Unless otherwise indicated or the context otherwise requires, references in this
section to "Markforged," "we," "us," "our" and other similar terms refer to
Markforged Holding Corporation and its subsidiaries after giving effect to the
Merger. The following discussion and analysis summarizes the significant factors
affecting the consolidated operating results, financial condition, liquidity and
cash flows of our company as of and for the periods presented below. The
following discussion and analysis should be read in conjunction with our
unaudited consolidated financial statements and the related notes thereto
included elsewhere in this Quarterly Report on Form 10-Q. The discussion
contains forward-looking statements that are based on the beliefs of management,
as well as assumptions made by, and information currently available to, our
management. Actual results could differ materially from those discussed in or
implied by forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this Quarterly Report on Form 10-Q,
particularly in the sections entitled "Risk Factors" and "Cautionary Note
Regarding Forward-Looking Statements."

Business Overview



Our platform, The Digital Forge, is an intuitive additive manufacturing platform
powering engineers, designers and manufacturing professionals globally. The
Digital Forge combines precise and reliable 3D printers and metal and composite
proprietary materials seamlessly with its cloud-based learning software offering
to empower manufacturers to create more resilient and agile supply chains.
Founded in 2013 by two MIT-educated engineers, Markforged is based in greater
Boston, Massachusetts, where we have our own in-house manufacturing facility and
where we design all of our industrial 3D printers, software and metal and
composite proprietary materials.

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 $71.3 million and $64.6 million for the nine months ended
September 30, 2022 and 2021, respectively, and incurred a net loss of $14.7
million and net profit of $0.6 million, respectively, for those same periods.
Net profit (loss) for the nine months ended September 30, 2022 and 2021 is
inclusive of non-cash mark-to-market gains of $52.2 million and $42.9 million,
respectively. As of September 30, 2022, we had an accumulated deficit of $90.4
million. We expect to continue to incur operating losses as we focus on growing
commercial sales of our products in both the 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 continue to
incur additional general and administrative expenses associated with operating
as a public company. In addition, we will incur substantial spending to build
out the global footprint of our sales network, continue investing in research
and development to accelerate product innovation, and fund inorganic growth
opportunities.

Merger agreement



On February 23, 2021, one, a Cayman Islands exempted company ("AONE"), entered
into an Agreement and Plan of Merger (the "Merger Agreement") with Caspian
Merger Sub Inc., a wholly owned subsidiary of AONE ("Merger Sub"), and
MarkForged, Inc. ("Legacy Markforged"), pursuant to which (i) AONE would
deregister as a Cayman Islands company and domesticate as a corporation in the
State of Delaware and would be renamed "Markforged Holding Corporation" (the
"Domestication") and (ii) Merger Sub would merge with and into Legacy Markforged
with Legacy Markforged surviving as a wholly owned subsidiary of Markforged
Holding Corporation (the "Merger"). AONE's shareholders approved the
transactions contemplated by the Merger Agreement on July 13, 2021, and the
Domestication and the Merger were completed on July 14, 2021.

Cash proceeds of the Merger were funded through a combination of AONE's $132.5
million of cash held in trust (after redemptions of $64.2 million) and an
aggregate of $210.0 million in fully committed common stock transactions at
$10.00 per share. Upon closing of the Merger (the "Closing"), Legacy Markforged
repurchased shares of common stock from certain of its stockholders, for a total
value of $45.0 million of cash on hand (the "Employee Transactions"). Total net
proceeds upon the Closing, net of the Employee Transactions and transaction
costs paid at the Closing of $27.1 million, were $288.8 million.

Recent Developments

Impact of Global Supply Chain Disruption and the COVID-19 Pandemic



We have experienced longer lead-times, higher costs, delays in procuring parts
and materials, delays in production, and increased production labor costs. For
example, we recently experienced longer lead times and capacity constraints in
connection with the raw resources required to manufacture our printing material
and we are also facing increased prices in connection with the procurement of
the electronic components and custom metal fabricated parts for our printers.
Partially due to these factors, we have experienced a longer and more costly
production ramp-up of our new FX20 printer. We are working closely with our
suppliers and

                                       29
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customers to minimize impacts, and we continue to closely monitor availability
of labor and supply of parts and materials required for our business. However,
the extent to which our operations may continue to be impacted by supply-chain
disruptions will depend largely on future developments, which are uncertain and
cannot be accurately predicted, including the timing, pace and scale of the
recovery of global economic conditions. The magnitude of the adverse impact on
our financial condition, results of operations and cash flows will depend on the
evolution of our supply chain difficulties.

We are continuing to closely monitor the impact of the COVID-19 pandemic on all
aspects of our business, including how it is impacting our customers, employees,
supply chain, and distribution network, as well as the demand for our products
in the markets that we serve. The extent to which the COVID-19 pandemic may
impact our business going forward will depend on numerous evolving factors that
we cannot reliably predict. These factors may adversely impact business spending
on manufacturing technology as well as customers' ability to pay for our
products and services on an ongoing basis.

For more information on operations and risks related to the COVID-19 pandemic
and global supply chain disruptions, please see the section of this Quarterly
Report on Form 10-Q titled "Risk Factors - General Risk Factors, The global
COVID-19 pandemic has significantly affected our business and operations".

