908 Devices(MASS) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Unaudited condensed consolidated financial statements and notes for periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets Total assets decreased to $210.8 million, driven by reduced cash, while liabilities decreased due to debt repayment Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :------------------ | | Cash and cash equivalents | $132,996 | $188,422 | | Marketable securities | $19,691 | — | | Total current assets | $181,077 | $215,626 | | Total assets | $210,830 | $242,587 | | Total current liabilities | $20,194 | $19,226 | | Long-term debt | — | $15,000 | | Total liabilities | $36,371 | $51,988 | | Total stockholders' equity | $174,459 | $190,599 | - Cash and cash equivalents decreased by $55.4 million from December 31, 2022, to June 30, 2023, while marketable securities increased from zero to $19.7 million[12] - Long-term debt was fully repaid, decreasing from $15.0 million at December 31, 2022, to zero at June 30, 2023[12] Condensed Consolidated Statements of Operations Revenue increased, but net loss widened due to higher costs and operating expenses, despite increased interest income Condensed Consolidated Statements of Operations (in thousands, except per share) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $12,094 | $11,106 | $21,581 | $19,412 | | Total cost of revenue | $6,300 | $4,472 | $11,403 | $8,649 | | Gross profit | $5,794 | $6,634 | $10,178 | $10,763 | | Total operating expenses | $16,733 | $15,003 | $34,134 | $28,653 | | Loss from operations | $(10,939) | $(8,369) | $(23,956) | $(17,890) | | Interest income | $1,689 | $293 | $2,706 | $464 | | Net loss | $(9,346) | $(8,099) | $(21,879) | $(17,514) | | Net loss per share (Basic & Diluted) | $(0.29) | $(0.26) | $(0.68) | $(0.56) | - Total revenue increased by 8.9% for the three months and 11.2% for the six months ended June 30, 2023, compared to prior year periods[14] - Gross profit decreased by 12.7% for the three months and 5.4% for the six months ended June 30, 2023, due to higher cost of revenue[14] - Net loss increased by 15.4% for the three months and 25.0% for the six months ended June 30, 2023, driven by higher operating expenses and cost of revenue[14] Condensed Consolidated Statements of Comprehensive Loss Comprehensive loss reported, with other comprehensive income from foreign currency and marketable securities gains Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(9,346) | $(8,099) | $(21,879) | $(17,514) | | Foreign currency translation adjustment | $(57) | — | $234 | — | | Unrealized gains on marketable securities, net of tax | $112 | — | $112 | — | | Total other comprehensive income | $55 | — | $346 | — | | Comprehensive loss | $(9,291) | $(8,099) | $(21,533) | $(17,514) | - Total other comprehensive income was $55 thousand for the three months and $346 thousand for the six months ended June 30, 2023, primarily from foreign currency translation adjustments and unrealized gains on marketable securities[17] Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased due to net loss, partially offset by stock-based compensation and option exercises Condensed Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) | Metric | December 31, 2022 | June 30, 2023 | | :-------------------------------- | :---------------- | :------------ | | Common Stock Shares | 31,859,847 | 32,326,861 | | Common Stock Amount | $32 | $32 | | Additional Paid-in Capital | $323,969 | $329,361 | | Accumulated Other Comprehensive Income | $798 | $1,144 | | Accumulated Deficit | $(134,200) | $(156,078) | | Total Stockholders' Equity | $190,599 | $174,459 | - Accumulated deficit increased by $21.9 million from December 31, 2022, to June 30, 2023, reflecting the net loss for the period[19] - Additional paid-in capital increased by $5.4 million, driven by stock-based compensation expense ($4.7 million) and issuance of common stock from options and ESPP ($0.6 million)[19] Condensed Consolidated Statements of Cash Flows Net cash decreased by $55.4 million, primarily from operating and investing activities and debt repayment Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(18,529) | $(10,876) | | Net cash used in investing activities | $(21,121) | $(689) | | Net cash (used in) provided by financing activities | $(15,782) | $597 | | Net decrease in cash, cash equivalents and restricted cash | $(55,426) | $(10,968) | | Cash, cash equivalents and restricted cash at end of period | $133,167 | $213,165 | - Net cash used in operating activities increased to $18.5 million for the six months ended June 30, 2023, from $10.9 million in the prior year, mainly due to a higher net loss[20] - Net cash used in investing activities significantly increased to $21.1 million, primarily driven by $19.6 million in purchases of marketable securities[20] - Financing activities shifted from providing $0.6 million in cash in 2022 to using $15.8 million in 2023, largely due to the repayment of $15.0 million in long-term debt[20] Notes to Unaudited Condensed Consolidated Financial Statements