The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated condensed financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited Consolidated Financial Statements and related notes thereto for the year endedDecember 31, 2020 , included in our prospectus, datedJuly 14, 2021 , filed with theSecurities and Exchange Commission , or theSEC , in accordance with Rule 424(b) of the Securities Act onJuly 16, 2021 , or the Prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are an innovative life sciences technology company that enables the safe and efficient manufacture of pharmaceutical products through our rapid automated microbial quality control, or MQC, detection platform. We develop, manufacture, market and sell the Growth Direct system and related proprietary consumables, and value-added services to enable rapid MQC testing in the manufacture of biologics, cell and gene therapies, vaccines, sterile injectables, and other healthcare products. Our system delivers the power of industrial automation to bioprocessing and pharmaceutical manufacturing firms by modernizing and digitizing their MQC operations. Our Growth Direct platform, developed with over 15 years of active feedback from our customers, was purpose-built to meet the growing demands posed by the increasing scale, complexity, and regulatory scrutiny confronting global pharmaceutical manufacturing. Our Growth Direct platform comprises the Growth Direct system, optional laboratory information management system, or LIMS, connection software (which the majority of our customers purchase), proprietary consumables, and comprehensive field service, validation services and post-warranty service contracts. Once embedded and validated in our customers' facilities, our Growth Direct platform provides for recurring revenues through ongoing sales of consumables and service contracts. Our technology fully automates and digitizes the process of pharmaceutical MQC and is designed to enable our customers to perform this critical testing process more efficiently, accurately, and securely. Our Growth Direct platform accelerates time to results by several days, a 50% improvement over the traditional method, and reduces MQC testing to a simple two-step workflow, eliminating 85% of the manual steps of traditional MQC, generating significant time, operational, and cost savings for our customers. We seek to establish the Growth Direct as the trusted global standard in automated MQC by delivering the speed, accuracy, security, and data integrity compliance that our customers depend on to ensure patient safety and consistent drug supply. Since inception, we have devoted a majority of our resources to designing, developing, and building our proprietary Growth Direct platform and associated products, launching our Growth Direct platform commercially, expanding our sales and marketing infrastructure to grow our sales, building a global customer support team to deliver our value-added services, investing in robust manufacturing and supply chain operations to serve our customers globally, and providing general and administrative support for these operations. To date, we have funded our operations primarily with proceeds from sales of preferred stock, proceeds from our IPO, borrowings under loan agreements and product and service sales as well as our cost-reimbursement contract with theU.S. Department of Health and Human Services Biomedical Advanced Research & Development Authority, or BARDA. OnJuly 19, 2021 , we closed an initial public offering of our Class A common stock, or the IPO, which resulted in the sale of 7,920,000 shares of our Class A common stock at a public offering price of$20.00 per share, before underwriting discounts. The IPO resulted in gross proceeds of$158.4 million and net proceeds of approximately$143.8 million after deducting underwriting discounts, commissions and estimated offering expenses payable by us. Additionally, onAugust 4, 2021 , the underwriters exercised their overallotment option in part and purchased 1,086,604 shares of Class A common stock at the initial public offering price of$20.00 per share less discounts and commissions. The overallotment option exercise resulted in net proceeds of approximately$20.2 million . 36 Table of Contents
Since our inception, we have incurred net losses in each year. We generated
revenue of
? growing sales of our products in both
markets by further expanding our sales and marketing capabilities;
? scaling our manufacturing and supply chain processes and infrastructure to meet
growing demand for our products;
? investing in research and development to develop new products and further
enhance our existing products;
? protecting and building on our intellectual property portfolio; and
? attracting, hiring and retaining qualified personnel.
Until such time as we can generate revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings and debt financings. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue our expansion plans including the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations. We believe that the net proceeds from the IPO, together with our cash and cash equivalents as ofSeptember 30, 2021 , will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "Liquidity and Capital Resources."
COVID-19 update
In response to the COVID-19 pandemic and various resulting government directives, we took proactive measures to protect the health and safety of our employees, customers, and partners, while maintaining our ability to supply and service our customers. We continue to monitor the implications of the ongoing COVID-19 pandemic on our business, as well as our customers' and suppliers' businesses. Some of the measures we have taken follow:
During this pandemic, we moved quickly to implement several business continuity
initiatives aimed at maintaining uninterrupted manufacturing and supply
? capabilities while keeping our workforce safe, including instituting a COVID-19
task force, forming multiple manufacturing teams with staggered shifts,
increasing inventory safety stock levels, and establishing appropriate
protective equipment and distancing policies for essential on-site personnel.
We have been designated an essential business that can continue operations
during the COVID-19 pandemic. In early
protocols to have many personnel work remotely. At the same time, because of
our continued designation as an essential business, many employees continue to
work on-site at our facility in
activities that support essential operations to provide mission-critical MQC
? testing products to global pharmaceutical customers manufacturing life-saving
drugs. We have also restricted business travel and have limited access to our
facilities to outside visitors other than customers, vendors, suppliers and
partners who are integral to supporting our business. To date, these
arrangements have not materially affected our ability to maintain our business
operations, including the operation of financial reporting systems, internal
control over financial reporting and disclosure controls and procedures. 37 Table of Contents
Our production, shipping and customer service functions remain operational to
maintain a continuous supply of products to our customers. We are communicating
? regularly with our suppliers and logistics partners so that our supply chain
remains intact and we have not experienced any material supply issues to date.
Our customer service teams around the world are operating remotely and remain
available to assist our customers and partners as needed.
As a result of travel restrictions and shelter-in-place orders, we experienced
an impact on our ability to ship, install and validate systems, as well as
? train customers in certain geographies, which negatively impacted our product
and service revenues during 2021 and 2020. Despite these restrictions, we were
able to implement several measures including remote and customer-assisted
support activities to support the continued growth of our business.
