VELO3D, INC. The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2021 and our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon our current expectations, estimates and projections, and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements due to, among other considerations, the matters discussed in the sections titled "Risk Factors" and "Forward-looking Statements" herein.
Overview
We seek to fulfill the promise of additive manufacturing, also referred to as 3D
printing ("AM"), to deliver breakthroughs in performance, cost and lead time in
the production of high-value metal parts.
We produce a full-stack hardware and software solution based on our proprietary
laser powder bed fusion ("L-PBF") technology, which enables support-free
production. Our technology enables the production of highly complex,
mission-critical parts that existing AM solutions cannot produce without the
need for redesign or additional assembly. Our products give our customers who
are in space, aviation, defense, energy, and industrial markets the freedom to
design and produce metal parts with complex internal features and geometries
that had previously been considered impossible for AM. We believe our technology
is years ahead of competitors
Our technology is novel compared to other AM technologies based on its ability
to deliver high-value metal parts that have complex internal channels,
structures and geometries. This affords a wide breadth of design freedom for
creating new metal parts and it enables replication of existing parts without
the need to redesign the part to be manufacturable with AM. Because of these
features, we believe our technology and product capabilities are highly valued
by our customers. Our customers are primarily original equipment manufacturers
("OEMs") and contract manufacturers who look to AM to solve issues with
traditional metal parts manufacturing technologies. Those traditional
manufacturing technologies rely on processes, including casting, stamping and
forging, that typically require high volumes to drive competitive costs and have
long lead times for production. Our customers look to AM solutions to produce
assemblies that are lighter, stronger and more reliable than those manufactured
with traditional technologies. Our customers also expect AM solutions to drive
lower costs for low-volume parts and substantially shorter lead times. However,
many of our customers have found that legacy AM technologies failed to produce
the required designs for the high-value metal parts and assemblies that our
customers wanted to produce with AM. As a result, other AM solutions often
require that parts be redesigned so that they can be produced and frequently
incur performance losses for high-value applications. For these reasons, AM
solutions of our competitors have been largely relegated to tooling and
prototyping or the production of less complex, lower-value metal parts.
In contrast, our technology can deliver complex high-value metal parts with the
design advantages, lower costs and faster lead times associated with AM, and
generally avoids the need to redesign the parts. As a result, our customers have
increasingly adopted our technology into their design and production processes.
We believe our value is reflected in our sales patterns, as most customers
purchase a single machine to validate our technology and purchase additional
systems over time as they embed our technology in their product roadmap and
manufacturing infrastructure. We consider this approach a "land and expand"
strategy, oriented around a demonstration of our value proposition followed by
increasing penetration with key customers.
The unaudited condensed consolidated financial statements and disclosures
reflect the effects of the Reverse Recapitalization which was consummated on
September 29, 2021 . The number of shares of redeemable convertible preferred
stock and common stock presented in the financial statements and elsewhere in
this Quarterly Report for periods prior to the Reverse Recapitalization have
been retroactively adjusted to reflect the Merger's exchange ratio similar to
the presentation of a stock-split.
33
--------------------------------------------------------------------------------See "Explanatory Note- Certain Defined Terms" for the definitions of certain terms used throughout this Quarterly Report.
Key Financial and Operational Metrics
We believe that our performance and future success depend on many factors that
present significant opportunities for us but also pose risks and challenges,
including those discussed below and in the section of this Quarterly Report
titled "Risk Factors."
We regularly evaluate several metrics, including the metrics presented in the
table below, to measure our performance, identify trends affecting our business,
prepare financial projections, make strategic decisions and establish
performance goals for compensation and we periodically review and revise these
metrics to reflect changes in our business. During 2022, our business has
continued to evolve based on new product introductions and changing customer
demand trends, including significantly higher average selling prices driven by
higher demand for our higher priced Sapphire® XC systems versus our Sapphire®
systems, offset by lower unit growth, as well as a material shift in our
customer mix toward existing customers versus new customers as recurring
purchasing rates from our existing customers is significantly higher, in both
cases, relative to our initial plan for fiscal 2022. We have determined to no
longer report our Bookings, Total Shipments and New Customers (by shipments) and
to report instead the dollar value of our Bookings and Backlog.
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Revenue ($ in millions) $ 20 $ 7 $ 32 $ 8
Bookings ($ in millions) $ 18 $ 6 $ 36 $ 16
Backlog ($ in millions) $ 55 $ 28 $ 55 $ 28 Bookings ($ in millions): Bookings ($ in millions) are defined as a confirmed order for a 3D printer system in contracted dollars.
Backlog ($ in millions): Backlog ($ in millions) is defined as the unfulfilled 3D printer systems to be delivered to customers in contracted dollars as of period end.
Customer Concentration
Our operating results for the foreseeable future will continue to depend on sales to a small group of customers. For the three months endedJune 30, 2022 and 2021, sales to the top three customers accounted for 65.1% and 64.7%, respectively. Of the top three customers for the three months endedJune 30, 2022 , two customers were different from the top three customers for the comparable period in 2021. For the six months endedJune 30, 2022 and 2021, sales to the top three customers accounted for 65.6% and 56.0% of our revenue, respectively. Of the top three customers for the six months endedJune 30, 2022 , two customers were different from the top three customers for the comparable period in 2021. While our objective is to diversify our customer base, we believe that we could continue to be susceptible to risks associated with customer concentration. See "Risk Factors - Risks Related to Our Business - Risks Related to Our Financial Position and Need forAdditional Capital - We expect to rely on a limited number of customers for a significant portion of our near-term revenue" in this Quarterly Report and see Note 2, Summary of Significant Accounting Policies - Concentration of Credit Risk and Other Risks and Uncertainties, in the audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Since our founding, we have been a customer-focused company working to develop
innovative solutions to address customers' needs. We believe this process has
contributed significantly to our development of the most advanced metal AM
systems in the world. We focus on our customers to identify the most impactful
areas for
34
-------------------------------------------------------------------------------- research and development as we seek to further improve the capabilities of our AM solutions. We believe that continued investments in our products are important to our future growth and, as a result, we expect our research and development expenses to continue to increase, which may adversely affect our near-term profitability.
