Markforged (MKFG) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Markforged Holding Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Condensed Consolidated Financial Statements This section presents Markforged Holding Corporation's unaudited condensed consolidated financial statements, including the balance sheets, statements of operations and comprehensive income (loss), statements of changes in stockholders' equity, and statements of cash flows for the periods ended June 30, 2022, and December 31, 2021. It also includes detailed notes explaining the company's organization, significant accounting policies, recent acquisitions, and other financial details Unaudited Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | $243,216 | $288,603 | | Total current assets | $292,962 | $330,189 | | Total assets | $356,138 | $337,314 | | Total current liabilities | $33,543 | $25,412 | | Total liabilities | $89,786 | $93,145 | | Total stockholders' equity | $266,352 | $244,169 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This section presents the company's revenues, expenses, and net profit or loss over specific reporting periods | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Revenue | $24,227 | $20,419 | $46,086 | $40,539 | | Cost of revenue | $11,302 | $8,496 | $21,555 | $16,435 | | Gross profit | $12,925 | $11,923 | $24,531 | $24,104 | | Loss from operations | $(23,813) | $(10,735) | $(44,965) | $(19,733) | | Change in fair value of warrant liabilities | $976 | $(241) | $1,669 | $(1,251) | | Change in fair value of contingent earnout liability | $26,742 | — | $51,638 | — | | Net profit (loss) and comprehensive income (loss) | $4,075 | $(11,090) | $8,314 | $(21,109) | | Net profit (loss) per share - basic | $0.02 | $(0.28) | $0.04 | $(0.53) | | Net profit (loss) per share - diluted | $0.02 | $(0.28) | $0.04 | $(0.53) | Unaudited Statement of Changes in Convertible Preferred Stock and Stockholders' Equity (Deficit) This section details the changes in the company's equity accounts, including additional paid-in capital and accumulated deficit | Metric | December 31, 2021 (in thousands) | June 30, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :--------------------------- | | Additional paid-in capital | $319,859 | $333,728 | | Accumulated deficit | $(75,709) | $(67,395) | | Total stockholders' equity | $244,169 | $266,352 | - The company's accumulated deficit decreased from $(75,709) thousand at December 31, 2021, to $(67,395) thousand at June 30, 2022, primarily due to net income and equity-based compensation[23] Unaudited Condensed Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities for the reporting periods | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(41,574) | $(16,384) | | Net cash used in investing activities | $(3,564) | $(1,039) | | Net cash provided by (used in) financing activities | $1,181 | $(8,148) | | Net change in cash, cash equivalents, and restricted cash | $(43,957) | $(25,571) | | Cash, cash equivalents, and restricted cash - End of period | $244,646 | $33,144 | Unaudited Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures for the condensed consolidated financial statements, covering the company's organization, the impact of the Merger, significant accounting policies, recent acquisition of Teton Simulation Software, revenue disaggregation, and specifics on various balance sheet and income statement items like inventory, goodwill, equity, and liabilities Note 1. Organization, Nature of the Business, and Risks and Uncertainties This note describes Markforged's business, the impact of the Merger, and ongoing risks like supply chain disruptions - Markforged was founded in 2013, specializing in 3D printers, materials, software, and services for additive manufacturing[32] - The company completed a merger with AONE on July 14, 2021, resulting in Markforged Holding Corporation[33] - The COVID-19 pandemic has caused ongoing disruptions, particularly in the supply chain, but as of June 30, 2022, it had no material impact on the realizability of accounts receivables, inventories, or assets[35] Note 2. Merger and Reverse Recapitalization This note details the merger with AONE, its accounting treatment as a reverse recapitalization, and the resulting proceeds and share structure - The Merger with AONE was completed on July 14, 2021, and accounted for as a reverse recapitalization, with Legacy Markforged as the accounting acquirer[33][43] - The merger generated $360.9 million in proceeds, including $215.1 million from AONE's trust account and $210.0 million from PIPE financing, net of redemptions and transaction costs[45] Shares Issued Immediately After Merger | Shares Issued Immediately After Merger | Number of Shares | | :------------------------------------- | :--------------- | | Common stock of one (net of redemptions) | 20,456,333 | | Shares issued in PIPE | 21,000,000 | | Legacy Markforged shares | 143,795,504 | | Total shares of common stock | 185,251,837 | Note 3. Summary of Significant Accounting Policies This