Item 1A. Risk Factors.
An investment in our common stock involves
risks. You should carefully consider the following risks and all of the other information contained in this Annual Report on Form 10-K
before investing in our common stock. The risks described below are those that we believe are the material risks that we face. If any
of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the
trading price of our common stock could decline, and you could lose all or part of your investment. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial
may also adversely affect our business. See “Forward-Looking Statements” in this Annual Report on Form 10-K.
Risks related to our business and industry
We have a history of net losses and may not be able to achieve
profitability for any period in the future or sustain cash flow from operating activities.
We have had a history of net losses since our
inception in 2012, including net losses of $12.8 million and $13.4 million for the years ended December 31, 2020 and 2019, respectively,
and we may never achieve or maintain profitability. As of December 31, 2020, our accumulated deficit was $78.5 million. We cannot
make any assurances that we will be able to increase our revenue to sustain cash flow from operating activities or reach profitability.
As we continue to expand and develop our business,
we expect to incur significant additional expenditures in the areas of sales, marketing, research and development, and customer service
and support. Additionally, as a public company, we expect our legal, accounting and other expenses to be substantially higher than the
expenses we incurred as a private company. Furthermore, we may encounter unforeseen issues that require us to incur additional costs.
We will have to generate and sustain increased revenue to achieve profitability and positive cash flow as a result of these increased
expenditures. Accordingly, if we are not able to achieve or maintain profitability and we incur significant losses in the future, the
market price of our common stock may decline, and you could lose part or all of your investment.
Our operating results may fluctuate significantly from period-to-period
and may fall below expectations in any particular period, which could adversely affect the market price of our common stock.
Our quarterly results of operations may fluctuate
significantly from period-to-period. Accordingly, the results of any one quarter should not be relied upon as an indication of future
performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company
in any period, the price of our common stock would likely decline. Each of the risks described in this section, as well as other factors,
may affect our operating results. For example, factors that may cause our operating results to fluctuate include:
• the addition of new customers or the loss of existing customers;
• the length and unpredictability of our product sales cycle;
• the productivity and growth of our sales force and customer service team;
• unexpected costs or delays related to the COVID-19 pandemic;
• the possibility of seasonality in demand for our products;
• changes in pricing by us or our competitors;
• future accounting pronouncements and changes in accounting policies;
• general economic conditions.
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Our operating expenses are heavily based on our
anticipated product revenue growth, especially as we continue to invest significant resources in building out our sales and marketing
channels and the development of future products. As a result, any shortfall in product revenue in relation to our expectations could cause
significant changes in our operating results from period-to-period and could result in negative cash flow from operations and a decrease
in the price of our common stock.
We have experienced a period of significant growth in recent
years, and our inability to manage this growth could have a material adverse effect on our business, the quality of our products and services
and our ability to retain key personnel.
We have experienced a period of significant growth
in recent years. Our growth has placed increased demands on our management and other resources and will continue to do so in the future.
We may not be able to maintain or accelerate our current growth rate, manage our expanding operations effectively or achieve planned growth
on a timely or profitable basis. Managing our growth effectively will involve, among other things:
• growing our direct sales force and channel partners; and
If demand for our products increases rapidly,
we will need to expand internal production capacity or implement additional outsourcing of components and/or our assembled products. Success
in developing, manufacturing and supporting products manufactured in small volumes does not guarantee comparable success in operations
conducted on a larger scale. Modifying and reconfiguring our facility to increase production capacity may delay delivery of our products.
In addition, component costs as well as additional production, financial, and management control costs may rise. If we are unable to meet
the demand of our customers and deliver products quickly and cost effectively, customers may turn to our competitors. The costs associated
with implementing new manufacturing technologies, methods and processes, including the purchase of new equipment, and any resulting delays,
inefficiencies, and loss of sales, could harm our results of operations.
As we grow, we will also need to make corresponding
improvements to other operational functions, such as our customer service and billing systems, compliance programs and our internal quality
assurance programs. We will also need additional equipment, manufacturing and warehouse space and trained personnel to process higher
volumes of products. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully
implemented or that equipment, manufacturing and warehouse space and appropriate personnel will be available. As we develop additional
products, we may need to bring new equipment on-line, implement new systems, technology, controls and procedures and hire personnel with
different qualifications.
If we are unable to manage our growth effectively,
there could be a material adverse effect on our ability to maintain or increase revenue and profitability, the quality of our products
and services and our ability to retain key personnel. These factors could adversely affect our reputation in the market and our ability
to generate future sales from new or existing customers.
We must develop new products, as well as enhancements to existing
products, and adapt to rapid and significant technological change to remain competitive.
We sell our products in industries that are characterized
by significant enhancements and evolving industry standards. As a result, our customers’ needs are rapidly evolving. If we do not
appropriately innovate and invest in new technologies, our offerings may become less desirable in the markets we serve, and our customers
could move to new technologies offered by our competitors or make products themselves. To achieve market acceptance for our products,
we must effectively anticipate customer requirements, and we must offer products that meet changing customer demands in a timely manner.
Customers may require product features and capabilities that our current products do not have. Any of the current plans we have for future
developments or enhancements are strategic in nature and not commitments to develop such capabilities for our customers. If we fail to
develop products that satisfy customer requirements, our ability to create or increase demand for our products will be harmed.