Detailed explanations of accounting policies, financial line items, and business operations 1. Nature of the Business and Basis of Presentation 908 Devices Inc. provides chemical/biochemical analysis devices, with recurring losses but sufficient liquidity - The company provides purpose-built handheld and desktop devices for chemical and biochemical analysis in life sciences, bioprocessing, pharma/biopharma, and forensics markets[21] - Acquired TRACE Analytics GmbH in August 2022, renamed 908 Devices GmbH, to integrate enabling sampling technology into future product offerings[23] - Incurred net losses of $21.9 million for the six months ended June 30, 2023, and had an accumulated deficit of $156.1 million, but expects sufficient liquidity for at least the next 12 months[26] 2. Summary of Significant Accounting Policies Outlines accounting policies, revenue recognition, and disaggregated revenue data by stream, type, end-user, and geography - The unaudited condensed consolidated financial statements are prepared in conformity with GAAP and SEC rules for interim reporting, with certain disclosures condensed or omitted[28] - Significant estimates include revenue recognition, inventory valuation, fair value of acquired assets/liabilities, and stock-based awards, with ongoing evaluation for global economic uncertainties[29] - Revenue is recognized when control of products or services transfers to customers, primarily FOB shipping point for products, and over time for extended warranty/support[50] Disaggregated Revenue by Stream (in thousands) | Revenue Stream | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Device sales revenue | $7,959 | $7,755 | $13,042 | $13,287 | | Recurring revenue | $3,990 | $2,853 | $8,169 | $5,350 | | Contract revenue | $145 | $498 | $370 | $775 | | Total revenue | $12,094 | $11,106 | $21,581 | $19,412 | Disaggregated Revenue by Device Type (in thousands) | Device Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Handheld revenue | $8,822 | $6,937 | $14,994 | $11,407 | | Desktop revenue | $3,127 | $3,671 | $6,217 | $7,230 | Disaggregated Revenue by End-User Entity Type (in thousands) | End-User Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Government | $8,812 | $7,002 | $14,992 | $11,719 | | Pharmaceutical/Biotechnology | $3,106 | $3,577 | $6,158 | $6,705 | | Academia and other | $31 | $29 | $61 | $213 | Disaggregated Revenue by Geography (in thousands) | Geography | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $7,857 | $9,460 | $14,350 | $15,512 | | Europe, Middle East and Africa | $3,954 | $1,245 | $5,942 | $2,601 | | Asia Pacific | $221 | $391 | $797 | $1,273 | | Americas other | $62 | $10 | $492 | $26 | 3. Fair Value Measurements Fair value measurements for cash equivalents, marketable securities, and acquisition-related contingent consideration Fair Value Measurements at June 30, 2023 (in thousands) | Asset/Liability | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :------ | :------ | :------ | | Cash equivalents - Money market funds | $90,527 | — | — | $90,527 | | Cash equivalents - U.S. Treasury securities | — | $9,969 | — | $9,969 | | Marketable securities - U.S. Treasury securities | — | $19,691 | — | $19,691 | | Acquisition-related contingent consideration (current) | — | — | $973 | $973 | | Acquisition-related contingent consideration (long-term) | — | — | $156 | $156 | - The total maximum payments for acquisition-related contingent consideration is approximately $2 million, with a fair value of $1.1 million as of June 30, 2023[80] - The $0.9 million pension liability contingent consideration from the Trace acquisition was released and paid out in April 2023[81] 4. Marketable Securities Company held $29.7 million in available-for-sale marketable securities as of June 30, 2023 Marketable Securities at June 30, 2023 (in thousands) | Security Type | Amortized Cost | Gross Unrealized Gain | Fair Value | | :-------------------------------- | :------------- | :-------------------- | :--------- | | Cash equivalents - U.S. Treasury securities | $9,932 | $37 | $9,969 | | Marketable securities - U.S. Treasury securities | $19,616 | $75 | $19,691 | | Total | $29,548 | $112 | $29,660 | - The company did not have marketable securities as of December 31, 2022, indicating a new investment strategy in the first half of 2023[83] 5. Inventory Total inventory increased to $14.1 million, with increases across raw materials, work-in-progress, and finished goods Inventory (in thousands) | Inventory Component | June 30, 2023 | December 31, 2022 | | :------------------ | :------------ | :---------------- | | Raw materials | $9,579 | $8,343 | | Work-in-progress | $2,916 | $2,722 | | Finished goods | $1,640 | $1,448 | | Total | $14,135 | $12,513 | - Raw materials increased by $1.2 million, work-in-progress by $0.2 million, and finished goods by $0.2 million from December 31, 2022, to June 30, 2023[84] 6. Goodwill and Intangible Assets, net Goodwill increased due to foreign currency, while net intangible assets decreased due to amortization Goodwill Roll Forward (in thousands) | Metric | Six Months Ended June 30, 2023 | | :---------------------- | :----------------------------- | | Balances at beginning of period | $10,050 | | Foreign currency impact | $135 | | Balances at end of period | $10,185 | Intangible Assets, net (in thousands) | Intangible Asset | June 30, 2023 Net Book Value | December 31, 2022 Net Book Value | | :----------------- | :--------------------------- | :------------------------------- | | Customer Relationships | $2,962 | $3,129 | | Developed Technology | $4,964 | $5,073 | | Software | $200 | $235 | | Trade Name | $36 | $51 | | Total | $8,162 | $8,488 | - Amortization expense for intangible assets was $219 thousand for the three months and $437 thousand for the six months ended June 30, 2023, recorded in product cost of revenue and selling, general and administrative expenses[86] 7. Accrued Expenses Total accrued expenses decreased to $6.0 million, mainly from lower employee compensation and contingent consideration Accrued Expenses (in thousands) | Accrued Expense Category | June 30, 2023 | December 31, 2022 | | :----------------------- | :------------ | :---------------- | | Accrued employee compensation and benefits | $2,506 | $4,909 | | Accrued warranty | $854 | $1,119 | | Contingent consideration | $973 | $1,243 | | Total Accrued Expenses | $6,034 | $8,847 | - Accrued employee compensation and benefits decreased by $2.4 million, and contingent consideration decreased by $0.3 million[87] - The product warranty obligation decreased from $1.1 million at the beginning of the six-month period to $0.9 million at June 30, 2023, due to settlements exceeding new provisions[87] 8. Long-Term Debt Company repaid $15.0 million debt, defaulted on covenants, and entered an amended $10.0 million credit line - The 2021 Revolver was voluntarily terminated on November 2, 2022, with no outstanding amounts[90] - The $15.0 million outstanding principal balance under the 2022 Revolver was fully repaid on January 4, 2023[94] - The company defaulted on its 2022 Revolver covenants by transferring cash away from SVB after its closure in March 2023, resulting in a $0.5 million loss on extinguishment of debt[98] - An Amended 2022 Revolver, effective August 4, 2023, reduced the line of credit to $10.0 million, waived prior defaults, and requires maintaining $20.0 million at SVB and a minimum unrestricted cash level[99][102] 9. Equity and Net Income (Loss) per Share Common shares outstanding were 32.3 million, with anti-dilutive securities excluded from net loss per share - The company had 32,326,861 common shares outstanding as of June 30, 2023[12] Net Loss Per Share (Basic and Diluted) | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Net loss per share (Basic and Diluted) | $(0.29) | $(0.68) | - Potential dilutive securities totaling 4,513,853 shares (warrants, options, PSUs, RSUs) were excluded from diluted EPS calculations for the six months ended June 30, 2023, due to the net loss making their effect anti-dilutive[105] 10. Stock-Based Compensation Stock-based compensation expense increased, with $17.7 million unrecognized cost for unvested RSUs Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $140 | $86 | $255 | $149 | | Research and development expenses | $732 | $421 | $1,327 | $681 | | Selling, general and administrative expenses | $1,706 | $1,387 | $3,162 | $2,353 | | Total | $2,578 | $1,894 | $4,744 | $3,183 | - Unrecognized compensation cost for unvested RSUs was $17.7 million as of June 30, 2023, with a weighted average recognition period of 3.0 years[106] - 53,794 performance-based restricted stock units (PSUs) were granted in March 2023, with vesting contingent on stock price levels and valued using the Monte Carlo simulation model[107][108] 11. Leases Operating lease expenses reported, with new leases in North Carolina and Germany for R&D and manufacturing Lease Expense (in thousands) | Lease Expense Component | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $485 | $583 | $969 | $1,165 | | Short-term lease cost | $16 | $11 | $32 | $20 | | Variable lease cost | $27 | $2 | $54 | $4 | | Total Lease Cost | $528 | $596 | $1,055 | $1,189 | - A new operating lease in Morrisville, North Carolina, for 13,300 sq ft commenced in March 2023, with total costs of approximately $4.0 million over 88 months[110] - A new operating lease in Braunschweig, Germany, for 7,500 sq ft commenced in January 2023, with total costs of approximately $0.4 million over 60 months[111] - The weighted-average remaining lease term for operating leases was 4.25 years at June 30, 2023, with a weighted-average discount rate of 8.5%[112] 12. Commitments and Contingencies Royalty arrangements, 401(k) contributions, acquisition earnouts, and no material legal proceedings - The company has royalty arrangements with future minimum payments of $0.1 million per year through the end of the patents' lives[115] - Contributions to the 401(k) savings plan were $0.3 million for the six months ended June 30, 2023[116] - Contingent consideration for the Trace acquisition includes up to $2.0 million for