note outlines the key accounting principles and estimates used in preparing the financial statements, including fair value measurements and lease accounting - The company's financial statements are prepared in conformity with US GAAP and SEC regulations, with all significant intercompany accounts and transactions eliminated[47] - Key estimates include allowance for doubtful accounts, inventory reserves, fair value of contingent earnout liability, warrant liability, and valuation of intangibles and goodwill[49] - Effective January 1, 2022, the company adopted ASC Topic 842, Leases, recognizing operating lease right-of-use assets and related liabilities, increasing total assets by $12.2 million and total liabilities by $14.0 million[72][85] Fair Value Measurements (June 30, 2022, in thousands) | Fair Value Measurements (June 30, 2022, in thousands) | Level 1 | Level 2 | Level 3 | Total | | :---------------------------------------------------- | :------ | :------ | :------ | :---- | | Money market funds | $244,631 | — | — | $244,631 | | Contingent earnout liability | — | — | $8,084 | $8,084 | | Private placement warrant liability | — | — | $977 | $977 | | Teton acquisition contingent earnout liability | — | — | $1,602 | $1,602 | Note 4. Acquisition This note details the acquisition of Teton Simulation Software, including consideration transferred and the allocation of purchase price to assets and goodwill - On April 4, 2022, Markforged acquired Teton Simulation Software for $6.6 million in cash and equity, aiming to integrate its SmartSlice™ technology with Eiger™[87] Teton Acquisition Consideration (in thousands) | Teton Acquisition Consideration (in thousands) | Amount | | :------------------------------------- | :----- | | Cash consideration | $2,635 | | Equity consideration | $2,354 | | Development milestone earnout fair value | $1,020 | | Business milestone earnout fair value | $582 | | Total consideration transferred | $6,591 | - The acquisition resulted in $4.475 million in goodwill and $2.220 million in identifiable intangible assets (developed technology) with an estimated useful life of 7 years[90][96] Note 5. Revenue This note disaggregates revenue by category (hardware, consumables, services) and provides details on deferred revenue recognition Revenue Category | Revenue Category | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :--------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Hardware | $16,011 | $14,331 | $30,527 | $28,569 | | Consumables | $5,889 | $4,780 | $11,345 | $9,397 | | Services | $2,327 | $1,308 | $4,214 | $2,573 | | Total Revenue | $24,227 | $20,419 | $46,086 | $40,539 | - The company recognized $2.5 million and $3.9 million of revenue from deferred revenue account balances for the three and six months ended June 30, 2022, respectively[91] Note 6. Property and Equipment, net This note provides a breakdown of property and equipment, including gross values, accumulated depreciation, and net book value Property and Equipment (in thousands) | Property and Equipment (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Machinery and equipment | $6,777 | $6,091 | | Leasehold improvements | $2,426 | $2,262 | | Computer equipment | $2,098 | $1,764 | | Furniture and fixtures | $447 | $367 | | Computer software | $270 | $250 | | Construction in process | $1,970 | $1,741 | | Property and equipment, gross | $13,988 | $12,475 | | Less: Accumulated depreciation | $(7,049) | $(6,126) | | Property and equipment, net | $6,939 | $6,349 | - Depreciation expense for property and equipment was $0.4 million and $0.9 million for the three and six months ended June 30, 2022, respectively[94] Note 7. Inventory This note details the composition of inventory, including raw materials, work in process, finished goods, and related reserves Inventory (in thousands) | Inventory (in thousands) | June 30, 2022 | December 31, 2021 | | :----------------------- | :------------ | :---------------- | | Raw material | $2,070 | $853 | | Work in process | $213 | $77 | | Finished goods | $17,038 | $9,447 | | Total inventory | $19,321 | $10,377 | - The company's total inventory increased from $10.377 million at December 31, 2021, to $19.321 million at June 30, 2022, with a significant increase in finished goods[95] - Reserves for obsolete inventory were $1.1 million at June 30, 2022, and $1.0 million at December 31, 2021[95] Note 8. Goodwill and Intangible Assets This note provides information on goodwill and identifiable intangible assets, primarily from the Teton Simulation Software acquisition Goodwill (in thousands) | Goodwill (in thousands) | Amount | | :---------------------- | :----- | | December 31, 2021 | — | | Acquisition of Teton | $4,475 | | June 30, 2022 | $4,475 | Intangible Assets (in thousands) | Intangible Assets (in thousands) | Estimated Useful Life (years) | Gross Carrying Value | Accumulated Amortization | Net Book Value | | :------------------------------- | :---------------------------- | :------------------- | :----------------------- | :------------- | | Developed