We are actively reviewing and managing costs to navigate the current
? environment. However, to date, the COVID-19 pandemic has not had a material
adverse effect on results of operations.
While the disruption due to COVID-19, and its variants, is currently expected to be temporary, there is considerable uncertainty around its duration. We expect these disruptions to continue to impact our operating results. However, the related financial impact and duration of these disruptions cannot be reasonably estimated at this time.
Factors affecting our performance
We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described under the heading "Risk Factors."
New customer adoption of the Growth Direct platform
Our financial performance has largely been driven by, and a key factor to our future success will be, our ability to increase the global adoption of our Growth Direct platform in our key markets. We plan to drive global customer adoption through both direct and indirect sales and marketing organizations inNorth America ,Europe , andAsia . We are investing substantially in these organizations and expect to continue to do so in the future. As part of this effort, we increased our direct sales and marketing team by 69% for the nine months endedSeptember 30, 2021 compared to the prior year-end.
Expansion within our existing customer base
There is an opportunity to increase broader adoption and utilization of our Growth Direct platform throughout our existing customers' organizations by their purchasing of more systems to convert more of their test volume at existing locations, to support multiple locations, to meet redundancy requirements, or driven by a need to increase capacity. As ofSeptember 30, 2021 , approximately 50% of our customers have purchased Growth Direct systems for multiple sites, and approximately 60% of our customers have purchased multiple Growth Direct systems. Increased utilization amongst existing customers can also occur as customers advance through the Growth Direct platform adoption cycle from early validation of initial applications to validation and conversion of multiple applications on the Growth Direct platform.
Innovating and launching new products on the Growth Direct platform
We believe the depth, scalability and robust capabilities of our Growth Direct platform allow us to address key opportunities and challenges facing MQC testing in the pharmaceutical industry. As an innovative leader in automated MQC testing, we intend to invest in further enhancements in our existing Growth Direct platform as well as end-to-end workflow solutions in our core market. We plan to further invest in research and development to support the expansion 38
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of our Growth Direct platform through development and launch of new applications to capture greater share of customer testing volume, new product formats to broaden our ability to serve different market segments and launch of new products and technologies to address adjacent segments of the overall MQC workflow. We plan to continue to hire employees with the necessary scientific and technical backgrounds to enhance our existing products and help us introduce new products to market. We expect to incur additional research and development expenses as a result. By expanding and continuously enhancing the Growth Direct platform, we believe we can drive incremental revenue from existing clients as well as broaden the appeal of our solutions to potential new customers.
Expanding Growth Direct into adjacent end markets
We have identified adjacent end markets that conduct high volumes of MQC testing under regulatory control and derive value from improving operational efficiency via MQC automation and we may opportunistically enter these markets. We could expand into these markets through our existing technologies, through adapting our existing technologies, or through developing new products to specifically address the unmet needs of these adjacent markets. We may drive our expansion into these markets by building commercial infrastructure to specifically target customers in those markets, or by partnering with other participants in those markets. Revenue mix Our revenue is derived from sales of our Growth Direct systems, our LIMS connection software, proprietary consumables, services and our cost-reimbursement contract with BARDA. During the three and nine months endedSeptember 30, 2021 and 2020, Growth Direct system revenue was the single largest component of our revenue. Because Growth Direct system revenue involves a capital selling process and tends to be somewhat concentrated within a small (but different) group of customers each year, it is subject to variability from quarter to quarter. While we expect Growth Direct systems revenue to continue to be the largest contributor to our revenue over the near- to mid-term, as our base of validated Growth Direct systems continues to grow, we expect our recurring revenue (consumables and service contracts) to grow at a faster rate than our non-recurring revenues (Growth Direct systems, validation and other services), which we expect to drive variability and longer-term trends in our revenue mix. Our non-commercial revenue is generated from long-term contracts with governmental agencies and third parties that are typically fixed in terms of scope and value. As a result, the amount of non-commercial revenue recognized in each period is subject to variability depending on factors such as the number of active contracts as well as the work performed and value remaining under each contract. Key business metrics
We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are representative of our current business; however, we anticipate these may change or be substituted for additional or different metrics as our business grows and evolves.
Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Systems placed: Systems placed in period 10 11 (1) (9.1) % Cumulative systems placed 113 77 36 46.8 % Systems validated:
Systems validated in period 5 4 1 25.0 % Cumulative systems validated 68 37 31 83.8 % Product and service revenue - total$ 6,303 $ 4,964 $ 1,339 27.0 % Product and service revenue - recurring$ 2,171 $ 855 $ 1,316 153.9 % 39 Table of Contents Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Systems placed: Systems placed in period 26 16 10 62.5 % Cumulative systems placed 113 77 36 46.8 % Systems validated:
Systems validated in period 17 10 7 70.0 % Cumulative systems validated 68 37 31 83.8 % Product and service revenue - total$ 16,782 $ 8,981 $ 7,801 86.9 % Product and service revenue - recurring$ 5,539 $ 2,712 $ 2,827
104.2 %
Growth Direct system placements
We consider a Growth Direct system to be "placed" upon transfer of control of the system to the customer, at which point the revenue for that system is recognized. We regularly review the number of Growth Direct systems placed and cumulative Growth Direct system placements in each period as a leading indicator of our business performance. Our revenue has historically been driven by, and in the future will continue to be impacted by, the rate of Growth Direct system placements as a reflection of our success selling and delivering our products. We expect our Growth Direct system placements to continue to grow over time as we increase penetration in our existing markets and expand into new markets. The number of Growth Direct system placements and rate of growth varies from period-to-period due to factors including, but not limited to, Growth Direct system order volume and timing, and access to customer sites (including COVID-19 related restrictions). As a result, we expect to experience continued variability in our period-to-period number of Growth Direct system placements due to the aforementioned factors.
