MATTERPORT, INC. 
The following discussion and analysis provides information thatMatterport's management believes is relevant to an assessment and understanding ofMatterport's consolidated results of operations and financial condition. The discussion should be read together with our unaudited interim condensed consolidated financial statements, the respective notes thereto, and other financial information included elsewhere within this Report. The discussion and analysis should also be read together with the audited consolidated financial statements for the year endedDecember 31, 2020 and the related notes in the final prospectus and definitive proxy statement, datedAugust 27, 2021 (the "Proxy Statement/Prospectus") and filed with theSEC . This discussion may contain forward-looking statements based uponMatterport's current expectations, estimates and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed under "Risk Factors", "Forward-Looking Statements" and other disclosures included in this Report. Unless the context otherwise requires, all references in this section to "we," "our," "us," "the Company" orMatterport refer to the business ofMatterport, Inc. , aDelaware corporation, and its subsidiaries both prior to the consummation of and following the Merger (as defined below). OverviewMatterport is leading the digitization and datafication of the built world. We believe the digital transformation of the built world will fundamentally change the way people interact with buildings and the physical spaces around them. Since its founding in 2011,Matterport's pioneering technology has set the standard for digitizing, accessing and managing buildings, spaces and places online. Our platform's innovative software, spatial data-driven data science, and 3D capture technology have broken down the barriers that have kept the largest asset class in the world, buildings and physical spaces, offline and underutilized for many years. We believe the digitization and datafication of the built world will continue to unlock significant operational efficiencies and property values, and thatMatterport is the platform to lead this enormous global transformation. The world is rapidly moving from offline to online. Digital transformation has made a powerful and lasting impact across every business and industry today. Nevertheless, the global building stock remains largely offline today, and we estimate that less than 0.1% is penetrated by digital transformation. We were among the first to recognize the increasing need for digitization of the built world and the power of spatial data, the unique details underlying buildings and spaces, in facilitating the understanding of buildings and spaces. With approximately 6.2 million spaces under management as ofSeptember 30, 2021 , we are continuing to penetrate the estimated$228 trillion global building stock and expand our footprint across various end markets, including residential and commercial real estate, facilities management, retail, architecture, engineering and construction ("AEC"), insurance and repair, and travel and hospitality. We estimate our total addressable market to be more than four billion buildings and 20 billion spaces globally, yielding a more than$240 billion market opportunity. We believe the total addressable market for the digitization and datafication of the built world could expand beyond$1 trillion as our spatial data platform continues to grow, powered by the following: •Bringing offline buildings online: Traditionally, our customers needed to conduct site visits in-person to understand and assess their buildings and spaces. With the AI-powered capabilities of Cortex, our proprietary AI software engine, the world's building stock can move from offline to online and be accessible to our customers real-time and on demand from anywhere. •Driven by spatial data: Cortex uses the breadth of the billions of data points we have accumulated over the years to improve the 3D accuracy of our digital twins. Our sophisticated algorithms also deliver significant commercial value to our subscribers by generating data-based insights that allow them to confidently make assessments and decisions about their properties. With approximately 6.2 million spaces under management as ofSeptember 30, 2021 , our spatial data library is the clearinghouse for information about the built world. •Powered by AI and ML: Artificial intelligence ("AI") and machine learning ("ML") technologies effectively utilize spatial data to create a robust virtual experience that is dynamic, realistic, interactive, informative and permits multiple viewing angles. AI and ML also make costly cameras unnecessary for everyday scans-subscribers can now scan their spaces by simply tapping a button on their smartphones. As a result,Matterport is a device agnostic platform, helping us more rapidly scale and drive towards our mission of digitizing and indexing the built world. 35 -------------------------------------------------------------------------------- Table of Content We believe thatMatterport has tremendous growth potential ahead. After securing market leading positions in a variety of geographies and vertical markets, we have demonstrated our repeatable value proposition and the ability of our sales growth model to scale. The magnitude of our total addressable market is so large that even with leading market share, we believe our penetration rates today are a small fraction of the opportunity forMatterport . With a mature and tested go-to-market playbook and team in place, we are focused on scaling execution across a carefully selected set of growth vectors, including: scaling the enterprise across industry verticals, expanding internationally, investing in R&D, and expanding partner integrations and third-party developer platforms. BUSINESS IMPACT OF COVID-19 InApril 2020 , we implemented a workforce restructuring and reduced spending on certain development programs in order to preserve operating flexibility and working capital, given that the duration and impact of the coronavirus ("COVID-19") pandemic on our industry was highly uncertain during that period. We also modified our business practices, including reducing employee travel, recommending that all non-essential personnel work from home, and cancelling or reducing physical participation in meetings, events and conferences. The COVID-19 pandemic did not adversely affect our revenue during the three and nine months endedSeptember 30, 2021 , and we have seen some signs of positive effects for our long-term business prospects as a result of the pandemic as businesses and consumers have increasingly adopted online technologies that allow them to manage their assets digitally and collaborate on tasks and projects via online platforms. However, the future impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration of the pandemic, impact on our customers and their spending habits, impact on our marketing efforts, effect on the growth of our customers' businesses and their usage of our platform, and impact on our suppliers, all of which are uncertain and cannot be predicted with certainty. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our operations and the operations of our customers, and our third-party suppliers, along with the related global slowdown in economic activity, may result in decreased revenues and increased costs. Delays, interruptions and disruptions in our supply chain have and could continue to impact our ability to maintain supplies of products and the costs associated with obtaining products. It is possible that the COVID-19 pandemic, the measures taken by the federal, state, or local authorities and businesses affected and the resulting economic impact may materially and adversely affect our business, results of operations, cash flows and financial position as well as those of our customers. For more information on our operations and risks related to the COVID-19 pandemic, please see the section titled "Risk Factors" in this Report. The Merger OnJuly 22, 2021 , we consummated the previously announced Merger, pursuant to which First Merger Sub merged with and into Legacy Matterport, with LegacyMatterport continuing as the surviving corporation, and immediately following the First Merger and as part of the same overall transaction as the First Merger, Legacy Matterport merged with and into Second Merger Sub, with Second Merger Sub continuing as the surviving entity as our wholly owned subsidiary. In connection with the consummation of the Merger, we changed our name toMatterport, Inc. OnJuly 23, 2021 , our Class A common stock and warrants began trading on the Nasdaq Global Market under the symbols "MTTR" and "MTTRW," respectively. The Merger was accounted for as a reverse recapitalization in accordance withU.S. GAAP. Under this method of accounting, Gores was treated as the "acquired" company for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of the combined entity upon consummation of the Merger represented a continuation of the financial statements ofMatterport with the Merger being treated as the equivalent ofMatterport issuing stock for the net assets of Gores, accompanied by a recapitalization. The net assets of Gores are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are presented as those ofMatterport in future reports of the combined entity. All periods prior to the Merger have been retroactively adjusted using the Exchange Ratio for the equivalent number of shares outstanding immediately after the Merger to effect the reverse recapitalization. See Note 1 and Note 3, in Part I, Item 1. "Financial Statements" for additional detail about the Merger.
Our Business Model We generate revenue by selling subscriptions to our AI-powered spatial data platform to customers, licensing our data to third parties, selling capture devices (including our Matterport Pro2 camera) and by providing services to customers
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from our technicians and through in-application purchases. We are focused on
driving substantial annual growth in subscription and license revenue and
maintaining modest growth in product and services revenue.
We serve customers of all sizes, at every stage of maturity, from individuals to
large enterprises, and we see opportunities for growth across all of our
customer segments. We are particularly focused on increasing sales efficiency
and driving customer growth and recurring revenue growth from large enterprises.
Subscription Revenue
Our AI-powered spatial data platform creates high-fidelity and high-accuracy
digital twins of physical spaces and generates valuable data analytics and
insights for customers. We derive subscription revenue from the sale of
subscription plans to subscribers of all sizes ranging from individuals to large
enterprises.