Without the timely introduction of new products,
services and enhancements, our offerings will likely become less competitive over time, in which case our competitive position and operating
results could suffer. Accordingly, we focus significant efforts and resources on the development and identification of new technologies,
products and markets to further broaden our offerings. In addition, the development cycle for our products and technologies can take multiple
years and require significant investment, including substantial research and development, development of different engineering and manufacturing
workflows, and adjustments to our data and analytics infrastructure. Even if these efforts are successful, the product or enhancement
may not perform as expected. The ultimate success of our new products depends, in large part, on the accuracy of our assessments of the
long-term needs of the industries and markets we serve, and it is difficult to quickly change the design or function of a planned new
product if the market need does not develop as anticipated. As a result, to the extent we fail to accurately forecast the needs of our
customers and timely introduce new and innovative products or services, or fail to obtain desired levels of market acceptance, our business
may suffer and our operating results could be adversely affected. The challenge of identifying market trends and customer needs is even
more demanding for markets that we have recently entered, such as the bioprocessing market, or that we intend to enter in the future,
such as the GxP quality assurance market. There is no certainty that we will effectively identify these trends and needs or introduce
products that are successful.
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We have limited experience in marketing and sales and are in
the early stages of building our sales channels in the life science market and internationally.
We may not be able to market, sell or distribute
our current and future products effectively enough to support our planned growth. Currently, we sell our products through a combination
of direct sales efforts and partnerships with distributors across all of our key markets. During 2020, one of our distributors accounted
for 33% of our total revenue. We are in the process of broadening and diversifying our sales channels across all markets. In the future,
if we fail to maintain good relationships with, or fail to successfully motivate any of our large distributors, our revenue may decline.
If we do not diversify our sales channels and effectively utilize our direct sales force, we will continue to be susceptible to risks
associated with having a large percentage of revenue concentrated with a limited number of distributors.
We have a direct sales force of more than 15 employees
and we intend to increase the size and reach of our sales team in the future, particularly those focused on the life sciences market.
Competition for employees capable of selling expensive instruments within the pharmaceutical and biotechnology industries is intense.
We may not be able to attract and retain personnel or be able to build an efficient and effective sales organization, which could negatively
impact sales and market acceptance of our products and limit our revenue growth and potential profitability.
In addition, the time and cost of establishing
a specialized sales, marketing and customer service force for a particular product or service may be difficult to justify in light of
the revenue projected to be generated by such additional personnel and resources. We also intend to add additional distribution partners
in the life science market, and if we are unable to do so successfully, it will adversely impact our ability to increase the revenue from
our Rebel and ZipChip Interface.
We rely on distributors for the sale of our products
in certain countries outside of the United States. We intend to continue to grow our business internationally and to do so we must attract
additional distributors and retain existing distributors to maximize the commercial opportunity for our products. We exert limited control
over existing distributors under our agreements with them, and if their sales and marketing efforts for our products in their particular
region are not successful, our business would be materially and adversely affected. Locating, qualifying and engaging additional distribution
partners with local industry experience and knowledge will be necessary in at least the short to mid-term to effectively market and sell
our platform in certain countries outside the United States. We may not be successful in finding, attracting and retaining distribution
partners, or we may not be able to enter into such arrangements on favorable terms.
Most of our distribution relationships are non-exclusive
and permit such distributors to distribute competing products. As such, our distributors may not commit the necessary resources to market
our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors
do not perform adequately or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may
not realize long-term international revenue growth.
The global COVID-19 outbreak has significantly affected our business
and operations.
The COVID-19 pandemic and efforts to control its
spread have significantly curtailed the movement of people, goods and services worldwide. In light of the uncertain and rapidly evolving
situation relating to the spread of COVID-19, we have taken precautionary measures intended to minimize the risk of the virus to our employees,
our customers and the communities in which we operate. These measures include temporarily closing our offices to visitors and limiting
the number of employees in our offices to those that are deemed essential for manufacturing and research purposes, as well as virtualizing,
postponing or canceling customer, employee and industry events.
The COVID-19 pandemic has also created many negative
headwinds that present risks to our business and results of operations. For example, it has generally disrupted the operations of our
customers and prospective customers, and may continue to disrupt their operations, including as a result of travel restrictions and/or
business shutdowns, uncertainty in the financial markets or other harm to their business and financial results. These disruptions have
caused reduced capital spend by our existing customers and potential new customers. These disruptions could result in further reductions
to capital expenditure budgets, delayed purchasing decisions, longer sales cycles, extended payment terms or missed payments, and postponed
or canceled projects, any of which would negatively impact our business and operating results, including sales and cash flows. We do not
yet know the net impact that the COVID-19 pandemic may have on our business and cannot guarantee that it will not be materially negative.
Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become
available, the ongoing effects of the COVID-19 pandemic and/or the precautionary measures that we have adopted may create operational
and other challenges, any of which could harm our business and results of operations.
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Historically, a significant portion of our field
sales, customer training events and other application services have been conducted in person, and the rollout of our new products has
historically been supported by our participation at industry conferences. Currently, as a result of the work and travel restrictions related
to the COVID-19 pandemic, and the precautionary measures that we have adopted, substantially all of our field sales and professional services
activities are being conducted remotely, which has resulted in a decrease in our travel expenditures. However, we expect our travel expenditures
to increase in the future, which could negatively impact our financial condition and results of operations. We do not yet know the extent
of the negative impact of such restrictions and precautionary measures on our ability to attract new customers or retain and expand our
relationships with existing customers over the near and long term.