Validated systems
We regularly review the number of Growth Direct systems validated and cumulative Growth Direct systems validated in each period as indicators of our business performance. Management focuses on validated Growth Direct systems as a leading indicator of likely future recurring revenue as well as a reflection of our success validating placed systems. We expect our validated Growth Direct systems to continue to grow over time as we increase our base of cumulative systems placed and then validate those systems. After a Growth Direct system is placed with a customer and installed, we work with the customer to validate the system, which typically takes anywhere from three to nine months. Once a validation has been completed, we generally expect our customers to transition from their legacy manual method to our automated method and begin regular utilization of consumables over a period of up to three months. The number of validated Growth Direct systems and rate of growth varies from period-to-period due to factors including, but not limited to, Growth Direct system order volume and timing, whether customers have previously validated Growth Direct systems within their site or network, access to customer sites (including as a result of COVID-19 related restrictions and delays in 2021 and 2020), customer site readiness and the time to install and validate each individual system. As a result, we expect to experience continued fluctuations in our period-to-period number of Growth Direct systems validated due to the aforementioned factors. Product and service revenue We regularly assess trends relating to our combined product and service revenue as an indicator of our business performance. Product and service revenue represents all of our commercial revenue for the business. It excludes non-commercial revenue, which typically supports other business functions such as research and development and is by its nature subject to significant variability. 40 Table of Contents
During the three and nine months endedSeptember 30, 2021 and 2020, travel restrictions related to COVID-19, and its variants, negatively impacted our ability to ship, install and validate Systems, as well as train customers in certain geographies. This negatively impacted our product and service revenue in those periods. While we expect these disruptions to continue to impact our operating results, the related financial impact and duration of these disruptions cannot be reasonably estimated at this time.
Recurring revenue
We regularly assess trends relating to recurring revenue, which is the revenue from consumables and service contracts, based on our product offerings, our customer base and our understanding of how our customers use our products. Recurring revenue was 31.5% and 16.3% of our total revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Recurring revenue was 30.7% and 25.0% of our total revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Our recurring revenue as a percentage of the total product and service revenue will generally vary based upon the cumulative number of validated Growth Direct systems in the period, as well as other variables such as the volume of tests being conducted, and the test application(s) being used on those Growth Direct systems. As our base of validated systems continues to grow, we expect our recurring revenue streams to grow at a faster rate that will ultimately result in them constituting the majority of our revenue over the longer term.
Components of results of operations
Revenue
We generate revenue from sales of our Growth Direct system including our LIMS connection software, consumables, validation services, service contracts and field service as well as our contractual arrangement with BARDA. We primarily sell our products and services through direct sales representatives. The arrangements are generally noncancelable and nonrefundable after ownership passes to the customer. Three Months Ended Percentage Three Months Ended Percentage September 30, of total September 30, of total 2021 revenue 2020 revenue (in thousands) (in thousands) Product revenue $ 4,824 69.9 % $ 4,069 77.5 % Service revenue 1,479 21.4 % 895 17.1 % Non-commercial revenue 596 8.6 % 283 5.4 % Total revenue $ 6,899 100.0 % $ 5,247 100.0 % Nine Months Ended Percentage Nine Months Ended Percentage September 30, of total September 30, of total 2021 revenue 2020 revenue (in thousands) (in thousands) Product revenue $ 12,630 70.1 % $ 6,921 63.9 % Service revenue 4,152 23.0 % 2,060 19.0 % Non-commercial revenue 1,242 6.9 % 1,858 17.1 % Total revenue $ 18,024 100.0 % $ 10,839 100.0 % Product revenue We derive product revenue primarily from the sale of our Growth Direct systems and related consumables as well as our LIMS connection software, which the majority of our customers purchase. As ofSeptember 30, 2021 , we had sold over 100 Growth Direct systems to over thirty customers globally, including over half of the top twenty pharmaceutical companies as measured by revenue and 30% of globally approved cell and gene therapies. 41 Table of Contents Growth Direct systems
Growth Direct system revenue is a non-recurring product revenue stream that we recognize as revenue upon transfer of control of the system to the customer. The Growth Direct system is fully functional for use by the customer upon delivery, as such transfer of control occurs at shipment or delivery, depending on contractual terms. We expect our Growth Direct system revenue to continue to grow over time as we increase system placements in our existing customers and markets and expand into new customers and markets.
Consumables
Our consumable revenue is a recurring product revenue stream composed of two proprietary consumables to capture test samples for analysis on the Growth Direct system, an Environmental Monitoring or EM, consumable, and a Water/Bioburden consumable, or W/BB consumable. Both proprietary consumables support the growth-based compendial method for MQC testing mandated by global regulators and provide results that are comparable to traditional consumables. Our consumables are designed with features that enable automation on the Growth Direct system, with bar coding for tracking and data integrity, and physical characteristics for robotic handling, to support vision detection, and to prevent counterfeiting.
We expect consumable revenue to increase in future periods as our base of cumulative validated Growth Direct systems grows and those systems utilize our consumables on a recurring, ongoing basis.
Our LIMS connection software is a non-recurring product revenue stream. Although optional, the majority of our customers elect to purchase this software, which allows Growth Direct systems to export result reports and securely link to a customer's two-way LIMS connection software to completely eliminate manual data entry and drive productivity.
Service revenue
We derive service revenue from validation services, field service including installations, and service contracts sold to our customers. Revenue from validation services and field service are non-recurring service revenue streams, while revenue from service contracts is a recurring service revenue stream.