Our subscription plans are priced from free to custom plans tailored to the
needs of larger-scale businesses. Our standard subscription plans for
individuals and small businesses range from a free online Matterport account
with a single user and a single active space that can be captured with an iPhone
to multiple-user accounts that provide for the capture of unlimited active
spaces. The pricing of our subscription plans increases as the number of users
and active spaces increase. The wide variety and flexibility of our subscription
plans enable us to retain existing subscribers and grow our subscriber base
across diverse end markets, with particular focus on large enterprise
subscribers. Subscription revenue accounted for approximately 57% and 46% of our
total revenue for the three months ended September 30, 2021 and 2020,
respectively, and 53% and 47% of our total revenue for the nine months ended
September 30, 2021 and 2020, respectively.
The majority of our subscription services are billed either monthly or annually
in advance and are typically non-refundable and non-cancellable. Consequently,
for month-to-month subscriptions, we recognize the revenue monthly, and for
annual or longer subscriptions, we record deferred revenue on our consolidated
balance sheet and recognize the deferred revenue ratably over the subscription
term.
License Revenue
We also offer data license solutions that allow certain customers to use our
digital twin data for their own needs. We began offering these solutions in
2020. License revenue accounted for approximately less than 1% and 12% of our
total revenue for the three months ended September 30, 2021 and 2020,
respectively, and approximately 5% of our total revenue for the nine months
ended September 30, 2021 and 2020, respectively. Data licenses to date have been
granted as perpetual licenses and are therefore recognized at a point in time
upon transfer of control when the customer accepts delivery of the licensed data
or other property. We expect our license revenue to fluctuate from quarter to
quarter based on the number of new licenses purchased by our customers as we
obtain new customers for our license solutions and the delivery of our licensed
content is accepted by our customers during each quarter.
Product Revenue
We offer a comprehensive set of solutions designed to provide our customers with
access to state-of-the-art capture technology that produces the high-quality
data necessary to process images into dimensionally accurate digital twins. We
derive product revenue from sales of our innovative 3D capture product, the Pro2
Camera, which has played an integral part in shaping the 3D building and
property visualization ecosystem. Recently, we also have begun to offer capture
devices manufactured by third parties. The Pro2 Camera has driven adoption of
our solutions and has generated the unique high-quality and scaled data set that
has enabled Cortex to become the pioneering software engine for digital twin
creation, and we expect that future sales of our Pro2 Camera and third party
capture devices will continue to drive increased adoption of our solutions.
Product revenue accounted for approximately 31% and 33% of our total revenue for
the three months ended September 30, 2021 and 2020, respectively, and
approximately 31% and 40% of our total revenue for the nine months ended
September 30, 2021 and 2020, respectively.
Services Revenue
Most of our customers are able to utilize the Pro2 Camera or other compatible
capture devices to scan digital twins without external assistance, as the camera
is relatively easy to configure and requires minimal training. However, our
customers sometimes may also request professional assistance with the data
capture process. We generate professional services revenue from Matterport
Capture Services, a fully managed solution for enterprise subscribers worldwide
that require on-demand scheduling of experienced and reliable Matterport
professionals to scan their properties. In addition, we
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derive services revenue from in-app purchases, made by subscribers using our
smartphone applications or by logging in to their subscriber account. Services
revenue accounted for approximately 12% and 9% of our total revenue for the
three months ended September 30, 2021 and 2020, respectively, and approximately
11% and 9% of our total revenue for the nine months ended September 30, 2021 and
2020, respectively.
Key Metrics
We monitor the following key metrics to help us evaluate our business, identify
trends affecting our business, formulate business plans, and make strategic
decisions. The calculation of the key metrics discussed below may differ from
other similarly titled metrics used by other companies, analysts, investors and
other industry participants.
Spaces Under Management
We track the number of spaces that have been scanned and filed on the Matterport
platform, which we refer to as spaces under management, because we believe that
the number of spaces under management is an indicator of market penetration and
the growth of our business. A space can be a single room or building, or any one
contiguous scan of a discrete area, and is composed of a collection of imagery
and spatial data that is captured and reconstructed in a dimensionally accurate
digital twin of the scanned space. For tracking purposes, we treat each scanned
and filed space as a unique file or model. We have a history of growing the
number of our spaces under management and, as of September 30, 2021 , we had
approximately 6.2 million spaces under management. The scale of our spaces under
management allows us to directly monetize each space managed for our paid
subscribers as well as increase our ability to offer new and enhanced services
to subscribers, which in turn provides us with an opportunity to convert
subscribers from free subscription plans to paid plans. We believe our spaces
under management will continue to grow as our business expands with our current
customers and as we add new free and paid subscribers.
The following chart shows our spaces under management for each of the periods
presented (in millions):
Nine Months Ended September 30, Year ended December 31
2021 2020 2020 2019
Spaces under management 6.2 3.8 4.3 2.3
Total Subscribers
We believe that our ability to increase the number of subscribers on our
platform is an indicator of market penetration, the growth of our business and
future revenue trends. For purposes of our business, a "subscriber" is an
individual or entity that has signed up for a Matterport account during the
applicable measurement period. We include both free and paid subscribers in our
total subscriber count. We refer to a subscriber that has signed up for a free
account and typically scans only one free space allocated to the account as a
"free subscriber." We refer to a subscriber that has signed up for one of our
paid subscription levels and typically scans at least one space as a "paid
subscriber." Our paid subscribers typically enter into monthly subscriptions
with us. We generally consider a single organization to be a single subscriber
if the organization has entered into a discrete enterprise agreement with us,
even if the organization includes multiple divisions, segments or subsidiaries
that utilize our platform. If multiple individuals, divisions, segments or
subsidiaries within an organization have each entered into a discrete
subscription with us, we consider each individual account to be a separate
subscriber.
We believe the number of paid subscribers on our platform is an important
indicator of future revenue trends, and we believe the number of free
subscribers on our platform is important because free subscribers may over time
become paid subscribers on our platform and are therefore another indicator of
our future revenue trend. We continue to demonstrate strong growth in the number
of free and paid subscribers on our platform as indicated by our results for the
three and nine ended September 30, 2021 .
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The following chart shows the number of our free subscribers, paid subscribers
and total subscribers for each of the periods presented (in thousands):
Nine Months Ended September 30, Year ended December 31
2021 2020 2020 2019
Free subscribers 385.2 163.2 210.3 19.1
Paid subscribers 53.8 39.9 43.9 20.5
Total subscribers 439.0 203.1 254.2 39.6
Net Dollar Expansion Rate
We believe our ability to retain and grow the subscription revenue generated by
our existing subscribers is an important measure of the health of our business
and our future growth prospects. We track our performance in this area by
measuring our net dollar expansion rate from the same set of customers across
comparable periods. We calculate this metric on a quarterly basis by comparing
the aggregate amount of subscription revenue attributable to a subscriber cohort
for the most recent quarter divided by the amount of subscription revenue
attributable to the same subscriber cohort for the same quarter in the previous
fiscal year. Our calculation for the applicable quarter includes any subscriber
in the cohort that upgrades or downgrades the subscriber's respective
subscription level or churns. Our net dollar expansion rate can fluctuate from
quarter to quarter due to a number of factors, including, but not limited to,
the number of subscribers that upgrade or downgrade their respective
subscription levels or a higher or lower churn rate during any given quarter.
Three Months Ended September 30,
2021 2020
Net dollar expansion rate 114 % 119 %
NON-GAAP FINANCIAL MEASURES
In addition to our results of operations below, we report certain financial
measures that are not required by, or presented in accordance with, U.S.
generally accepted accounting principles ("GAAP"). These measures have
limitations as analytical tools when assessing our operating performance and
should not be considered in isolation or as a substitute for GAAP measures,
including gross profit and net income. We may calculate or present our non-GAAP
financial measures differently than other companies who report measures with
similar titles and, as a result, the non-GAAP financial measures we report may
not be comparable with those of companies in our industry or in other
industries.
Non-GAAP Income (loss) from Operations
We calculate non-GAAP income (loss) from operations as GAAP income (loss) from
operations excluding stock-based compensation expenses. We believe this measure
provides our management and investors with consistency and comparability with
our past financial performance and is an important indicator of the performance
and profitability of our business. Additionally, this measure eliminates the
effects of stock-based compensation, which we do not consider to be indicative
of our overall operating performance.