Impact of COVID-19 and Other World Events
We continue to operate our business through the ongoing COVID-19 pandemic and have taken additional precautions to ensure the safety of our employees, customers, and vendors with which we operate. The impact of COVID-19 on our operating results has added uncertainty in timing of customer orders creating longer lead times for sales and marketing. We continue to experience various supply chain constraints due to the pandemic, which could lead to delays in shipment of our products to our customers. Furthermore, if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures, remote working or other restrictions in connection with the ongoing COVID-19 pandemic, our operations will likely be adversely impacted. General economic and political conditions such as recessions, interest rates, fuel prices, inflation, foreign currency fluctuations, international tariffs, social, political and economic risks and acts of war or terrorism (including, for example, the ongoing military conflict betweenUkraine andRussia and the economic sanctions related thereto), have added uncertainty in timing of customer orders and supply chain constraints.
Climate Change
Material pending or existing climate change-related legislation, regulations, and international accords could have an adverse effect on our business, financial condition, and results of operations, including: (1) material past and/or future capital expenditures for climate-related projects; (2) material indirect consequences of climate-related regulation or business trends, such as the following: decreased/increased demand for goods or services that produce significant greenhouse gas emissions or are related tocarbon -based energy sources; increased competition to develop innovative new products that result in lower emissions; increased demand for generation and transmission of energy from alternative energy sources; and any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions; and (3) material increased compliance costs related to climate change.
Components of Results of Operations
Revenue
Our revenue is primarily derived from our AM full-stack solution product, which
includes the Flow™ print preparation software, Sapphire® and Sapphire® XC metal
AM printers using our support-free L-PBF technology and Assure™ quality
validation software (collectively referred to as the "3D Printer"). Contracts
for 3D Printers also include post-sale customer support services ("Support
Services"), except for our distributor partners, which are qualified to perform
support services.
We sell our AM full-stack solution product through two types of transaction
models: a 3D Printer sale transaction and a recurring payment transaction
("Recurring Payment"). We define our Recurring Payment transactions as operating
leases. 3D Printer sale transactions are structured as a payment of a fixed
purchase price for the system. The timeframe from order to completion of the
site acceptance test occurs normally over three to six months. As we scale our
production, we expect to reduce this timeframe. Contract consideration allocated
to the 3D Printer is recognized at a point in time, which occurs upon transfer
of control to the customer at shipment.
The initial sales of 3D Printers and Support Services are included in one
contract and are invoiced together. Contract consideration is allocated between
the two performance obligations based on relative fair value. This allocation
involves judgement and is periodically updated as new relevant information
becomes available.
In addition, the sales of 3D Printer systems under certain contracts may include
variable consideration such that we are entitled to a rate per hour used on the
3D Printer systems. Sales with variable consideration represented a small
percentage of revenue during the three and six months ended June 30, 2022 and
none of our revenue during
35
--------------------------------------------------------------------------------
the three and six months ended
The Recurring Payment transactions, which are structured as operating leases, represented a small percentage of revenue during the three and six months endedJune 30, 2022 and 2021. Under this model, the customer typically pays a base rent and variable payments based on usage in excess of a defined threshold. Most of our leases have a 12-month term, though in certain cases the lease term is longer. Support Services are included with most 3D Printer sale transactions and Recurring Payment transactions. Support services consist of field service engineering, phone and email support, preventative maintenance, and limited on and off-site consulting support. A subsequent Support Service contract is available for renewal after the initial contract period based on the then-fair value of the service, which is paid for separately. Support Service revenue is recognized over the contract period beginning with customer performance test acceptance. Other revenue included under 3D Printer sales includes parts and consumables, such as filters, powder or build plates, that are sold to customers and recognized when the customer takes title to the product. Other revenue was not material for the three and six months endedJune 30, 2022 and 2021.
Cost of Revenue
Our cost of revenue includes the "Cost of 3D Printers," "Cost of Recurring Payment" and "Cost of Support Services."
Cost of 3D Printers includes the manufacturing cost of our components and subassemblies purchased from vendors for the assembly, as well as raw materials and assemblies, shipping costs and other directly associated costs. Cost of 3D Printers also includes allocated overhead costs from headcount-related costs, such as salaries, stock-based compensation, depreciation of manufacturing related equipment and facilities, and information technology costs. Cost of Recurring Payment includes depreciation of the leased equipment over the useful life of five years less the residual value, and an allocated portion of Cost of Support Services. Cost of Support Services includes the cost of spare or replacement parts for preventive maintenance, installation costs, headcount-related costs such as salaries, stock-based compensation, depreciation of manufacturing related equipment and facilities, and information technology costs. The headcount-related costs are directly associated with the engineers dedicated to remote and on-site support, training, travel costs and other services costs.