We offer our customers validation services (including related documentation) that enable them to replace their existing manual testing method and utilize their Growth Direct systems in compliance with relevant MQC regulations. Validation services are recognized as revenue over time as these services are provided to the customer. We offer our customers service contracts that can be purchased after the expiration of the one-year assurance warranty that all of our customers receive with the purchase of a Growth Direct system. Under these contracts, they are entitled to receive phone support, emergency on-site maintenance support and two preventative maintenance visits per year. These service contracts generally have fixed fees and a term of one year. We recognize revenue from the sale of service contracts over time as these services are provided over the respective contract term. We also offer our customers field service which consists of services provided by our field service engineers to install Growth Direct systems at customer sites. We recognize revenue from field service over time as these services are provided to the customer. We expect service revenue to increase in future periods as the number of placed and validated Growth Direct systems grows and we are able to generate increasing non-recurring revenue from validation services and field service for newly placed systems and increasing recurring revenue from service contracts for
validated systems. 42 Table of Contents Non-commercial revenue We generate non-commercial revenue from long-term contracts with governmental agencies and third parties. To date, our non-commercial revenue has been derived from contracts with BARDA. Our current contract with BARDA is a cost-reimbursable, cost-sharing arrangement, whereby BARDA reimburses us for a percentage of the total cost incurred which includes allowable indirect costs. We recognize revenue from non-commercial revenue over time using an input method based on cost incurred to date in relation to total estimated cost. Since the underlying contracts are typically fixed in terms of scope and value, the amount of non-commercial revenue recognized in each period is subject to variability depending on factors such as the number of active contracts as well as the work performed and value remaining under each contract. We received additional funding inApril 2021 from BARDA. The Company expects our current funding to be fully earned by the end of 2021.
Costs and operating expenses
Costs of revenue
Cost of product revenue primarily consists of costs for raw material parts and associated freight, shipping and handling costs, salaries and other personnel costs including stock-based compensation expense, contract manufacturer costs, scrap, warranty cost, inventory reserves, royalties, depreciation and amortization expense, allocated information technology and facility-related costs, overhead and other costs related to those sales recognized as product revenue in the period. Cost of service revenue primarily consists of salaries and other personnel costs including stock-based compensation expense, travel costs, materials consumed when performing installations, validations and other services, allocated information technology and facility-related costs associated with training, and other expenses related to service revenue recognized in the period. Cost of non-commercial revenue primarily consists of salaries and other personnel costs including stock-based compensation expense, consulting expense, materials, travel and other costs related to the revenue recognized as non-commercial revenue during the period. Our contract with BARDA is subject to the Federal Acquisition Regulation, or FAR and is priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods or services provided underU.S. government contracts.
We expect that our cost of revenue will generally increase or decrease to the extent that our revenue increases or decreases, but that such costs will increase more slowly than the related revenue streams over time.
Research and development
Research and development expenses consist primarily of costs incurred for our research activities, product development, hardware and software engineering and consultant services and other costs associated with our technology Growth Direct platform and products, which include:
employee-related expenses, including costs for salaries, bonuses and other
? personnel costs including stock-based compensation expense, for employees
engaged in research and development functions;
? the cost of developing, maintaining and improving new and existing product
designs;
? the cost of hardware and software engineering;
? research materials and supplies;
43 Table of Contents
? external costs of outside consultants engaged to conduct research and
development associated with our technology and products; and
information technology and facilities expenses, which include direct and
? allocated expenses for rent, maintenance of facilities and insurance as well as
related depreciation and amortization.
Our research and development costs are expensed as incurred. We believe that our continued investment in research and development is essential to our long-term competitive position, and we expect these expenses to increase in future periods.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, commissions, benefits and other personnel costs including stock-based compensation expense as well as costs relating to travel, consulting, public relations and allocated information technology and facility-related costs for our employees engaged in sales and marketing activities. We expect sales and marketing expenses to increase in future periods as the number of sales and marketing personnel grows and we continue to expand our geographic reach and capabilities, broaden our customer base and introduce new products.
General and administrative
General and administrative expenses consist primarily of salaries, bonuses and other personnel costs including stock-based compensation expense for our finance, legal, human resources and general management employees, as well as professional fees for legal, patent, accounting, audit, investor relations, recruiting, consulting and other services. General and administrative expenses also include direct and allocated information technology and facility-related costs. General and administrative expenses are expected to increase in future periods as the number of administrative personnel grows to support increasing business size and complexity. We have also started to incur incremental accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor relations expenses associated with operating as a public company. Other income (expense) Interest expense
Interest expense is comprised of interest cost associated with outstanding borrowings under our loan and security agreements, amortization of deferred financing costs and debt discounts associated with such arrangements.
