Desktop Metal(DM) - 2023 Q3 - Quarterly Report

Part I. Financial Information Financial Statements The company reported total assets of $644.3 million and a net loss of $148.7 million for the nine months ended September 30, 2023, showing improved financial performance Condensed Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $644.3 million, while liabilities slightly increased and stockholders' equity significantly declined due to accumulated deficits Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $107,432 | $76,291 | | Short-term investments | $803 | $108,243 | | Inventory | $107,196 | $91,736 | | Goodwill | $108,651 | $112,955 | | Intangible assets, net | $178,802 | $219,830 | | Total Assets | $644,264 | $754,347 | | Liabilities & Equity | | | | Total current liabilities | $90,958 | $83,387 | | Convertible notes | $112,382 | $111,834 | | Total Liabilities | $238,690 | $226,845 | | Accumulated deficit | $(1,457,696) | $(1,308,954) | | Total Stockholders' Equity | $405,574 | $527,502 | Condensed Consolidated Statements of Operations Total revenues for Q3 2023 decreased to $42.8 million, while the net loss narrowed to $46.4 million, and the nine-month net loss significantly improved to $148.7 million due to lower impairment charges Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $42,750 | $47,086 | $137,352 | $148,466 | | Gross Profit (Loss) | $1,924 | $(309) | $6,649 | $6,760 | | Loss from Operations | $(45,120) | $(57,819) | $(145,954) | $(419,868) | | Net Loss | $(46,373) | $(60,774) | $(148,742) | $(427,990) | | Net Loss per Share | $(0.14) | $(0.19) | $(0.46) | $(1.36) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities improved to $91.9 million for the nine months ended September 30, 2023, with a total cash increase of $27.0 million, ending at $108.9 million Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(91,854) | $(150,789) | | Net cash provided by investing activities | $118,568 | $42,427 | | Net cash provided by financing activities | $719 | $113,766 | | Net increase in cash, cash equivalents, and restricted cash | $26,972 | $3,913 | Notes to Condensed Consolidated Financial Statements Key notes detail the Stratasys merger termination, Aerosint SA divestiture with related impairment charges, ongoing restructuring efforts, and outstanding convertible senior notes - The planned merger with Stratasys Ltd. was terminated on September 28, 2023, after Stratasys shareholders did not approve the deal Stratasys paid Desktop Metal a $10.0 million expense reimbursement[21] - On September 29, 2023, the company sold its subsidiary Aerosint SA for $4.1 million, resulting in a non-cash goodwill impairment charge of $2.5 million and an asset group impairment charge of $6.1 million in Q3 2023[44][45] - The company's restructuring initiative, expanded in January 2023, is expected to incur total costs of $19.6 million to $26.0 million, with $6.6 million recorded in the first nine months of 2023[123][124] - As of September 30, 2023, the company had $115.0 million in principal amount of 6.0% Convertible Senior Notes due 2027 outstanding, with a net carrying value of $112.4 million[56][65] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 9% Q3 2023 revenue decline due to macroeconomic pressures, improved gross margin, significant operating expense reductions, and sufficient liquidity for the next 12 months Results of Operations Q3 2023 total revenue decreased 9% to $42.8 million, with improved gross margin and significant operating expense reductions, while the nine-month net loss substantially narrowed to $148.7 million Q3 2023 vs Q3 2022 Revenue (in thousands) | Revenue Stream | Q3 2023 | Q3 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Products Revenue | $37,502 | $42,937 | $(5,435) | (13)% | | Services Revenue | $5,248 | $4,149 | $1,099 | 26% | | Total Revenue | $42,750 | $47,086 | $(4,336) | (9)% | - The decrease in Q3 2023 product revenue was primarily due to a reduction in units shipped, driven by macroeconomic conditions, partially offset by a 26% increase in services revenue from a larger installed base of systems[150] - Operating expenses decreased significantly in Q3 2023 versus Q3 2022, primarily due to the company's cost optimization initiative, with Sales and Marketing expenses down 48% ($7.7 million) and General and Administrative expenses down 50% ($9.4 million)[160][161] - For the nine months ended September 30, 2023, the company recorded a goodwill impairment of $2.5 million, compared to a $229.5 million charge in the same period of 2022[182] Non-GAAP Financial Information The company utilizes non-GAAP measures, reporting an improved Q3 2023 Non-GAAP operating loss of $23.8 million and an Adjusted EBITDA loss of $20.5 million, reflecting better core performance Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(46,373) | $(60,774) | $(148,742) | $(427,990) | | EBITDA | $(32,112) | $(46,804) | $(106,130) | $(390,017) | | Adjusted EBITDA | $(20,452) | $(28,151) | $(59,935) | $(97,256) | - Non-GAAP adjustments are made for stock-based compensation, amortization of acquired intangibles, restructuring expenses, acquisition-related costs, goodwill impairment, and changes in fair value of investments to provide a view of core operating results[189] Liquidity and Capital Resources As of September 30, 2023, the company held $108.2 million in cash and investments, deemed sufficient for the next 12 months, despite ongoing net losses and potential