In addition, many of our suppliers are experiencing
operational challenges as a result of COVID-19, which in turn may destabilize our supply chain or otherwise have an adverse effect on
our ability to provide products to our customers. For example, global demand for ventilators and other respiratory care products has reached
previously unseen levels as a result of the COVID-19 outbreak. This has, in turn, resulted in shortages and longer lead times for certain
of our critical components. Our suppliers may have to temporarily close a facility for disinfecting after employees tested positive for
COVID-19, face staffing shortages from employees who are sick or apprehensive about coming to work or be overwhelmed by unexpected demand.
Currently, the difficulties experienced by our suppliers have had minimal impact on our ability to ship products to our customers; however,
if the COVID-19 pandemic continues, it may negatively affect our inventory and delay delivery to our customers, which in turn will adversely
affect our revenue and results of operations. If our suppliers are unable to deliver the components and subassemblies we require on a
timely basis, we cannot guarantee that we will be able to locate alternative sources of supply for our products on acceptable terms, or
at all. If we are unable to adequately purchase appropriate amounts of inventory, our business and results of operations may be materially
and adversely affected.
Additionally, the COVID-19 pandemic has impacted,
and may continue to impact, our headquarters, which is our primary corporate office, sales and marketing center and manufacturing location,
including through the effects of facility closures, reductions in operating hours and other social distancing efforts. For example, if
even a small number of our employees who work in clusters relating to critical functions such as manufacturing, procurement, supply chain,
and research and development, test positive for COVID-19, the entire business function could be temporarily shut down to ensure the safety
of our employees and the effectiveness of business would be severely impacted. Additionally, we cannot predict whether these conditions
and concerns will continue or whether we will experience more significant or frequent disruptions in the future, including the complete
closure of one or more of our facilities.
Furthermore, as a result of the COVID-19 pandemic,
we have required all employees who are able to do so to work remotely on a full-time or partial basis. It is possible that widespread
remote work arrangements may have a negative impact on our operations, the execution of our business plans, the productivity and availability
of key personnel and other employees necessary to conduct our business, and on third party service providers who perform critical services
for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the outbreak and related
governmental actions. If a natural disaster, power outage, connectivity issue or other event occurred that impacted our employees’
ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period
of time. The increase in remote working may also result in increased consumer privacy, data security and fraud risks, and our understanding
of applicable legal and regulatory requirements, as well as the latest guidance from regulatory authorities in connection with the COVID-19
pandemic, may be subject to legal or regulatory challenge, particularly as regulatory guidance evolves in response to future developments.
More generally, the COVID-19 pandemic has had,
and is expected to continue to have, an adverse effect on economies and financial markets globally, leading to a continued economic downturn,
which is expected to decrease technology spending generally and could adversely affect demand for our platforms and services. It is not
possible at this time to estimate the full impact that COVID-19 will have on our business, as the impact will depend on future developments,
which are highly uncertain and cannot be predicted.
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To the extent the COVID-19 pandemic adversely
affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks
described in this “Risk Factors” section, including but not limited to, those related to our ability to increase sales to
existing and new customers, continue to perform on existing contracts, develop and deploy new technologies, expand our marketing capabilities
and sales organization, generate sufficient cash flow to service our indebtedness, and comply with the covenants in the agreements that
govern our indebtedness.
We face intense and growing competition from leading technology
companies as well as from emerging companies. Our inability to compete effectively with any or all of these competitors could affect our
ability to achieve our anticipated market penetration and achieve or sustain profitability.
The markets we serve are highly competitive, and
we expect competition to intensify in the future. This competition may make it more difficult for us to sell our products, and may result
in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of,
market share, any of which would likely seriously harm our business, operating results and financial condition.
We face substantial competition from very large
and experienced enterprises, both public and privately held, including Agilent Technologies, Bruker Corporation, Danaher Corporation, Inficon,
Flir Systems, PerkinElmer, Shimadzu Corporation, Thermo Fisher Scientific, and Waters Corp. Our competitors also include many smaller
companies, including companies established to pursue new and emerging technologies. We also expect additional competition in the future
from new and existing companies with whom we do not currently compete directly. As our industry evolves, our current and potential competitors
may establish cooperative relationships among themselves or with third parties, including companies with whom we have partnerships and
whose products interoperate with our own, that could acquire significant market share, which could adversely affect our business. Any
of these competitive threats, alone or in combination with others, could seriously harm our business, operating results and financial
condition.
Many of our competitors have greater market presence,
longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and
marketing, manufacturing, distribution and other resources than we have. In addition, many of our competitors have broader product offerings
than we do. These companies may attempt to use their greater resources to better position themselves in the market, including by pricing
their products at a discount or bundling them with other products and services in an attempt to rapidly gain market share. Moreover, many
of our competitors have more extensive customer and partner relationships than we do, and may therefore be in a better position to identify
and respond to market developments or changes in customer demands, including successfully developing technologies that outperform our
technologies. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier regardless of product
performance or features. Our larger competitors may be able to better manage large or complex contracts and maintain a broader geographic
presence. Our smaller competitors typically focus on one or a few products, and they are often well entrenched in their chosen markets.
Any of these competitors may respond more quickly to new technology, market developments or pursue new sales opportunities more effectively
than we can. We cannot assure you that we will be able to compete successfully against existing or new competitors. Accordingly, our business
may not grow as expected and our business may suffer.
Currently, we derive the majority of our revenue from our handheld
products and are actively growing the revenue we derive from our desktop products, focused today in the life science market. If we fail
to maintain significant market acceptance in existing markets or fail to successfully increase our penetration in new and expanding markets,
we will not generate expected revenue and our prospects may be harmed.