Change in fair value of preferred stock warrant liability
In connection with theMay 2020 term loan facility we entered into with a lender, or the 2020 Term Loan, we issued 1,195,652 warrants to purchase shares of Series C1 Preferred Stock at an exercise price of$1.15 per share. These warrants were immediately exercisable and expire 10 years after the issuance date. We also have other outstanding warrants to purchase preferred stock issued in connection with previous financing arrangements. We classified all of our warrants to purchase preferred stock as a liability on our consolidated balance sheets until our IPO because the warrants were freestanding financial instruments that may require us to transfer assets upon exercise. The liability associated with each of these warrants was initially recorded at fair value upon the issuance date and was subsequently remeasured to fair value at each reporting date. The resulting change in the fair value of the preferred stock warrant liability was recorded as a component of other income (expense) in our consolidated statements of operations. We continued to recognize changes in the fair value of this preferred stock warrant liability at each reporting period until the IPO when they qualified for equity classification. In connection with the IPO, the preferred stock warrants were automatically converted to Class A common stock warrants. We determined the event resulted in equity classification of the Class A common stock warrants and derecognized the fair value of the preferred stock warrant liability as of the IPO date and
reclassified to equity. 44 Table of Contents
Loss on extinguishment of debt
Loss on extinguishment of debt recognized in the nine months endedSeptember 30, 2020 , includes a loss from the conversion of the 2020 Convertible Notes into Series C1 Preferred Stock inApril 2020 . In addition, the loss on extinguishment of debt includes unamortized issuance costs, back-end fees and early payment fees related to the refinancing of our$18.0 million term loan with a new$25.0 million term loan inMay 2020 . We determined the loss on extinguishment of debt to be the difference between the reacquisition price of the debt and net carrying value of the extinguished debt. Loss on extinguishment of debt recognized in the three and nine months endedSeptember 30, 2021 , includes a loss from the extinguishment of the 2020 Term Loan. In addition, the loss on extinguishment of debt includes unamortized issuance costs, unamortized prepaid commitment fees, and early payment fees associated with the 2020 Term Loan repayment.
Other income
Other income primarily consists of interest income as well as other miscellaneous income unrelated to our core operations.
Income tax expense
We generated significant taxable losses during the three and nine months endedSeptember 30, 2021 and 2020, and, therefore, have not recorded anyU.S. federal or state income tax expense during those periods. However, we did record an immaterial amount of foreign income tax expense during each of those periods. 45 Table of Contents Results of operations
Comparison of the three months ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended September 30, September 30, Change 2021 2020 Amount % (in thousands) Revenue: Product revenue $ 4,824 $ 4,069$ 755 18.6 % Service revenue 1,479 895 584 65.3 % Non-commercial revenue 596 283 313 110.6 % Total revenue 6,899 5,247 1,652 31.5 % Costs and operating expenses: Cost of product revenue 6,298 5,441 857 15.8 % Cost of service revenue 1,516 772 744 96.4 % Cost of non-commercial revenue 396
399 (3) (0.8) % Research and development 2,441 2,224 217 9.8 % Sales and marketing 3,063 1,447 1,616 111.7 % General and administrative 5,308 2,541 2,767 108.9 %
Total costs and operating expenses 19,022
12,824 6,198 48.3 % Loss from operations (12,123) (7,577) (4,546) 60.0 % Other income (expense): Interest expense (775) (886) 111 (12.5) % Change in fair value of preferred stock warrant liability (8,160) - (8,160) * Loss on extinguishment of debt (3,100) - (3,100) * Other income (expense) (809) 18 (827) (4,594.4) % Total other income (expense), net (12,844) (868) (11,976) 1,379.7 % Loss before income taxes (24,967)
(8,445) (16,522) 195.6 % Income tax expense 20 20 - - % Net loss$ (24,987) $ (8,465) $ (16,522) 195.2 % * Not Meaningful Revenue
Product revenue increased by$0.8 million , or 18.6%, with a net increase of$1.2 million primarily attributable to increased utilization of consumables attributable to both recently validated systems as well as those at existing customer sites. Partially offsetting the increase in product revenue volume was a negative impact of consumable product mix of$0.4 million . Service revenue increased by$0.6 million , or 65.3%. The increase in service revenue was primarily due to a$0.3 million increase in validation revenue due to the increase in Growth Direct systems placed during 2021, as well as a$0.2 million increase in service contract revenue, driven by an increase in cumulative Growth Direct systems validated. During the quarters endedSeptember 30, 2021 and 2020, travel restrictions and shelter-in-place orders related to COVID-19, and its variants, negatively impacted our ability to ship, install and validate systems, as well as train customers in certain geographies. This negatively impacted our product and service revenue in the periods. While we expect these disruptions to continue to impact our operating results, the related financial impact and duration of these disruptions cannot be reasonably estimated at this time. 46
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Non-commercial revenue increased by
Costs and operating expenses
Costs of revenue
Cost of product revenue increased by$0.9 million , or 15.8%. The increase was primarily driven by increased product volume of$1.0 million partially offset by a reduction in product cost of$0.9 million and mix of$0.2 million . Also contributing to the increase was an increase of$0.5 million in personnel-related costs resulting from higher headcount to support increased production volume and manufacturing support activities as well as to provide redundancy in the event of potential disruptions from COVID-19 and its variants, a$0.2 million increase in facilities and information technology, or IT, costs, and a net increase of$0.3 million in other costs. Cost of service revenue increased by$0.7 million , or 96.4%. This increase was driven by an increase of$0.5 million due to higher headcount-related costs associated with additional validation and field service employees hired in 2021 and 2020 to support increased service activity. Also contributing to the increase was higher material, supplies and IT related costs of$0.2 million driven by higher service activity.
Cost of non-commercial revenue remained relatively flat, decreasing 0.8%. There was no significant change in costs incurred under our BARDA contract.
Research and development Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Research and development$ 2,441 $ 2,224 $ 217 9.8 % Percentage of total revenue 35.4 % 42.4 %
Research and development expenses increased by$0.2 million , or 9.8%. This increase was primarily due to an increase of$0.4 million in employee-related costs due primarily to higher headcount partially offset by a reduction in consulting expenses of$0.3 million , and an increase in other general research and development costs of$0.1 million . Sales and marketing Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Sales and marketing$ 3,063 $ 1,447 $ 1,616 111.7 %
Percentage of total revenue 44.4 % 27.6 %
Sales and marketing expenses increased by$1.6 million , or 111.7%. This increase was due to an increase in marketing consulting of$0.7 million , an increase in employee-related costs (including commissions earned) of$0.8 million primarily due to the expansion of our sales organization, and a$0.1 million increase in other expenses to support our sales and marketing organizations. 47 Table of Contents General and administrative Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) General and administrative$ 5,308 $ 2,541 $ 2,767 108.9 % Percentage of total revenue 76.9 % 48.4 % General and administrative expenses increased by$2.8 million , or 108.9%. This increase was driven by a$1.5 million increase in employee-related costs due to business growth, including the transition to a public company beginning inJuly 2021 , and higher benefit costs, a$0.6 million increase in business insurance, and increase of$0.7 million in professional fees related to legal, audit, accounting, and consulting activities due to an increase in underlying business activity, including public company operating costs.