The following table presents our non-GAAP income (loss) from operations for each
of the periods presented (in thousands):
Nine Months Ended
Three Months Ended September 30, September 30,
2021 2020 2021 2020
GAAP income (loss) from operations
$ (52,488) $ (8,757) Add back: stock based compensation expense, net 30,738 630 31,997 1,794
Non-GAAP income (loss) from operations
$ (20,491) $ (6,963) Free Cash Flow We calculate free cash flow as net cash used in operating activities less purchases of property and equipment and capitalized software and development costs. We believe this metric provides our management and investors with an important indicator of the ability of our business to generate additional cash from our business operations or our need to access additional sources of cash, in order to fund our operations and investments. 39
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The following table presents our free cash flow for each of the periods
presented (in thousands):
Nine Months Ended September 30,
2021 2020
Net cash used in operating activities $ (21,091) $ (7,140)
Less: purchases of property and equipment 536 20
Less: capitalized software and development costs 5,233 3,624
Free cash flow $ (26,860) $ (10,784)
FACTORS AFFECTING OUR PERFORMANCE
We believe that our growth and financial performance are dependent upon many
factors, including the key factors described below, which are in turn subject to
significant risks and challenges, including those discussed below and in the
section of this Report titled "Risk Factors.".
Penetrating a Largely Undigitized Global Property Market
Despite the rapid pace of digital transformation in today's world, the massive
global building stock, estimated by Savills to be $228 trillion in total
property value as of 2017, remains largely undigitized today, and we estimate
that less than 0.1% is penetrated by digital transformation. As a first mover in
digital twin creation and spatial data library construction, we see significant
opportunities to continue leading the digitization and datafication of the built
world. We estimate that there are more than 4 billion buildings and 20 billion
spaces in the world globally, yielding a more than $240 billion market
opportunity. We believe that as Matterport's unique spatial data library and
property data services continue to grow, this opportunity could increase to more
than $1 trillion based on the size of the building stock and the untapped value
creation available to buildings worldwide. The constraints created by
the COVID-19 pandemic have only reinforced and accelerated the importance of the
solutions that we have developed for diverse markets over the past decade.
Through providing a comprehensive set of solutions from cutting-edge capture
technology and high-accuracy digital twins to valuable property insights,
our AI-powered platform delivers value across the property lifecycle to
subscribers from various end markets, including residential and commercial real
estate, facilities management and retail, AEC, insurance and repair, and travel
and hospitality. As of September 30, 2021 , we had over 439,000 subscribers on
our platform and approximately 6.2 million spaces under management, which we
believe represents more than 100 times number of spaces under management by the
rest of the market, and we aim to continue scaling our platform and strengthen
our foothold in various end markets and geographies to deepen our market
penetration. We believe that the breadth and depth of the Matterport platform
along with the strong network effect from our growing spatial data library will
lead to increased adoption of our solutions across diverse end markets, enabling
us to drive further digital transformation of the built world.
Adoption of our Solutions by Enterprise Subscribers
We are pioneering the transformation of the built world from offline to online.
We provide a complete, data-driven set of solutions for the digitization and
datafication of the built world across a diverse set of use cases and
industries. We take a largely offline global property market to the online world
using a data-based approach, creating a digital experience for subscribers to
interact with buildings and spaces and derive actionable insights. Our
Cortex AI-driven engine and software platform uses the breadth of the billions
of data points we have accumulated over the years to improve the 3D accuracy of
our digital twin models. Our machine learning algorithms also deliver
significant commercial value to our subscribers by generating data-based
insights that allow them to confidently make assessments and decisions about
their properties. We provide enterprise subscribers with a comprehensive
solution that includes all of the capture, design, build, promote, insure,
inspect and manage functionality of our platform. We believe that our scale of
data, superior capture technology, continued focus on innovation and
considerable brand recognition will drive a continued adoption of
our all-in-one platform by enterprise subscribers. We are particularly focused
on acquiring and retaining large enterprise subscribers due to the significant
opportunities to expand our integrated solutions to different parts of an
organization and utilize digital twins for more use cases within an
organization. We will continue improving our proprietary spatial data library
and AI-powered platform while increasing investments in direct sales and
account-based marketing to enhance enterprise adoption of our solutions.
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Retention and Expansion of Existing Subscribers Our ability to increase revenue depends in part on retaining our existing subscribers and expanding their use of our platform. We offer an integrated, comprehensive set of solutions including spatial data capturing, digital twin creation, publication, vertical-market specific content, and property analytics. We have a variety of subscription plans to meet the needs of every subscriber, including free subscription plans and several standard paid subscription plans, and we are able to provide customized subscription plans tailored to the specific needs of large enterprises. As we seek to develop long-term subscriber relationships, our value proposition to subscribers is designed to serve the entirety of the property lifecycle, from design and build to maintenance and operations, promotion, insure, repair, restore, secure and finance. As a result, we believe we are uniquely positioned to grow our revenue with our existing subscribers as our platform helps them discover opportunities to drive short and long term returns on their property investments. Given the all-in-one nature of our platform and its ease of use, we are also able to drive adoption of our solutions across various parts of an organization. For example, we started a long-term relationship with a large commercial real estate client when we were engaged to create digital twins for available office spaces for promotion and leasing. We were then able to expand the relationship by working with the subscriber's construction team to redesign office spaces through integrating our digital twins with the construction team's design software. Most recently, we signed a global agreement with the client's real estate acquisition team to conduct due diligence of potential real property acquisitions. As a result of our long-term focus and expansion strategy, we have been able to consistently retain our subscribers and drive increased usage of our platform. Our net dollar expansion rate of 114% and 119% for the three months endedSeptember 30, 2021 and 2020 demonstrates the stickiness and growth potential of our platform. Scaling Across Various Industry VerticalsMatterport's fundamental go-to-market model is built upon a subscription first approach. We have invested aggressively to unlock a scalable and cost-effective subscription flywheel for customer adoption. With our large spatial data library and pioneering AI-powered capabilities, we pride ourselves on our ability to deliver value across the property lifecycle to subscribers from various end markets, including residential and commercial real estate, facilities management and retail, AEC, insurance and repair, and travel and hospitality. Going forward, we will continue to improve our spatial data library and AI-powered platform to address the workflows of the industries we serve, while expanding our solutions and reaching new real estate segments. We also plan to increase investments in industry-specific sales and marketing initiatives to increase sales efficiency and drive subscriber and recurring revenue growth. While we expect that these investments will result in a considerable increase in our operating expenses, we expect operating margins to improve over the long term as we continue to scale and gain higher operating leverage. International Expansion We are focused on continuing to expand our AI-powered spatial data platform to all corners of the world. Given that the global building stock remains largely undigitized today and with the vast majority of the world's buildings located outside ofthe United States , we expect significant opportunities in pursuing the digitization and datafication of the building stock worldwide. We use a "land and expand" model to capitalize on the potential for geographic expansion. As we continue to seek to further penetrate our existing geographies in order to add their spatial data to our platform, we expanded availability of our industry-leading Matterport Pro2 3D camera in United Kingdom, France, Italy andSpain inSeptember 2021 . Subscribers outsidethe United States accounted for more than 42% of our subscription revenues for three months endedSeptember 30, 2021 . Given the flexibility and ease of use of our platform and capture device agnostic data capture strategy, we believe that we are well-positioned to further penetrate existing and additional geographies. To scale our international penetration, we plan to continue to increase our investment in sales and marketing efforts across the globe, including building up sales and marketing teams inNorth America ,Europe , theMiddle East andAfrica , and theAsia Pacific region. With multiple sales attachment points and a global marketing effort, we believe that we can further penetrate enterprises and businesses worldwide through channel partnerships and direct sales. Such international expansion efforts will also involve additional investments in our market research