Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes
appearing in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy
for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those
factors set forth in the ‘‘Risk Factors’’ section of this Annual Report on Form 10-K, our actual results
could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion
and analysis.
Overview
We have developed an innovative
suite of purpose-built handheld and desktop mass spectrometry, or Mass Spec, devices for the point-of-need. Leveraging our proprietary
platform technology, we make the extraordinary analytical power of Mass Spec available in devices that are significantly smaller and more
accessible than conventional laboratory instruments. Our Mass Spec devices are used at the point-of-need to interrogate unknown and invisible
materials and provide quick, actionable answers to directly address some of the most critical problems in life sciences research, bioprocessing,
industrial biotech, forensics and adjacent markets.
60
We create simplified measurement
devices that our customers can use as accurate tools where and when their work needs to be done, rather than overly complex and centralized
analytical instrumentation. We believe the insights and answers our devices provide will accelerate workflows, reduce costs, and offer
transformational opportunities for our end users.
Front-line workers rely upon our
handheld devices to combat the opioid crisis and detect counterfeit pharmaceuticals and illicit materials in the air or on surfaces at
levels 1,000 times below their lethal dose. Our desktop devices are accelerating development and production of biotherapeutics by identifying
and quantifying extracellular species in bioprocessing critical to cell health and productivity. They sit alongside bioreactors and fermenters
producing drug candidates, functional proteins, cell and gene therapies, and synthetic biology derived products. We believe the insights
and answers our devices provide accelerate workflows, reduce costs, and offer transformational opportunities for our end users. The term
“products” as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
refers to the MX908, Rebel and ZipChip Interface.
Since inception,
we have focused substantially all of our resources on designing, developing and building our proprietary Mass Spec platform and associated
technologies, supporting software improvements and data analysis, organizing and staffing our company, planning our business, raising
capital, and providing general and administrative support for these operations. To date, we have funded our operations primarily with
proceeds from sales of preferred stock and borrowings under loan agreements and, most recently, with proceeds from our initial
public offering, or IPO. On December 22, 2020, we completed our IPO, pursuant to which we issued and sold 7,475,000 shares of common
stock, inclusive of 975,000 shares pursuant to the full exercise of the underwriters’ option to purchase additional shares. We received
net proceeds of $136.6 million after deducting underwriting discounts and commissions and other offering costs.
Since our inception, we have incurred
significant operating losses. Our ability to generate revenue sufficient to achieve profitability will depend on the successful further
development and commercialization of our products. We generated revenue of $26.9 million and $18.0 million for the years ended December 31,
2020 and 2019, respectively, and incurred net losses of $12.8 million and $13.4 million for those same years. As of December 31,
2020, we had an accumulated deficit of $78.5 million. We expect to continue to incur net losses as we focus on growing commercial sales
of our products in both the United States and international markets, including growing our sales teams, scaling our manufacturing operations,
continuing research and development efforts to develop new products and further enhance our existing products. Further, we expect to incur
additional costs associated with operating as a public company. As a result, we will need substantial additional funding for expenses
related to our operating activities, including selling, general and administrative expenses and research and development expenses.
Because of the numerous risks
and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount
of increased expenses or when, or if, we will be able to achieve or maintain profitability. Until such time, if ever, as we can generate
substantial revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings,
debt financings and strategic alliances. We may be unable to raise additional funds or enter into such other agreements or arrangements
when needed on favorable terms, or at all. If we are unable to raise capital or enter into such agreements as, and when, needed, we may
have to significantly delay, scale back or discontinue the further development and commercialization efforts of one or more of our products,
or may be forced to reduce or terminate our operations.
We believe that our existing cash
and cash equivalents, will enable us to fund our operating expenses, capital expenditure requirements and debt service payments into 2023.
We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than
we expect. See “Liquidity and Capital Resources.”
COVID-19
In December 2019, a novel
strain of coronavirus, or COVID-19, emerged in Wuhan, Hubei Province, China. Less than four months later, in March 2020, the World
Health Organization declared COVID-19 a pandemic, and the virus has now spread to many other countries and regions and every state within
the United States, including Massachusetts, where our primary offices and manufacturing facility are located. The impact of this pandemic
has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result
in significant disruptions to the global economy, as well as businesses and capital markets around the world.