Other income (expense)
Interest expense
Interest expense for the three months endedSeptember 30, 2021 and 2020 was$0.8 million and$0.9 million , respectively. The decrease of$0.1 million , or 12.5%, was primarily due to$0.1 million in term loan interest expense, which decreased primarily due to the repayment of our 2020 Term loan inSeptember 2021 .
Change in fair value of preferred stock warrant liability
The change in fair value of preferred stock warrant liability was a loss of$8.2 million for the three months endedSeptember 30, 2021 , compared no change in the fair value of preferred stock warrant liability for the three months endedSeptember 30, 2020 . The change was due to an increase in the fair value of the underlying preferred stock, which is used to determine the value of preferred stock warrants, to reflect the IPO price. The increase in fair value was recorded upon the IPO prior to the conversion to Class A common stock warrants and the reclassification to equity.
Loss on extinguishment of debt
The loss on extinguishment of debt was$3.1 million for the three months endedSeptember 30, 2021 , compared to no loss for the three months endedSeptember 30, 2020 . The$3.1 million loss is comprised of a$1.8 million prepayment penalty,$1.1 million in expense related to unamortized discounts, and$0.2 million in unamortized prepaid facility fee and other charges. We determined the loss on extinguishment of debt to be the difference between the reacquisition price of the debt and net carrying value of the extinguished debt.
Other income (expense)
Other expense was$0.8 million for the three months endedSeptember 30, 2021 compared to less than$0.1 million for the three months endedSeptember 30, 2020 . The increase was due to the expense related to the Exit Fee described in Note 16 to our condensed consolidated financial statements.
Income tax expense
Income tax expense was
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Comparison of the nine months ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended September 30, September 30, Change 2021 2020 Amount % (in thousands) Revenue: Product revenue $ 12,630 $ 6,921$ 5,709 82.5 % Service revenue 4,152 2,060 2,092 101.6 % Non-commercial revenue 1,242 1,858 (616) (33.2) % Total revenue 18,024 10,839 7,185 66.3 % Costs and operating expenses: Cost of product revenue 17,900 11,544 6,356 55.1 % Cost of service revenue 3,997 2,478 1,519 61.3 % Cost of non-commercial revenue 1,282
1,732 (450) (26.0) % Research and development 6,926 4,906 2,020 41.2 % Sales and marketing 8,460 4,149 4,311 103.9 % General and administrative 12,135 6,855 5,280 77.0 %
Total costs and operating expenses 50,700
31,664 19,036 60.1 % Loss from operations (32,676) (20,825) (11,851) 56.9 % Other income (expense): Interest expense (2,631) (2,463) (168) 6.8 % Change in fair value of preferred stock warrant liability (19,643) 549 (20,192) (3,678.0) % Loss on extinguishment of debt (3,100) (2,910) (190) 6.5 % Other income (812) 24 (836) (3,483.3) % Total other income (expense), net (26,186)
(4,800) (21,386) 445.5 % Loss before income taxes (58,862) (25,625) (33,237) 129.7 % Income tax expense 57 114 (57) (50.0) % Net loss$ (58,919) $ (25,739) $ (33,180) 128.9 % Revenue Product revenue increased by$5.7 million , or 82.5%. The increase is attributable to a higher number of Growth Direct system placements during the nine months endedSeptember 30, 2021 , as well as higher volume of consumable shipments due to increased utilization of consumables attributable to both recently validated systems as well as those at existing customer sites, partially offset by an unfavorable impact of consumable product mix of$0.6 million . Service revenue increased by$2.1 million , or 101.6%. The increase in service revenue was primarily due to a$1.3 million increase in validation revenue, a$0.7 million increase in service contract revenue, driven by an increase in cumulative Growth Direct systems validated, as well as a$0.1 million increase in field service revenue due to the increase in Growth Direct systems placed.