teams to tailor platform solutions, subscription plans and pricing for each market. These international expansion activities may impact our near-term profitability as we lay the foundation for international growth. Nevertheless, we believe that customers around the world will derive value from the universal utility and flexibility of our spatial data platform which transforms how customers interact with their physical spaces in the modern age. 41 -------------------------------------------------------------------------------- Table of Content Investing in Research and Innovation for Growth We will continue to invest in research and development to improve Cortex, expand our solutions portfolio, and support seamless integration of our platform with third-party software applications. We plan to concentrate on in-house innovation and expect to consider acquisitions on an opportunistic basis. We have a robust pipeline of new product releases. For example, inMay 2020 , we launchedMatterport for iPhone, which gave every recent iPhone owner the ability to capture and collaborate on 3D spaces and resulted in significant subscriber growth and digital twin creations. InApril 2021 ,Matterport announced the official release of the Android Capture app, giving Android users the ability to quickly and easily capture buildings and spaces in immersive 3D. We see significant potential for future subscriber growth as we release more products and create additional upselling opportunities. We will also strengthen our AI and ML capabilities as we enlarge our spatial data library, enabling continuous improvement of the fidelity and accuracy of digital twins and enhancing the commercial value from data-driven analytics. InJune 2021 ,Matterport announced a collaboration with Facebook AI (now known as Meta) to release the world's largest dataset of 3D spaces for academic research and a partnership with Apex, a national provider of advanced store surveys, to enable retail brands across theU.S. andCanada to access, collect and evaluate building data and information. InAugust 2021 , we announced a new integration with Xactimate that allows property professionals to order a TruePlan of aMatterport 3D model with a single click inVerisk's Xactimate solution. Also inAugust 2021 , we launched Notes, an interactive collaboration and communication tool for its digital twins to unlock big productivity gains for teams. These investments may impact our operating profitability in the near term, but we expect our operating margins to improve over the long term as we solidify our scale and reach. While we plan to concentrate on in-house innovation, we may also pursue acquisitions of products, teams and technologies on an opportunistic basis to further expand the functionality of and use cases for our platform. As with organic research and development, we adopt a long-term perspective in the evaluation of acquisition opportunities in order to ensure sustainable value creation for our customers. Expanding Partner Integrations and Third-Party Developer Platform We aim to foster a strong network of partners and developers around ourMatterport platform. Through integration with our open, scalable and secure enterprise platform, organizations across numerous industries have been able to automate workflows, enhance subscriber experiences and create custom extensions for high-value vertical applications. For example, inMay 2020 , we rolled out integration capability with Autodesk to assist construction teams with streamlining documentation across workflows and collaborate virtually. InJuly 2021 , by partnering with PTC, we offer a joint solution that gives customers a highly visual and interactive way to deliver digital content onto the environments captured by our platform. Going forward, we plan to develop additional strategic partnerships with leading software providers to enable more effective integrations and enlarge our marketplace of third-party software applications. We believe that our future growth and scale depend partially upon our ability to develop a strong ecosystem of partners and developers which can augment the value of our platform. Going forward, we plan to establish additional strategic partnerships with leading software providers through the Matterport Platform Partner Program, in which our industry partners and developers can build, develop, and integrate with our spatial data library. We will also invest in the Matterport Developer Program to enlarge our marketplace of value-added third-party applications built on top of theMatterport platform. We expect that monetization opportunities from partner integrations and the third-party developer marketplace will allow us to drive subscriber growth and develop a more loyal subscriber base, and the revenue derived from the marketplace will grow over time. COMPONENTS OF RESULTS OF OPERATIONS Revenue Our revenue consists of subscription revenue, license revenue, services revenue and product revenue. Subscription revenue-We provide our software as a service on ourMatterport platform. Subscribers use our platform under different subscription levels based on the number of active scanned spaces. We typically bill our subscribers monthly in advance based on their subscription level and recognize revenue on a monthly basis based on the subscription level. License revenue-We provide spatial data to customers in exchange for payment of a license fee. Under these license arrangements, customers take right to possession of the spatial data and pay a fee for an agreed scope of use. 42 -------------------------------------------------------------------------------- Table of Content Services revenue-Services revenue consist of capture services and add-on services. Capture services consist of professional services in which aMatterport -qualified third-party technician will provide on-site digital capture services for the customer. Under these arrangements, we will pay the third-party technician directly and bill the customer directly. Add-on services consist of additional software features that the customer can purchase. These services are typically provided by third parties under our direction and oversight and we pay the third party directly and bill the subscriber directly for the provisions of such services. Product revenue-Product revenue consists of revenue from the sale of capture devices, including our Pro2 Camera, and out-of-warranty repair fees. Customers place orders for the capture devices, and we fulfill the order and ship the devices directly to the customer or, in some cases, we arrange for the shipment of devices from third parties directly to the customer. We recognize product revenue associated with a sale in full at the time of shipment of the capture device. In some cases, customers prepay for the ordered device and, in other cases we bill the customer upon shipment of the device. Customers purchasing capture devices from us also typically subscribe to theMatterport platform for use with their captured spaces. However, we do not require Pro2 Camera owners to have a subscription when purchasing a Pro2 Camera. We will also repair Pro2 Cameras for a fee if the nature of the repair is outside the scope of the applicable warranty. Cost of Revenue Cost of revenue consists of cost of subscription revenue, cost of license revenue, cost of services revenue, and cost of product revenue. Cost of subscription revenue-Cost of subscription revenue consists primarily of costs associated with hosting and delivery services for our platform to support our subscribers and other users of our subscribers' spatial data, along with our customer success operations. Cost of subscription revenue also includes amortization of internal-use software and stock-based compensation. Cost of license revenue-Cost of license revenue consists primarily of costs associated with data curation and delivery costs associated with providing spatial data to customers. Cost of services revenue-Cost of services revenue consists primarily of costs associated with capture services and costs for add-on features. Costs for capture services are primarily attributable to services rendered by third-party technicians that digitally capture spaces on behalf of the applicable customer, as well as administration and support costs associated with managing the program. Costs for add-on features are primarily attributable to services rendered by third-party contractors that develop the floor plans or other add-ons applications purchased by our subscribers as well as support costs associated with delivering the applications. Cost of product revenue-Cost of product revenue consists primarily of costs associated with the manufacture of our Pro2 Camera, warranty and repair expenses relating to Pro2 Cameras and personnel-related expenses associated with manufacturing employees including salaries, benefits, bonuses, overhead and stock-based compensation. Cost of product revenue also includes depreciation of property and equipment, costs of acquiring third-party capture devices, and costs associated with shipping devices to customers. Operating Expenses Our operating expenses consist primarily of research and development expenses, selling, general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and sales commissions. Operating expenses also include overhead costs. Research and development expenses-Research and development expenses consist primarily of personnel-related expenses associated with our research and development employees, including salaries, benefits, bonuses, and stock-based compensation. Research and development expenses also include third-party contractor or professional services fees, and software and subscription services dedicated for use by our research and development organization. We expect that our research and development expenses will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our platform and products. In addition, research and development expenses that qualify as internal-use software development costs are capitalized, the amount of which may fluctuate significantly from period to period. 