908 Devices 10Q 2023 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-39815

908 DEVICES INC.

(Exact name of registrant as specified in its charter)

Delaware	45-4524096
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

645 Summer Street, Boston, MA	02210
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (857) 254-1500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	MASS	The Nasdaq Global Market

Title of each class

Trading Symbol(s)

Name of each exchange

on which registered

Common Stock, par value $0.001 per share

MASS

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer	☐
Non-accelerated filer ☒	Smaller reporting company	☒
	Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2023, the registrant had 32,334,184 shares of common stock, $0.001 par value per share, issued and outstanding.

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908 DEVICES INC.

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		Page
PART I.	FINANCIAL INFORMATION	4
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Loss	6
	Condensed Consolidated Statements of Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures		49

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements, and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “should,” “could,” “target,” “predict,” “seek” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short- and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those referenced in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

We own various trademark registrations and applications, and unregistered trademarks, including MX908, Rebel, ZipChip, Maven, 908 Devices and our corporate logo. All other trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Quarterly Report on Form 10-Q may be referred to without the ®,™ or RTM symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

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PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

908 DEVICES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)


	June 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	132,996	$	188,422
Marketable securities		19,691		—
Accounts receivable, net of allowance for credit losses of $133 and $25 at June 30, 2023 and December 31, 2022		10,308		10,033
Inventory		14,135		12,513
Prepaid expenses and other current assets		3,947		4,658
Total current assets		181,077		215,626
Operating lease, right-of-use assets		7,136		3,956
Property and equipment, net		2,940		3,083
Goodwill		10,185		10,050
Intangible assets, net		8,162		8,488
Other long-term assets		1,330		1,384
Total assets	$	210,830	$	242,587
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,486	$	1,397
Accrued expenses		6,034		8,847
Deferred revenue		10,814		7,514
Operating lease liabilities		1,860		1,468
Total current liabilities		20,194		19,226
Long-term debt		—		15,000
Operating lease liabilities, net of current portion		4,962		3,040
Deferred revenue, net of current portion		8,474		11,496
Deferred income taxes		2,585		2,671
Other long-term liabilities		156		555
Total liabilities		36,371		51,988
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued or outstanding at June 30, 2023 and December 31, 2022, respectively		—		—
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,326,861 shares and 31,859,847 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		32		32
Additional paid-in capital		329,361		323,969
Accumulated other comprehensive income		1,144		798
Accumulated deficit		(156,078)		(134,200)
Total stockholders' equity		174,459		190,599
Total liabilities and stockholders' equity	$	210,830	$	242,587

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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908 DEVICES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue:
Product revenue	$	9,595	$	9,082	$	16,617	$	15,589
Service revenue		2,354		1,526		4,594		3,048
Contract revenue		145		498		370		775
Total revenue		12,094		11,106	��	21,581		19,412
Cost of revenue:
Product cost of revenue		4,800		3,304		8,586		6,276
Service cost of revenue		1,448		1,057		2,718		2,126
Contract cost of revenue		52		111		99		247
Total cost of revenue		6,300		4,472		11,403		8,649
Gross profit		5,794		6,634		10,178		10,763
Operating expenses:
Research and development		5,525		4,293		10,923		8,198
Selling, general and administrative		11,208		10,710		23,211		20,455
Total operating expenses		16,733		15,003		34,134		28,653
Loss from operations		(10,939)		(8,369)		(23,956)		(17,890)
Other income:
Interest income		1,689		293		2,706		464
Interest expense		—		(15)		(551)		(35)
Other expense, net		(167)		(8)		(200)		(53)
Total other income, net		1,522		270		1,955		376
Loss from operations before income taxes		(9,417)		(8,099)		(22,001)		(17,514)
Benefit for income taxes		71		—		122		—
Net loss	$	(9,346)	$	(8,099)	$	(21,879)	$	(17,514)
Net loss per share
Basic and diluted	$	(0.29)	$	(0.26)	$	(0.68)	$	(0.56)
Weighted average common shares outstanding
Basic and diluted		32,199,156		31,413,431		32,083,122		31,312,559

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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908 DEVICES INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net loss	$	(9,346)	$	(8,099)	$	(21,879)	$	(17,514)
Other comprehensive income
Foreign currency translation adjustment		(57)		—		234		—
Unrealized gains on marketable securities, net of tax of $0		112		—		112		—
Total other comprehensive income	$	55	$	—	$	346	$	—
Comprehensive loss	$	(9,291)	$	(8,099)	$	(21,533)	$	(17,514)

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908 DEVICES INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share amounts)


						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balances at December 31, 2022	31,859,847	$	32	$	323,969	$	798	$	(134,200)	$	190,599
Issuance of common stock upon exercise of stock options	56,547		—		88		—		—		88
Stock-based compensation expense	—		—		2,166		—		—		2,166
Vesting of restricted stock units	145,123		—		—		—		—		—
Net loss	—		—		—		—		(12,532)		(12,532)
Foreign currency translation adjustments	—		—		—		291		—		291
Balances at March 31, 2023	32,061,517	$	32	$	326,223	$	1,089	$	(146,732)	$	180,612
Issuance of common stock upon exercise of stock options	166,226		—		301		—		—		301
Stock-based compensation expense	—		—		2,578		—		—		2,578
Issuance of common stock upon ESPP purchase	45,082		—		259		—		—		259
Vesting of restricted stock units	54,036		—		—		—		—		—
Net loss	—		—		—		—		(9,346)		(9,346)
Foreign currency translation adjustments	—		—		—		(57)		—		(57)
Unrealized gains on marketable securities	—		—		—		112		—		112
Balances at June 30, 2023	32,326,861	$	32	$	329,361	$	1,144	$	(156,078)	$	174,459