technology | 7 | $2,220 | $(5) | $2,215 | - Goodwill and intangible assets are entirely related to the Teton Simulation Software acquisition in April 2022[96] Note 9. Accrued Expenses This note details the components of accrued expenses, including warranty reserves, compensation, and professional services Accrued Expenses (in thousands) | Accrued Expenses (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------------------ | :------------ | :---------------- | | Warranty reserve | $790 | $658 | | Compensation, benefits, expenses | $3,380 | $4,360 | | Professional services | $3,600 | $1,725 | | Teton acquisition holdback liability | $250 | — | | Total accrued expense | $9,525 | $7,411 | - Total accrued expenses increased from $7.411 million at December 31, 2021, to $9.525 million at June 30, 2022, driven by increases in professional services and the Teton acquisition holdback liability[97] Note 10. Borrowings This note provides information on the company's borrowing activities, including the repayment of the PPP loan - The company's $5.0 million Paycheck Protection Program (PPP) loan, granted in April 2020, was fully repaid in January 2021[98][99] Note 11. Convertible Preferred Stock, Common Stock and Stockholders' Equity (Deficit) This note details the company's capital structure, including common stock and shares reserved for future issuance - As a result of the Merger, all convertible preferred stock was converted into Legacy Markforged common stock and recapitalized into Common Stock; no convertible preferred stock was outstanding as of June 30, 2022[100] Common Stock Reserved for Future Issuance | Common Stock Reserved for Future Issuance | June 30, 2022 | December 31, 2021 | | :---------------------------------------- | :------------ | :---------------- | | Common stock options outstanding and unvested RSU | 18,653,953 | 20,267,035 | | Shares available for issuance under the 2021 plan | 30,549,724 | 21,502,768 | | Common stock warrants outstanding | 8,525,000 | 8,525,000 | | Shares available for issuance as Earnout RSU | 1,400,000 | 1,400,000 | | Employee stock purchase plan | 6,559,930 | 4,700,000 | | Total shares reserved | 65,688,607 | 56,394,803 | Note 12. Equity Based Awards This note outlines the company's equity compensation plans, including stock options and restricted stock units, and related expenses - The 2021 Stock Option and Incentive Plan (2021 Plan) and 2021 Employee Stock Purchase Plan (2021 ESPP) were approved, with 30,549,724 and 6,559,930 shares available for issuance, respectively, as of June 30, 2022[102] Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $957 | $1,188 | $1,944 | $2,382 | | Restricted stock units | $3,048 | $589 | $6,346 | $589 | | Total stock-based compensation expense | $4,005 | $1,777 | $8,290 | $2,971 | - Total unrecognized stock-based compensation expense was $29.9 million for RSUs (3.0 years weighted-average period) and $5.3 million for options (1.9 years weighted-average period) at June 30, 2022[108] Note 13. Earnout This note describes the contingent earnout shares for eligible equityholders based on specific stock price triggering events - Eligible Markforged Equityholders are entitled to receive up to 14,666,667 Markforged Earnout Shares upon achieving certain stock price triggering events within a five-year period after the Merger[111] - Triggering Event I ($12.50 VWAP) would release 8,000,000 shares, and Triggering Event II ($15.00 VWAP) would release the remaining 6,666,667 shares[112][113] - As of June 30, 2022, neither Earnout Triggering Event had occurred, and the estimated value of Markforged Earnout Shares was $0.55 per share for Triggering Event I and $0.46 per share for Triggering Event II[114] Note 14. Stock Warrants This note details the public and private placement warrants, their fair value measurement, and valuation assumptions - The company assumed 5,374,984 Public Warrants and 3,150,000 Private Placement Warrants upon the Merger, exercisable at $11.50 per share[63] - Private Placement Warrants are classified as a derivative liability and remeasured at fair value each reporting period, resulting in a gain of $1.0 million and $1.7 million for the three and six months ended June 30, 2022, respectively[64][120] Private Placement Warrants Valuation Assumptions | Private Placement Warrants Valuation Assumptions | June 30, 2022 | July 14, 2021 | | :----------------------------------------------- | :------------ | :------------ | | Market price of public stock | $1.85 | $8.56 | | Exercise price | $11.50 | $11.50 | | Expected term (years) | 4.04 | 5.01 | | Volatility | 125.0% | 39.1% | | Risk-free interest rate | 2.98% | 0.85% | | Dividend rate | 0.0% | 0.0% | Note 15. Income Taxes This note discusses the company's income tax expense and the establishment of a full valuation allowance against deferred tax assets - The company recognized a de minimis tax expense for the three and six months ended June 30, 2022 and 2021[122] - A full valuation allowance has been established