43 -------------------------------------------------------------------------------- Table of Content Selling, general and administrative expenses-Selling, general, and administrative expenses consist primarily of personnel-related expenses associated with our sales and marketing, finance, legal, information technology, human resources, facilities, and administrative employees, including salaries, benefits, bonuses, sales commissions, and stock-based compensation. We capitalize and amortize commissions associated with attracting new paid subscribers and services revenue equal to a period of three years, which is the estimated period for which we expect to benefit from the sales commissions. Selling, general and administrative expenses also include external legal, accounting, and other professional services fees, software and subscription services, and other corporate expenses. Following the closing of the Merger, we have incurred and expect to incur in the future additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations, and professional services. We expect that our selling, general and administrative expenses will continue to increase in absolute dollars as our business grows. Interest Income Interest income consists of interest income earned on our cash and cash equivalents and investments. Interest Expense Interest expense consists primarily of interest payments for our debt facilities. See "Liquidity and Capital Resources-Debt and Financing Arrangements" Transaction costs expensed Transaction costs consist of legal, accounting, banking fees and other costs that were directly related to the consummation of the Merger. Change in fair value of warrants liabilities The Public and Private Warrants are subject to fair value remeasurement at each balance sheet date.Matterport expects to incur an incremental income (expense) in the condensed consolidated statements of operations for the fair value change for the outstanding Public and Private warrants liabilities at the end of each reporting period or through the exercise of such warrants. Change in fair value of contingent earn-out liability The contingent obligation to issue Earn-out Shares toMatterport legacy Stockholders was accounted for as a liability because the Earn-out Triggering Events determine the number of Earn-out Shares required. The estimated fair value of the total Earn-out Shares was determined based on a Monte Carlo simulation valuation model and are subject to remeasurement to fair value at each balance sheet date.Matterport expects to incur an incremental income (expense) in the condensed consolidated statements of operations for the fair value adjustments for the outstanding earn-out liability at the end of each reporting period. Provision for Income Taxes Provision for income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business. We record income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of existing assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes the enactment date. We record a valuation allowance to reduce our deferred tax assets and liabilities to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance. 44 -------------------------------------------------------------------------------- Table of Content RESULTS OF OPERATIONS The following table sets forth our results of operations for the periods presented based on our condensed consolidated statements of operations data (in thousands, except percentages). The period-to-period comparison of results is not necessarily indicative of results for future periods. Nine Months Ended Three Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue: Subscription 15,677 11,517 44,758 29,032 License 118 3,000 4,477 3,000 Services 3,292 2,341 8,860 5,498 Product 8,568 8,216 25,992 24,767 Total revenue 27,655 25,074 84,087 62,297 Costs of revenue: Subscription 3,908 2,981 10,543 8,299 License - 69 - 69 Services 2,460 1,730 6,785 4,270 Product 7,106 5,228 18,036 15,198 Total costs of revenue 13,474 10,008 35,364 27,836 Gross profit 14,181 15,066 48,723 34,461 Gross margin 51% 60% 58% 55% Operating expenses: Research and development 14,484 3,861 27,599 13,003 Selling, general, and administrative 44,053 9,942 73,612 30,215 Total operating expenses 58,537 13,803 101,211 43,218 Income (loss) from operations (44,356) 1,263 (52,488) (8,757) Other income (expense): Interest income 550 3 572 16 Interest expense (91) (339) (676) (1,197) Transaction costs (565) - (565) - Change in fair value of warrants liabilities (24,176) - (24,176) - Change in fair value of contingent earn-out liability (98,478) - (98,478) - Other expense, net (839) (4) (1,186) (903) Total expense (123,599) (340) (124,509) (2,084) Income (loss) before provision for income taxes (167,955) 923 (176,997) (10,841) Provision for income taxes 34 17 73 51 Net income (loss)$ (167,989) $ 906 $ (177,070) $ (10,892) Revenues Our revenue consists of subscription revenue, license revenue, services revenue and product revenue. The increase in revenue is attributable to growth from all revenue streams. We expect our revenue to vary from quarter to quarter based on seasonal and cyclical factors. 45
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Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 Change 2021 2020 Change
Amount Amount Amount % Amount Amount Amount %
(dollars in thousands)
Subscription $ 15,677 $ 11,517 $ 4,160 36 % $ 44,758 $ 29,032 $ 15,726 54 %
License 118 3,000 (2,882) (96) % 4,477 3,000 1,477 49 %
Services 3,292 2,341 951 41 % 8,860 5,498 3,362 61 %
Product 8,568 8,216 352 4 % 25,992 24,767 1,225 5 %
Total revenue $ 27,655 $ 25,074 $ 2,581 10 % $ 84,087 $ 62,297 $ 21,790 35 %
Subscription revenue increased for the three and nine months ended September 30,
2021 compared to the same periods in 2020, primarily due to higher volume of
subscription plans from both new and existing subscribers. Of the $4.2 million
and $15.7 million increase during the three and nine months ended September 30,
2021 , approximately $3.0 million and $6.6 million was attributable to the higher
volume of subscription plans from additional new subscribers and approximately
$1.2 million and $9.1 million was attributable to additional sales to existing
customers during that period.
License revenue can fluctuate from period to period, depending on the timing of
completed transactions and any associated implementation work that we must
perform to recognize revenue. License revenue decreased for the three months
ended September 30, 2021 compared to the same period in 2020, primarily due to
not having large license transactions move to the revenue recognition phase
during three months ended September 30, 2021 . The increase in License revenue
for the nine months ended September 30, 2021 compared to the same period in 2020
was primarily due to onboarding of new license customers.
Services revenue increased for the three and nine months ended September 30,
2021 compared to the same periods in 2020. The increases were primarily
attributable to increased sales of capture services and add-on services,
primarily driven by our investment in growing our capture services business and
the increase in the number of our subscribers.
Product revenue increased for the three and nine months ended September 30, 2021
compared to the same periods in 2020. The increases were primarily attributable
to the growth in the number of capture devices shipped during the periods.
Product revenue increases were primarily driven by growth in the sales of our
Matterport Pro2 camera.
For further information related to the impact of COVID-19, please see "Business
Impact of COVID-19."
Cost of Revenue
Our cost of revenue consists of cost of subscription revenue, cost of license
revenue, cost of services revenue and cost of product revenue.
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 Change 2021 2020 Change
Amount Amount Amount % Amount Amount Amount %
(dollars in thousands)
Cost of subscription
revenue $ 3,908 $ 2,981 $ 927 31 % $ 10,543 $ 8,299 2,244 27 %
Cost of license revenue - 69 (69) (100) % - 69 (69) (100) %
Cost of services
revenue 2,460 1,730 730 42 % 6,785 4,270 2,515 59 %
Cost of products
revenue 7,106 5,228 1,878 36 % 18,036 15,198 2,838 19 %
Total cost of revenue $ 13,474 $ 10,008 $ 3,466 35 % $ 35,364 $ 27,836 $ 7,528 27 %
Cost of subscription revenue increased for the three and nine months ended
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Cost of license revenue decreased for the three and nine months ended
September 30, 2021 compared to the same periods in 2020, primarily due to no
cost of licenses incurred during the three months ended September 30, 2021 .
Cost of services revenue increased for the three and nine months ended
September 30, 2021 compared to the same periods in 2020, primarily due to an
increase in volume and cost related to capture services sold.
Cost of products revenue increased for the three and nine months ended
September 30, 2021 compared to the same periods in 2020, primarily due to
increased costs related to materials to support the higher demand for capture
devices, as well as increased direct labor, and manufacturing overhead to
support the increased volume of capture devices sold.
Gross Profit and Gross Margin
Nine Months Ended
Three Months Ended September 30, September 30,
2021 2020 2021 2020
(dollars in thousands)
Gross profit $ 14,181 $ 15,066 $ 48,723 $ 34,461
Gross margin 51% 60% 58% 55%
Gross profit and gross margin decreased for the three months ended September 30,
2021 compared to the same period in 2020, primarily due to the composition of
revenue and increased stock-based compensation expense. Gross profit and gross
margin increased for the nine months ended September 30, 2021 compared to the
same period in 2020 was primarily driven by the composition of revenue.
Subscription and license revenue have had a positive effect on our total gross
margin given their higher gross margins compared to the gross margins of product
revenue.
Research and Development Expenses
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 Change 2021 2020 Change
Amount Amount Amount % Amount Amount Amount %
(dollars in thousands)
Research and
development expenses $ 14,484 $ 3,861 $ 10,623 275 % $ 27,599 $ 13,003 $ 14,596 112 %
Research and development expenses increased for the three and nine months ended
September 30, 2021 compared to the same periods in 2020. The increases were
primarily attributable to increases in personnel-related costs, which grew $8.8
million for the three months ended September 30, 2021 compared to the same
period in 2020, and grew $10.5 million for the nine months ended September 30,
2021 compared to the same period in 2020. The increase in personnel costs in
both periods was largely due to headcount growth and increased stock-based
compensation expense. In addition, expenses increased in both periods included
increased consulting services expense to support our business growth.