Gross Profit and Gross Margin
Our gross profit is revenue less cost of revenue and our gross margin is gross profit as a percentage of revenue. The gross profit and gross margin for our products are varied and are expected to continue to vary from period to period due to the mix of products sold through either a 3D Printer sale transaction or a Recurring Payment transaction, new product introductions and efforts to optimize our operational costs. Other factors affecting our gross profit include changes to our material costs, assembly costs that are themselves dependent upon improvements to yield, and any increase in assembly overhead to support a greater number of 3D Printers sold and markets served.
Research and Development Expenses
Our research and development expenses represent costs incurred to support
activities that advance the development of innovative AM technologies, new
product platforms and consumables, as well as activities that enhance the
capabilities of our existing product platforms. Our research and development
expenses consist primarily of salaries and related personnel costs for
individuals working in our research and development departments, including
stock-based compensation, prototypes, design expenses, information technology
costs and software license amortization, consulting and contractor costs, and an
allocated portion of overhead costs, including depreciation of property and
equipment used in research and development activities.
36
--------------------------------------------------------------------------------Selling and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and related personnel costs for individuals working in our sales and marketing departments, including stock-based compensation, costs related to trade shows and events, advertising, marketing promotions, travel costs and an allocated portion of overhead costs, including information technology costs and costs for customer validation.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related personnel costs for individuals associated with our executive, administrative, finance, legal, information technology and human resources functions, including stock-based compensation, professional fees for legal, audit and compliance, accounting and consulting services, general corporate costs, facilities, rent, information technology costs, insurance, bad debt expenses and an allocated portion of overhead costs, including equipment and depreciation and other general and administrative expenses.
Interest Expense
Interest expense primarily consists of interest incurred under our outstanding debt and finance leases.
Gain (Loss) on Fair Value of Warrants
Gain (loss) on valuation of warrant liabilities relates to the changes in the fair value of warrant liabilities, including liabilities related to the public warrants and private placement warrants, which are subject to remeasurement at each balance sheet date.
Gain (Loss) on Fair value of Contingent Earnout Liabilities
Gain (loss) on valuation of contingent earnout liabilities relates to the changes in fair value of the contingent earnout liabilities in connection with the Earnout Shares, which are subject to remeasurement at each balance sheet date.
Other Income (Expense), Net
Other income (expense), net includes interest earned on our bank sweep account, gains and losses on disposals of fixed assets and other miscellaneous income/expenses.
Income Taxes
No provision for federal and state income taxes was recorded for any periods presented due to projected losses, and we maintained a full valuation allowance on the deferred tax assets as ofJune 30, 2022 andDecember 31, 2021 . We will continue to review our conclusions about the appropriate amount of the valuation allowance on a quarterly basis. If we were to generate profits, theU.S. valuation allowance position could be reversed in the foreseeable future. We expect a benefit to be recorded in the period the valuation allowance reversal is recorded and a higher effective tax rate in periods following the valuation allowance reversal. 37
--------------------------------------------------------------------------------
Results of Operations
Comparison of the Three Months Ended
The following table summarizes our historical results of operations for the
periods presented:
Three Months Ended June 30,
2022 2021 Change %
(In thousands, except for percentages)
Revenue
3D Printer $ 17,615 $ 6,079 $ 11,536 189.8 %
Recurring payment 934 372 562 151.1 %
Support services 1,095 695 400 57.6 %
Total Revenue 19,644 7,146 12,498 174.9 %
Cost of revenue
3D Printer 15,633 3,899 11,734 300.9 %
Recurring payment 685 257 428 166.5 %
Support services 2,094 806 1,288 159.8 %
Total cost of revenue 18,412 4,962 13,450 271.1 %
Gross profit 1,232 2,184 (952) (43.6) %
Operating expenses
Research and development 12,965 6,399 6,566 102.6 %
Selling and marketing 6,249 2,337 3,912 167.4 %
General and administrative 8,259 5,218 3,041 58.3 %
Total operating expenses 27,473 13,954 13,519 96.9 %
Loss from operations (26,241) (11,770) (14,471) 122.9 %
Interest expense (92) (524) 432 (82.4) %
Gain (loss) on fair value of warrants 23,665 (227) 23,892 (10525.1) %
Gain on fair value of contingent earnout
liabilities 130,227 - 130,227 100.0 %
Other income (expense), net 391 (17) 408 (2400.0) %
Gain (loss) before provision for income
taxes 127,950 (12,538) 140,488 (1120.5) %
Provision for income taxes - - - - %
Net income (loss) $ 127,950 $ (12,538) $ 140,488 (1120.5) %
38
--------------------------------------------------------------------------------
Revenue
The following table presents the revenue disaggregated by products and service type, as well as the percentage of total revenue.