In 2020, approximately 71% of our product and
service revenue was derived from sales of our handheld products, mainly the MX908. Today, this market consists primarily of first responders,
firefighters, local, state and federal law enforcement, as well as military, customs and homeland security customers. Continued market
acceptance of the products we sell to these organizations is critical to our future success, and the adoption of our products by these
organizations worldwide is a key part of our growth strategy. If market demand for our MX908 product declines, if our products fail to
maintain or achieve greater market acceptance, or if we fail to execute on our sales and customer service efforts in the field forensics
market, we will not be able to grow our revenue sufficiently to achieve or maintain profitability.
We also derive a significant and growing portion
of our revenue from our desktop devices, primarily in the life science market, specifically the antibody therapeutics, cell and gene therapy
and synthetic biology markets. In 2020, approximately 30% of our product and service revenue came from biopharmaceutical companies and
research institutions, collectively. We recently introduced our Rebel product line and our future success will partially depend on our
ability to successfully commercialize this product line. The life sciences scientific community is comprised of a small number of early
adopters and key opinion leaders who significantly influence the rest of the community. The success of life sciences products is due,
in large part, to acceptance by the scientific community and their adoption of certain products as best practice in the applicable field
of research.
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The sizes of the markets for our solutions may be smaller than
estimated and new market opportunities may not develop as quickly as we expect, or at all, limiting our ability to successfully sell our
products.
The markets for our products are rapidly evolving,
making it difficult to predict with any accuracy the sizes of the markets for our current and future solutions. Our estimates of the annual
total addressable market for our current and future solutions are based on a number of internal and third party estimates and assumptions.
In addition, our growth strategy involves launching new solutions and expanding sales of existing solutions into new markets in which
we have limited or no experience. Sales of new or existing solutions into new market opportunities may take several years to develop and
mature, and we cannot be certain that these market opportunities will develop as we expect. For example, new life sciences technology
is often not adopted by the relevant market until a sufficient amount of research conducted using such technology has been published in
peer-reviewed publications. While we believe our assumptions and the data underlying our estimates of the total annual addressable market
for our solutions are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or
estimates, or those underlying the third party data we have used, may change at any time, thereby reducing the accuracy of our estimates.
As a result, our estimates of the annual total addressable market for our solutions may be incorrect.
We rely on assumptions and estimates and data to calculate certain
of our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
In addition to our financial results, our management
regularly reviews a number of operating and financial metrics, including a breakdown of product and service revenue into device sales
and consumables and service revenue (recurring revenue), product placements, cumulative product placements, revenue by customer market
(government, pharmaceutical/biotechnology and academia), and status of pipeline opportunities that represent customers in test, trials,
pilots and full deployments, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial
projections and make strategic decisions. As both the industry in which we operate and our businesses continue to evolve, so too might
the metrics by which we evaluate our businesses and the company. In addition, while the calculation of the metrics we use is based on
what we believe to be reasonable estimates, our internal tools are not independently verified by a third party and have a number of limitations
and, furthermore, our methodologies for tracking these metrics may change over time, for example, the industry breakdown of our customer
revenue by government, pharma/bio and academia sales. Accordingly, investors should not place undue reliance on these metrics.
Our sales cycles can be long and unpredictable, and our sales
efforts require considerable time and expense, which contribute to the unpredictability and variability of our financial performance and
may adversely affect our profitability.
The timing of our revenue is difficult to predict
as we experience extended sales cycles, due in part to our need to educate our customers about our products, the significant purchase
price of our products, the desire of some of our customers to do extended product testing and evaluations, including pilot studies, and
our customers’ willingness to replace their existing solutions and supplier relationships. Product purchases by our customers are
often subject to a variety of other considerations that may extend the length of our sales cycle, including timing of their budget cycles
and approval processes, budget constraints, extended negotiations, user surveys, administrative processing and other delays. In particular,
government departments and agencies, both in the U.S. and in other countries, generally evaluate our products for critical, strategic
applications. As a result, the piloting, testing and evaluation process can be extensive, and orders are often dependent on the availability
of sufficient budgeted funds. The procurement processes for orders by government agencies may involve complex and time-consuming competitive
bidding processes. Bid specifications and contract awards are subject to challenge by competitors, which can further extend the sales
cycle. Furthermore, U.S. state and local hazardous material, emergency management and police organizations must often apply for grants
to obtain the funds needed to procure our products, a process which is lengthy and unpredictable, particularly as to when and whether
a grant will be awarded. As a result, our sales cycle ranges from several months to over a year, and it is difficult to predict when or
if a sale to a potential customer will occur. All of these factors can contribute to fluctuations in our quarterly financial performance
and increase the likelihood that our operating results in a particular quarter will fall below investor expectations. If we are unsuccessful
in closing sales after expending significant resources, or if we experience delays for any of the reasons discussed above, our future
revenue and operating expenses may be materially adversely affected.
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Due to the significant resources required to enable access in
new markets, we must make strategic and operational decisions to prioritize certain markets, technology offerings or partnerships and
there can be no assurance that we will expend our resources in a way that results in meaningful revenue or capitalizes on potential new
markets.