Impacts in 2020 to our business
as a result of COVID-19 include disruptions to our manufacturing operations and supply chain caused by facility closures, reductions in
operating hours, staggered shifts and other social distancing efforts, decreased productivity and unavailability of materials or components,
limitations on our employees’ and customers’ ability to travel, and delays in product installations, trainings or shipments
to and from affected countries and within the United States. 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, including 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. In addition, during 2020, we temporarily reduced the manufacturing and distribution of our products at our
facility in Boston, Massachusetts.
61
Disruptions in our customers’
operations have impacted and may continue to impact our business. For example, laboratory shutdowns and reduced capital spend have negatively
impacted our ZipChip Interface and consumables sales, resulting in a decrease in ZipChip Interface sales from 2019 to 2020. While this
decrease did not significantly impact our total revenue in 2020, the impact could be more significant in the future. We are focused on
navigating the challenges presented by COVID-19, with a primary focus on preserving our liquidity and managing our cash flows by taking
preemptive action to enhance our ability to meet our short-term liquidity needs. To address actual and expected reductions in revenue
and cash flows, we reduced our discretionary spending and reduced payroll costs through temporary employee furloughs and salary reductions.
Starting in July 2020, we reinstated our furloughed employees and pay rates.
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. While we maintain an inventory of finished products and raw materials used
in our products, a prolonged pandemic could lead to shortages in the raw materials necessary to manufacture our products. If we experience
a prolonged disruption in our manufacturing, supply chains or commercial operations, or if demand for our products is significantly reduced
as a result of the COVID-19 pandemic, we would expect to experience a material adverse impact on our business, financial condition, results
of operations and prospects.
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.
Factors affecting our performance
We believe that our financial
performance has been and in the foreseeable future will continue to be primarily driven by the following factors. While each of these
factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in
order to sustain our growth and improve our results of operations. Our ability to successfully address the factors below is subject to
various risks and uncertainties, including those described under the heading “Risk Factors.”
Device sales
Our financial performance has
largely been driven by, and in the future will continue to be impacted by, the rate of sales of our handheld and desktop devices. Management
focuses on device sales as an indicator of current business success and a leading indicator of likely future recurring revenue from consumables
and services. We expect our device sales to continue to grow as we increase penetration in our existing markets and expand into, or offer
new features and solutions that appeal to, new markets.
We plan to grow our device sales
in the coming years through multiple strategies including expanding our sales efforts domestically and globally and continuing to enhance
the underlying technology and applications for life sciences research related to our Rebel and ZipChip Interface. As part of this strategy
and in an effort to increase the rate of sales of our devices, we increased our sales force by 60% from January 1, 2019 through December 31,
2020, with 16 commissionable sales representatives as of December 31, 2020. We regularly solicit feedback from our customers and
focus our research and development efforts on enhancing our devices and enabling our customers to use additional applications that address
their needs, which we believe in turn helps to drive additional sales of our devices and consumables.
Our sales process varies considerably
depending upon the type of customer to whom we are selling. Historically, our handheld devices have been used by state, federal and foreign
governments and governmental agencies. Our sales process with government customers is often long and involves multiple levels of approvals,
testing and, in some cases, trials. Device orders from a government customer are typically large orders and can be impacted by the timing
of their capital budgets. As a result, the revenue for our handheld devices can vary significantly from period-to-period and has been
and may continue to be concentrated in a small number of customers in any given period.
62
Our desktop devices are typically
used by the pharmaceutical, biotechnology and academia markets. Our sales cycles within these markets tend to vary based on the size of
the customer and the number of devices they purchase. Our shortest sales cycles are typically for small laboratories and individual researchers
where, in some cases, we receive purchase orders from these customers within three months. Our sales process with other institutions can
be longer with most customers submitting purchase orders within six to twelve months. Given the variability of our sales cycle, we have
in the past experienced, and likely will in the future experience, fluctuations in our desktop device sales on a period-to-period basis.
Additionally, we have experienced and may continue to experience the impact of laboratory shutdowns related to COVID-19 on device and
consumable sales to these markets.
Recurring revenue
We regularly assess trends relating
to recurring revenue which includes consumables and services based on our product offerings, our customer base and our understanding of
how our customers use our products. Consumables and service revenue was 14% and 15% of total product and service revenue for the years
ended December 31, 2020 and 2019, respectively. Our recurring revenue as a percentage of total product and service revenue will vary
based upon new device placements in the period. As our device installed base expands, recurring revenue on an absolute basis is expected
to increase and over time should be an increasingly important contributor to our revenue.