Key Factors Affecting Operating Results



We believe that our financial performance has been and in the foreseeable future
will continue to be primarily driven by the factors discussed below. While each
of these factors presents significant opportunities for our business, they also
pose important challenges that we must successfully address in order to sustain
our growth and improve our results of operations.

Hardware 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 hardware. Management
focuses on hardware sales as an indicator of current business success and a
leading indicator of likely future recurring revenue from consumables, success
plans, and premium software subscriptions. We expect our hardware sales to
continue to grow as we increase penetration in our existing markets and expand
into new markets.

Recurring revenue

We regularly assess trends relating to recurring revenue which includes
consumables, services, and premium software subscriptions. The consumables
revenue stream includes metals, continuous fiber, and chopped fiber materials
used by customers as print media. Our services revenue is made up of revenue
generated from hardware maintenance contracts (which we also refer to as
"Success Plans") and premium software subscriptions. The Success Plan revenue
stream primarily consists of hardware maintenance services generally realized
over a period of one to three years. Premium software subscriptions relate to
certain cloud software solutions sold separately from our standard cloud-based
software platform offering that is fully integrated with our hardware. Recurring
revenue was 30% and 27% of total revenue for the three months ended September
30, 2022 and 2021, respectively. Recurring revenue was 33% and 29% of total
revenue for the nine months ended September 30, 2022 and 2021, respectively. Our
recurring revenue as a percentage of total revenue may vary based upon new
product placements in the period as well as consumption trends impacted by
macroeconomic factors, customer behavior, and the useful life of our hardware.
As our cumulative historical hardware sales increase, recurring revenue on an
absolute basis is expected to increase and over time should be an increasingly
important contributor to our total revenue.

Go to market



We believe that we are in a strong position within the industry with our
accessible solutions that offer users design flexibility and industrial strength
parts. Accordingly, we continue to invest in operations and sales channels
necessary to scale our business and continue to gain market share and open new
market opportunities. We have proven an ability to design, manufacture, and
distribute products through channels that provide a high value to customers at
gross margins higher than many of our competitors. In addition to our go to
market strategy, our integrated platform of hardware, software and consumables
has been core to our success and we will continue to drive value through
research and development as we introduce smarter and more adaptive technology
that is expected to improve our integrated platform and, ultimately, the value
provided by our 3D printers. We believe these investments are critical to
achieve long-term scalability, but expect the near term impacts will be a muting
of our short term profitability.

                                       30
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Seasonality



Historically, the sales of our 3D printers have been subject to seasonality and
we have seen higher hardware sales in the third and fourth quarters. We believe
this trend is likely driven by available funds in federal capital budgets at the
end of the third quarter and commercial budgets at year end which they direct
towards the evolution of their manufacturing processes through investments in
additive manufacturing.

Components of Results of Operations

Revenue



The majority of our revenue results from the sale of hardware, including our
additive manufacturing products, and related consumables. We deliver products
and services primarily through our VAR network, who purchase and resell our
products to end users. Hardware and consumables revenue is recognized upon
transfer of control to the customer, which is typically the VAR, and generally
takes place at the point of shipment. We also generate a portion of our revenue
from hardware maintenance services and our premium software subscriptions.
Revenue from hardware maintenance services for our additive manufacturing
products is primarily generated through one-year or three-year contracts and is
recognized ratably over the term of the agreement. Revenue related to software
subscriptions is recognized ratably over the term of the subscription. Our VARs
may provide installation services, as needed depending on the product.

Cost of revenue



Our cost of revenue consists of the cost of product, software subscriptions,
maintenance services, personnel costs, third party logistics, warranty
fulfillment costs, and overhead. Cost of products includes the manufacturing
cost of our additive manufacturing products and consumables. We primarily
utilize third party manufacturers for the production of our additive
manufacturing hardware while we utilize our own manufacturing facilities and
personnel for the production of our consumables. The costs of revenue for
internally manufactured products include the cost of raw materials, labor
conversion costs, and overhead related to our manufacturing operations,
including depreciation. Cost of maintenance services includes personnel-related
costs associated with our customer success teams' provision of remote and
on-site support services to our customers and the costs of replacement parts.

Our cost of revenue also includes indirect costs of providing our products and services to customers which consist primarily of reserves for excess and obsolete inventory and stock-based compensation.

We expect our cost of revenue to increase in absolute dollars in future periods as we expect our revenues to continue to grow.

Gross profit and gross margin

Our gross profit is calculated based on the difference between our revenues and cost of revenue. Gross margin is the percentage obtained by dividing gross profit by our revenue. Our gross profit and gross margin are, or may be, influenced by a number of factors, including:

Market conditions and competition that may impact our pricing;

Product mix changes between our printer product lines and consumables trends;

Excess and obsolete material related to new product introductions;

The impact of global supply chain disruptions on the cost to both procure materials and ship materials and finished goods;


Growth in the number of customers utilizing our additive manufacturing products
and changes in customer utilization rates, which affects sales of our consumable
materials and may result in excess or obsolete inventories;


Our cost structure for manufacturing operations, including the impact of
inflation, the extent to which we utilize contract manufacturers compared to
in-house manufacturing, the ability to achieve economies of scale in our
purchase volumes, any impacts to changes in our manufacturing on our product
warranty obligations and freight and logistics costs; and

Our ability to directly monetize the capabilities of our software solutions in the future.