We believe our platform has potential applications
across a wide range of markets and we have targeted certain markets in which we believe we have a higher probability of success or revenue
opportunity or for which the path to commercialize products and realizing or achieving revenue is shorter. For example, in 2018 we entered
into agreements regarding a specific government program opportunity to develop an aerosol vapor detector, and more recently we entered
into several engagements related to the evaluation of our products within the cell therapy and gene therapy markets. We seek to continue
to prioritize opportunities and allocate our resources among our programs to maintain a balance between advancing near-term opportunities
and exploring additional markets for our technology. However, due to the significant resources required for the development of workflows
for new markets, we must make decisions regarding which markets to pursue and the amount of resources to allocate to each. Our decisions
concerning the allocation of research, development, collaboration, management and financial resources toward particular markets or workflows
may not lead to the development of any viable product and may divert resources away from better opportunities. Similarly, our potential
decisions to delay, terminate or collaborate with third parties in respect of certain markets may subsequently also prove to be suboptimal
and could cause us to miss valuable opportunities. In particular, if we are unable to develop additional relevant products and applications
for markets such as antibody therapeutics, cell therapy or the synthetic biology market, it could slow or stop our business growth and
negatively impact our business, financial condition, results of operations, and prospects.
If we market our products for clinical or diagnostic purposes,
our products could become subject to onerous regulation by the U.S. Food and Drug Administration, or FDA, or other regulatory agencies
in the future, which could increase our costs and delay or prevent commercialization of our products, thereby materially and adversely
affecting our business, financial condition, results of operations, and prospects.
We make our platform and devices, including our
MX908, Rebel, and ZipChip Interface, available to customers as research-use-only, or RUO, products. Products that are labeled as RUO are
exempt from compliance with most FDA requirements, including premarket clearance or approval, manufacturing requirements, and others.
A product labeled RUO but which is actually intended for clinical diagnostic use may be viewed by the FDA as adulterated and misbranded
under the Federal Food, Drug, and Cosmetic Act, or FDCA, and subject to FDA enforcement action. The FDA has indicated that when determining
the intended use of a product labeled RUO, the FDA will consider the totality of the circumstances surrounding distribution and use of
the product, including how the product is marketed and to whom. The FDA could disagree with our assessment that our products are properly
marketed as RUOs, or could conclude that products labeled as RUO are actually intended for clinical diagnostic use, and could take enforcement
action against us, including requiring us to stop distribution of our products until we are in compliance with applicable regulations,
which would reduce our revenue, increase our costs and adversely affect our business, prospects, results of operations and financial condition.
In the event that the FDA requires us to obtain marketing authorization of our RUO products in the future, there can be no assurance that
the FDA will grant any clearance or approval requested by us in a timely manner, or at all. Furthermore, although we currently market
our products as RUO, we may in the future make the decision to market them for clinical or diagnostic purposes, or may develop other different
products intended for clinical or diagnostic purposes, which would result in the application of a more onerous set of regulatory requirements.
We depend on our key personnel and other highly qualified personnel,
and if we are unable to recruit, train and retain our personnel, we may not achieve our goals.
Our future success depends on our ability to recruit,
train, retain and motivate key personnel, including our senior management, research and development, manufacturing and sales, customer
service and marketing personnel. In particular, Dr. Knopp, our Chief Executive Officer and one of our co-founders, and Dr. Brown,
our Chief Technology Officer and one of our co-founders, are critical to our vision, strategic direction, culture and products. Each of
our employees may terminate his or her relationship with us at any time and the loss of the services of such persons could have an adverse
effect on our business. We rely on our senior management to manage our existing business operations and to identify and pursue new growth
opportunities. The loss of any member of senior management could significantly delay or prevent the achievement of our business objectives
and their replacement would likely involve significant time and expense.
As we continue to scale our business, we may find
that certain of our products, certain customers or certain markets, including the biopharmaceutical market, may require a dedicated sales
force or sales personnel with different experience than those whom we currently employ. Our continued growth will depend, in part, on
attracting, retaining and motivating highly-trained sales personnel with the necessary scientific background and technical ability to
understand our systems and effectively identify and sell to potential new customers. Identifying, recruiting and training additional qualified
personnel will require significant time, expense and attention. In addition, the continued development of complementary software tools,
such as our analysis tools and visualization software, requires us to compete for highly trained software engineers in the Boston area
and for highly trained customer service personnel globally.
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We do not have fixed term employment contracts
with any of our employees. As a result, our employees could leave our company with little or no prior notice and would be free to work
for a competitor, subject to the terms of their confidentiality, non-solicitation and intellectual property assignment agreements. Because
of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, train, retain
and motivate qualified personnel could materially harm our operating results and growth prospects.
We may be unable to consistently manufacture our devices and
consumables to the necessary specifications or in quantities necessary to meet demand at an acceptable cost or at an acceptable performance
level.
Our products are integrated solutions with many
different components that work together. As such, a quality defect in a single component can compromise the performance of the entire
solution. As we continue to grow and introduce new products, and as our products incorporate increasingly sophisticated technology, it
will be increasingly difficult to ensure our products are produced in the necessary quantities without sacrificing quality. There is no
assurance that we or our third party manufacturers will be able to continue to manufacture our products so that they consistently achieve
the product specifications and quality that our customers expect. Any future design issues, unforeseen manufacturing problems, such as
contamination of our or such third party facilities, equipment malfunctions, aging components, quality issues with components and materials
sourced from third party suppliers, or failures to strictly follow procedures or meet specifications, may have a material adverse effect
on our brand, business, financial condition and operating results and could result in us or our third party manufacturers losing International
Organization for Standardization, or ISO, quality management certifications. If we or our third party manufacturers fail to maintain ISO
quality management certifications, our customers might choose not to purchase products from us. Furthermore, we or our third party manufacturers
may not be able to increase manufacturing to meet anticipated demand or may experience downtime.
In order to meet our customers’ needs, we
attempt to forecast demand for our products and components used for the manufacture of our products. If we fail to accurately forecast
this demand, we could incur additional costs or experience manufacturing delays and may experience lost sales or significant inventory
carrying costs.