Revenue from the sales of consumables
will vary by type of device. We expect that consumables and service revenue as a percentage of the original device price to be higher
for our desktop devices (Rebel and ZipChip Interface) than for our handheld device (MX908). While we sell single-use swab samplers for
MX908 to be used in liquid and solid materials analysis, there are a number of other applications that the MX908 can be used for that
do not require consumables. Rebel and ZipChip Interface require consumables kits for all areas of operations. Currently, Rebel customers,
who are actively utilizing the device, are consuming on average one 200-sample kit per month; however, Rebel is a new product and purchasing
patterns related to our consumables kits are evolving. We expect that the number of kits sold per month will vary over the short term.
In time, we expect Rebel consumables kits sales to become more consistent as our installed base grows and our customers establish usage
patterns. At maximum potential capacity, with continuous operation, the Rebel can consume approximately one 200-sample kit per day.
Revenue mix and gross margin
Our revenue is derived from sales
of our devices, consumables and services. There will be fluctuations in mix between devices and consumables from period-to-period. Over
time, as our device installed base grows and we see adoption of Rebel, we expect consumables revenue to constitute a larger percentage
of product and service revenue. However, the percentage will be subject to fluctuation based upon our handheld sales in a period. In addition,
our selling price and, consequently, our margins, are higher for those devices and consumables that we sell directly to customers as compared
to those that we sell through distributors. While we expect the mix of direct sales as compared to sales through distributors to remain
relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies.
Future device and consumable selling
prices and gross margins may fluctuate due to a variety of factors, including the introduction by others of competing products and solutions.
We aim to mitigate downward pressure on our average selling prices by increasing the value proposition offered by our devices and consumables,
primarily by expanding the applications for our devices and increasing the quantity and quality of data that can be obtained using our
consumables.
Product adoption
We monitor our customers’
stage of adoption of our products to provide insight into the timing of future potential sales and to help us formulate financial projections.
Typical stages of adoption include testing, trials, pilot and deployment as follows:
63
Key Business Metrics
We regularly review the number
of product placements and cumulative product placement as key metrics to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections, and make strategic decisions. We believe that these metrics are representative
of our current business; however, we anticipate these will change or may be substituted for additional or different metrics as our business
grows.
During the years ended December 31,
2020 and 2019, our product placements (units recognized as revenue) by device type were as follows:
Year Ended December 31,
Product Placements:
ZipChip Interface 26 43
The number of product placements
vary considerably from period-to-period due to the type and size of our customers and concentrations among larger government customers
as described above. We also have been impacted by laboratory shutdowns related to COVID-19. We expect continued fluctuations in our period-to-period
number of product placements.
As of December 31, 2020 and
2019, our cumulative product placements consisted of the following number of devices:
December 31,
Cumulative Product Placements:
Cumulative Product Placements 1,361 971
Components
of Our Results of Operations
Revenue
Product and Service Revenue
We generate product and service
revenue from the sale of our devices and recurring revenue from the sale of consumables and services. Device sales accounted for 86% and
85% of our product and service revenue for the years ended December 31, 2020 and 2019, respectively. Consumables and service revenue
accounted for 14% and 15% of our product and service revenue for the years ended December 31, 2020 and 2019, respectively.
Our current device offerings include:
· Handheld devices—MX908; and
· Desktop devices—Rebel and ZipChip Interface.
We sell our devices directly to
customers and through distributors. Each of our device sales drives various streams of recurring revenue comprised of consumable product
sales and service revenue.
Our consumables consist of:
· MX908—accessories and swabs;
· Rebel—consumables kit with a microfluidic chip and standards; and
· ZipChip Interface—microfluidic chip, reagent and assay kits.
Rebel and ZipChip Interface consumables
can only be used with our devices and there are no alternative after-market options that can be used as a substitute. Each chip is used
for a defined number of samples (or runs). We recognize revenue from the sale of consumables as the consumable products are shipped.
We also offer our customers extended
warranty and service plans. Our extended warranty and service plans are offered for periods beyond the standard one-year warranty that
all of our customers receive. These extended warranty and service plans generally have fixed fees and terms ranging from one additional
year to four additional years. We recognize revenue from the sale of extended warranty and service plans over the respective coverage
period, which approximates the service effort provided by us.
64
We expect consumables and service
revenue to increase in future periods as our installed base grows and we are able to generate recurring sales.