Three Months Ended June 30,
2022 2021 Change %
(In thousands, except for percentages)
3D Printer sales $ 17,615 89.6 % $ 6,079 85.1 % $ 11,536 189.8 %
Recurring payment 934 4.8 % 372 5.2 % 562 151.1 %
Support services 1,095 5.6 % 695 9.7 % 400 57.6 %
Total Revenue $ 19,644 100.0 % $ 7,146 100.0 % $ 12,498 174.9 %
Total revenue for the three months ended
3D Printer sales were$17.6 million and$6.1 million for the three months endedJune 30, 2022 and 2021, respectively, an increase of$11.5 million , which was primarily attributed to the launch of the Sapphire® XC system in late 2021 and the subsequent sales of these systems in 2022. The improvement in revenue was due to a mix of higher production volumes and our product mix between Sapphire® and Sapphire® XC systems, resulting in an increase in the average selling price and a sale of a lease Sapphire system.The 3D Printer sales included parts and consumables revenue. Recurring Payment, structured as an operating lease, was$0.9 million and$0.4 million , for the three months endedJune 30, 2022 and 2021, respectively. The increase was primarily attributed to an increase in the number of 3D Printer systems in service generating Recurring Payment revenue as ofJune 30, 2022 , compared systems to the number of 3D Printer systems in service as ofJune 30, 2021 . During the three months endedJune 30, 2022 , one operating lease purchase option was exercised. Our Support Service revenue was$1.1 million and$0.7 million for the three months endedJune 30, 2022 and 2021, respectively. The increase was primarily attributed to a significant increase in the number of 3D Printer systems in service as ofJune 30, 2022 , compared to the number of 3D Printers in service as ofJune 30, 2021 . We expect the demand for the Sapphire® and Sapphire® XC to increase our revenue in the future. We also expect our Recurring Payment and Support Service revenue to increase as the number of systems we have in the field increases. As ofJune 30, 2022 , our backlog for firm orders was$55 million for 3D Printers. Our focus for revenue remains on expanding our selling and marketing efforts and developing our existing customer network to increase demand. 39 --------------------------------------------------------------------------------
Cost of Revenue
The following table presents the Cost of Revenue disaggregated by product and service type, as well as the percentage of total revenue.
Three Months Ended June 30,
2022 2021
(In thousands, except for percentages)
Cost of Revenue
Cost of 3D Printers $ 15,633 84.9 % $ 3,899 78.6 %
Cost of Recurring Payment 685 3.7 % 257 5.2 %
Cost of Support Services 2,094 11.4 % 806 16.2 %
Total Cost of Revenue $ 18,412 100.0 % $ 4,962 100.0 %
Total cost of revenue for the three months ended
Cost of 3D Printers was$15.6 million and$3.9 million for the three months endedJune 30, 2022 and 2021, respectively. The increase of$11.7 million was due to an increase in the number of 3D Printers sold in the three months endedJune 30, 2022 , compared to the number of 3D Printers sold in the three months endedJune 30, 2021 . For the three months endedJune 30, 2022 , cost of 3D Printers increased compared to the prior quarter in 2021, due to higher material, labor and factory overhead costs associated with a mix of higher production volumes and our product mix between the Sapphire® and Sapphire® XC systems. Cost of Recurring Payment was$0.7 million and$0.3 million for the three months endedJune 30, 2022 and 2021, respectively. This increase of$0.4 million was due to an increase in depreciation of the equipment on lease and the allocable Cost of Support Services as a result of more 3D Printers in service as ofJune 30, 2022 , compared toJune 30, 2021 . Cost of Support Services was$2.1 million and$0.8 million for the three months endedJune 30, 2022 and 2021, respectively. This increase of$1.3 million was primarily attributable to the costs for preventative maintenance, costs incurred to enhance system reliability performance, and field service engineering labor costs due to significantly more 3D Printers in service as ofJune 30, 2022 , compared toJune 30, 2021 . In addition, field service engineering support cost has increased specifically with the ramp of the Sapphire® XC systems in the field and we expect this to decrease on a per unit basis as the Sapphire® XC system performance improves. We expect our Cost of Support Services will increase with the delivery of more 3D Printer systems to customers. Cost of revenue as a percentage of revenue was 93.7% and 69.4%, for the three months endedJune 30, 2022 and 2021, respectively. This was primarily due to the costs for preventative maintenance, costs incurred to enhance system reliability performance, and field service engineering labor costs as a result of more 3D Printers in service as ofJune 30, 2022 , compared toJune 30, 2021 .
Gross Profit and Gross Margin
Total gross profit was$1.2 million and$2.2 million for the three months endedJune 30, 2022 and 2021, respectively. As a percentage of revenue, the gross margin was 6.3% and 30.6%, for the three months endedJune 30, 2022 and 2021, respectively. The lower gross profit for the three months endedJune 30, 2022 was primarily attributable to the mix of Sapphire® and Sapphire® XC system sales, the impact of launch customer pricing for Sapphire® XC, and the higher material, labor and overhead costs for the increased number of systems sold during the three months endedJune 30, 2022 , as compared to sales for the three months endedJune 30, 2021 .
Our gross profit and gross margin are influenced by a number of factors, including:
•New product introduction pricing strategies and market conditions that may impact our pricing;
40
--------------------------------------------------------------------------------• Production volumes that may impact factory overhead absorption; and
• Cost of our Support Services and product support may be influenced by product mix changes, including new product introductions, and other factors.
• During the remainder of 2022, we expect our gross margin will continue to be impacted by ongoing supply chain challenges, which have increased our material costs and resulted in shipping delays.
Research and Development Expenses
Research and development expenses were$13.0 million and$6.4 million , for the three months endedJune 30, 2022 and 2021, respectively, an increase of$6.6 million . The research and development expenses have increased due to the development of the Sapphire® XC system. The increases in research and development expenses in 2022 were related to a$2.9 million increase for additional headcount, salaries and employee-related expenses, a$2.3 million increase in stock-based compensation, and a$1.7 million increase in product development expenses for new parts for the Sapphire® family of systems, offset by a$0.3 million decrease in components design and engineering testing and validation for the Sapphire® XC large format AM system. We expect research and development costs to begin to stabilize over time as our Sapphire® systems mature, while we continue to invest in enhancing and advancing our portfolio of AM solutions. In the near term, we expect a slight increase to be driven by research and development expenses for the product development of the Sapphire® XC system such as the launch of the Sapphire®1MZ XC system.