The risk of manufacturing defects or quality control
issues is generally higher for new products, whether produced by us or a third party manufacturer, products that are transitioned from
one manufacturer to another, particularly if manufacturing is transitioned or initiated with a manufacturer we have not worked with in
the past, and products that are transferred from one manufacturing facility to another. We cannot assure investors that we and our third
party manufacturers will be able to launch new products on time, transition manufacturing of existing products to new manufacturers, transition
our manufacturing capabilities to a new location or transition manufacturing of any additional consumables in-house without manufacturing
defects. An inability to manufacture products and components that consistently meet specifications, in necessary quantities and at commercially
acceptable costs will have a negative impact and may have a material adverse effect on our business, financial condition and results of
operations.
We depend on a continued supply of components and raw materials
for our products from third party suppliers, and if shortages of these components or raw materials arise, we may not be able to secure
enough components to build new products to meet customer demand or we may be forced to pay higher prices for these components.
We rely on a limited number of suppliers for several
key components utilized in the assembly of our products, and in some cases, such as the glass in our microfluidic chips, swab samplers,
and sensors within our products, we rely on a single supplier for a particular component, subassembly or consumable. Although in many
cases we use standard components for our products, in some cases, components may only be purchased from a limited number of suppliers.
In particular, we are dependent on single suppliers for our Rebel autosampler subassemblies and our MX908 consumables. If, for any reason,
our access to these swab samplers is limited or delayed, we would need to quickly identify and qualify an alternate source of swab samplers.
Identifying and qualifying an alternate source may take time and involve additional expense, and there is no guarantee that the alternate
source will perform as expected. If our customers experienced a shortage or delay in consumables, such as swab samplers, microfluidic
chips, or assay kits, or if these consumables do not perform at the levels our customers expect, our business could be materially and
adversely impacted.
In addition, we maintain relatively low inventory
and acquire components based upon anticipated annual demand. Neither we nor our contract manufacturers enter into long-term supply contracts
for these components, and none of our third party suppliers is obligated to supply products to us for any specific period or in any specific
quantities, except as may be provided in a particular purchase order. We are not a major customer of many of our suppliers, and these
suppliers may therefore give other customers’ needs higher priority than ours. Our industry has experienced component shortages
and delivery delays in the past, and we may experience shortages or delays of critical components in the future as a result of strong
demand in the industry or other factors. Many of the other components required to build our systems are also occasionally in short supply.
Therefore, if shortages or delays arise, we may not be able to secure enough components at reasonable prices or of acceptable quality
to build new products, resulting in an inability to meet customer demand or our own operating goals, which could adversely affect our
customer relationships, business, operating results and financial condition.
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Additionally, damage to a manufacturing facility
or other property of any of our suppliers, due to fire, flood or other natural disaster or casualty event may have a material adverse
effect on our business, financial condition and results of operations.
Our current research and development efforts may not produce
significant revenue for several years, if at all.
Developing our products is expensive, and the
investment in product development may involve a long payback cycle. Our investment in research and development may not result in marketable
products or may result in products that take longer to generate revenue, or generate less revenue, than we anticipate. For the year ended
December 31, 2020, our research and development expenses were $8.2 million, or 30% of our total revenue. Our future plans include
significant investments in research and development of product opportunities for expansion of our handheld products and new application
areas for our desktop products. We believe that we must continue to dedicate a significant amount of resources to our research and development
efforts to maintain our competitive position. However, we may not receive significant revenue from these investments for several years,
if at all.
Undetected errors or defects in our products, or errors made
by the end users of our products, could harm our reputation and decrease market acceptance of our products.
Our devices and consumables, as well as the software
that accompanies them, may contain undetected errors or defects when first introduced or as new versions are released. Disruptions or
other performance problems with our products or software may adversely impact our customers’ research or business, harm our reputation
and result in reduced revenue or increased costs associated with product repairs or replacements. Further, in the event that an end user
makes an error or fails to analyze a particular substance correctly, our product may be associated with a failure to identify a substance
that ultimately turns out to be harmful, or, conversely, be associated with a false alarm raised over a substance that turns out to be
benign. We also provide customer support services, such as in connection with our “Reachback” program described in the “Business”
section of this Annual Report on Form 10-K. It is possible that incorrect or inaccurate information may be delivered to a customer
in the context of one or more support consultations. If any such errors or mistakes occur, we may also incur significant costs, the attention
of our key personnel could be diverted or other significant customer relations problems may arise. We may also be subject to unwanted
media attention, warranty claims or breach of contract for damages related to errors or defects in our products and solutions.
If we experience a significant disruption in our information
technology systems or breaches of data security, our business could be adversely affected.
We rely on information technology systems to keep
financial records, facilitate our research and development initiatives, manage our manufacturing operations, maintain quality control,
fulfill customer orders, maintain corporate records, communicate with staff and external parties and operate other critical functions.
Our information technology systems are potentially vulnerable to disruption due to breakdown, malicious intrusion and computer viruses
or other disruptive events including, but not limited, to natural disasters and catastrophes. Cyberattacks and other malicious internet-based
activity continue to increase and cloud-based platform providers of services have been and are expected to continue to be targeted. In
addition to traditional computer hackers, malicious code (such as viruses and worms), employee theft or misuse, denial-of-service attacks
and sophisticated nation-state and nation-state supported actors now engage in attacks (including advanced persistent threat intrusions).