Licenses and contract revenue
License and contract agreements
are arrangements whereby we provide engineering services for the development of our technology platform for specific programs or new and
expanding applications of our technologies for future commercial endeavors. Our license and contract agreements are with the U.S. government
and commercial entities (who may be contracting with the government). Contracts typically include compensation for labor effort and materials
incurred related to the deliverables under the contract. Our license and contract revenue was primarily related to one customer during
the years ended December 31, 2020 and 2019.
During the years ended December 31,
2020 and 2019, our revenue was comprised of revenue from the following sources:
Year Ended December 31,
(in thousands)
Product and service revenue:
Consumables and service revenue 3,487 2,306
Our product and service revenue
is comprised of sales of our handheld and desktop devices and related consumables and service contracts to end-users in the government,
pharmaceuticals/biotechnology and academia markets as follows:
Year Ended December 31,
(in thousands)
Product and Service Revenue by Device:
Total product and service revenue $ 24,756 $ 15,344
Year Ended December 31,
(in thousands)
Product and Service Revenue by Market:
Total product and service revenue $ 24,756 $ 15,344
We sell our products primarily
in the United States; however, we are expanding our global sales efforts as we see traction in our products and assess market needs. The
majority of our international sales are through a distribution channel.
Cost of Revenue, Gross Profit and Gross Margin
Product cost of revenue primarily
consists of costs for raw material parts and associated freight, shipping and handling costs, royalties, contract manufacturer costs,
salaries and other personnel costs, overhead and other direct costs related to those sales recognized as product revenue in the period.
Cost of revenue for services primarily
consists of salaries and other personnel costs, travel related to services provided, facility costs associated with training, warranties
and other costs of servicing equipment on a return-to-factory basis and at customer sites. License and contract cost of revenue primarily
consists of salaries and other personnel costs, materials, travel and other direct costs related to the revenue recognized in the period.
The license and contract cost of revenue will vary based upon the type of contract, including whether it is primarily for development
services or for both materials and development services.
65
We expect that our cost of revenue
will increase or decrease to the extent that our revenue increases and decreases and depending on how many contracts we have ongoing at
any given point in time and the stage of those contracts.
Gross profit is calculated as
revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods
will depend on a variety of factors, including: market conditions that may impact our pricing, sales mix among devices, sales mix changes
among consumables, excess and obsolete inventories, our cost structure for manufacturing operations relative to volume, and product warranty
obligations. Our gross profit in future periods will vary based upon our channel mix and may decrease based upon our distribution channels
and the potential to establish original equipment manufacturing channels for certain components of our technology platform which would
have a lower gross margin.
We expect that our gross profit
margin for product and service will increase over the long term as our sales and production volumes increase and our cost per unit decreases
due to efficiencies of scale. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the
efficiency of our manufacturing, which we believe will reduce costs and increase our gross margin. We expect that our gross profit margin
for license and contract will remain consistent for our contracts that are cost reimbursement contracts.
Operating Expenses
Research and development expenses
Research and development expenses
consist primarily of costs incurred for our research activities, product development, hardware and software engineering and consultant
services and other costs associated with our technology platform and products, which include:
· research materials and supplies; and
We believe that our continued
investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future
periods.
Selling, general and administrative expenses
Selling, general and administrative
expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales and marketing, finance, legal,
human resources and general management, as well as professional services, such as legal, audit and accounting services. We expect selling,
general and administrative expenses to increase in future periods as the number of sales, sales application specialists and marketing
and administrative personnel grows and we continue to introduce new products, invest in demonstration equipment, broaden our customer
base and grow our business. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director
and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.
Other Income (Expense)
Interest expense
Interest expense consists of interest
expense associated with outstanding borrowings under our loan and security agreements and the amortization of deferred financing costs
and debt discounts associated with such arrangements. In 2019, our interest expense also included our loss on debt extinguishment resulting
from the early repayment of debt and end of term payment with proceeds from a new debt facility.
Other income (expense), net
Other income (expense),
net consists primarily of the change in fair value of our redeemable convertible preferred stock warrants. We classified warrants for
the purchase of shares of our redeemable convertible preferred stock as a liability on our consolidated balance sheets as these warrants
were freestanding financial instruments that may have required us to transfer assets upon exercise. The warrant liability was initially
recorded at fair value upon the date of issuance of each warrant and was subsequently remeasured to fair value at each reporting date.
Changes in the fair value of the warrant liability were recognized as a component of other income (expense), net in the consolidated statements
of operations and comprehensive loss. On December 22, 2020, immediately prior to the closing of our IPO, the warrants to purchase
preferred stock were converted into warrants to purchase common stock, and the fair value of the warrant liability at that time was reclassified
to additional paid-in capital. As a result, subsequent to the closing of our IPO, we no longer remeasure the fair value of the warrant
liability at each reporting date.