We expect our gross margins to fluctuate over time, depending on the factors described above.


                                       31
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Research and development



Our research and development expenses represent costs incurred to support
activities that advance the development of innovative additive manufacturing
technology, new printer products, development of proprietary printing materials,
as well as activities that enhance the functionality of our offerings. Our
research and development expenses consist primarily of employee-related
personnel expenses, prototypes, facilities costs, and engineering services. We
believe our research and development department is staffed at a level that
enables us to innovate and develop products throughout 2023 and 2024.

Sales and marketing



Sales and marketing expenses consist primarily of personnel-related costs for
our sales and marketing departments, costs related to sales commissions, trade
shows, advertising, facilities costs, and other demand generation services. We
reorganized our go-to-market team during the fourth quarter of 2022, and expect
that costs will stabilize as we continue to optimize our team.

General and administrative



General and administrative expenses consist primarily of personnel-related costs
for our executive leadership and finance, human resources and IT departments. We
believe our general and administrative costs have stabilized as we have
completed our investments required to operate as a public company.

Change in fair value of derivative liabilities



Change in fair value of derivative liabilities primarily includes the change in
fair value of the contingent earnout liabilities and private placement warrant
liability. All were accounted for as liabilities as of the date of the Merger,
or acquisition, and remeasured to fair value at the end of the reporting period.

Other (expense) income, net

Other (expense) income, net includes other non-operating expenses and income sources.



Interest expense

Interest expense includes interest accrued on our debt and the amortization of deferred debt issuance costs.



Interest income

Interest income includes interest earned on deposits and short-term investments.

Income taxes



Our income tax provision consists of an estimate for U.S. federal and state
income taxes based on enacted rates, as adjusted for allowable credits,
deductions, changes in deferred tax assets and liabilities and changes in tax
law. Due to cumulative losses, we maintain a valuation allowance against our
U.S. and state deferred tax assets.

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law,
with tax provisions primarily focused on implementing a 15% minimum tax on
global adjusted financial statement income and a 1% excise tax on share
repurchases. The Inflation Reduction Act of 2022 will become effective beginning
in Fiscal 2024. The Company does not currently expect that the Inflation
Reduction Act will have a material impact on its income taxes.

Results of Operations



The results of operations presented below should be reviewed in conjunction with
the condensed consolidated financial statements and notes included elsewhere in
this Quarterly Report on Form 10-Q. The following tables set forth our results
of operations for the periods presented.

                                       32
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Comparison of the three months ended September 30, 2022 and 2021



                                              Three Months Ended
                                                 September 30,
(dollars in thousands)                       2022             2021        $ Change       % Change
Revenue                                   $   25,208       $   24,045     $   1,163               5 %
Cost of revenue                               12,959           10,330         2,629              25 %
Gross profit                                  12,249           13,715        (1,466 )           (11 )%
Operating expense
Sales and marketing                           11,783           10,399         1,384              13 %
Research and development                      10,421            9,761           660               7 %
General and administrative                    12,873           15,935        (3,062 )           (19 )%
Total operating expense                       35,077           36,095        (1,018 )            (3 )%
Loss from operations                         (22,828 )        (22,380 )        (448 )             2 %
Change in fair value of warrant
liabilities                                     (448 )          1,418        (1,866 )          (132 )%
Change in fair value of contingent
earnout liability                               (656 )         42,710       (43,366 )          (102 )%
Other expense, net                               (39 )            (48 )           9             (19 )%
Interest expense                                  (2 )             (6 )           4             (67 )%
Interest income                                1,006                6         1,000              NM
(Loss) profit before income taxes            (22,967 )         21,700       (44,667 )          (206 )%
Income tax benefit (expense)                       3               (3 )           6            (200 )%
Net (loss) profit                         $  (22,970 )     $   21,703     $ (44,673 )          (206 )%


________________
NM - Not meaningful



Revenue, cost of revenue, and gross margin



We earn revenue from the sale of hardware, consumables, and services contracts.
The hardware revenue stream includes 3D metal printers, 3D composite printers,
and sintering furnaces. The consumables revenue stream includes metals,
continuous fiber, and chopped fiber materials used by customers as print media.
The services revenue stream primarily consists of hardware maintenance services
and software subscriptions.

The following table sets forth the changes in the components of gross margin for the three months ended September 30, 2022 and 2021.



                           Three Months Ended September 30,
(dollars in thousands)        2022                  2021           $ Change      % Change
Revenue                  $        25,208       $        24,045     $   1,163             5 %
Cost of revenue                   12,959                10,330         2,629            25 %
Gross profit                      12,249                13,715        (1,466 )         (11 )%
Gross margin                          49 %                  57 %           -           (15 )%




Comparison of revenue

The following table disaggregates the Company's revenue based on the nature of the products and services:



                   Three Months Ended September 30,
(in thousands)        2022                  2021            $ Change       % Change
Hardware         $        17,571       $        17,469     $      102              1 %
Consumables                5,568                 4,899            669             14 %
Services                   2,069                 1,677            392             23 %
Total Revenue    $        25,208       $        24,045     $    1,163              5 %



Consolidated revenue for the three months ended September 30, 2022 was $25.2
million compared with revenue of $24.0 million for the three months ended
September 30, 2021 representing an increase of 5%, primarily driven by increases
in consumable and service revenue over the comparable period.