Despite significant efforts to create security barriers to such threats, it is virtually impossible for us to entirely mitigate these
risks. If our security measures are compromised as a result of third party action, employee or customer error, malfeasance, stolen or
fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur
significant liability. If we were to experience a prolonged system disruption in our information technology systems or those of certain
of our vendors, it could negatively impact our ability to serve our customers, which could adversely impact our business. If operations
at our facilities were disrupted, it may cause a material disruption in our business if we are not capable of restoring functionality
on an acceptable timeframe. In addition, our information technology systems (and those of our vendors and partners) are potentially vulnerable
to data security breaches, whether by internal bad actors (e.g., employees) or external bad actors (attacks of which are becoming increasingly
sophisticated, including social engineering and phishing scams), which could lead to the exposure of personal data, sensitive data and
confidential information to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual
property, or could lead to the exposure of personal information (including sensitive personal information) of our employees, customers
and others, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations.
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In addition, any such access, disclosure or other
loss or unauthorized use of information or data could result in legal claims or proceedings, regulatory investigations or actions, and
other types of liability under laws that protect the privacy and security of personal information, including federal, state and foreign
data protection and privacy regulations, violations of which could result in significant penalties and fines. In addition, although we
seek to detect and investigate all data security incidents, security breaches and other incidents of unauthorized access to our information
technology systems and data can be difficult to detect and any delay in identifying such breaches or incidents may lead to increased harm
and legal exposure of the type described above.
The cost of investigating, mitigating and responding
to potential data security breaches and complying with applicable breach notification obligations to individuals, regulators, partners
and others can be significant. Our insurance policies may not be adequate to compensate us for the potential costs and other losses arising
from such disruptions, failures or security breaches. In addition, such insurance may not be available to us in the future on economically
reasonable terms, or at all. Further, defending a suit, regardless of its merit, could be costly, divert management attention and harm
our reputation.
Our international operations may raise additional risks, which
could have an adverse effect on our operating results.
For the year ended December 31, 2020, international
revenue accounted for 18% of our total revenue. We expect our international revenue and operations will continue to expand in the future.
Our international operations are subject to a variety of risks that we do not face in the United States, including:
• general economic conditions in the countries in which we operate;
• compliance with foreign technical standards;
• increased length of time for shipping and acceptance of our products;
• increased exposure to foreign currency exchange rate risk;
• reduced protection for intellectual property rights in some countries; and
• political unrest, war, incidents of terrorism, or responses to such events.
As we continue to expand our business globally,
our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our
international operations.
Our overall success in international markets depends,
in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be successful
in developing and implementing policies and strategies that will be effective in managing these risks in each country where we do business.
Our failure to manage these risks successfully could harm our international operations, reduce our international sales and increase our
costs, thus adversely affecting our business, operating results and financial condition.
Compliance with global privacy and data security requirements
could result in additional costs and liabilities to us or inhibit our ability to collect and process data globally, and the failure to
comply with such requirements could subject us to significant fines and penalties, which may have a material adverse effect on our business,
financial condition or results of operations.
The regulatory framework for the collection, use,
safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is likely to remain uncertain for
the foreseeable future. Internationally, laws, regulations and standards in many jurisdictions apply broadly to the collection, use, retention,
security, disclosure, transfer and other processing of personal information. For example, the European General Data Protection Regulation,
or the GDPR, which took effect across all member states of the European Economic Area, or the EEA, in May 2018, greatly increased
the European Commission’s jurisdictional reach of its laws and adds a broad array of requirements for handling personal data. The
GDPR, together with national legislation, regulations and guidelines of the EEA member states and the United Kingdom governing the processing
of personal data, impose strict obligations and restrictions on the ability to collect, use, retain, protect, disclose, transfer and otherwise
process personal data. In particular, the GDPR includes obligations and restrictions concerning the consent and rights of individuals
to whom the personal data relates, the transfer of personal data out of the European Economic Area or the United Kingdom, security breach
notifications and the security and confidentiality of personal data. The GDPR authorizes fines for certain violations of up to 4% of global
annual revenue or €20 million, whichever is greater.
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All of these evolving compliance and operational
requirements may require us to modify our data processing practices and policies, which in turn could distract management or divert resources
from other initiatives and projects. Any failure or perceived failure by us to comply with any applicable laws and regulations relating
to data privacy and security could result in damage to our reputation, as well as proceedings or litigation by governmental agencies or
other third parties, including class action privacy litigation in certain jurisdictions, which would subject us to significant fines,
sanctions, awards, penalties or judgments, all of which could have a material adverse effect on our business, financial condition, results
of operations, and prospects.
Our loan and security agreement contains covenants, which restrict
our operating activities, and we may be required to repay the outstanding indebtedness in an event of default, which could have a material
adverse effect on our business, financial condition, results of operations, and prospects.
On March 11, 2021, we entered into an Amended
and Restated Loan and Security Agreement, or the 2021 Revolver, with Signature Bank, or the Lender,
to replace our existing term loan. This agreement created a revolving line of credit totaling $25.0 million and eliminated the existing
term loan. On March 11, 2021, we used $14.5 million of proceeds from the revolving line of credit to repay all amounts then due on
the existing term loan. Until we have repaid such indebtedness, the 2021 Revolver subjects us to various customary covenants, including
requirements as to financial reporting and financial covenants (including unrestricted minimum cash level of $10.0 million), and restrictions
on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change
in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property
of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or make other distributions
on capital stock other than dividends payable solely in capital stock, to redeem capital stock, to enter into in-bound licensing agreements,
to engage in transactions with affiliates, and to encumber our intellectual property. Our business may be adversely affected by these
restrictions on our ability to operate our business.