66
Other income (expense), net also
consists of miscellaneous other income and expense unrelated to our core operations.
Provision for Income Taxes
We have not recorded any
U.S. federal or state income tax benefits for the net operating losses we have incurred in each year or for the research and
development tax credits we generated in the United States, as we believe, based upon the weight of available evidence, that it is
more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As of December 31,
2020, we had U.S. federal and state net operating loss carryforwards of $59.2 million and $35.9 million, respectively, which may be
available to offset future taxable income and begin to expire in 2032 and 2025, respectively, of which $24.8 million of federal net operating losses do not expire. As of December 31, 2020, we
also had U.S. federal and state research and development tax credit carryforwards of $4.1 million and $2.3 million, respectively,
which may be available to offset future tax liabilities and begin to expire in 2032 and 2029, respectively. We have recorded a full
valuation allowance against our net deferred tax assets at each balance sheet date.
Results of Operations
The results of operations
presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Annual
Report on Form 10-K. The following tables set forth our results of operations for the periods presented:
Comparison of the Years ended December 31,
2020 and 2019
The following table summarizes our results of
operations for the years ended December 31, 2020 and 2019:
Year Ended December 31,
(in thousands)
Revenue:
Cost of revenue:
License and contract cost of revenue 857 731 126
Operating expenses:
Other income (expense):
67
Revenue, Cost of revenue and Gross profit
Product and service
Year Ended December 31, Change
(dollars in thousands)
Gross profit margin 55 % 41 % 14 %
Our product and service revenue
is comprised of revenue from sales of devices and related consumables and service as follows:
Year Ended December 31, Change
(dollars in thousands)
Product and service revenue increased
by $9.4 million, or 61%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. Device sales accounted
for 86% and 85% of our product and service revenue for the years ended December 31, 2020 and 2019, respectively. Consumables and
service revenue accounted for 14% and 15% of our product and service revenue for the years ended December 31, 2020 and 2019, respectively.
The increase in device sales of $8.2 million was primarily due to an increase of $7.1 million in handheld device sales driven by
180 MX908s delivered to a government customer in the year ended December 31, 2020. We also had a $2.3 million increase in device
sales related to our desktop products primarily due to a 20 unit increase in Rebel sales in the year ended December 31, 2020, partially
offset by a decrease in sales of our ZipChip Interfaces. We commercially launched Rebel in the fourth quarter of 2019. The decrease of
17 ZipChip Interfaces was primarily a result of laboratory shutdowns and reduced capital spend related to COVID-19. Consumables and service
revenue increased by $1.2 million primarily due to an increase in service revenue of $0.7 million and an increase in Rebel kit
sales.
Product and service cost of revenue
increased by $2.0 million, or 22%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase
in product and service cost of revenue was primarily related to a $2.5 million increase in materials and manufacturing costs related to
volume increases, partially offset by a $0.5 million decrease in salaries and related costs as a result of our temporary furloughs related
to COVID-19.
Product and service gross profit
increased by $7.4 million, or 118%, and gross profit margin increased by 14 percentage points for the year ended December 31, 2020
as compared to the year ended December 31, 2019, primarily due to MX908 sales volume which leveraged our fixed costs related to our
manufacturing facility.
License and contract
Year Ended December 31, Change
(dollars in thousands)
Gross profit margin 60 % 72 % (12 )%
License and contract revenue decreased
by $0.5 million, or 19%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. License revenue
decreased by $0.3 million due to a contract that ended in 2019. There was also a decrease in revenue related to activities under our subcontract
agreement with a commercial entity that holds a U.S. government prime contract being $0.2 million lower in the year ended December 31,
2020 compared to the year ended December 31, 2019.
68
License and contract cost of revenue
increased $0.1 million, or 17% for the year ended December 31, 2020, compared to the year ended December 31, 2019 due to the
mix within our contracts and specific costs incurred to support the contract deliverables.
License and contract gross profit
decreased by $0.6 million, or 32%, and gross profit margin decreased by 12 percentage points for the year ended December 31, 2020
as compared to the year ended December 31, 2019, primarily due to the reduction in license revenue and the mix in contract deliverables
during the year ended December 31, 2020.
