on extinguishment of debt
100 %
Gain on extinguishment of debt increased by
Other expense, net
Six months ended
June 30 , Change($ in thousands, except percentages) 2021 2020 Amount % Other expense, net
$ 118 $ 161 $ (43) (27) %
Other expense, net decreased by
Liquidity and Capital Resources
As of
Since our inception, we have experienced losses and negative cash flows from operations, and as ofJune 30, 2021 , we had a consolidated net loss of$13.6 million and an accumulated deficit of$66.8 million . We have primarily relied on equity and debt financings to fund our operations to date. 37
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We expect to incur additional operating losses in the foreseeable future as we continue to invest in the research and development of our product offerings, commercialize and launch platforms, and expand into new markets. Based on our current business plan, we believe the net proceeds from the IPO, together with our existing cash and cash equivalents and anticipated cash flows from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months following the date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including, but not limited to our ability to successfully commercialize and launch products, and to achieve a level of sales adequate to support our cost structure. If we are unable to execute on our business plan and adequately fund operations, or if the business plan requires a level of spending in excess of cash resources, we will have to seek additional equity or debt financing. If additional financings are required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition, results of operations and prospects could be adversely affected. Sources of Liquidity Since our inception, we have financed our operations primarily from the issuance and sale of our convertible preferred stock and borrowings under long-term debt agreements. InApril 2021 , we completed our IPO, resulting in the receipt of aggregate proceeds of$138.6 million , net of offering costs, underwriter discounts and commissions of$12.8 million .
Convertible preferred stock financings
Through
Payroll Protection Program loan
DuringApril 2020 , we received a$2.48 million small business loan under the Payroll Protection Program, part of the Coronavirus Aid, Relief and Economic Security Act, the CARES Act. We expect a portion of the loan to be forgiven under the provisions of the program. See "Risks Related to Our Business and Strategy - We received economic stimulus funding under the CARES Act." The PPP Loan was forgiven inJune 2021 .
Midcap Trust Term Loan
InOctober 2020 , we entered into the Midcap Trust Term Loan, for a$37.5 million credit facility, consisting of a senior, secured term loan to refinance all existing indebtedness withInnovatus . We realized$32.5 million in aggregate proceeds as a result of the debt financing. The term of the Midcap Trust Term Loan is interest only for 36-months followed by 24-months of straight-line amortization with a final maturity date ofOctober 27, 2025 . Interest on the outstanding balance of the Midcap Trust Term Loan shall be payable monthly in arrears at an annual rate of one-month LIBOR plus 6.35%, subject to a LIBOR floor of 1.50%.
The Midcap Trust Term Loan is subject to a minimum revenue financial covenant measuring our last twelve months trailing revenue, tested on a monthly basis.
The Midcap Trust Term Loan is collateralized by substantially all of our assets.
The agreement contains customary negative covenants that limit our ability to,
among other things, incur additional indebtedness, grant liens, make
investments, repurchase stock, pay dividends, transfer assets and merge or
consolidate with any other entity or to acquire all or substantially all the
capital stock or property of another entity. The agreement also contains
customary affirmative covenants, including requirements to, among other things,
deliver audited financial statements. If we default under the Midcap Trust Term
Loan and if the default is not cured or waived, the lender could cause any
amounts outstanding to be payable immediately. Under certain circumstances, the
lender could also exercise its rights with respect to the collateral
38
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securing such loans. Moreover, any such default would limit our ability to obtain additional financing, which may have an adverse effect on our cash flow and liquidity.
We were in compliance with all covenants under the Midcap Trust Term Loan as of
Cash flows
The following table summarizes our cash flows for the periods presented:
Six months ended
June 30,
($ in thousands) 2021 2020
Net cash provided by (used in):
Operating activities $ (16,819) $ (2,956)
Investing activities (1,854) (2,023)
Financing activities 136,930 (241)
Net increase (decrease) in cash, cash equivalents, and
restricted cash $ 118,257 $ (5,220)
Operating activities
Net cash used in operating activities increased by $13.9 million to $16.8
million in the six months ended June 30, 2021 compared to $3.0 million in the
six months ended June 30, 2020 . This increase is attributable to a net loss of
$13.6 million , offset by non-cash charges of $4.9 million . Non-cash charges
primarily consisted of $2.7 million in change in fair value of warrant
liability, $2.2 million of depreciation and amortization, $0.8 million in change
in fair value of contingent consideration, and $0.2 million of non-cash interest
expense, offset by $2.5 million gain on extinguishment of debt.
Investing activities
Net cash used in investing activities was$1.9 million in the six months endedJune 30, 2021 compared to$2.0 million during the six months endedJune 30, 2020 . The decrease was primarily driven by purchases of property and equipment of$1.9 million . Financing activities
Net cash provided by (used in) financing activities was$136.9 thousand for the six months endedJune 30, 2021 compared with($0.2) million for the six months endedJune 30, 2020 . In April of 2021, the Company received$138.6 million in net IPO proceeds, after deducting underwriting discounts and commissions and other offering expenses. During the six months endedJune 30, 2021 , we paid out$1.6 million in contingent consideration as compared to$2.6 million during the six months endedJune 30, 2020 . Remaining changes were immaterial.
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