Selling, General and Administrative Expenses
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 Change 2021 2020 Change
Amount Amount Amount % Amount Amount Amount %
(dollars in thousands)
Selling, general and
administrative expenses $ 44,053 $ 9,942 $ 34,111 343 % $ 73,612 $ 30,215 $ 43,397 144 %
Selling, general and administrative expenses increased for the three and nine
months ended September 30, 2021 compared to the same period in 2020. The
increases were primarily attributable to increases in personnel-related costs
which grew $26.6 million for the three months ended September 30, 2021 compared
to the same period in 2020, and grew by $30.8 million for the nine months ended
September 30, 2021 compared to the same period in 2020. The increase in
personnel costs in both periods was largely due to headcount growth and
increased stock-based compensation expense. In addition, the increased expenses
for the three months ended September 30, 2021 included increased expenses in
marketing
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expenses. The increased expenses for nine months ended September 30, 2021
included increased expenses in consulting expenses to support our business
growth and marketing expenses.
Interest Income
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 2021 2020
(dollars in thousands)
Interest income $ 550 $ 3 $ 572 $ 16
Interest income increased for the three and nine months ended September 30, 2021
compared to the same periods in 2020. The increases were primarily attributable
to interest earned on our cash equivalents and investments made during the three
months ended September 30, 2021
Interest Expense
Three Months Ended Nine Months Ended September
September 30, 30,
2021 2020 2021 2020
(dollars in thousands)
Interest expense $ (91) $ (339) $ (676) $ (1,197)
Interest expense decreased for the three and nine months ended September 30,
2021 compared to the same periods in 2020, primarily due to repayment of our
outstanding debts during the three months ended September 30, 2021 . As of
September 30, 2021 , we had no outstanding debts.
Transaction costs
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 2021 2020
(dollars in thousands)
Transaction costs $ (565) $ - $ (565) $ -
During the three months ended
Three Months Ended September
30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in thousands)
Change in fair value of warrants liabilities $ (24,176) $ -
We recognized a change in fair value of warrants liabilities of$24.2 million during the three and nine months endedSeptember 30, 2021 due to the increase in the fair value of our outstanding Public and Private Warrants since the Closing of the Merger.
Change in Fair Value of Contingent Earn-out Liability
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Three Months Ended September
30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in thousands)
Change in fair value of contingent earn-out liability
We recognized a change in fair value of contingent earn-out liability of$98.5 million for the three and nine months endedSeptember 30, 2021 , primarily due to the increase in the fair value of the Company common stock since the Closing the Merger. Other (Expense) Income, Net Three Months
Ended September Nine Months Ended September
30, 30,
2021 2020 2021 2020
(dollars in thousands)
Other expense, net $ (839) $ (4) $ (1,186) $ (903)
Other expense increased for the three and nine months ended September 30, 2021
compared to the same periods in 2020. The increase for the three months ended
September 30, 2021 was primarily due to amortization of investment premium, loss
on debt extinguishment, and unfavorable changes in foreign exchange rates. The
increase for the nine months ended September 30, 2021 was primarily due to
amortization of investment premium.
Provision for Income Taxes
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 2021 2020
(dollars in thousands)
Provision for income taxes $ 34 $
17
The provision for income taxes did not significantly fluctuate year over year. For the three and nine months endedSeptember 30, 2021 , our provision for income taxes reflects an effective tax rate of (0.02)% and (0.04)%, respectively. Our provision for income taxes for the three and nine months endedSeptember 30, 2020 reflects an effective tax rate of 1.84% and (0.47)%, respectively. The difference was due primarily to the tax benefit of pre-tax book income (losses) offset by a valuation allowance. LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity Our capital requirements will depend on many factors, including the growth and expansion of our paid subscribers, development of our technology and software platform (including research and development efforts), expansion of our sales and marketing activities and sales, general and administrative expenses. As ofSeptember 30, 2021 , we had cash, cash equivalents, restricted cash and investments of approximately$614.4 million . Our cash equivalents primarily consist of cash on hand and amounts on deposit with financial institutions. To date, our principal sources of liquidity have been proceeds received from the issuance of equity and the proceeds from the Merger. September 30, 2021 December 31, 2020 (dollars in thousands) Cash, cash equivalents, and investments: Cash and cash equivalents$ 148,853 $ 51,850 Restricted cash 468 400 Investments 465,068 - Total cash, cash equivalents, and investments$ 614,389 $ 52,250 49 -------------------------------------------------------------------------------- Table of Content We believe our existing cash resources are sufficient to support planned operations for the next 12 months. We completed the Merger and PIPE Financing onJuly 22, 2021 , pursuant to which we received net proceeds of$612.9 million . As a result, management believes that its current financial resources are sufficient to continue operating activities for at least one year past the issuance date of the financial statements. We have incurred negative cash flows from operating activities and significant losses from operations in the past. We expect to continue to incur operating losses at least for the next 12 months due to the investments that we intend to make in our business. Our future capital requirements will depend on many factors, including increase in our customer base, the timing and extent of spend to support the expansion of sales, marketing and development activities, and the impact of the COVID-19 pandemic. As a result, we may require additional capital resources to grow our business. We believe that current cash, cash equivalents and investments will be sufficient to fund our operations for at least the next 12 months. Debt and Financing Arrangements Debt consists of our 2019 Term Loan, our 2018 Term Loan, our 2020 Term Loan, and our line of credit. During the three months endedSeptember 30, 2021 , the Company repaid in full the 2019 Term Loan of$1.9 million , the Line of Credit of$3.0 million , the 2018 Term Loan of$3.9 million including$0.5 million of final payment fee and$0.1 million interest and prepayment fee, and the 2020 Term Loan of$1.8 million . As ofSeptember 30, 2021 , there were no amounts outstanding under our term loans or line of credit. 2019 Term Loan The 2019 term loan is secured by certain assets and has customary negative and affirmative covenants. The loan has a maturity date ofMay 1, 2023 and bears interest rate at a floating per annum rate equal to the greater of (a) the Prime Rate + 1% and (b) 5.25%. The 2019 Term loan was fully repaid inJuly 2021 . Line of Credit Our line of credit with third-party lender is secured by our accounts receivable and has customary negative and affirmative covenants. The loan has a maturity date ofDecember 14, 2021 and bears interest at a floating per annum rate of equal to the greater of (a) the Prime Rate + 0.5% and (b) 5.25%. The Line of Credit was fully repaid inJuly 2021 . 2018 Term Loan The 2018 term loan is repayable in 48 monthly scheduled installments commencing onMay 1, 2018 . We are required to make interest-only payments for the first 12 months startingMay 2018 and thereafter to make 36 equal installment payments through the maturity date of the loan. The loan is secured by certain assets and has customary negative and affirmative covenants. The loan has a maturity date ofMay 1, 2022 and bears interest at a fixed per annum rate of 11.5%. The 2018 Term loan was fully repaid inJuly 2021 . 2020 Term Loan The 2020 term loan is provided under two facilities; facility A is comprised of$1.0 million maturing in 36 months, and facility B is comprised of$1.0 million maturing in 30 months. Principal is payable in 24 equal installments commencing onMay 31, 2021 throughApril 30, 2023 . The loan is secured by a letter of credit and has customary negative and affirmative covenants. The facility term loan has a maturity date ofApril 30, 2023 and bears interest at a fixed per annum rate of 4.75%. The 2020 Term loan was fully repaid inAugust 2021 . Other commitments We lease office space under operating leases for ourU.S. headquarters and other locations inthe United States that expire at various dates from the remainder of 2021 through 2025. In addition, we have purchase obligations, which include contracts and issued purchase orders containing non-cancellable payment terms to purchase third-party goods and services. As ofSeptember 30, 2021 , our 12-month lease obligations (throughSeptember 30, 2022 ) totaled approximately$1.6 million , or approximately$4.5 million through the year endingDecember 31, 2025 . Our non-cancellable purchase obligations as ofSeptember 30, 2021 totaled approximately$13.9 million and are due throughout through the year endingDecember 31, 2024 . 50 -------------------------------------------------------------------------------- Table of Content Cash Flows
The following table set forth a summary of our cash flows for the nine months
ended
Nine Months Ended September 30,
2021 2020
Cash provided by (used in):
Operating activities (21,091) (7,140)
Investing activities (473,235) (3,644)
Financing activities 591,670 49,590
Net Cash Used in Operating Activities
Net cash used in operating activities was $21.1 million for the nine months
ended September 30, 2021 . This amount primarily consisted of a net loss of
$177.1 million , offset by non-cash charges of $160.7 million , and a change in
net operating assets and liabilities of $4.8 million . The non-cash charges
primarily consisted of $4.1 million of depreciation and amortization expense,
$32.0 million of stock-based compensation expense, $24.2 million of change in
fair value of warrants liabilities, $98.5 million of change in fair value of
contingent earn-out liability, $0.5 million increase of allowance for doubtful
accounts and $0.6 million of transaction costs related to reverse
recapitalization. Changes in net operating assets and liabilities primarily
consisted of an increase in accounts payable, deferred revenue, accruals and
other liabilities, which was partially offset by an increase in accounts
receivable, prepaid expenses and other assets, and inventories.