Non-commercial revenue decreased by
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Costs and operating expenses
Costs of revenue
Cost of product revenue increased by$6.4 million , or 55.1%. The increase was driven by a$4.6 million increase in volume of Growth Direct systems and consumables sold, an increase of$2.0 million in personnel-related costs resulting from higher headcount to support increased production volume and manufacturing support activities, as well as to provide redundancy in the event of potential COVID-19 related disruptions, an increase in IT and facilities related costs of$0.9 million , an increase in freight costs of$0.3 million , and a$0.1 million increase in other non-direct costs. Partially offsetting the cost increase was a decrease in cost and mix of product sold of$1.5 million . Cost of service revenue increased by$1.5 million , or 61.3%. This increase was primarily due to higher headcount-related costs of$1.2 million associated with additional validation and field service employees hired in the later part of 2020 and in 2021 to support increased service activity. Additionally, an increase in IT and facility related costs of$0.2 million , and materials used for increased validations and customers under service contracts, were partially offset by a net reduction in other cost of service revenue expenses of$0.1 million . Cost of non-commercial revenue decreased by$0.5 million , or 26.0%. This decrease was primarily due to a reduction in spend due to the timing and extent of development activities under our contract with BARDA, with consulting activities down$0.5 million . Research and development Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Research and development$ 6,926 $ 4,906 $ 2,020 41.2 % Percentage of total revenue 38.4 % 45.3 %
Research and development expenses increased by$2.0 million , or 41.2%. This increase was primarily due to an increase of$1.9 million in employee-related costs due primarily to higher headcount to support increased activity, an increase of$0.3 million in IT and facility costs, and a net increase of$0.2 million in other general research and development expenses, partially offset by a reduction in consulting expenses of$0.4 million . Sales and marketing Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Sales and marketing$ 8,460 $ 4,149 $ 4,311 103.9 % Percentage of total revenue 46.9 % 38.3 % Sales and marketing expenses increased by$4.3 million , or 103.9%. This increase was primarily due to a$2.0 million increase in employee-related costs (including commissions earned) due to higher headcount, and increase in marketing consulting expenses of$1.8 million , an increase of$0.3 million in other marketing activities and a net increase of$0.2 million in other sales and marketing expenses. 50 Table of Contents General and administrative Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) General and administrative$ 12,135 $ 6,855 $ 5,280 77.0 % Percentage of total revenue 67.3 % 63.2 % General and administrative expenses increased by$5.3 million , or 77.0%. This increase was primarily due to a$3.1 million increase in employee-related costs driven by higher headcount and a$1.7 million increase in professional fees related to legal, audit, accounting, recruiting and consulting activities due to an increase in underlying business activity, including IPO preparation costs and public company operating costs, and an increase of$0.6 million in business insurance. The increase was partially offset by a net decrease of$0.1 million in other general and administrative expenses.
Other income (expense)
Interest expense
Interest expense for the nine months endedSeptember 30, 2021 and 2020 was$2.6 million and$2.5 million , respectively. The increase of$0.1 million , or 6.8%, was primarily due to a larger long-term debt principal balance incurring interest expense during 2021.
Change in fair value of preferred stock warrant liability
The change in fair value of preferred stock warrant liability was a loss of$19.6 million for the nine months endedSeptember 30, 2021 , compared to a gain of$0.5 million for the nine months endedSeptember 30, 2020 . The change was due primarily to an increase in the fair value of the underlying preferred stock, which is used to determine the value of preferred stock warrants, to reflect the IPO price. The increase in fair value was recorded upon the IPO prior to the conversion to Class A common stock warrants and reclassification to equity.
Loss on extinguishment of debt
The loss on extinguishment of debt was$3.1 million for the nine months endedSeptember 30, 2021 , compared to$2.9 million for the nine months endedSeptember 30, 2020 . The$3.1 million loss is comprised of a$1.8 million prepayment penalty,$1.1 million in expense related to unamortized discounts, and$0.2 million in unamortized prepaid facility fee and other charges, and was incurred as a result of the repayment of the 2020 Term Loan. We determined the loss on extinguishment of debt to be the difference between the reacquisition price of the debt and net carrying value of the extinguished debt. The loss for the nine months endedSeptember 30, 2020 is comprised of unamortized issuance costs, unamortized prepaid commitments fees, and early payment fees, and was incurred as result of the conversion of the 2020 Convertible Notes into Series C1 Preferred Stock inApril 2020 .
Other income (expense)
Other expense was$0.8 million for the nine months endedSeptember 30, 2021 compared to less than$0.1 million income for the nine months endedSeptember 30, 2020 . The increase was due to the expense related to the Exit Fee described in Note 16 to our condensed consolidated financial statements.
Liquidity and capital resources
Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily through proceeds from sales of redeemable convertible preferred stock, proceeds from our IPO, borrowings under loan agreements and revenue from sales of our products, services and contracts.
As ofSeptember 30, 2021 , we had 51 Table of Contents
cash and cash equivalents of$219.6 million . InJuly 2021 , we completed our IPO and received net proceeds of approximately$143.8 million . Additionally, inAugust 2021 , the underwriters exercised their overallotment option in part which resulted in net proceeds of approximately$20.2 million . We believe that our cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least twelve months following the date these condensed consolidated financial statements were issued.
Cash flows
The following table summarizes our sources and uses of cash for each of the periods presented: Nine Months Ended September 30, 2021 2020 Net cash used in operating activities$ (42,077) $ (25,825) Net cash provided by (used in) investing activities 13,769 (25,546) Net cash provided by financing activities 218,001 64,185
Net increase in cash and cash equivalents and restricted cash
Operating activities
During the nine months endedSeptember 30, 2021 , operating activities used$42.1 million in cash, primarily resulting from our net loss of$58.9 million , net cash used by changes in our operating assets and liabilities of$8.6 million , which were partially offset by non-cash charges of$25.4 million , which included a non-cash change in fair value of preferred stock warrant liability of$19.6 million and debt extinguishment loss of$3.1 million . Net cash used by changes in our operating assets and liabilities for the nine months endedSeptember 30, 2021 consisted primarily of increases in inventory of$5.2 million driven by an increase in finished good and raw material inventory to support increased production volume and to build safety stock, an increase in prepaid and other assets of$2.6 million driven by an increase in prepaid business insurance, as well as a decrease in accounts payable of$2.2 million and deferred revenue of$0.5 million . The cash used by operating assets and liabilities was partially offset by an increase in accrued expenses and other liabilities of$2.6 million , and an increase long term deferred rent of less than$0.1 million . During the nine months endedSeptember 30, 2020 , operating activities used$25.8 million in cash, primarily resulting from our net loss of$25.7 million , and net cash used by changes in our operating assets and liabilities of$5.4 million , which were partially offset by non-cash charges of$5.3 million , which included a non-cash loss on extinguishment of debt of$2.9 million . Net cash used by changes in our operating assets and liabilities for the nine months endedSeptember 30, 2020 consisted primarily of increases in accounts receivable of$2.0 million , increase in inventory of$2.5 million to support increased production volume and to build safety stock, an increase in prepaid expenses and other current and long-term assets of$1.2 million , decreases of$1.6 million in accounts payable, and a decrease in prepaid and other current assets of$0.3 million . The cash used by operating assets and liabilities was partially offset by an increase in deferred revenue of$1.3 million and accrued expense and
other liabilities of$0.6 million . Investing activities During the nine months endedSeptember 30, 2021 , net cash provided by investing activities was$13.8 million , maturities of investments of$15.0 million , net of purchases of property and equipment of$1.3 million .