We are permitted to make interest-only payments
on the revolving line of credit through March 11, 2024, at which time all outstanding indebtedness shall be immediately due and payable.
However, we may be required to repay the outstanding indebtedness under the revolving line of credit if an event of default occurs under
the 2021 Revolver. An event of default will occur if, among other things, we fail to make required payments under the 2021 Revolver; we
breach any of our covenants under the 2021 Revolver, subject to specified cure periods with respect to certain breaches; the Lender determines
that a material adverse change (as defined in the 2021 Revolver) has occurred; we or our assets become subject to certain legal proceedings,
such as bankruptcy proceedings; we are unable to pay our debts as they become due; or we default on contracts with third parties which
would permit the third party to accelerate the maturity of such indebtedness or that could have a material adverse change on us. We may
not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the
time any such event of default occurs. In such a case, we may be required to delay, limit, reduce or terminate our product development
or operations or grant to others rights to develop and market products that we would otherwise prefer to develop and market ourselves.
The Lender could also exercise its rights as secured lender to take possession of and to dispose of the collateral securing the revolving
line of credit, which collateral includes substantially all of our property (excluding intellectual property, which is subject to a negative
pledge). Our business, financial condition, results of operations, and prospects could be materially adversely affected as a result of
any of these events.
The majority of our operations are currently conducted at a single
location and any disruption at our facility could negatively impact our operations and increase our expenses.
Our headquarters in Boston, Massachusetts contains
nearly all of our corporate and administrative functions, the majority of our research, and all of our in-house manufacturing. A natural
or other disaster, such as a fire or flood, could cause substantial delays in our operations, damage or destroy our manufacturing equipment
or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods and other natural disasters
may not be adequate to cover our losses in any particular case. With or without insurance, damage to our manufacturing facility or our
other property, or to any of our suppliers, due to fire, flood or other natural disaster or casualty event may have a material adverse
effect on our business, financial condition and results of operations.
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Risks related to sales of products to the U.S. Government
For the year ended December 31, 2020, revenue
from government customers accounted for 70% of our product and service revenue. The majority of these product and service revenues were
generated from agencies and departments of the U.S. government. In addition, substantially all of our revenue from license and contracts
revenue are derived from contracts or sub-contracts related to the U.S. government. We expect significant revenue from U.S. government
contracts for the foreseeable future. There is considerable risk associated with deriving a material portion of our revenue from sales
to the U.S. government, including the risks described below.
A significant portion of our business depends on sales to the
public sector, and our failure to receive and maintain government contracts or changes in the contracting or fiscal policies of the public
sector could have a material adverse effect on our business.
We derive a significant portion of our revenue
from contracts that we have, either directly or through distribution partners, with federal, state, local and foreign governments and
government agencies, and we believe that the success and growth of our business will continue to depend on our successful procurement
of government contracts. For example, we have historically derived, and expect to continue to derive, a significant portion of our revenue
from sales to agencies of the U.S. federal government, either directly by us or through other distribution partners.
Sales to such government agencies are subject
to a number of challenges and risks. Selling to government agencies can be highly competitive, expensive and time-consuming, often requiring
significant upfront time and expense, without any assurance that these efforts will generate a sale. We also must comply with laws and
regulations relating to the formation, administration and performance of contracts, which provide public sector customers certain rights
that are not typically found in commercial contracts.
Accordingly, our business, financial condition,
results of operations, and prospects may be adversely affected by certain events or activities, including, but not limited to:
• changes in government programs or applicable requirements;
Any such event or activity, among others, could
cause governments and governmental agencies to delay or refrain from purchasing our products and services in the future, reduce the size
or payment amounts of purchases from existing or new government customers, or otherwise have an adverse effect on our business, results
of operations, financial condition and prospects.
U.S. government programs are limited by budgetary constraints
and political considerations and are subject to uncertain future funding levels that could result in the termination of programs.
U.S. government agency and department purchases
are often strategic in nature and large in size. Therefore, reductions in federal funding levels that impact our customers could negatively
affect the size of our customers’ orders or lead to cancellation of orders. Government contracts are often subject to more extensive
scrutiny and publicity than commercial contracts. The number and terms of new government contracts signed can be affected significantly
by political and economic factors, such as pending elections and revisions to government tax policies. Negative publicity related to our
government contracts, regardless of its accuracy, may damage our business by affecting our ability to compete for new contracts. A decline
in security-related government spending for any reason, or a shift away from programs that we address, could hurt our sales, put pressure
on our prices and reduce our revenue and margins.
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A multi-year U.S. government program may be implemented
through the award of many different individual contracts, grants, cooperative agreements and subcontracts or other subawards. For U.S.
government programs, program funding is subject to Congressional appropriations. Congress generally appropriates funds on a fiscal year
basis even though a program may continue for several years. Government programs are often only partially funded initially, and additional
funds are committed only as Congress makes further appropriations. The termination of a program or failure to commit funds to a program
would result in a loss of anticipated future revenue attributable to that program, which could materially harm our business.
Our contracts with the U.S. government may impose requirements
that may be unfavorable to us and that may have a material adverse effect on our growth prospects and operating results.
There are inherent risks in contracting with the
U.S. government. The U.S. government can typically terminate, reduce orders under or otherwise modify any of its contracts with us for
its convenience (i.e., without cause) whether or not we have failed to perform under the terms of the applicable contract. In such case,
the government would not be required to pay us for the lost profits for the unperformed work. A termination arising out of our default