Net cash used in operating activities was $7.1 million for the nine months ended
September 30, 2020 . This amount primarily consisted of a net loss of $10.9
million , offset by non-cash charges of $7.1 million , and an increase in net
operating assets and liabilities of $3.3 million . The non-cash charges primarily
consisted of $3.5 million of depreciation and amortization expense, $1.8 million
of stock-based compensation expense, $1.0 million of loss on extinguishment of
loan and convertible note, $0.6 million increase of allowance for doubtful
accounts, and $0.2 million amortization of debt discount and debt issuance
costs. Changes of net operating assets and liabilities primarily consisted of an
increase in accounts payable, deferred revenue and accruals and other
liabilities, which was partially offset by an increase in account receivable,
prepaid and other assets, and inventories.
Net Cash Used in Investing Activities
Net cash used in investing activities was $473.2 million for the nine months
ended September 30, 2021 . This amount primarily consisted of investments in
available-for-sale securities of $466.5 million , capitalized software and
development costs of $5.2 million , an investment in convertible notes receivable
of $1.0 million and purchases of property and equipment of $0.5 million .
Net cash used in investing activities was $3.6 million for the nine months ended
September 30, 2020 . This amount primarily consisted of capitalized software and
development costs.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $591.7 million for the nine months
ended September 30, 2021 . This amount primarily consisted of $612.9 million
proceeds from reverse recapitalization and PIPE financing, net, $1.7 million
proceeds from exercise of stock options, partially offset by $9.8 million
payment of transaction costs related to reverse recapitalization and repayment
of debt of $13.1 million .
Net cash provided by financing activities was $49.6 million for the nine months
ended September 30, 2020 . This amount primarily consisted of proceeds from
issuance of redeemable convertible preferred stock, net, of $43.7 million ,
proceeds from issuance of convertible notes of $8.5 million , proceeds from
external loans of $5.2 million , partially offset by repayment of debt of $7.0
million .
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Off-Balance Sheet Arrangements
As of the balance sheet date of September 30, 2021 , we have not engaged in any
off-balance sheet arrangements as defined in the rules and regulations of the
SEC .
Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being
required to comply with new or revised financial accounting standards until
private companies are required to comply with the new or revised financial
accounting standards. The JOBS Act provides that a company can choose not to
take advantage of the extended transition period and comply with the
requirements that apply to non-emerging growth companies, and any such election
to not take advantage of the extended transition period is irrevocable.
The Company is an "emerging growth company" as defined in Section 2(a) of the
Securities Act, and has elected to take advantage of the benefits of the
extended transition period for new or revised financial accounting standards.
The Company will remain an emerging growth company until the earliest of (i) the
last day of the fiscal year in which the market value of common stock that is
held by non-affiliates exceeds $700 million as of the end of that year's second
fiscal quarter, (ii) the last day of the fiscal year in which the Company has
total annual gross revenue of $1.07 billion or more during such fiscal year (as
indexed for inflation), (iii) the date on which the Company has issued more than
$1 billion in non-convertible debt in the prior three-year period or
(iv) December 31, 2025 , and the Company expects to continue to take advantage of
the benefits of the extended transition period, although it may decide to early
adopt such new or revised accounting standards to the extent permitted by such
standards. This may make it difficult or impossible to compare the Company's
financial results with the financial results of another public company that is
either not an emerging growth company or is an emerging growth company that has
chosen not to take advantage of the extended transition period exemptions
because of the potential differences in accounting standards used.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. We evaluated the development and selection of our
critical accounting policies and estimates and believe that the following
involve a higher degree of judgement or complexity and are most significant to
reporting our results of operations and financial position and are therefore
discussed as critical. The following critical accounting policies reflect the
significant estimates and judgements used in the preparation of our consolidated
financial statements. Actual results could differ materially from those
estimates and assumptions, and those differences could be material to our
consolidated financial statements. We re-evaluate our estimates on an ongoing
basis. For information on our significant accounting policies, refer to Note
2.-Summary of Significant Accounting Policies of our audited consolidated
financial statements included in this Report.
Revenue
Effective January 1, 2019 , our revenue recognition policy is a critical policy
due to the adoption of the guidance from ASC 606, Revenue from Contracts with
Customers, and because of the variety of revenue generating transactions. We
determine the amount of revenue to be recognized through the application of the
following steps: (1) identify the contract; (2) identify the performance
obligations; (3) determine the transaction price; (4) allocate the transaction
price to the performance obligations; and (5) recognize revenue when (or as)
performance obligations are satisfied.
We identify performance obligations in our contracts with customers, which
primarily include subscription, license, services and products. The transaction
price is determined based on the amount which we expect to be entitled to in
exchange for providing the promised goods and services to our customer. The
transaction price in the contract is allocated to each distinct performance
obligation on a relative standalone selling price basis. Revenue is recognized
when performance obligations are satisfied. In certain transactions the
transaction price is considered variable and an estimate of the constrained
transaction price is recorded by us. Changes in variable consideration may
result in an increase or a decrease to revenue. Changes to the estimated
variable consideration were not material for the periods presented.
Contract payment terms vary, and are generally net 30 days. Collectability is
assessed based on a number of factors including collection history and
creditworthiness of the customer. If collectability of substantially all
consideration to
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which we are entitled under the contract is determined to be not probable,
revenue is not recorded until collectability becomes probable at a later date.
Stock-Based Compensation
We measure and record the expense related to stock-based awards based on the
fair value of those awards as determined on the date of grant. We recognize
stock-based compensation expense over the requisite service period of the
individual grant, generally equal to the vesting period and use the
straight-line method to recognize stock-based compensation. For stock-based
awards with performance conditions, we record compensation expense when it is
deemed probable that the performance condition will be met. We account for
forfeitures as they occur. We selected the Black-Scholes option-pricing model as
the method for determining the estimated fair value for stock options. The
Black-Scholes option-pricing model requires the use of highly subjective and
complex assumptions, which determine the fair value of stock-based awards,
including the option's expected term and the price volatility of the underlying
stock.
We calculated the fair value of options granted by using the Black-Scholes
option-pricing model with the following assumptions:
Expected Volatility-We estimated volatility for option grants by evaluating the
average historical volatility of a peer group of companies for the period
immediately preceding the option grant for a term that is approximately equal to
the options' expected term.
Expected Term-The expected term of the Matterport's options represents the
period that the stock-based awards are expected to be outstanding.
We have elected to use the midpoint of the stock options vesting term and
contractual expiration period to compute the expected term, as we do not have
sufficient historical information to develop reasonable expectations about
future exercise patterns and post vesting employment termination behavior.
Risk-Free Interest Rate-The risk-free interest rate is based on the implied
yield available on US Treasury zero coupon issues with a term that is equal to
the options' expected term at the grant date.
Dividend Yield -We have never declared or paid dividends and do not anticipate
declaring dividends. As such, the dividend yield has been estimated to be zero.