milestone-based earnouts through June 30, 2024[117] - The $0.9 million pension liability from the Trace acquisition was released and paid out to sellers in April 2023[118] - The company is not currently involved in any material legal proceedings[120] 13. Acquisition Acquired TRACE Analytics GmbH for $17.3 million, allocating $9.6 million to goodwill for synergies - Acquired 100% of TRACE Analytics GmbH on August 3, 2022, for a total purchase price of $17.3 million[121] - The purchase consideration included a $14.4 million initial cash payment, up to $2.0 million in contingent cash consideration, and a $0.9 million contingent pension liability holdback[121] - The acquisition was accounted for as a business purchase, with $9.6 million allocated to goodwill, representing cost and revenue synergies[123][124] Allocation of Purchase Consideration (in thousands) | Item | Amount | | :-------------------------------- | :----- | | Cash paid | $14,400 | | Net cash and working capital adjustment | $113 | | Contingent consideration - pension liability | $900 | | Contingent consideration - earnout | $737 | | Total consideration transferred | $16,150 | | Goodwill | $9,566 | | Intangible assets (Customer Relationships, Developed Technology, Software, Trade Name) | $8,424 | 14. Segment Reporting and Geographic Data Company operates in a single segment, with most long-lived assets located in the United States - The company operates in one segment[126] Long-Lived Assets by Geography (in thousands) | Geography | June 30, 2023 | December 31, 2022 | | :---------- | :------------ | :---------------- | | United States | $9,555 | $7,852 | | All other countries | $521 | $63 | | Total long-lived assets | $10,076 | $7,915 | - Long-lived assets in the United States increased by $1.7 million, and in other countries by $0.5 million, from December 31, 2022, to June 30, 2023[126] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's analysis of financial condition, operational results, liquidity, and critical accounting policies Overview 908 Devices Inc. develops analysis devices, with revenue growth but increased net losses and accumulated deficit - The company's devices are used for point-of-need chemical and biochemical analysis in life sciences, bioprocessing, pharma/biopharma, and forensics[128] - Revenue for the six months ended June 30, 2023, was $21.6 million, with a net loss of $21.9 million, leading to an accumulated deficit of $156.1 million[133] - The company expects to continue incurring net losses due to investments in commercial sales, manufacturing, and R&D, and is monitoring macroeconomic conditions like inflation and interest rates[133][135][136] - The company believes existing cash, cash equivalents, and revenue will fund operations for at least the next 12 months[135] Factors Affecting Our Performance Performance driven by device sales, recurring revenue, revenue mix, gross margin, and product adoption stages - Device sales are a key indicator of business success and future recurring revenue, with growth strategies including sales expansion and technology enhancements[146][147] - Handheld device sales are often large government orders with long sales cycles, leading to period-to-period fluctuations and customer concentration[148] - Recurring revenue, including consumables and services, was 39% of total product and service revenue for the six months ended June 30, 2023, up from 29% in the prior year[151] - Recurring revenue is expected to increase as the device installed base expands, with desktop devices having a higher recurring revenue percentage than handheld devices[151][152] - Gross margins are higher for direct sales compared to distributor sales, and the company aims to mitigate downward pressure on selling prices by expanding applications and improving data quality[153][154] Device sales Device sales growth driven by expanded efforts and technology, with varied sales cycles and customer concentration - Handheld device sales are often large government orders with long sales cycles and can be concentrated in a small number of customers[148] - Desktop device sales cycles typically range from three to twelve months, varying by customer size[149] Recurring revenue Recurring revenue grew to 39% of total, expected to increase with installed base, especially for desktop devices - Recurring revenue was 39% of total product and service revenue for the six months ended June 30, 2023, compared to 29% in the prior year[151] - Rebel and ZipChip Interface devices require consumables kits for all operations, driving higher recurring revenue compared to MX908 handheld devices[152][163][164] Revenue mix and gross margin Revenue mix fluctuates, with consumables growing; gross margins higher for direct sales, aiming for improvement - Consumables revenue is expected to constitute a larger percentage of product and service revenue over time as the device installed base grows[153] - Gross margins are higher for direct sales compared to sales through distributors[153] - The company aims to mitigate downward pressure on average selling