Selling and Marketing Expenses
Selling and marketing expenses were$6.2 million and$2.3 million for the three months endedJune 30, 2022 and 2021, respectively, an increase of$3.9 million . This increase was attributable to a$2.2 million increase for additional headcount, salaries and employee-related expenses, a$1.0 million increase in stock-based compensation, a$0.4 million increase in trade show expense and a$0.3 million increase in new marketing initiatives and branding expenses. We expect selling and marketing expenses to increase over time as we expand our headcount, initiate new marketing campaigns with the launch of the Sapphire® XC, travel for trade shows, focus on our European markets and increase attendance of additive manufacturing conferences to build product and market awareness.
General and Administrative Expenses
General and administrative expenses were$8.3 million and$5.2 million for the three months endedJune 30, 2022 and 2021, respectively, an increase of$3.0 million . The increase was attributable to a$3.0 million increase for additional headcount, salaries and employee-related benefits, a$1.1 million increase in stock-based compensation, and a$1.3 million increase in general and administrative expenses, offset by a$0.8 million decrease in public company related expenses in advisory, legal and accounting fees and insurance, and a non-recurring$1.6 million decrease in Merger related expenses. We expect general and administrative expenses to slightly increase as a result of the expected increase in the scale of our operations and the increased costs of operating as a public company.
Interest Expense
Interest expense was
41
--------------------------------------------------------------------------------Gain (loss) on Fair Value of Warrants
The change in fair value of warrants resulted in a gain of$23.7 million for the three months endedJune 30, 2022 , and was related to the non-cash fair value change of the warrant liabilities driven by the impact of the change in the stock price.
Gain (loss) on Fair value of Contingent Earnout Liabilities
The change in fair value of the contingent earnout liability was a loss of$130.2 million for the three months endedJune 30, 2022 and was related to the non-cash fair value change of the contingent earnout liabilities driven by the impact of the change in the stock price.
Other Income (Expense), Net
Other income (expense), net was$0.4 million and less than$0.1 million , for the three months endedJune 30, 2022 and 2021, respectively. Interest income earned from available-for-sale investments was$0.4 million for the three months endedJune 30, 2022 . Income Taxes No provision for federal and state income taxes was recorded for both the three months endedJune 30, 2022 and 2021, due to projected losses, and we maintained a full valuation allowance on the deferred tax assets as ofJune 30, 2022 andDecember 31, 2021 . We will continue to review on a quarterly basis our conclusions about the appropriate amount of the valuation allowance. If we were to generate profits in 2022 and beyond, theU.S. valuation allowance position could be reversed in the foreseeable future. We expect a benefit to be recorded in the period the valuation allowance reversal is recorded and a higher effective tax rate in periods following the valuation allowance reversal. 42 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Six Months Ended
The following table summarizes our historical results of operations for the
periods presented:
Six Months Ended June 30,
2022 2021 Change %
(In thousands, except for percentages)
Revenue
3D Printer $ 27,799 $ 6,313 $ 21,486 340.3 %
Recurring payment 1,859 635 1,224 192.8 %
Support services 2,204 1,370 834 60.9 %
Total Revenue 31,862 8,318 23,544 283.0 %
Cost of revenue
3D Printer 26,112 4,482 $ 21,630 482.6 %
Recurring payment 1,403 444 $ 959 216.0 %
Support services 3,100 1,598 $ 1,502 94.0 %
Total cost of revenue 30,615 6,524 24,091 369.3 %
Gross profit 1,247 1,794 (547) (30.5) %
Operating expenses
Research and development 25,880 11,094 14,786 133.3 %
Selling and marketing 12,232 4,360 7,872 180.6 %
General and administrative 17,549 10,004 7,545 75.4 %
Total operating expenses 55,661 25,458 30,203 118.6 %
Loss from operations (54,414) (23,664) (30,750) 129.9 %
Interest expense (233) (644) 411 (63.8) %
Gain (loss) on fair value of warrants 17,651 (1,741) 19,392 (1113.8) %
Gain on fair value of contingent earnout
liabilities 98,995 - 98,995 100.0 %
Other income (expense), net 609 (37) 646 (1745.9) %
Gain (loss) before provision for income
taxes 62,608 (26,086) 88,694 (340.0) %
Provision for income taxes - - - - %
Net income (loss) $ 62,608 $ (26,086) $ 88,694 (340.0) %
43
--------------------------------------------------------------------------------
Revenue
The following table presents the revenue disaggregated by products and service type, as well as the percentage of total revenue.
Six Months Ended June 30,
2022 2021 Change %
(In thousands, except for percentages)
3D Printer sales $ 27,799 87.3 % $ 6,313 75.9 % $ 21,486 340.3 %
Recurring payment 1,859 5.8 % 635 7.6 % 1,224 192.8 %
Support services 2,204 6.9 % 1,370 16.5 % 834 60.9 %
Total Revenue $ 31,862 100.0 % $ 8,318 100.0 % $ 23,544 283.0 %
Total revenue for the six months ended
3D Printer sales were$27.8 million and$6.3 million , respectively, for the six months endedJune 30, 2022 and 2021, an increase of$21.5 million , which was primarily attributed to the launch of the Sapphire® XC system in late 2021 and the subsequent sales of these systems in 2022. The improvement in revenue was due to a mix of higher production volumes and our product mix between Sapphire® and Sapphire® XC systems, resulting in an increase in the average selling price. The 3D Printer sales included parts and consumables revenue. Recurring Payment, structured as an operating lease, was$1.9 million and$0.6 million , for the six months endedJune 30, 2022 and 2021, respectively. The increase was primarily attributed to an increase in the number of 3D Printer systems in service generating Recurring Payment revenue as ofJune 30, 2022 , compared to the number of 3D Printer systems in service as ofJune 30, 2021 . During the six months endedJune 30, 2022 , one operating lease purchase option was exercised. Our Support Service revenue was$2.2 million and$1.4 million for the six months endedJune 30, 2022 and 2021, respectively. The increase was primarily attributed to a significant increase in the number of 3D Printer systems in service as ofJune 30, 2022 , compared to the number of 3D Printers in service as ofJune 30, 2021 . 44
--------------------------------------------------------------------------------
Cost of Revenue
The following table presents the Cost of Revenue disaggregated by product and service type, as well as the percentage of total revenue.