against federal and state deferred tax assets due to the uncertainty of their realization, primarily from net operating loss carryforwards[124] Note 16. Leases This note details the adoption of ASC 842, recognizing operating lease assets and liabilities, and future minimum lease payments - The company adopted ASC 842 on January 1, 2022, recognizing operating lease ROU assets and liabilities[72][84] - New lease agreements include a 120,681 sq ft office space in Waltham, MA, commencing April 1, 2022, with an undiscounted future minimum rent obligation of approximately $49.3 million[128] Future Minimum Lease Payments (in thousands) | Future Minimum Lease Payments (in thousands) | Amount | | :------------------------------------------- | :----- | | 2022 | $3,268 | | 2023 | $7,957 | | 2024 | $7,140 | | 2025 | $7,216 | | 2026 | $7,385 | | After 2026 | $30,423 | | Total future lease payments | $63,389 | | Less: interest | $(14,225) | | Present value of lease liabilities | $49,164 | Note 17. Commitments and Contingencies This note discloses ongoing legal proceedings, including a patent infringement claim, and management's assessment of potential losses - The company is involved in a patent infringement claim brought by Continuous Composites Inc. in July 2021, which it believes is baseless and intends to vigorously defend[132] - Management does not believe a loss from this legal proceeding is probable and has not recorded a loss contingency[132] Note 18. Net Profit (Loss) Per Share This note presents basic and diluted net profit (loss) per common share and explains the treatment of anti-dilutive securities Net Profit (Loss) Per Common Share | Net Profit (Loss) Per Common Share | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic | $0.02 | $(0.28) | $0.04 | $(0.53) | | Diluted | $0.02 | $(0.28) | $0.04 | $(0.53) | - For periods with a net loss (e.g., three and six months ended June 30, 2021), potentially dilutive securities were excluded from diluted EPS calculation as their inclusion would be anti-dilutive[136] Note 19. Segment Information This note provides revenue disaggregation by geographic markets, as the company operates as a single reportable segment - The company operates as a single segment, with revenue disaggregated by geographic markets: Americas, EMEA, and APAC[137] Revenue by Geographic Market (in thousands) | Revenue by Geographic Market (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Americas | $11,462 | $9,806 | $21,559 | $20,232 | | EMEA | $7,545 | $6,425 | $14,265 | $12,687 | | APAC | $5,220 | $4,188 | $10,262 | $7,620 | | Total | $24,227 | $20,419 | $46,086 | $40,539 | - Revenue from the United States was $10.6 million and $20.1 million for the three and six months ended June 30, 2022, respectively[137] Note 20. Subsequent Events This note discloses significant events occurring after the reporting period, including the planned acquisition of Digital Metal - On July 11, 2022, the company entered an agreement to acquire Digital Metal from Höganäs AB for approximately $32.0 million in cash and 4.1 million shares of Markforged common stock[138] - The acquisition is expected to close in Q3 2022 and aims to expand capabilities into high-throughput metal additive manufacturing[138] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of Markforged's financial condition, results of operations, liquidity, and cash flows Business Overview This section describes Markforged's additive manufacturing platform and its historical financial performance, including accumulated deficit - Markforged operates 'The Digital Forge,' an additive manufacturing platform combining 3D printers, proprietary materials, and cloud-based software[141] - The company has incurred significant operating losses since its 2013 inception, with an accumulated deficit of $67.4 million as of June 30, 2022[142][245] Financial Performance (in millions) | Metric | Six Months Ended June 30, 2022 (in millions) | Six Months Ended June 30, 2021 (in millions) | | :----- | :----------------------------------------- | :----------------------------------------- | | Revenue | $46.1 | $40.5 | | Net Profit (Loss) | $8.3 | $(21.1) | Merger agreement This section summarizes the merger with AONE, which led to the formation of Markforged Holding Corporation and generated significant net proceeds - The merger with AONE was completed on July 14, 2021, leading to the formation of Markforged Holding Corporation[143] - The merger generated $288.8 million in net proceeds, after accounting for redemptions, employee transactions, and transaction costs[144] Recent Developments This section discusses recent events impacting the company, including the ongoing effects of the COVID-19 pandemic and global supply chain disruptions Impact of the COVID-19 Pandemic and Global Supply Chain Disruption This section details the ongoing disruptions caused by COVID-19, such as shipment delays and increased costs, and the company's mitigation efforts - COVID-19 has caused ongoing disruptions, including delays in shipments