Operating Expenses
Research and development
Year Ended December 31, Change
(dollars in thousands)
Research and development expenses $ 8,235 $ 8,993 $ (758 ) (8 )%
Percentage of total revenue 31 % 50 %
Our research and development expenses
were $8.2 million for the year ended December 31, 2020, a decrease of $0.8 million from research and development expenses
of $9.0 million for the year ended December 31, 2019. The decrease was due primarily to a $0.5 million decrease in materials
spend and consulting costs primarily associated with the development and testing of our Rebel as we commercially launched the Rebel in
the fourth quarter of 2019, and a $0.2 million decrease in travel expenses related to COVID-19.
Selling, general and administrative expenses
Year Ended December 31, Change
(dollars in thousands)
Percentage of total revenue 46 % 63 %
Our selling, general and administrative
expenses were $12.5 million for the year ended December 31, 2020, an increase of $1.2 million from selling, general and administrative
expenses of $11.3 million for the year ended December 31, 2019. The increase was due primarily to a $1.8 million increase in salaries
and related costs as a result of expanding our sales force and sales commissions for increased product and service revenue during the
year ended December 31, 2020 and a $1.3 million increase in professional fees related to our preparations to operate as a public
company, supporting our growing business and market research support. These investments were partially offset by a $0.7 million decrease
in travel expenses and a $0.2 million decrease in tradeshows and related marketing, both mainly related to COVID-19, a $0.3 million reduction
in legal fees related to an abandoned debt refinancing during the first quarter of 2019, and a $0.7 million decrease related to our commercial
services agreement liability due to the fact that with our IPO, there is no longer a requirement to make any future payments under this
agreement and therefore the fair value of the liability is zero.
Other Income (Expense)
Interest expense
Interest expense was $1.0 million
for the year ended December 31, 2020, a decrease of $0.5 million from interest expense of $1.5 million for the year ended
December 31, 2019. Interest expense for the year ended December 31, 2019 included a loss on extinguishment of debt of $0.3 million.
Interest expense also decreased due to a lower interest rate on our new credit facility entered into in August 2019 compared to our
previous debt facility, partially offset by an increase in debt. Our previous loan and security agreement was outstanding through August 2019,
when we terminated and repaid in full the borrowings under that agreement of $10.0 million and entered into a new credit agreement
with Signature Bank for borrowings of $15.0 million.
Other income (expense), net
Other income (expense), net included
other expense of $6.1 million for the year ended December 31, 2020 and other income of $0.1 million for the year ended December 31,
2019 consisting of the change in the fair value of our preferred stock warrant liability during these periods. The increase in fair value
of the warrant liability during the year ended December 31, 2020 was primarily due to the increase in the value of the underlying
shares from January 1, 2020 through December 22, 2020, the date of the conversion of the warrants. On December 22, 2020,
immediately prior to the closing of our IPO, the warrants to purchase preferred stock were converted into warrants to purchase common
stock, and the fair value of the warrant liability at that time was reclassified to common stock. As a result, subsequent to the closing
of our IPO, we no longer remeasure the fair value of the warrant liability at each reporting date.
69
Other income (expense), net also
included interest income of $0.1 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively.
Liquidity and Capital Resources
Since our inception,
we have incurred significant operating losses. To date, we have funded our operations primarily with proceeds from sales of redeemable
preferred stock, borrowings under loan agreements and revenue from sales of our products and services and license and contract revenue
and, most recently, with proceeds from our IPO. As of December 31, 2020, we had cash and cash equivalents
of $159.2 million. We believe that our existing cash and cash equivalents will enable us to fund our operating expenses, capital expenditure
requirements and debt service payments into 2023.
We have based this estimate on
assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Our future funding
requirements will depend on many factors, including:
• the effect of competing technological and market developments; and
• the level of our selling, general and administrative expenses.
As of December 31, 2020,
we had a Loan and Security Agreement entered into in August 2019, or the 2019 Loan, with Signature Bank, or the Lender. The 2019
Loan provided for up to $15.0 million in borrowings, of which the entire $15.0 million was borrowed in 2019. The 2019 Loan called for
monthly interest-only payments through February 28, 2021, followed by 30 monthly payments of principal and interest commencing March 1,
2021. The 2019 Loan was scheduled to mature on August 1, 2023 and bore interest at an annual rate equal to the greater of (i) 0.5%
plus the Wall Street Journal prime rate, or (ii) 6.0%. The 2019 Loan was secured by a lien on our assets. The 2019 Loan included
financial covenants and required us to maintain a balance of unrestricted cash at the Lender in an amount not less than $3.0 million.