                                       33
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Hardware revenue remained consistent during the three months ended September 30,
2022 compared to the three months ended September 30, 2021. Overall unit sales
decreased over the three months ended September 30, 2022 driven by a shift in
sales to higher value next-gen printers, specifically the FX20. Consumables
revenue increased approximately 14% for the three months ended September 30,
2022 compared to the three months ended September 30, 2021. The increase in
consumables revenue was due to the increase in active printers being utilized in
the field as a result of the incremental volume of new printer sales in the
prior year. Services revenue increased approximately 23% for the three months
ended September 30, 2022 compared to the three months ended September 30, 2021.
The increase in services revenue was driven by an increase in the percentage of
hardware units sold with a warranty and maintenance contract during the
preceding year, as well as the introduction of software subscription services,
including Eiger Fleet and Blacksmith.

Cost of revenue and gross profit



Consolidated cost of revenue for the three months ended September 30, 2022 was
$13.0 million compared with cost of revenue of $10.3 million for the three
months ended September 30, 2021 representing an increase of 25%. This was
primarily due to higher than anticipated costs to produce the initial units of
our newest printer, the FX20, principally the cost of mechanical and electronic
components, and labor to produce the FX20, and, more broadly across our product
portfolio, rising freight and logistics costs. Gross profit for the three months
ended September 30, 2022 was $12.2 million compared with gross profit of $13.7
million for the three months ended September 30, 2021 representing an decrease
of 11%. Gross profit margin for the three months ended September 30, 2022 was
49% while the gross profit margin for the three months ended September 30, 2021
was 57%. The decline in consolidated gross profit is primarily due to the
increased costs to procure supplies of mechanical and electronic components and
increases in the cost of labor to produce the initial units of our newest
printer, the FX20. Additionally, gross profit was impacted by increases to
freight and logistics expenses in support of production, and a shift in our
product mix.

Operating expenses

The following table sets forth the components of operating expenses for the three months ended September 30, 2022 and 2021.



                                         Three Months Ended September 30,
                                          2022                         2021                     Change
                                                    %                          %
(dollars in thousands)           Amount          Revenue       Amount       Revenue         $            %
Operating expenses
Sales and marketing            $   11,783              47 %   $ 10,399            43 %   $  1,384           13 %
Research and development           10,421              41 %      9,761            41 %        660            7 %
General and administrative         12,873              51 %     15,935            66 %     (3,062 )        (19 )%
Total operating expenses       $   35,077             139 %   $ 36,095           150 %   $ (1,018 )         (3 )%



Sales and marketing expense increased 13% for the three months ended September
30, 2022, as compared to the three months ended September 30, 2021, primarily
due to increased spending on personnel costs of $1.9 million, which was
partially offset by a decline in contractor costs of $1.0 million as more roles
were shifted in-house. Events and travel costs increased $0.5 million as more
events were held, and rent increased $0.3 million due to the commencement of the
new Waltham headquarters lease. The increases in expense are consistent with our
increase in headcount over the comparable quarter as we executed on our growth
strategy, and increased travel in the current year as a result of the lifting of
travel restrictions from the COVID-19 pandemic. These increases were partially
offset by a decline in demand generating advertising spending of $0.8 million
due to a strategic shift by our marketing team to other advertising avenues.

Research and development expense increased 7% for the three months ended
September 30, 2022, as compared to the three months ended September 30, 2021,
primarily due to increases in personnel and contractor costs of $1.2 million.
The increase in employee related costs are consistent with our investment in
human capital to meet our innovation goals. Rent expense increased by $0.6
million due to the commencement of the new Waltham headquarters lease. These
increases were offset by a decrease in stock-based compensation of $0.7 million
due to the graded vested accounting for stock based compensation. In addition
there was a decrease in prototype research and development of $0.4 million due
to the phase of the development of the FX20 in the third quarter of 2021 versus
current projects.

General and administrative expenses decreased 19% for the three months ended
September 30, 2022, as compared to the three months ended September 30, 2021,
primarily due to a decrease in stock-based compensation expense of $2.5 million
due to the nature of graded vesting of expense, decreased legal expense of $1.5
million, and a decrease in the use of contractors of $0.7 million. Offsetting
these decreases, rent expense increased by $0.8 million due to the commencement
of the new Waltham headquarters lease and tax compliance costs of $0.2 million.

                                       34
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Change in fair value of derivative liabilities and contingent earnout liability, other (expense) income, net, interest expense, and interest income

The following table sets forth Change in fair value of derivative liabilities for the three months ended September 30, 2022 and 2021.