prices and improve gross margins by increasing the value proposition of its devices and consumables[154] Product adoption Customer product adoption stages (testing, trials, pilot, deployment) are monitored for financial projections - Product adoption stages include testing (internal/external evaluation), trials (assessing functionality in operational environment), pilot (initial quantity purchase for broader opportunity), and deployment (enterprise-wide rollout)[155][157] Key Business Metrics Product placements and cumulative placements are key metrics, showing units recognized as revenue Product Placements (Units Recognized as Revenue) | Device Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Handheld | 107 | 102 | 169 | 165 | | Desktop | 15 | 22 | 31 | 42 | Cumulative Product Placements | Device Type | June 30, 2023 | June 30, 2022 | | :------------ | :------------ | :------------ | | Handheld | 2,189 | 1,815 | | Desktop | 401 | 327 | - Handheld product placements increased by 5 units QoQ and 4 units YoY for the respective periods, while desktop placements decreased by 7 units QoQ and 11 units YoY[159] Components of Our Results of Operations Details revenue, cost of revenue, gross profit, operating expenses, and other income/expense components - Device sales accounted for 61% of product and service revenue for the six months ended June 30, 2023, while recurring revenue accounted for 39%[161] - Product cost of revenue includes raw materials, freight, royalties, manufacturing costs, and personnel, while service cost of revenue includes personnel, travel, and warranty costs[169][170] - Gross profit margin is influenced by market pricing, sales mix, inventory, manufacturing costs, and warranty obligations, with expectations for long-term improvement due to economies of scale[172][173] - Research and development expenses are expected to increase due to continued investment in product development, hardware/software engineering, and consultant services[174] - Selling, general and administrative expenses are projected to rise with increased sales, marketing, and administrative personnel, new product introductions, and public company operating costs[175][178] - The company has a full valuation allowance against its net deferred tax assets due to recurring net operating losses and tax credits[182] Revenue Revenue categorized into product/service (device, recurring) and contract, with expected growth in recurring - Product and service revenue includes sales of handheld (MX908) and desktop (Rebel, ZipChip Interface, Maven) devices, and recurring revenue from consumables and extended warranty/service plans[162][163][165] - Contract revenue is generated from short and long-term agreements, primarily with the U.S. government, for design, development, and delivery of detection devices or related services[167] Cost of Revenue, Gross Profit and Gross Margin Cost of revenue components detailed; long-term gross profit margin improvement expected from economies of scale - Product cost of revenue includes raw materials, freight, royalties, contract manufacturer costs, and personnel[169] - Service cost of revenue includes salaries, travel, facility costs, and warranty expenses[170] - Gross profit margin is expected to increase over the long term as sales and production volumes rise, leading to cost efficiencies[173] Operating Expenses R&D and SG&A expenses expected to increase with continued investment and business expansion - R&D expenses include employee-related costs, product design, third-party development, research materials, and facilities expenses[174][176] - SG&A expenses primarily cover salaries, stock-based compensation for sales, marketing, and administrative personnel, as well as professional services and public company operating costs[175][178] Other Income (Expense) Includes interest income from cash, interest expense from borrowings, and debt extinguishment losses - Interest income is derived from invested cash balances[179] - Interest expense includes costs from loan agreements, amortization of deferred financing costs, and losses on debt extinguishment[180] Provision for Income Taxes No U.S. income tax benefits recognized due to net operating losses and full valuation allowance - A full valuation allowance has been recorded against net deferred tax assets due to the unlikelihood of realizing net operating loss carryforwards and tax credits[182] - As of December 31, 2022, the company had $92.3 million in federal and $64.0 million in state operating loss carryforwards, and $5.9 million in federal and $2.8 million in state R&D tax credit carryforwards[182] Results of Operations Detailed comparison of financial performance for three and six months ended June 30, 2023 and 2022 Summary of Results of Operations (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :-------------------------------- | :----- | :----- | :------------ | :------- | | Total revenue | $12,094 | $11,106 | $988 | 8.9% | | Total cost of revenue | $6,300 | $4,472 | $1,828 | 40.9% | | Gross profit | $5,794 | $6,634 | $(840) | (12.7)% | | Total