The 2019 Loan also contained negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions;
encumbering or granted in a security interest in our intellectual property, incurring indebtedness or liens, paying dividends, making
certain investments and certain other business transactions. As of December 31, 2020, we were in compliance with all covenants under
the 2019 Loan.
On March 11, 2021, we entered
into an Amended and Restated Loan and Security Agreement, or the 2021 Revolver, with the Lender to replace the 2019 Loan. This agreement
created a revolving line of credit totaling $25.0 million and eliminated the existing term loan. Borrowings under the revolving line of
credit bear interest at an annual rate equal to the greater of (i) one-half percent (0.5%) above the prime rate or (ii) 4.0%
and mature on March 11, 2024. Borrowings are collateralized by substantially all of our property, excluding intellectual property,
which is subject to a negative pledge. The 2021 Revolver subjects us to various customary covenants, including requirements as to financial
reporting and financial covenants (including an 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. Events of default under the 2021 Revolver include failure to make payments
when due, insolvency events, failure to comply with covenants or material adverse events with respect to us. Upon the occurrence of an
event of default and until such event of default is no longer continuing, the annual interest rate will be 5.0% above the otherwise applicable
rate.
The terms of the 2021 Revolver
required that the existing term loan outstanding under the 2019 Loan be repaid with an advance under the line of credit. Accordingly,
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.
70
We may seek additional funding
through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing
arrangements. We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional
funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may
involve covenants, in addition to our existing covenants, restricting our operations or our ability to incur additional debt or potentially
limiting our ability to obtain new debt financing or the refinance of our existing debt. Any debt or equity financing that we raise may
contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements
with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that
are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay development or commercialization
of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations.
Cash Flows
The following table summarizes
our sources and uses of cash for each of the periods presented:
Year Ended December 31,
(in thousands)
Cash provided by (used in) operating activities $ 4,131 $ (11,004 )
Cash used in investing activities (9 ) (392 )
Net increase in cash and cash equivalents $ 141,314 $ 10,841
Operating Activities
During the year ended December 31,
2020, net cash provided by operating activities was $4.1 million, primarily consisting of net cash provided by changes in our operating
assets and liabilities of $10.0 million and non-cash charges of $6.9 million, partially offset by our net loss of $12.8 million. Net cash
provided by changes in our operating assets and liabilities for the year ended December 31, 2020 consisted primarily of an increase
in deferred revenue of $9.6 million and an increase in accounts payable and accrued expenses of $2.0 million, partially offset by a $1.8
million increase in accounts receivable and a $0.2 million increase in prepaid expenses and other current and non-current assets.
During the year ended December 31,
2019, operating activities used $11.0 million of cash, primarily resulting from our net loss of $13.4 million, partially offset by non-cash
charges of $1.6 million and net cash provided by changes in our operating assets and liabilities of $0.7 million. Net cash provided by
changes in our operating assets and liabilities for the year ended December 31, 2019 consisted primarily of a $2.1 million decrease
in unbilled receivables, an increase in deferred revenue of $0.7 million and a $0.7 million increase in the net effect of our right-of-use
operating assets and operating lease liabilities, partially offset by a $1.9 million increase in inventory and a $0.9 million increase
in accounts receivable.
Investing Activities
During the year ended December 31,
2020, net cash used in investing activities was less than $0.1 million, due to purchases of property and equipment.
During the year ended December 31,
2019, net cash used in investing activities was $0.4 million, due to purchases of property and equipment.
Financing Activities
Cash provided by
financing activities during the year ended December 31, 2020, was $137.2 million, consisting primarily of net proceeds of $139.0
million from the issuance of common stock in our IPO that closed in December 2020, partially offset by payments of offering costs
related to our IPO. We also received proceeds from a Paycheck Protection Program loan of $2.2 million in the second
quarter of 2020, which we then fully repaid in the same period.
During the year ended December 31,
2019, net cash provided by financing activities was $22.2 million, consisting primarily of net proceeds from the issuance of our Series E
redeemable preferred stock of $17.3 million and net proceeds from borrowings under our credit agreement with Signature Bank of $15.0 million,
partially offset by the repayment of our previously outstanding borrowings under our loan and security agreement of $10.0 million.
71
Contractual Obligations and Commitments
The following table summarizes
our contractual obligations as of December 31, 2020, and the effects that such obligations are expected to have on our liquidity
and cash flows in future periods:
Payments Due by Period
Total Less Than 1 Year 1 to 3 Years 4 to 5 Years More Than 5 Years
(in thousands)
Purchase orders or contracts for the purchase
of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such
purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding
agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short
time horizons.