Refer to Note 14-Stock Plan, to our unaudited interim condensed consolidated
financial statements included elsewhere in this Report for details regarding our
share-based compensation plans.
Common Stock Valuation
Prior to the Closing date, in the absence of a public trading market for our
common stock, on each grant date, the fair value of our common stock had
historically been determined by our board of directors with inputs from
management, taking into account our most recent valuations from an independent
third-party valuation specialist . Our board of directors intended all stock
options granted to have an exercise price per share not less than the per share
fair value of our common stock on the date of grant. The valuations of our
common stock were determined in accordance with the guidelines outlined in the
American Institute of Certified Public Accountants Practice Aid , Valuation of
Privately-Held-Company Equity Securities Issued as Compensation. The assumptions
used to determine the estimated fair value of our common stock were based on
numerous objective and subjective factors, combined with management's judgment,
including:
•relevant precedent transactions involving our capital stock;
•external market conditions affecting the industry and trends within the
industry;
•the rights, preferences and privileges of our redeemable convertible preferred
stock relative to those of our common stock;
•our financial condition and operating results, including our levels of
available capital resources;
•the progress of our research and development efforts, our stage of development
and business strategy;
•the likelihood of achieving a liquidity event, such as an initial public
offering or a sale of our given prevailing market conditions;
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•the history and nature of our business, industry trends and competitive
environment;
•the lack of marketability of our common stock;
•recent secondary stock sales and tender offers;
•equity market conditions affecting comparable public companies; and
•general U.S. and global market conditions.
In determining the fair value of our common stock, we established the enterprise
value of our business using the market approach. Under the market approach, a
group of guideline publicly traded companies with similar financial and
operating characteristics to Matterport are selected, and valuation multiples
based on the guideline public companies' financial information and market data
are calculated. Based on the observed valuation multiples, an appropriate
multiple was selected to apply to our historical and forecasted revenue results.
In allocating the equity value of our business among the various classes of
equity securities prior to December 2020 , we used the option pricing model
("OPM") method, which models each class of equity securities as a call option
with a unique claim on our assets. The OPM treats our common stock and
redeemable convertible preferred stock as call options on an equity value with
exercise prices based on the liquidation preference of our redeemable
convertible preferred stock. The common stock is modeled as a call option with a
claim on the equity value at an exercise price equal to the remaining value
immediately after our redeemable convertible preferred stock is liquidated. The
exclusive reliance on the OPM until December 2020 was appropriate when the range
of possible future outcomes was difficult to predict and resulted in a highly
speculative forecast.
Since December 2020 , we used a hybrid method utilizing a combination of the OPM
and the probability weighted expected return method ("PWERM"). The PWERM is a
scenario-based methodology that estimates the fair value of common stock based
upon an analysis of future values for Matterport , assuming various outcomes. The
common stock value is based on the probability-weighted present value of
expected future investment returns considering each of the possible outcomes
available as well as the rights of each class of shares. The future value of the
common stock under each outcome is discounted back to the valuation date at an
appropriate risk-adjusted discount rate and probability weighted to arrive at an
indication of value for the common stock. We considered two different scenarios:
(a) a transaction with a SPAC , (b) remaining a private company. Under the hybrid
method, we used the OPM, the if-converted method, and the liquidation method to
allocate the equity value of our business among the various classes of stock.
The if-converted method presumes that all shares of our redeemable convertible
preferred stock convert into shares of common stock based upon their conversion
terms and differences in the rights and preferences of the share of redeemable
convertible preferred stock are ignored. The liquidation method presumes payment
of proceeds in accordance with the liquidation terms of each class of stock.
After the allocation to the various classes of equity securities, a discount for
lack of marketability ("DLOM") was applied to arrive at a fair value of common
stock. A DLOM was meant to account for the lack of marketability of a stock that
was not publicly traded. In making the final determination of common stock
value, consideration was also given to recent sales of common stock.
Application of these approaches and methodologies involves the use of estimates,
judgments and assumptions that are highly complex and subjective, such as those
regarding our expected future revenue, expenses and future cash flows, discount
rates, market multiples, the selection of comparable public companies, and the
probability of and timing associated with possible future events. Changes in any
or all of these estimates and assumptions or the relationships between those
assumptions impact our valuations as of each valuation date and may have a
material impact on the valuation of our common stock.
Warrants Liability
The Company assumed publicly-traded warrants ("Public Warrants") and private
warrants ("Private Warrants") upon the Closing. The Company accounts for
warrants for shares of the Company's Class A common stock that are not indexed
to its own stock as liabilities at fair value on the balance sheet. The warrants
are subject to remeasurement at each balance sheet date and any change in fair
value is recognized in the Company's statement of operations. For issued or
modified warrants that meet all of the criteria for equity classification, the
warrants are required to be recorded as a component of additional paid-in
capital at the time of issuance. For issued or modified warrants that do not
meet all the criteria for equity classification, the warrants are required to be
recorded as a liability at their initial fair value on the date of
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issuance, and each balance sheet date thereafter. Changes in the estimated fair
value of the warrants are recognized as a non-cash gain or loss on the
statements of operations.
Earn-out Arrangement
In connection with the Reverse Recapitalization and pursuant to the Merger
Agreement, eligible Legacy Matterport stockholders and Legacy Matterport stock
options and restricted share units (RSUs) holders are entitled to receive an
aggregate of 23,460,000 shares of the Company's Class A common shares ("Earn-out
Shares") upon the Company achieving certain Earn-out Triggering Events during
the Earn-out Period (as described in Note 11).
In accordance with ASC 815-40, Earn-out Shares issuable to Legacy Matterport
common stockholders in respect of such common stock are not solely indexed to
the common stock and therefore are accounted for as contingent earn-out
liability on the condensed consolidated balance sheet at the reverse
recapitalization date and subsequently remeasured at each reporting date with
changes in fair value recorded a component of other expense, net in the
condensed consolidated statements of operations and comprehensive loss.
Earn-out Shares issuable to certain holders of Legacy Matterport stock options
and RSUs in respect of such stock options and RSUs (the "Earn-out Awards") are
subject to forfeiture and are accounted for in accordance with ASC 718. The
Company measures and recognizes stock-compensation expense based on the fair
value of the Earn-out Awards over the derived service period for each tranche.
Forfeitures are accounted for as they occur.
Upon the forfeiture of Earn-out Shares issuable to any eligible holder of Legacy
Matterport stock options and RSUs, the forfeited Earn-out awards are subject to
reallocation and grant on a pro rata basis to the remaining eligible Legacy
Matterport stockholders and stock options and RSUs holders. The reallocated
issuable shares to Legacy Matterport common stockholders are recognized as
contingent earn-out liability, and the reallocated issuable shares to Legacy
Matterport stock options and RSUs holders are recognized as share-based
compensation over the remaining derived service period based on the fair value
on the date of the reallocation.
Upon Closing, the estimated fair value of the Earn-out Shares is allocated
proportionally to contingent earn-out liability and the grant date fair value of
the Earn-out Awards. The estimated fair value of the Earn-out Shares is
determined using a Monte Carlo simulation prioritizing the most reliable
information available. The assumptions utilized in the calculation are based on
the achievement of certain stock price milestones, including the current Company
common stock price, expected volatility, risk-free rate, expected term and
dividend rate. The contingent earn-out liability is categorized as a Level 3
fair value measurement because the Company estimates projections during the
Earn-out Period utilizing unobservable inputs. See Note 6 "Fair Value
Measurement" and Note 13 "Contingent Earn-Out Liability" for additional
information.
If the applicable triggering event is achieved for a tranche, the Company will
account for the Earn-out Shares for such tranche as issued and outstanding
common stock. As of September 30, 2021 , the Earn-out triggering events have not
yet been achieved, the Earn-out Shares are contingently issuable and not
reflected in the condensed consolidated financial statements.
Recent Accounting Pronouncements
For a discussion of the recent accounting pronouncements, refer to "Accounting
Pronouncements" in Note 2. Summary of Significant Accounting Policies in Part I,
Item 1 of this Report.
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