operating expenses | $16,733 | $15,003 | $1,730 | 11.5% | | Loss from operations | $(10,939) | $(8,369) | $(2,570) | (30.7)% | | Interest income | $1,689 | $293 | $1,396 | 476.5% | | Net loss | $(9,346) | $(8,099) | $(1,247) | (15.4)% | Comparison of the three months ended June 30, 2023 and 2022 Revenue increased, but gross profit decreased, and net loss widened due to higher costs and operating expenses Revenue, Cost of Revenue and Gross Profit (Product) Product revenue increased, but cost of revenue surged, leading to decreased gross profit and margin Product Revenue, Cost, and Gross Profit (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :------------------ | :----- | :----- | :------------ | :------- | | Product revenue | $9,595 | $9,082 | $513 | 6% | | Product cost of revenue | $4,800 | $3,304 | $1,496 | 45% | | Gross profit | $4,795 | $5,778 | $(983) | (17)% | | Gross profit margin | 50% | 64% | (14)% | | - Product revenue increase was primarily due to $1.1 million higher handheld device revenues (5 additional placements and higher ASP) and $0.3 million increase in consumable and accessory revenue, partially offset by $0.8 million decrease in desktop device sales (9 fewer Rebel placements)[185][186] - Product cost of revenue increased due to $0.5 million higher unabsorbed overhead from lower production builds, $0.5 million higher materials/supplies for warranty/production, $0.2 million from higher volume, $0.2 million from product mix, and $0.1 million in intangible amortization[187] Revenue, Cost of Revenue and Gross Profit (Service) Service revenue and gross profit increased significantly, with improved gross profit margin from leverage Service Revenue, Cost, and Gross Profit (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :------------------ | :----- | :----- | :------------ | :------- | | Service revenue | $2,354 | $1,526 | $828 | 54% | | Service cost of revenue | $1,448 | $1,057 | $391 | 37% | | Gross profit | $906 | $469 | $437 | 93% | | Gross profit margin | 38% | 31% | 7% | | - Increase in service revenue was primarily from handheld extended service contracts and training, and desktop service arrangements[189] - Service gross profit margin improved due to leveraging fixed infrastructure across handheld and desktop services[191] Revenue, Cost of Revenue and Gross Profit (Contract) Contract revenue and gross profit decreased due to completion of prior year government contracts Contract Revenue, Cost, and Gross Profit (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :------------------ | :----- | :----- | :------------ | :------- | | Contract revenue | $145 | $498 | $(353) | (71)% |\n| Contract cost of revenue | $52 | $111 | $(59) | (53)% | | Gross profit | $93 | $387 | $(294) | (76)% | | Gross profit margin | 64% | 78% | (14)% | | - The decrease in contract revenue was primarily due to the completion of work in 2022 related to a prime contract with the U.S. government and a subcontract with a commercial entity holding a U.K. government prime contract[192] Operating Expenses (Research and development) R&D expenses increased due to higher headcount, stock-based compensation, and occupancy costs Research and Development Expenses (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :-------------------------------- | :----- | :----- | :------------ | :------- | | Research and development expenses | $5,525 | $4,293 | $1,232 | 29% | - The increase was driven by a $0.5 million increase in salaries and related costs, a $0.3 million increase in stock-based compensation, and a $0.2 million increase in occupancy expenses[195] Operating Expenses (Selling, general and administrative expenses) SG&A expenses increased due to higher personnel, stock-based compensation, and acquisition costs Selling, General and Administrative Expenses (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :-------------------------------- | :----- | :----- | :------------ | :------- | | Selling, general and administrative expenses | $11,208 | $10,710 | $498 | 5% | - Key drivers of the increase included a $0.3 million rise in stock-based compensation, $0.2 million in acquisition-related costs, $0.2 million in personnel costs, and $0.1 million in credit loss provision[196] - These increases were partially offset by a $0.4 million decrease in insurance costs, particularly director and officer insurance premiums[198] Other Income (Interest income) Interest income significantly increased due to higher interest rates on invested cash balances - Interest income increased by $1.4 million to $1.7 million for the three months ended June 30, 2023, from $0.3 million in the prior year, driven by higher interest rates[199] Other Income (Other income (expense), net) Other income (expense), net, remained stable with no material change from the prior year period - Other income (expense), net, was $0.2 million for the three months ended June 30, 2023, showing no material change from the prior year[200] Comparison of the six months ended June 30, 2023 and 2022 Revenue increased, but gross profit decreased, and net loss