Six Months Ended June 30,
2022 2021
(In thousands, except for percentages)
Cost of Revenue
Cost of 3D Printers $ 26,112 85.3 % $ 4,482 68.7 %
Cost of Recurring Payment 1,403 4.6 % 444 6.8 %
Cost of Support Services 3,100 10.1 % 1,598 24.5 %
Total Cost of Revenue $ 30,615 100.0 % $ 6,524 100.0 %
Total cost of revenue for the six months ended
Cost of 3D Printers was$26.1 million and$4.5 million for the six months endedJune 30, 2022 and 2021, respectively. The increase of$21.6 million was due to an increase in the number of 3D Printers sold in the six months endedJune 30, 2022 , compared to the number of 3D Printers sold in the six months endedJune 30, 2021 . For the six months endedJune 30, 2022 , cost of 3D Printers increased compared to the same period in 2021, primarily due to higher material, labor and factory overhead costs associated with a mix of higher production volumes and our product mix between the Sapphire® and Sapphire® XC systems. Cost of Recurring Payment was$1.4 million and$0.4 million for the six months endedJune 30, 2022 and 2021, respectively. This increase of$1.0 million was due to an increase in depreciation of the equipment on lease and the allocable Cost of Support Services as a result of more 3D Printers in service as ofJune 30, 2022 , compared toJune 30, 2021 . Cost of Support Services was$3.1 million and$1.6 million for the six months endedJune 30, 2022 and 2021, respectively. This increase of$1.5 million was primarily attributable to the costs for preventative maintenance, costs incurred to enhance system reliability performance, and field service engineering labor costs due to significantly more 3D Printers in service as ofJune 30, 2022 , compared toJune 30, 2021 . In addition, field service engineering support cost has increased specifically with the ramp of the Sapphire® XC systems in the field. We expect our Cost of Support Services will increase with the delivery of more 3D Printer systems to customers. Cost of revenue as a percentage of revenue was 96.1% and 78.4%, for the six months endedJune 30, 2022 and 2021, respectively. This was primarily due to the costs for preventative maintenance, costs incurred to enhance system reliability performance, and field service engineering labor costs due to more 3D Printers in service in as a result of more 3D Printers in service as ofJune 30, 2022 , compared toJune 30, 2021 . Gross Profit and Gross Margin Total gross profit was$1.2 million and$1.8 million for the six months endedJune 30, 2022 and 2021, respectively. As a percentage of revenue, the gross margin was 3.9% and 21.6%, for the six months endedJune 30, 2022 and 2021, respectively. The lower gross profit was primarily attributable to the mix of Sapphire® and Sapphire® XC system sales, the impact of launch customer pricing for Sapphire® XC, and the higher material costs, and labor and overhead for the increased number of systems sold during the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 . 45 --------------------------------------------------------------------------------
Research and Development Expenses
Research and development expenses were$25.9 million and$11.1 million , for the six months endedJune 30, 2022 and 2021, respectively, an increase of $$14.8 million. The research and development expenses have increased due to the development of the Sapphire® XC system. The increases in research and development expenses in 2022 were related to a$1.4 million increase in components design and engineering testing and validation for the Sapphire® XC large format AM system, a$5.3 million increase for additional headcount, salaries and employee-related expenses, a$4.7 million increase in stock-based compensation and a$3.4 million increase in product development expenses for new parts for the Sapphire® family of systems.
Selling and Marketing Expenses
Selling and marketing expenses were$12.2 million and$4.4 million for the six months endedJune 30, 2022 and 2021, respectively, an increase of$7.8 million . This increase was attributable to a$4.4 million increase for additional headcount, salaries and employee-related expenses, a$2.1 million increase in stock-based compensation, a$0.7 million increase in trade show expense and a$0.6 million increase in new marketing initiatives and branding expenses.
General and Administrative Expenses
General and administrative expenses were$17.5 million and$10.0 million , for the six months endedJune 30, 2022 and 2021, respectively, an increase of$7.5 million . The increase was attributable to a$6.5 million increase for additional headcount, salaries and employee-related benefits, a$2.1 million increase in stock-based compensation, and a$3.1 million increase in general and administrative expenses, offset by a$0.6 million decrease in public company related expenses in advisory, legal and accounting fees and insurance, and a non-recurring$3.5 million decrease in Merger related expenses.
Interest Expense
Interest expense was
Gain (loss) on Fair Value of Warrants
The change in fair value of warrants resulted in a gain (loss) of$17.7 million and$(1.7) million for the six months endedJune 30, 2022 and 2021, respectively, and was related to the non-cash fair value change of the warrant liabilities driven by the impact of the change in the stock price.
Gain (loss) on Fair value of Contingent Earnout Liabilities
The change in fair value of the contingent earnout liability was a loss of$99.0 million for the six months endedJune 30, 2022 and was related to the non-cash fair value change of the contingent earnout liabilities driven by the impact of the change in the stock price.