and installations, decreased utilization of products, and increased costs and longer lead-times for procuring parts and materials[146][147] - The company is actively working with suppliers and customers to minimize impacts, but the extent of future disruptions remains uncertain[147] Key Factors Affecting Operating Results This section identifies the primary drivers of financial performance, including hardware sales, recurring revenue, and investments in business growth - Financial performance is primarily driven by hardware sales, which are a leading indicator for future recurring revenue from consumables, services, and premium software subscriptions[150][151] - Recurring revenue (consumables, services, premium software) constituted 34% of total revenue for the three and six months ended June 30, 2022, up from 30% in the prior year periods[151] - The company continues to invest in scaling its business, expanding sales channels, and research and development to enhance its integrated platform, which may mute short-term profitability[152][153] - Sales of 3D printers historically show seasonality, with higher sales in the third and fourth quarters due to federal and commercial budget cycles[154] Components of Results of Operations This section explains the various components of the income statement, including revenue, cost of revenue, gross profit, operating expenses, and derivative liabilities - Revenue is primarily from hardware, consumables, and services, recognized upon transfer of control or ratably over contract terms[155] - Cost of revenue includes product manufacturing, software subscriptions, maintenance services, personnel, logistics, warranty, and overhead, expected to increase with revenue growth[156][158] - Gross profit and gross margin are influenced by market conditions, product mix, supply chain disruptions, customer utilization, manufacturing costs, and software monetization[159] - Operating expenses (Sales & Marketing, R&D, G&A) are expected to increase due to investments in headcount, product innovation, brand awareness, and public company infrastructure[161][162][163] - Changes in fair value of derivative liabilities primarily reflect changes in the contingent earnout liability and private placement warrant liability[164] Results of Operations This section provides a comprehensive comparison of the company's financial performance for the three and six months ended June 30, 2022 and 2021 Comparison of the three months ended June 30, 2022 and 2021 This section compares the company's financial performance for the three-month periods, highlighting changes in revenue, expenses, and net profit (loss) | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------------------- | :------------------------------------------ | :------------------------------------------ | :------- | :------- | | Revenue | $24,227 | $20,419 | $3,808 | 19% | | Cost of revenue | $11,302 | $8,496 | $2,806 | 33% | | Gross profit | $12,925 | $11,923 | $1,002 | 8% | | Gross margin | 53% | 58% | — | (9)% | | Sales and marketing | $12,873 | $8,255 | $4,618 | 56% | | Research and development | $10,387 | $6,444 | $3,943 | 61% | | General and administrative | $13,478 | $7,959 | $5,519 | 69% | | Loss from operations | $(23,813) | $(10,735) | $(13,078) | 122% | | Change in fair value of warrant liabilities | $976 | $(241) | $1,217 | (505)% | | Change in fair value of contingent earnout liability | $26,742 | — | $26,742 | 100% | | Net profit (loss) | $4,075 | $(11,090) | $15,165 | (137)% | - Revenue increased by 19% YoY, driven by sales of next-gen printers (FX20), consumables (23% increase), and services (78% increase, including $0.4 million from long-term customers)[175][176][177] - Gross profit margin declined from 58% to 53% due to increased costs for mechanical/electronic components, labor, freight, logistics, and a shift in product mix[178] - Operating expenses significantly increased across all categories (Sales & Marketing +56%, R&D +61%, G&A +69%) due to increased personnel, stock-based compensation, tradeshows, and new headquarters lease[180][181][182] - A $27.7 million gain from the decrease in fair value of derivative liabilities (warrants and contingent earnout) contributed to a net profit of $4.075 million, reversing a prior-year loss[185] Comparison of the six months ended June 30, 2022 and 2021 This section compares the company's financial performance for the six-month periods, detailing changes in revenue, expenses, and net profit (loss) | Metric | 6 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2021 (in thousands) | $ Change | % Change | | :-------------------------------------- | :------------------------------------------ | :------------------------------------------ | :------- | :------- | | Revenue | $46,086 | $40,539 | $5,547 | 14% | | Cost of revenue | $21,555 | $16,435 | $5,120 | 31% | | Gross profit | $24,531 | $24,104 | $427 | 2% | | Gross margin | 53% | 59% | — | (10)% | | Sales and marketing | $23,321 | $15,312 | $8,009 | 52% | | Research and development | $20,954 | $11,703 | $9,251 | 79% | | General and administrative | $25,221 | $16,822 | $8,399 | 50% | | Loss from operations | $(44,965) | $(19,733) | $(25,232) | 128% | | Change in fair value of warrant liabilities | $1,669 | $(1,251) | $2,920 | (233)% | | Change in fair value of contingent earnout liability | $51,638 | — | $51,638 | 100% | | Net profit (loss) | $8,314 | $(21,109) | $29,423 | (139)% | - Total revenue increased by 14% YoY, driven by a 7% increase in hardware sales (shift to FX20 printers), a 21% increase in consumables, and a 64% increase in services revenue[191][192] - Gross profit margin decreased from 59% to 53% due to higher costs for components, labor, freight, logistics, and product mix changes[193] - Operating expenses rose significantly (Sales & Marketing +52%, R&D +79%, G&A +50%) due to increased personnel, stock-based compensation, and public company infrastructure costs[194][195][196][197] - A $53.3 million gain from the change in fair value of derivative liabilities (warrants and contingent earnout) resulted in a net profit of $8.314 million, compared to a net loss of $21.109 million in the prior year[198] Non-GAAP Net Profit (Loss) This section presents non-GAAP net profit (loss) by excluding specific non-cash and non-recurring items to provide a clearer view of operational performance - Non-GAAP net profit (loss) excludes stock-based compensation, changes in fair value of warrant and contingent earnout liabilities, and certain non-recurring expenses (including litigation costs)[200][202] Non-GAAP Net Profit (Loss) (in thousands) | Non-GAAP Net Profit (Loss) (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net profit (loss) (GAAP) | $4,075 | $(11,090) | $8,314 | $(21,109) | | Stock compensation expense | $4,912 | $1,777 | $10,334 | $2,971 | | Change in fair value of warrant liabilities | $(976) | $241 | $(1,669) | $1,251 | | Change in fair value of contingent earnout liability | $(26,742) | — | $(51,638) | — | | Non-recurring costs | $1,937 | $930 | $2,984 | $4,633 | | Non-GAAP net loss | $(16,794) | $(8,142) | $(31,675) | $(12,254) | - The company reported a non-GAAP net loss of $(16.794) million for the three months and $(31.675) million for the six months ended June 30, 2022, indicating continued operational losses when excluding non-cash gains[205] Liquidity and Capital Resources This section discusses the company's cash position, funding sources, and cash flow activities, including operating, investing, and financing - The company's operations have historically been funded by convertible preferred stock sales, merger proceeds, and product sales[206] - As of June 30, 2022, cash balances were $243.2 million, deemed sufficient to fund operating and capital expenditure requirements for at least one year, including the Digital Metal acquisition[206][208] - The company currently generates negative operating cash flows due to investments in business growth, R&D, and inorganic growth opportunities[208] Cash Flows (in thousands) | Cash Flows (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | $ Change | % Change | | :------------------------------------ | :----------------------------- | :----------------------------- | :------- | :------- | | Net cash used in operating activities | $(41,574) | $(16,384) | $(25,190) | 154% | | Net cash used in investing activities | $(3,564) | $(1,039) | $(2,525) | 243% | | Net cash provided by (used in) financing activities | $1,181 | $(8,148) | $9,329 | (114)% | | Net change in cash and cash equivalents | $(43,957) | $(25,571) | $(18,386) | 72% | Critical accounting policies and estimates This section outlines the key accounting policies and estimates, such as business combinations, goodwill impairment, and the company's status as an emerging growth company - The company uses the acquisition method for business combinations, allocating purchase price to acquired assets and liabilities based on fair values, with goodwill representing the excess[215] - Goodwill is not amortized but tested for impairment annually or when circumstances indicate, using a qualitative or quantitative assessment[218][219] - Definite-lived intangible assets are evaluated for impairment when indicators are present, comparing undiscounted cash flows to carrying value[221] - As an 'emerging growth company' under the JOBS Act, Markforged has elected to delay adopting new accounting standards until private companies are required to comply[224] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Markforged is not required to provide extensive market risk disclosures. As of June 30, 2022, the company was not subject to any material market or interest rate risk, with investments primarily in short-term U.S. government securities and money market funds. The company has not engaged in hedging activities - Markforged is a smaller reporting company and is not required to provide extensive market risk disclosures[226] - As of June 30, 2022, the company had no material exposure to market or interest rate risk, with investments