During the nine months ended
Financing activities
During the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$218.0 million , consisting of net proceeds from the IPO of$165.5 million , net proceeds of$79.7 million from the issuance of 52
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redeemable convertible preferred stock inMarch 2021 and$0.8 million proceeds from issuance of restricted common stock purchased by an employee and stock option exercises. The proceeds were partially offset by the repayment of the 2020 Term loan of$26.2 million and payment of debt extinguishment fees of$1.9 million inSeptember 2021 . During the nine months endedSeptember 30, 2020 , net cash provided by financing activities was$64.2 million , consisting primarily of net proceeds of$49.9 million from the issuance of redeemable convertible preferred stock inApril 2020 ,$9.5 million proceeds from issuance of convertible notes inFebruary 2020 , and$25.0 million in proceeds from the issuance of long-term debt inMay 2020 . Partially offsetting the proceeds from financing activities were$18.0 million for the repayment of term loans,$1.4 million payments to extinguish debt, and$0.9 million in payment of debt issuance costs.
Long-term debt
InMay 2020 , we entered into the 2020 Term Loan which provides for borrowings of an initial$25.0 million tranche upon closing and options to borrow up to an aggregate of$35.0 million in two additional tranches of$20.0 million under the second tranche, or the Term B Loan, and$15.0 million under the third tranche, or the Term C Loan, subject to certain Growth Direct system sales milestones.
At closing, we issued warrants to purchase 1,195,652 shares of Series C1
Preferred Stock to the lender with an exercise price of
The 2020 Term Loan's interest rate could be elected each quarter by us, as either (a) 12%, up to 7% of which may be Payment in Kind, or PIK, interest or (b) 13% PIK interest.
InSeptember 2021 , we repaid the 2020 Term Loan and incurred a debt extinguishment loss of$3.1 million , which was comprised of a$1.8 million prepayment penalty,$1.1 million in expense related to unamortized discounts, and$0.2 million in unamortized prepaid facility fee and other charges. For additional information on the 2020 Term Loan, see Note 9 -Long-term Debt to our condensed consolidated financial statements.
Contractual obligations and commitments
InOctober 2013 , we entered into an operating lease for office and manufacturing space inLowell, Massachusetts , which expires inJuly 2026 . The terms of the lease include options for a one-time, five-year extension of the lease and early termination of the lease inJuly 2024 as well as a$0.7 million tenant improvement allowance which has been drawn down in full. Future minimum commitments under this lease throughJuly 2026 are$2.3 million and$2.6 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. InDecember 2016 , in connection with the amendment of a then-outstanding loan agreement with the lender, we entered into an agreement under which we are obligated to pay the lender an exit fee in the amount of$0.8 million in the event of a "qualifying exit event" prior toDecember 31, 2026 . As defined in the agreement, a "qualifying exit event" includes but is not limited to a liquidation, merger, sale or change of control of the company or a public offering of its common stock. No amounts were accrued atDecember 31, 2020 as a "qualifying exit event" was not deemed probable. The IPO was a qualifying event and we expensed and paid the exit fee inJuly 2021 . InMarch 2020 , we entered into an agreement with a supplier to secure future supply of certain materials used in the manufacturing of our Growth Direct systems. As ofSeptember 30, 2020 , we had committed to minimum payments under these arrangements totaling$0.9 million throughDecember 31, 2022 . We had$0.3 million and$0.1 million accrued for the supply agreement as ofSeptember 30, 2021 andDecember 31, 2020 , respectively.
In
53 Table of Contents InJune 2021 , we entered into a Sublease agreement for office and manufacturing space inLexington, Massachusetts , which expires inJune 2029 . The Sublease agreement includes an option to terminate the sublease inJuly 2026 , subject to an early termination fee. Monthly rent payments are fixed and future minimum lease payments over the term of the sublease is$5.6 million . We also have the right to use furniture and equipment specified in the Sublease agreement for an additional$0.6 million in future payments over the term of the sublease with the option to purchase the furniture and equipment at the end of the sublease term. Concurrent with entering into the Sublease agreement, we executed an Option Agreement with the property owner which provides us the option to enter into a new direct lease for theLexington facility for an additional five-years following expiration of the Sublease.
For additional information on our contractual obligation and commitments please see Note 16 - Commitments and Contingencies to our condensed consolidated financial statements.
Seasonality
Our revenues vary from quarter to quarter as a result of factors such as our customers' budgetary cycles and extended summer vacation periods that could impact our ability to deliver products and provide onsite services to our customers during those periods that could impact our ability to deliver product and provide onsite services to our customer during those periods. We expect this volatility to continue for the foreseeable future, which may cause fluctuations in our operating results and financial metrics. However, trends may vary in the future as our revenue mix shifts from non-recurring to recurring revenues.
Critical accounting policies and significant judgments and estimates
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. Our estimates are based on our historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Prospectus.
Recently issued accounting pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Emerging growth company status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, and our financial statements may not be comparable to other public companies that comply with new or 54
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revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.
We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of$1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of the IPO, (iii) the date on which we have issued more than$1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of theSecurities and Exchange Commission . Further, even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.
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