We have also entered into license agreements under
which we are obligated to make royalty payments in the 2% to 5% range, subject to a minimum royalty fee of $0.1 million annually. We have
not included future payments under these agreements in the table of contractual obligations above since the payment obligations under
these agreements are contingent upon generating product sales. We have not included annual minimum royalty payments in the table above
because, although the amounts and timing are known, we cannot currently determine the final termination date of the agreement and, as
a result, we cannot determine the total amounts of such payments we will be required to make under the agreements.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements
are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated
financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenue, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base
our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates
under different assumptions or conditions.
While our significant
accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K, we believe that the following accounting policies are those most critical to the
judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue from sales
to customers under Accounting Standards Codification 606, Revenue from Contracts with Customers, or ASC 606 by applying the following
five steps: (1) identification of the contract, or contracts, with a customer, (2) identification of the performance obligations
in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations
in the contract and (5) recognition of revenue when, or as, performance obligations are satisfied.
72
Product and Service Revenue
We derive revenue primarily from
the sale of handheld and desktop products and related consumables and services. Revenue is recognized when control of the promised products
consumables or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange
for those products, consumables or services (the transaction price). A performance obligation is a promise in a contract to transfer a
distinct product or service to a customer and is the unit of accounting under ASC 606. For devices and consumables sold by us, control
transfers to the customer at a point in time. To indicate the transfer of control, we must have a present right to payment, legal title
must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is other
than perfunctory, the customer must have accepted the product or service. Our principal terms of sale are freight on board, or FOB, shipping
point, or equivalent, and, as such, we primarily transfer control and record revenue for product sales upon shipment. Sales arrangements
with delivery terms that are not FOB shipping point are not recognized upon shipment and the transfer of control for revenue recognition
is evaluated based on the associated shipping terms and customer obligations. If a performance obligation to the customer with respect
to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition
for that performance obligation is deferred until such commitments have been fulfilled. For extended warranty and support, control transfers
to the customer over the term of the arrangement. Revenue for extended warranty and support is recognized based upon the period of time
elapsed under the arrangement as this period represents the transfer of benefits or services under the agreement.
For a contract with multiple performance
obligations, we allocate the contract’s transaction price to each performance obligation on a relative standalone selling price
basis using our best estimate of the standalone selling price of each distinct product or service in the contract. The primary method
used to estimate standalone selling price is the price observed in standalone sales to customers; however, when prices in standalone sales
are not available we may use third party pricing for similar products or services or estimate the standalone selling price, which is set
by management. Allocation of the transaction price is determined at the contract’s inception.
License and Contract Revenue
We generate revenue from short
and long-term contracts associated with the design and development and delivery of detection devices or related design and support services.
To date, these contracts are primarily with the U.S. government or commercial entities contracting with the U.S. government, but we have
also had such contracts with commercial partners. Our contracts with the U.S. government typically are subject to the Federal Acquisition
Regulation, or FAR, and are priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance
on the types of costs that are allowable in establishing prices for goods or services provided under U.S. government contracts. The pricing
for non-U.S. government contracts is based on the specific negotiations with each customer.
Under the typical payment terms
of U.S. government fixed-price contracts, the customer pays in accordance with the terms of the specific agreement, but generally through
progress payments. If these progress payments are made in advance, these payments are recorded as a contract liability, classified as
deferred revenue within the accompanying consolidated balance sheet, until we provide the underlying services. For U.S. government cost-type
contracts, the customer generally pays for actual costs incurred within a short period of time. For contracts with commercial partners,
payments are made in accordance with the terms of the specific agreement. For agreements which call for milestone payments, to the extent
we do not conclude that it is probable that a significant reversal of cumulative revenue will occur, a contract asset is generated until
we are permitted to bill for costs incurred, which is classified as unbilled receivables in the accompanying consolidated balance sheet.
In some cases, payments received in advance under license agreements are recorded as deferred revenue and recognized over the respective
contract term, absent any other performance obligations.
Generally, revenue for long-term
contracts is recognized based upon the cost-to-cost measure of progress, provided that we meet the criteria associated with transferring
control of the good or service over time such as not creating an asset with an alternative use and having an enforceable right to payment
for completed performance. However, we evaluate the proper revenue recognition on a contract by contract basis, as each contract generally