Other Income (Expense), Net
Other income (expense), net was$0.6 million and less than$(0.1) million , for the six months endedJune 30, 2022 and 2021, respectively. Interest income earned from available-for-sale investments was$0.6 million for the six months endedJune 30, 2022 . 46
--------------------------------------------------------------------------------
Income Taxes
No provision for federal and state income taxes was recorded for both the six months endedJune 30, 2022 and 2021, due to projected losses, and we maintained a full valuation allowance on the deferred tax assets as ofJune 30, 2022 andDecember 31, 2021 .
Liquidity and Capital Resources
As ofJune 30, 2022 , we had raised net proceeds of$428.3 million , comprised of approximately$278.3 million from the Merger and the PIPE Financing, which closed onSeptember 29, 2021 , and$150.0 million from the issuance of redeemable convertible preferred stock (series A to series D), third-party financing and convertible notes. We have incurred net income (loss) of$62.6 million and$(26.1) million for the six months endedJune 30, 2022 and 2021, respectively. As ofJune 30, 2022 andDecember 31, 2021 , we had$141.8 million and$223.1 million in cash and cash equivalents and short-term investments, respectively, and an accumulated deficit of$167.3 million and$229.9 million , respectively. Our business requires substantial amounts of cash for operating activities, including salaries and wages paid to our employees, component and sub-assembly purchases, general and administrative expenses, and others. Our purchase commitments per our standard terms and conditions with our suppliers and vendors are cancellable in whole or in part with or without cause prior to delivery. If we terminate an order, we will have no liability beyond payment of any balances owing for goods and services delivered previously. Certain Sapphire® and Sapphire® XC purchase orders for parts and assemblies are non-cancellable and are due upon receipts with standard payment terms and will primarily be delivered over the next two quarters of 2022. We may require additional funds to respond to business challenges and opportunities, including the need to provide working capital, develop new features or enhance our products, expand our manufacturing capacity, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds if our existing sources of cash and any funds generated from operations do not provide us with sufficient capital, including seeking additional capital from public or private offerings of our equity or debt securities, electing to repay, restructure or refinance our existing indebtedness, or electing to borrow additional amounts under new credit lines or from other sources. We may also seek to raise additional capital, including from offerings of our equity or debt securities, on an opportunistic basis when we believe there are suitable opportunities for doing so. We believe that our cash and cash equivalents on hand and the cash we obtained from the Merger and the PIPE Financing, together with cash we expect to generate from our future operations, will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months. However, our ability to meet our cash requirements depends on, among other things, our operating performance, competitive and industry developments, and financial market conditions, all of which are significantly affected by business, financial, economic, political and other factors, many of which we may not be able to control or influence. To the extent that our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected. Debt Facilities InMay 2021 , we entered into a third amended and restated loan and security agreement and a mezzanine loan and security agreement providing for certain debt facilities comprised of a$35.0 million term loan, a$10.0 million revolving credit line and a$8.5 million secured equipment loan facility. For more information, see Note 15, Long-Term Debt in the audited consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Revolving Credit Line
InAugust 2021 , we drew on the working capital revolver line of credit in the amount of$3.0 million , with a variable interest rate of the greater of 5.75% of Prime plus 2.50% and a term of 10 months. The outstanding balance 47 --------------------------------------------------------------------------------
on the revolver as of
OnJuly 25, 2022 , we entered into a joinder and fourth loan modification agreement that made certain modifications to the third amended and restated loan and security agreement, including (i) increasing the amount of the revolving credit line to$30.0 million , (ii) extending the maturity date of the revolving credit line toDecember 31, 2024 , and (iii) establishing a secured equipment loan facility of up to$15.0 million available throughDecember 31, 2023 . For more information, see Note 16, Subsequent Events, in the notes to the condensed consolidated financial statements in this Quarterly Report.
Equipment Loans Secured by Leased Equipment
The equipment loan secured by leased equipment has a variable interest rate of the greater of Prime rate, or 3.25%, and terms of three years. As ofJune 30, 2022 , we had$4.0 million outstanding on the equipment loan. We do not hedge our exposure to changes in interest rates. A 10% change in interest rates would not have a material impact on annualized interest expense.
As discussed in more detail above, on
Facilities Expansion
As of
Cash Flow Summary
The following table summarizes our cash flows for the six months endedJune 30, 2022 and 2021: Six Months Ended June 30, 2022 2021 Change (In thousands)
Net cash provided by (used in) operating activities
$ (94,796)
Operating Activities
Net cash used in operating activities for the six months endedJune 30, 2022 was$68.8 million , consisting primarily of net income of$62.6 million and a decrease in net operating assets of$26.8 million , primarily comprised of an increase from prepaid expenses of$7.0 million related to insurance and vendor prepayments, an increase from accounts receivable of$1.0 million due to timing of customer payments, an increase in accrued expenses and other current liabilities of$6.0 million , and an increase from other net operating assets of$0.5 million , offset by a decrease from inventories of$34.8 million for Sapphire® and Sapphire® XC system production, a decrease from contract liabilities of$6.1 million , and a decrease from accounts payable of$0.4 million . The noncash charges of$104.6 million primarily consisted of the gain on fair value of warrants of$17.7 million and the gain on fair value of contingent earnout liabilities of$99.0 million , partially offset by depreciation and amortization and stock-based compensation expense.