                                           Three Months Ended September 30,
(dollars in thousands)                         2022                  2021         $ Change       % Change
Change in fair value of derivative
liabilities                               $          (448 )       $     1,418     $  (1,866 )          (132 )%
Change in fair value of contingent
earnout liability                                    (656 )            42,710       (43,366 )          (102 )%
Other expense, net                                    (39 )               (48 )           9             (19 )%
Interest expense                                       (2 )                (6 )           4             (67 )%
Interest income                                     1,006                   6         1,000              NM




Fair value of derivative liabilities increased creating a loss of $1.1 million
for the three months ended September 30, 2022, compared to net income of $44.1
million during the three months ended September 30, 2021, primarily related to
the change in fair value of derivative liabilities for the SPAC earnout shares
and the Teton development milestone achievement. The changes in fair value
directly correlate with the change in the Company's common stock price over the
period, and probability of earnout milestone achievement.
The change in interest income is directly correlated to the interest rates
during each period, slightly offset by the decrease in the cash balance in
short-term investment accounts.

Provision for income taxes

We recorded a de minimis expense (benefit) for income taxes for the three months ended September 30, 2022 and 2021, respectively.

Comparison of the nine months ended September 30, 2022 and 2021



                                           Nine Months Ended September
                                                       30,
(dollars in thousands)                        2022             2021        $ Change       % Change
Revenue                                    $   71,294       $   64,584     $   6,710             10 %
Cost of revenue                                34,514           26,729         7,785             29 %
Gross profit                                   36,780           37,855        (1,075 )           -3 %
Operating expense
Sales and marketing                            35,104           25,711         9,393             37 %
Research and development                       31,375           21,487         9,888             46 %
General and administrative                     38,094           32,770         5,324             16 %
Total operating expense                       104,573           79,968        24,605             31 %
Loss from operations                          (67,793 )        (42,113 )     (25,680 )           61 %
Change in fair value of warrant
liabilities                                     1,221              170         1,051            618 %
Change in fair value of contingent
earnout liability                              50,982           42,710         8,272             19 %
Other expense, net                               (429 )           (168 )        (261 )          155 %
Interest expense                                  (11 )            (15 )           4            (27 )%
Interest income                                 1,380                9         1,371             NM
(Loss) profit before income taxes             (14,650 )            593       (15,243 )           NM
Income tax benefit                                  6               (1 )           7           (700 )%
Net (loss) profit                          $  (14,656 )     $      594     $ (15,250 )           NM


Revenue, cost of revenue, and gross margin



We earn revenue from the sale of hardware, consumables, and services contracts.
The hardware revenue stream includes 3D metal printers, 3D composite printers,
and sintering furnaces. The consumables revenue stream includes metals,
continuous fiber, and chopped fiber materials used by customers as print media.
The services revenue stream primarily consists of hardware maintenance services
and software subscriptions.

                                       35
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The following table sets forth the changes in the components of gross margin for the nine months ended September 30, 2022 and 2021.



                            Nine Months Ended September 30,
(dollars in thousands)        2022                  2021           $ Change      % Change
Revenue                  $        71,294       $        64,584     $   6,710            10 %
Cost of revenue                   34,514                26,729         7,785            29 %
Gross profit                      36,780                37,855        (1,075 )          (3 )%
Gross margin                          52 %                  59 %           -           (12 )%




Comparison of revenue

The following table disaggregates the Company's revenue based on the nature of the products and services:



                    Nine Months Ended September 30,
(in thousands)        2022                  2021            $ Change       % Change
Hardware         $        48,098       $        46,039     $    2,059              4 %
Consumables               16,913                14,295          2,618             18 %
Services                   6,283                 4,250          2,033             48 %
Total Revenue    $        71,294       $        64,584     $    6,710             10 %



Consolidated revenue for the nine months ended September 30, 2022 was $71.3
million compared with revenue of $64.6 million for the nine months ended
September 30, 2021 representing an increase of 10%, primarily driven by sales of
increases in consumable and service revenue over the comparable period, as well
as increased sales of our next-gen printers, specifically the FX20.

Hardware revenue increased approximately 4% for the nine months ended September
30, 2022 compared to the nine months ended September 30, 2021. The increase in
revenue was primarily due to a shift in sales to FX20 printers from legacy
printers. This increase was partially offset by a decrease in units sold of
other high value composite printers, largely driven by the $8.0 million
transaction that occurred in the fourth quarter of 2020 and contributed $1.2
million to hardware revenue in the first quarter of 2021. Consumables revenue
increased approximately 18% for the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021; this was due to the
increase in active printers being utilized in the field as a result of the
incremental volume of new printer sales in the prior year. Services revenue
increased approximately 48% for the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021, driven primarily by an
increase in the percentage of hardware units sold with a warranty and
maintenance contract during the preceding year, as well as the introduction of
software subscription services, including Eiger Fleet and Blacksmith.

Cost of revenue and gross profit



Consolidated cost of revenue for the nine months ended September 30, 2022 was
$34.5 million compared with cost of revenue of $26.7 million for the nine months
ended September 30, 2021 representing an increase of 29%. This was primarily due
to higher than anticipated costs to produce the initial units of our newest
printer, the FX20, principally the cost of mechanical and electronic components,
and labor to produce the FX20, and, more broadly across our product portfolio,
rising freight and logistics costs. Gross profit for the nine months ended
September 30, 2022 was $36.8 million compared with gross profit of $37.9 million
for the nine months ended September 30, 2021. Gross profit margin for the nine
months ended September 30, 2022 was 52% while the gross profit margin for the
nine months ended September 30, 2021 was 59%. The decline in consolidated gross
profit is primarily due to the increased costs to procure supplies of mechanical
and electronic components and increases in the cost of labor to produce the
initial units of our newest printer, the FX20. Additionally, gross profit was
impacted by increases to freight and logistics expenses in support of
production, and a shift in our product mix.