in short-term U.S. government securities and money market funds[226] - The company has not engaged in any hedging activities since its inception and does not expect to do so[227] Item 4. Controls and Procedures This section details the evaluation of Markforged's disclosure controls and procedures, identifying material weaknesses in internal control over financial reporting as of June 30, 2022 - Management concluded that disclosure controls and procedures were not effective as of June 30, 2022, due to identified material weaknesses in internal control over financial reporting[228] - Material weaknesses include an ineffective control environment (lack of sufficient accounting/IT resources, insufficient segregation of duties), ineffective period-end financial reporting controls, and inadequate controls for identifying and accounting for complex transactions (e.g., share repurchases, warrants, stock awards)[230][231] - Additional material weaknesses were identified in IT general controls, specifically regarding program change management, user access, computer operations, and program development[234][399][400] - Remediation efforts are underway, including hiring additional accounting and IT personnel (e.g., a new CFO in April 2021), designing and implementing formal accounting policies, and strengthening IT general controls[235][236][237][238][401] PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, unregistered sales of equity securities, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings This section discloses ongoing legal proceedings, including a patent infringement claim brought by Continuous Composites Inc. against Markforged. The company believes the claims are baseless and intends to mount a vigorous defense, not expecting a material adverse effect on its financial condition or results of operations - Markforged is currently involved in a patent infringement lawsuit filed by Continuous Composites Inc. in July 2021[132][345] - The company believes the claims are baseless and intends to vigorously defend itself, not anticipating a material adverse effect on its financial condition or results of operations[132][243][345] Item 1A. Risk Factors This comprehensive section outlines various risks that could materially and adversely affect Markforged's business, financial condition, operating results, and prospects. Key risk categories include those related to the company's operating history, the rapidly evolving additive manufacturing industry, business operations, reliance on third parties, international operations, government contracts, litigation, intellectual property, and general risks associated with being a public company - The company has a history of net losses and may not achieve or sustain profitability, with an accumulated deficit of $67.4 million as of June 30, 2022[245][246] - The additive manufacturing industry is characterized by rapid technological change, requiring continuous innovation, and the company faces intense competition from existing and new entrants[260][263] - Significant risks include dependence on a network of value-added resellers (VARs) and third-party suppliers, potential delays in product launches, and the impact of the COVID-19 pandemic and global supply chain disruptions[277][282][271][251] - Operating globally exposes the company to currency exchange rate volatility, tariffs, and complex foreign laws, while sales to the public sector are subject to budgetary constraints and restrictive government contracting policies[321][322][323][331][332] - The company faces risks related to intellectual property protection, potential infringement claims, and liabilities from product defects, data security breaches, and non-compliance with anti-corruption or environmental laws[381][386][294][370][351][358] - As a public company, Markforged incurs increased costs, faces challenges in maintaining effective internal controls (material weaknesses identified), and its stock price may be volatile due to various market and industry factors[389][398][408] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds were reported for the period[425] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported for the period[426] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[427] Item 5. Other Information This section indicates that there is no other information to report for the period - No other information was reported for the period[428] Item 6. Exhibits This section lists all exhibits filed as part of, or incorporated by reference into, the Quarterly Report on Form 10-Q, including organizational documents, lease amendments, and certifications - The exhibits include the Certificate of Incorporation, Bylaws, Amended and Restated First Amendment to Lease, and certifications from the Principal Executive Officer and Principal Financial Officer[431] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the report - The report is signed by Shai Terem, Chief Executive Officer, and Mark Schwartz, Chief Financial Officer, on August 11, 2022[433]