future capital needs - The company had an accumulated deficit of $1.46 billion as of September 30, 2023, and expects to continue to incur losses and negative cash flow in the near term[215] - Management believes existing capital resources of $108.2 million will be sufficient to fund operations for at least the next 12 months, based on current assumptions and cost-saving measures[222] - The company's cost optimization initiative is expected to incur total costs of $19.6 million to $26.0 million, having achieved its goal of $100 million in annualized cost savings in 2023[140][224] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on its $108.2 million portfolio and foreign currency exposure from international operations, but does not use derivatives for hedging - Primary market risks are interest rate fluctuations affecting the company's $108.2 million cash and investment portfolio and foreign currency translation risk from European and Asian operations[237][238][239] - The company does not currently use derivative financial instruments for trading, speculative purposes, or to manage exchange rate risk[237][239] Controls and Procedures As of September 30, 2023, disclosure controls and procedures were deemed ineffective due to material weaknesses in internal control over financial reporting, though financial statements are fairly presented and remediation is ongoing - As a result of previously identified material weaknesses, the CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2023[240] - The company is continuing to implement remediation efforts for the material weaknesses, but no changes during the quarter have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[242] - Notwithstanding the material weaknesses, management concluded that the financial statements included in the 10-Q are fairly presented in all material respects[241] Part II. Other Information Legal Proceedings The company is involved in several legal proceedings, including class action complaints related to the ExOne and EnvisionTEC mergers, and dismissed complaints regarding the Stratasys merger, all of which are being vigorously defended - An amended class action complaint was filed on October 20, 2023, alleging breach of fiduciary duty in connection with the ExOne Merger regarding disclosures about an investigation at EnvisionTEC[246] - A securities class action alleging false statements about EnvisionTEC was dismissed with prejudice on September 21, 2023, but the lead plaintiff filed a Notice of Appeal on October 13, 2023[247] - Several stockholder complaints related to the proposed merger with Stratasys were filed in June and September 2023; all have since been voluntarily dismissed by the plaintiffs[248][249] Risk Factors The company faces significant business, financial, operational, and compliance risks, including a history of losses, integration challenges from acquisitions, reliance on third parties, and material weaknesses in internal controls - Business & Financial Risks: The company has a history of losses and may not achieve profitability, facing risks from product launch delays, slow market adoption, intense competition, and potential failure of restructuring and cost-saving measures to achieve intended results[254][260][329] - Acquisition & Integration Risks: The company faces difficulties integrating acquired businesses like EnvisionTEC and ExOne, which could disrupt operations and prevent the realization of anticipated benefits and synergies[319] - Operational & Third-Party Risks: The business depends on a limited number of third-party contract manufacturers and a network of resellers, where disruptions could significantly harm operations and sales[349][352] - Compliance & Control Risks: Material weaknesses have been identified in internal controls over financial reporting, potentially impairing the ability to produce timely and accurate financial statements, alongside complex regulatory compliance challenges[377][409] Unregistered Sales of Equity Securities and Use of Proceeds, and Issuer Purchases of Equity Securities During Q3 2023, the company repurchased 22,360 shares of Class A common stock, primarily withheld from employees for tax obligations related to stock award vesting Issuer Purchases of Equity Securities (Q3 2023) | Period | Total number of shares purchased | Average price paid per share | | :--- | :--- | :--- | | July 2023 | 17,306 | $1.75 | | August 2023 | 4,507 | $1.62 | | September 2023 | 547 | $1.78 | | Total | 22,360 | N/A | - All shares purchased were withheld from employees to satisfy tax withholding obligations associated with the issuance of Class A common stock and were not part of a publicly announced program[422] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[423] Mine Safety Disclosures This item is not applicable to the company - Not applicable[424] Other Information During the nine months ended September 30, 2023, two officers adopted or modified Rule 10b5-1 trading plans for share sales Officer Trading Plan Activity | Name and Principal Position | Action | Date | Shares to be Sold | Expiration Date | | :--- | :--- | :--- | :--- | :--- | | Thomas Nogueira, COO | Modify | 8/18/2023 | 278,752 | 12/31/2024 | | Jonah Myerberg, CTO | Adopt | 6/15/2023 | 400,000 | 6/15/2024 | Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed with the report include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 1350, as well as Inline XBRL documents[426][430]