Operating expenses

The following table sets forth the components of operating expenses for the nine months ended September 30, 2022 and 2021:


                                       36
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                                        Nine Months Ended September 30,
                                        2022                         2021                     Change
                                                  %                          %
(dollars in thousands)          Amount         Revenue       Amount       Revenue         $            %
Operating expenses
Sales and marketing           $    35,104            49 %   $ 25,711            40 %   $  9,393           37 %
Research and development           31,375            44 %     21,487            33 %      9,888           46 %
General and administrative         38,094            53 %     32,770            51 %      5,324           16 %
Total operating expenses      $   104,573           147 %   $ 79,968           124 %   $ 24,605           31 %



Sales and marketing expense increased 37% for the nine months ended September
30, 2022, as compared to the nine months ended September 30, 2021, primarily due
to increased spending on personnel costs of $5.7 million, stock-based
compensation of $1.4 million, and market development funds of $0.7 million.
Events and travel costs increased $2.2 million as COVID-19 restrictions lifted
and more events were held compared to the comparable period. In addition, rent
expense increased by $0.6 million due to the commencement of the new Waltham
headquarters lease. The increases in expense are consistent with our increase in
headcount as we execute our growth strategy. These increases were partially
offset by a decline in contractor costs of $1.6 million as we shifted roles
in-house, and a decline in demand generating advertising spending of $1.5
million due to a strategic shift by our marketing team to other advertising
avenues.

Research and development expense increased 46% for the nine months ended
September 30, 2022, as compared to the nine months ended September 30, 2021,
primarily due to increases in personnel and contractor costs of $5.6 million,
and stock-based compensation expenses increased $1.6 million. The increase in
employee related costs are consistent with our investment in human capital to
meet our innovation goals. In addition, rent expense increased by $1.4 million
due to the commencement of the new Waltham headquarters lease.

General and administrative expenses increased 16% for the nine months ended
September 30, 2022, as compared to the nine months ended September 30, 2021,
primarily due to increased personnel and contractor costs of $1.6 million, and
stock-based compensation of $1.2 million. The increases are consistent with the
additions to our management team to position the company for future growth, and
additional key personnel to support our public company infrastructure, and
additional public company costs that began being incurred after the Merger. Rent
expense increased by $0.9 million due to the commencement of the new Waltham
headquarters lease. Director and officer insurance expense increased by $0.7
million over the comparable period, and software and subscription expense
increased by $0.5 million as we invested in new tools to support our public
company infrastructure. These increases were slightly offset by a $0.7 million
decrease in recruiting costs.

Change in fair value of derivative liabilities and contingent earnout liability, other (expense) income, net, interest expense, and interest income

The following table sets forth change in fair value of derivative liabilities for the nine months ended September 30, 2022 and 2021:



                                              Nine Months Ended September 

30,


(dollars in thousands)                          2022                  2021            $ Change       % Change
Change in fair value of derivative
liabilities                                $         1,221       $           170     $    1,051            618 %
Change in fair value of contingent
earnout liability                                   50,982                42,710          8,272             19 %
Other expense, net                                    (429 )                (168 )         (261 )          155 %
Interest expense                                       (11 )                 (15 )            4            (27 )%
Interest income                                      1,380                     9          1,371             NM




Fair value of derivative liabilities decreased creating additional income of
$52.2 million for the nine months ended September 30, 2022, compared to income
of $42.9 million during the nine months ended September 30, 2021, primarily
related to the change in fair value of the derivative liability for the
Markforged Earnout Shares issued in connection with the Merger. The changes in
fair value directly correlate with the change in our common stock price between
each period.
The change in interest income is directly correlated to the interest rates
during each period, slightly offset by a decrease in the cash balance in our
short-term investment accounts.

Provision for income taxes

We recorded a de minimis expense (benefit) for income taxes for the nine months ended September 30, 2022 and 2021, respectively.


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Non-GAAP Net Profit (Loss)



In addition to our financial results determined in accordance with U.S.
generally accepted accounting principles ("GAAP"), we believe that the below
non-GAAP net profit (loss) financial measure, that excludes one-time charges and
certain non-cash items, is useful in evaluating the performance of our business.
We define non-GAAP net profit (loss) as net profit (loss) less stock-based
compensation expense, net change in fair value of derivative liabilities and
contingent earnout liabilities, and certain non-recurring expenses.

We monitor non-GAAP net profit (loss) as a measure of our overall business
performance, which enables us to analyze our past and future performance without
the effects of non-cash items and/or one-time charges. While we believe that
non-GAAP net profit (loss) is useful in evaluating our business, non-GAAP net
profit (loss) is a non-GAAP financial measure that has limitations as an
analytical tool. Non-GAAP net profit (loss) can be useful in evaluating our
performance by eliminating the effect of financing and non-cash expenses such as
stock-based compensation, however, we may incur such expenses in the future
which could impact future results. We also believe that the presentation of the
non-GAAP financial measures in this Quarterly Report on Form 10-Q provides an
additional tool for investors to use in comparing our core business and results
of operations over multiple periods with other companies in our industry, many
of which present similar non-GAAP financial measures to investors.