widened due to higher costs and operating expenses Summary of Results of Operations (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :-------------------------------- | :----- | :----- | :------------ | :------- | | Total revenue | $21,581 | $19,412 | $2,169 | 11.2% | | Total cost of revenue | $11,403 | $8,649 | $2,754 | 31.8% | | Gross profit | $10,178 | $10,763 | $(585) | (5.4)% | | Total operating expenses | $34,134 | $28,653 | $5,481 | 19.1% | | Loss from operations | $(23,956) | $(17,890) | $(6,066) | (33.9)% | | Interest income | $2,706 | $464 | $2,242 | 483.2% | | Net loss | $(21,879) | $(17,514) | $(4,365) | (25.0)% | Revenue, Cost of Revenue and Gross Profit (Product) Product revenue increased, but cost of revenue surged, leading to decreased gross profit and margin Product Revenue, Cost, and Gross Profit (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :------------------ | :----- | :----- | :------------ | :------- | | Product revenue | $16,617 | $15,589 | $1,028 | 7% | | Product cost of revenue | $8,586 | $6,276 | $2,310 | 37% | | Gross profit | $8,031 | $9,313 | $(1,282) | (14)% | | Gross profit margin | 48% | 60% | (12)% | | - Product revenue increase was driven by $1.2 million higher consumable and accessory revenue, offset by a $0.2 million decrease in device sales (desktop sales down $1.7 million, handheld sales up $1.5 million)[202] - Product cost of revenue increased due to $0.7 million higher unabsorbed overhead, $0.6 million higher materials/supplies for warranty/production, $0.3 million from higher volume, $0.2 million in intangible amortization, and $0.2 million in shipping costs[203] Revenue, Cost of Revenue and Gross Profit (Service) Service revenue and gross profit increased significantly, with improved gross profit margin from leverage Service Revenue, Cost, and Gross Profit (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :------------------ | :----- | :----- | :------------ | :------- | | Service revenue | $4,594 | $3,048 | $1,546 | 51% | | Service cost of revenue | $2,718 | $2,126 | $592 | 28% | | Gross profit | $1,876 | $922 | $954 | 103% | | Gross profit margin | 41% | 30% | 11% | | - Increase in service revenue was primarily from handheld extended service contracts and training, and desktop service arrangements[205] - Service gross profit margin improved due to leveraging fixed infrastructure across handheld and desktop services[208] Revenue, Cost of Revenue and Gross Profit (Contract) Contract revenue and gross profit decreased due to completion of prior year government contracts Contract Revenue, Cost, and Gross Profit (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :------------------ | :----- | :----- | :------------ | :------- | | Contract revenue | $370 | $775 | $(405) | (52)% | | Contract cost of revenue | $99 | $247 | $(148) | (60)% | | Gross profit | $271 | $528 | $(257) | (49)% | | Gross profit margin | 73% | 68% | 5% | | - The decrease in contract revenue was primarily due to the completion of work in 2022 related to a prime contract with the U.S. government and a subcontract with a commercial entity holding a U.K. government prime contract[209] Operating Expenses (Research and development) R&D expenses increased due to higher headcount, stock-based compensation, occupancy, and program spend Research and Development Expenses (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :-------------------------------- | :----- | :----- | :------------ | :------- | | Research and development expenses | $10,923 | $8,198 | $2,725 | 33% | - The increase was driven by a $1.2 million increase in salaries and related costs, $0.6 million in stock-based compensation, $0.4 million in occupancy expenses, and $0.2 million in program spend[212] Operating Expenses (Selling, general and administrative expenses) SG&A expenses increased due to higher personnel, stock-based compensation, acquisition, travel, and marketing Selling, General and Administrative Expenses (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change Amount | Change % | | :-------------------------------- | :----- | :----- | :------------ | :------- | | Selling, general and administrative expenses | $23,211 | $20,455 | $2,756 | 13% | - Key drivers of the increase included a $1.5 million rise in salaries and related costs, $0.8 million in stock-based compensation, $0.3 million in acquisition-related costs, and $0.2 million in travel and marketing spend[213] - These increases were partially offset by a $0.7 million decrease in insurance costs[213] Other Income (Interest income) Interest income significantly increased due to higher interest rates on invested cash balances - Interest income increased by $2.2 million to $2.7 million for the six months ended June 30, 2023, from $0.5 million in the prior year, driven by higher interest rates[214] Other Income (Interest expense) Interest expense increased due to a $0.5 million loss on extinguishment of debt related to the 2022 Revolver - Interest expense increased by $0.5 million for the six months ended June 30, 2023, primarily due to a $0.5 million