Net cash used in operating activities for the six months ended
48
--------------------------------------------------------------------------------
increases from contract liabilities of $7.2 million , increase from accounts
payable of $5.3 million , increases in accrued expenses and other liabilities of
0.8 and increases from contract assets for committed orders of $2.9 million ,
offset by decreases from accounts receivable of $2.6 million , decreases from
prepaid expenses of $1.7 million , and decreases from inventory of $1.3 million
and a decrease from other net operating assets of $1.0 million . The noncash
charges of $3.5 million primarily consisted of the loss on fair value of
warrants of $1.7 million , depreciation and amortization and stock-based
compensation expense.
We expect our cash used in operating activities to increase in the remainder of 2022 driven by working capital requirements and operating expenses as we significantly increase the scale of our operations.
Investing Activities
Net cash used in investing activities during the six months endedJune 30, 2022 was$94.8 million , consisting of property and equipment purchases of$8.6 million , production of equipment for lease to customers of$2.6 million and purchases of available-for-sale investments of$87.7 million , partially offset by maturities of available-for-sale investment securities of$4.0 million . Net cash used in investing activities during the six months endedJune 30, 2021 was$5.6 million , consisting of property and equipment purchases of$0.6 million and production of equipment for the equipment on lease, net of$5.0 million . We expect our capital expenditures, excluding purchases of available-for-sale investments, to increase slightly in the remainder of 2022 as we expand existing operations, and complete the build out of our new manufacturing facility.
Financing Activities
Net cash used in financing activities during the six months endedJune 30, 2022 was$0.5 million , consisting of repayments of$1.1 million for equipment loans, partially offset by$0.6 million of proceeds from the issuance of common stock upon exercise of stock options. Net cash provided by financing activities during the six months endedJune 30, 2021 was$16.3 million , consisting of financing activities resulting primarily from the proceeds from the issuance of convertible notes of$5.0 million , proceeds from the term loan of$14.3 million , proceeds from equipment loans of$3.2 million , and proceeds from the issuance of common stock upon exercise of stock options of$0.3 million , partially offset by repayment of the term loan of$4.9 million and repayment of equipment loans of$1.6 million . We expect to provide cash by financing activities by issuing new equity or incurring new debt to continue operations. Our future cash requirements and the adequacy of available funds will depend on many factors, including our operating performance, competitive and industry developments, and financial market conditions.
Off-Balance Sheet Arrangements
As of
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, onVelo3D's condensed consolidated financial statements, see Note 2, Summary of Significant Accounting Policies, in the notes to the condensed consolidated financial statements in this Quarterly Report.
Implications of Being an
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
49
--------------------------------------------------------------------------------
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.
We are an "emerging growth company" as defined in Section 2(A) of the Securities
Act and has elected to take advantage of the benefits of this extended
transition period.
We will elect to use this extended transition period for complying with new or
revised accounting standards that have different effective dates for public
business entities and nonpublic business entities until the earlier of the date
we (a) are no longer an emerging growth company or (b) affirmatively and
irrevocably opt out of the extended transition period provided in the JOBS Act.
This may make it difficult or impossible to compare our financial results with
the financial results of another public company that is either not an emerging
growth company or 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. Please refer to Note 2. Summary of
Significant Accounting Policies, of the condensed consolidated financial
statements of Velo3D included elsewhere in this Quarterly Report for the recent
accounting pronouncements adopted and the recent accounting pronouncements not
yet adopted for the three months ended June 30, 2022 and 2021.
We will remain an emerging growth company under the JOBS Act until the earliest
of (a) December 31, 2025 , (b) the last date of our fiscal year in which we have
total annual gross revenue of at least $1.07 billion , (c) the last date of our
fiscal year in which we are deemed to be a "large accelerated filer" under the
rules of the SEC or (d) the date on which we have issued more than $1.0 billion
in nonconvertible debt securities during the previous three years.
Implications of Being a
We are a "smaller reporting company" as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited consolidated financial statements. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We will remain a smaller reporting company and may take advantage of certain scaled disclosures available to smaller reporting companies until the last day of the fiscal year in which (a) the market value of our voting and nonvoting common stock held by non-affiliates equals or exceeds$250.0 million measured on the last business day of that year's second fiscal quarter and (b) our annual revenue equals or exceeds$100.0 million during the most recently completed fiscal year or our voting and nonvoting common stock held by non-affiliates equals or exceeds$700.0 million measured on the last business day of that year's second fiscal quarter.
Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. 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 condensed consolidated financial statements. Actual results could differ materially from those estimates and assumptions, and those differences could be material to our condensed consolidated financial statements. We re-evaluate our estimates on an ongoing basis. For more information, see Note 2, Summary of Significant Accounting Policies, included in the notes to the condensed consolidated financial statements in this Quarterly Report, and Critical Accounting Policies and Significant Estimates in Part II Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 50 --------------------------------------------------------------------------------
Revenue - Variable Consideration
The sales of 3D Printer systems under certain contracts may include variable
consideration such that the Company is entitled to a rate per print hour used on
the 3D Printer systems. The Company makes certain estimates in calculating the
variable consideration, including amount of hours, the estimated life of the
equipment and the discount rate. Although estimates may be made on a
contract-by-contract basis, whenever possible, the Company uses all available
information including historical customer usage and collection patterns to
estimate variable consideration.
The Company intends to update its estimates of variable consideration on a
quarterly basis based on the latest data available, and adjust the transaction
price accordingly by recording an adjustment to net revenue and contract assets.
The Company has recognized the estimate of variable consideration to the extent
that it is probable that a significant reversal will not occur as a result from
a change in estimation.
51
--------------------------------------------------------------------------------
© Edgar Online, source