Investors should note that beginning with the second quarter of 2022, we have
modified the presentation of "non-recurring costs" included in non-GAAP gross
margin, non-GAAP operating profit (loss), non-GAAP net profit (loss) and
non-GAAP earnings per share metrics to include certain non-recurring litigation
costs. We use these metrics to provide an understanding of the results of our
core business performance and believe these non-recurring litigation costs are
reflective of one-time expenses that are not indicative of the performance of
our core business' operations. This change increases "non-recurring costs" by
$0.6 million, $1.0 million, and $0.8 million in the first through third quarters
of 2022, respectively, and by $3.7 million, $0.9 million, and $2.3 million in
the first through third quarters of 2021, respectively. To conform to the
current period's presentation, we have included non-recurring litigation costs
as "non-recurring costs" when presenting the foregoing non-GAAP figures for the
year to date period and periods presented for 2021.

In addition, other companies, including companies in our industry, may calculate
non-GAAP metrics differently or not at all, which reduces the usefulness of this
measure as a tool for comparison.

We recommend that you review the reconciliation of non-GAAP net profit (loss) to
net income (loss), the most directly comparable GAAP financial measure, and that
you not rely on any single financial measure to evaluate our business.

Non-GAAP Net Profit (Loss)

                                         Three Months Ended             Nine Months Ended
                                           September 30,                  September 30,
(dollars in thousands)                  2022            2021           2022           2021
Net (loss) profit                    $   (22,970 )   $   21,703     $  (14,656 )   $      594
Stock compensation expense                 5,286          8,424         15,620         11,395
Change in fair value of derivative           448         (1,418 )       (1,221 )         (170 )
liabilities
Change in fair value of contingent           656        (42,710 )      (50,982 )      (42,710 )
earnout liability
Non-recurring costs                        1,427          2,329          4,411          6,962
Non-GAAP net loss                    $   (15,153 )   $  (11,672 )   $  (46,828 )   $  (23,929 )

Liquidity and Capital Resources



We have historically funded our operations primarily through the sale of
convertible preferred stock, the proceeds from the Merger and reverse
recapitalization including the sale of common stock, and the sale of our
products. Since inception we have focused on growth, which has required ongoing
investment to support scaling of our business, research and development efforts,
and day to day operations. We had cash and cash equivalents balances of $181.8
million as of September 30, 2022. We incurred a net loss of $14.7 million and
net income of $0.6 million for the nine months ended September 30, 2022 and
2021, respectively.

Currently we generate negative operating cash flows as we pursue further
business growth. Our cash and cash equivalents balance as of September 30, 2022
of $181.8 million is more than sufficient to meet the working capital and
capital expenditure needs for the next 12 months following the filing for this
Quarterly Report on Form 10-Q. Our future capital requirements will depend on
many factors, including our revenue growth rate, the timing and the amount of
cash received from customers, the expansion of sales and marketing activities,
the timing and extent of spending to support development efforts, expenses
associated with our international

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expansion, the introduction of platform enhancements, and the continuing market
adoption of The Digital Forge platform. In the future, we may enter into
arrangements to acquire or invest in complementary businesses, products, and
technologies. We may be required to seek additional equity or debt financing. In
the event that we require additional financing, we may not be able to raise such
financing on terms acceptable to us or at all. If we are unable to raise
additional capital or generate cash flows necessary to expand our operations and
invest in continued innovation, we may not be able to compete successfully,
which would harm our business, results of operations, and financial condition.

Cash flows

For the nine months ended September 30, 2022 and 2021



The following table sets forth a summary of Markforged's cash flows for the
periods indicated:

                                     Nine Months Ended September 30,                Change
(dollars in thousands)                 2022                2021               $               %
Net cash used in operating
activities                          $   (65,317 )     $       (38,795 )   $  (26,522 )            68 %
Net cash used in investing
activities                              (41,629 )              (2,323 )      (39,306 )            NM
Net cash provided by financing
activities                                1,599               279,138       (277,539 )           (99 )%
Effect of exchange rate changes
on cash                                     (21 )                   -            (21 )          (100 )%
Net change in cash and cash
equivalents                         $  (105,368 )     $       238,020     $ (343,388 )          (144 )%




Cash flow from operations

Net cash used in operating activities for the nine months ended September 30,
2022 and 2021 was $65.3 million and $38.8 million, respectively. Operating cash
flows and changes in working capital for comparative periods were as follows:


                                                    Nine Months Ended September 30,
(dollars in thousands)                               2022                    2021
Operating cash flows before changes in
working capital                                $         (44,258 )     $         (27,269 )
Changes in working capital                               (21,059 )               (11,526 )




Net cash used in operating activities increased by $26.5 million for the nine
months ended September 30, 2022 compared to the nine months ended September 30,
2021. The change in operating cash flows before changes in working capital
consists of an increase in net loss of $15.3 million, adjusted for non-cash
items, primarily consisting of gains on changes in the fair value of liabilities
of $9.3 million, offset by an increase in stock-based compensation expense of
$4.2 million, and depreciation, amortization, and non-cash lease interest of
$5.0 million. Cash consumed by working capital increased $9.3 million for the
nine months ended September 30, 2022 compared to the nine months ended September
30, 2021; this was primarily driven by increases in inventory as we built
additional printers in anticipation of stronger demand for our desktop series in
the second half of 2022.