loss on extinguishment of debt related to the 2022 Revolver[215] Other Income (Other expense, net) Other expense, net, remained stable with no material change from the prior year period Liquidity and Capital Resources Company had $152.7 million in liquidity, repaid debt, defaulted on covenants, and secured an amended credit line - As of June 30, 2023, the company had $152.7 million in cash, cash equivalents, and marketable securities, expected to fund operations for at least 12 months[217] - The $15.0 million outstanding balance under the 2022 Revolver was fully repaid on January 4, 2023[225] - The company defaulted on its 2022 Revolver covenants by transferring cash from SVB in March 2023[230] - An Amended 2022 Revolver, effective August 4, 2023, reduced the credit line to $10.0 million, waived prior defaults, and requires maintaining $20.0 million at SVB and a minimum unrestricted cash level[231][233] Cash Flows Net cash decreased by $55.4 million, primarily from operating, investing, and financing activities Summary of Cash Flows (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Cash used in operating activities | $(18,529) | $(10,876) | | Cash used in investing activities | $(21,121) | $(689) | | Cash (used in) provided by financing activities | $(15,782) | $597 | | Net decrease in cash, cash equivalents and restricted cash | $(55,426) | $(10,968) | Operating Activities Net cash used in operating activities increased due to net loss and changes in operating assets/liabilities - Net cash used in operating activities was $18.5 million for the six months ended June 30, 2023, primarily from a $21.9 million net loss and $3.4 million used in changes in operating assets and liabilities[237] - Changes in operating assets and liabilities included a $1.7 million decrease from inventory and a $0.9 million decrease from accounts payable and accrued expenses[237] Investing Activities Net cash used in investing activities significantly increased due to marketable securities and equipment purchases - Net cash used in investing activities was $21.1 million for the six months ended June 30, 2023, driven by $19.6 million in marketable securities purchases and $1.5 million in property and equipment purchases[239] Financing Activities Cash used in financing activities due to debt repayment and pension liability payment - Cash used in financing activities was $15.8 million for the six months ended June 30, 2023, mainly from the $15.0 million repayment of the 2022 Revolver and a $0.9 million pension liability payment[240] Critical Accounting Policies and Significant Judgments and Estimates Financial statements require estimates and judgments; no significant changes to critical accounting policies - Financial statements require estimates and judgments for revenue recognition, inventory valuation, fair value of acquired assets/liabilities, and stock-based awards[242] - No significant changes to critical accounting policies were made for the six months ended June 30, 2023[244] Recently Issued Accounting Pronouncements Details on recently issued accounting pronouncements are provided in Note 2 of the financial statements - Details on recently issued accounting pronouncements are provided in Note 2 of the financial statements[245] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, market risk disclosures are not required for this period - The company is a smaller reporting company and is not required to provide market risk disclosures[246] Item 4. Controls and Procedures Disclosure controls and procedures were effective; no material changes in internal control over financial reporting - Disclosure controls and procedures were deemed effective at a reasonable assurance level as of June 30, 2023[247] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[248] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not currently party to any material legal proceedings[251] Item 1A. Risk Factors No material changes to risk factors occurred during the three months ended June 30, 2023 - No material changes to risk factors occurred during the three months ended June 30, 2023[252] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report for this period - No unregistered sales of equity securities or use of proceeds[253] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report for this period - No defaults upon senior securities[254] Item 4. Mine Safety Disclosures No mine safety disclosures to report for this period - No mine safety disclosures[255] Item 5. Other Information No other information to report for this period - No other information to report[256] Item 6. Exhibits Lists exhibits filed with the Quarterly Report, including certifications and loan agreement amendments - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2), a Default Waiver and First Amendment to Loan and Security Agreement (10.18), and Inline XBRL documents[258] Signatures Signatures The report was signed by the CEO and CFO on August 8, 2023 - The report was signed by Kevin J. Knopp, Ph.D., CEO, and Joseph H. Griffith IV, CFO, on August 8, 2023[263]