Cash flow from investing activities



Net cash used in investing activities for the nine months ended September 30,
2022 and 2021 was $41.6 million and $2.3 million, respectively. The increase in
cash used is directly related to the cash paid for the acquisitions, net of cash
acquired, completed in the second and third quarters of 2022.

Cash flow from financing activities

Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2022 and net cash provided by financing activities was $279.1 million for the nine months ended September 30, 2021. The change in financing activities was primarily due to the Merger.

Critical accounting policies and estimates



Our discussion and analysis of our financial condition and results of operations
are based on the historical consolidated and condensed financial statements
included elsewhere herein. We prepared these financial statements in conformity
with U.S. GAAP. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. We base our estimates on
historical experience and on various other assumptions we believe to be
reasonable under the circumstances. We routinely evaluate these estimates,
utilizing historical experience, consultation with experts and other methods we
consider

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reasonable in the particular circumstances. Our results may differ from these
estimates, and any effects on our business, financial position or results of
operations resulting from revisions to these estimates are recorded in the
period in which the facts that give rise to the revision become known. Changes
in these estimates could materially affect our financial position, results of
operations or cash flows. See the "Critical Accounting Policies and Estimates"
section in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 3, "Significant Accounting Policies" in the
Notes to Consolidated Financial Statements included within our Annual Report on
Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31,
2022.

Acquisitions


We account for business combinations using the acquisition method of accounting,
which requires that the assets acquired and liabilities assumed be recorded at
their respective estimated fair values as of the acquisition date. The excess of
the fair value of the purchase consideration over the fair values of these
identifiable assets and liabilities is recorded as goodwill. While we use our
best estimates and judgments, our estimates are inherently uncertain and subject
to refinement. During the measurement period, which may be up to one year from
the acquisition date, we may record adjustments to the fair value of these
tangible and intangible assets acquired and liabilities assumed, with the
corresponding offset to goodwill. We continue to collect information and
reevaluate these estimates and assumptions quarterly and record any adjustments
to our preliminary estimates to goodwill provided that we are within the
measurement period.


The judgments made in determining the estimated fair value assigned to the
assets acquired, as well as the estimated useful life of each asset, can
materially impact the consolidated statements of operations of the periods
subsequent to the acquisition through depreciation and amortization, and in
certain instances through impairment charges, if the asset becomes impaired in
the future. In determining the estimated fair value for intangible assets, we
typically utilize the income approach, which discounts the projected future net
cash flow using a discount rate deemed appropriate by management that reflects
the risks associated with such projected future cash flow. Significant estimates
and assumptions include revenue growth rates and discount rates. Determining the
useful life of an intangible asset also requires judgment, as different types of
intangible assets will have different useful lives and certain assets may even
be considered to have indefinite useful lives.

Goodwill and Intangible Assets

Goodwill is not amortized, but is reviewed at least annually for impairment or
earlier, if an indication of impairment exists. Determining the fair value of a
reporting unit is judgmental in nature and involves the use of significant
estimates and assumptions.

We have the option of first assessing qualitative factors to determine whether
it is necessary to perform a quantitative impairment test for goodwill or we can
perform the quantitative impairment test without performing the qualitative
assessment. In performing the qualitative assessment, we consider certain events
and circumstances specific to the reporting unit and to the entity as a whole,
such as macroeconomic conditions, industry and market considerations, overall
financial performance and cost factors when evaluating whether it is more likely
than not that the fair value of the reporting unit is less than its carrying
amount.


If the results of the quantitative test indicate the fair value of a reporting
unit exceeds the carrying value of the net assets assigned to a reporting unit,
goodwill is considered not impaired and no further testing is required. If the
carrying value of the net assets assigned to a reporting unit exceeds the fair
value of a reporting unit, goodwill is deemed impaired and is written down to
the extent of the difference between the fair value of the reporting unit and
the carrying value.


The Company evaluates definite-lived intangible assets for impairment when
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through future operations. If indicators of
impairment are present, the Company then compares the estimated undiscounted
cash flows that the asset group is expected to generate to its carrying value.
If such assets are impaired, the impairment recognized is measured as the amount
by which the carrying amount of the asset group exceeds its fair value.


We will complete our annual impairment test in the fourth quarter of 2022. We
will continue to monitor and evaluate the carrying values. If market and
economic conditions or business performance deteriorate, this could increase the
likelihood of us recording an impairment charge.




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Recent accounting pronouncements

Refer to Note 3 of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for the recent accounting pronouncements that we have adopted and have not yet adopted.

JOBS Act accounting election



We are an "emerging growth company," as defined in the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act. The JOBS Act permits companies with
emerging growth company status to delay adopting new or revised accounting
standards until those standards apply to private companies. We intend to use
this extended transition period to enable us to comply with new or revised
accounting standards that have different effective dates for public and private
companies until the earlier of the date we (1) are no longer an emerging growth
company or (2) affirmatively and irrevocably opt out of the extended transition
period provided in the JOBS Act. Accordingly, our financial statements may not
be comparable to companies that comply with the new or revised accounting
standards as of public company effective dates.

We intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act.

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