				Additional				Total
	Common Stock			Paid-in		Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit		Equity
Balances at December 31, 2021	31,077,004	$	31	$	315,210	$	(100,637)	$	214,604
Issuance of common stock upon exercise of stock options	243,842		—		324		—		324
Stock-based compensation expense	—		—		1,289		—		1,289
Vesting of restricted stock units	12,936		—		—		—		—
Net loss	—		—		—		(9,415)		(9,415)
Balances at March 31, 2022	31,333,782	$	31	$	316,823	$	(110,052)	$	206,802
Issuance of common stock upon exercise of stock options	164,638		1		275		—		276
Stock-based compensation expense	—		—		1,894		—		1,894
Issuance of common stock upon ESPP purchase	16,052		—		242		—		242
Vesting of restricted stock units	16,643		—		—		—		—
Net loss	—		—		—		(8,099)		(8,099)
Balances at June 30, 2022	31,531,115	$	32	$	319,234	$	(118,151)	$	201,115

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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908 DEVICES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(21,879)	$	(17,514)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		1,239		578
Stock-based compensation expense		4,744		3,183
Noncash interest expense and loss on extinguishment of debt		523		6
Provision for inventory obsolescence		38		39
Provision for credit losses		108		—
Change in fair value of contingent consideration		231		—
Deferred income tax		(122)		—
Changes in operating assets and liabilities:
Accounts receivable, net		(376)		5,277
Inventory		(1,680)		(3,857)
Prepaid expenses and other current assets		(274)		1,119
Other long-term assets		(58)		18
Accounts payable and accrued expenses		(918)		(1,043)
Deferred revenue		278		1,372
Right-of-use operating lease assets		741		599
Operating lease liabilities		(682)		(653)
Other long-term liabilities		(442)		—
Net cash used in operating activities		(18,529)		(10,876)
Cash flows from investing activities:
Purchases of property and equipment		(1,505)		(689)
Purchases of marketable securities		(19,616)		—
Net cash used in investing activities		(21,121)		(689)
Cash flows from financing activities:
Payments for withholding taxes on vested awards		(530)		(133)
Proceeds from issuance of common stock		648		842
Payments of public offering costs		—		(112)
Proceeds from borrowings on revolving line of credit		—		30,000
Payments for contingent consideration		(900)		—
Repayment of notes payable		(15,000)		(30,000)
Net cash (used in) provided by financing activities		(15,782)		597
Effect of foreign exchange rate changes on cash and cash equivalents		6		—
Net decrease in cash, cash equivalents and restricted cash		(55,426)		(10,968)
Cash, cash equivalents and restricted cash at beginning of period		188,593		224,133
Cash, cash equivalents and restricted cash at end of period	$	133,167	$	213,165
Supplemental disclosure of noncash investing and financing information:
Property and equipment included in account payable		48		147
Transfers of inventory to property and equipment		195		558
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	132,996	$	212,994
Restricted cash included in prepaid expenses and other current assets		—		60
Restricted cash included in other long-term assets		171		111
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	133,167	$	213,165

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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908 DEVICES INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of the Business and Basis of Presentation

908 Devices Inc. (the “Company”) was incorporated in the State of Delaware on February 10, 2012. The Company is a commercial-stage technology company providing a suite of purpose-built handheld and desktop devices used at the point-of-need for chemical and biochemical analysis in a broad array of markets including life sciences research, bioprocessing, pharma/biopharma, forensics and adjacent markets.

The Company is subject to risks and uncertainties common to technology companies in the device industry and of similar size, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, uncertainty of market acceptance of products, and the need to obtain additional financing to fund operations. Potential risks and uncertainties also include, without limitation, uncertainties regarding rising inflation and higher interest rates. Products currently under development will require additional research and development efforts prior to commercialization and will require additional capital and adequate personnel and infrastructure. The Company’s research and development may not be successfully completed, adequate protection for the Company’s technology may not be obtained, the Company may not obtain necessary government regulatory approval, and approved products may not prove commercially viable. The Company operates in an environment of rapid change in technology and competition.

Acquisition

The Company acquired TRACE Analytics GmbH, located in Braunschweig, Germany (“Trace”) in August 2022. Trace changed its corporate name to 908 Devices GmbH in February 2023. Trace is a leading provider of online analysis systems for biotech applications in research, development and production. Trace’s products are used for monitoring and control of complex processes in industrial pharmaceutical productions under continuous measurement conditions. With the acquisition of Trace, the Company has acquired enabling sampling technology that it expects to integrate within future product offerings. See Note 13, Acquisition, for further information.

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, 908 Devices Securities Corporation, 908 Devices (Shanghai) Technology Co., Ltd. and 908 Devices GmbH. All intercompany balances and transactions have been eliminated.

The accompanying condensed consolidated financial statements have been prepared based on continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has incurred recurring losses since inception, including net losses of $21.9 million for the six months ended June 30, 2023 and $33.6 million for the year ended December 31, 2022. As of June 30, 2023, the Company had an accumulated deficit of $156.1 million. The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash and cash equivalents and revenue from product and service will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the issuance date of the condensed consolidated financial statements. The Company may seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product expansion or commercialization efforts, or the Company may be unable to continue operations.

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2. Summary of Significant Accounting Policies

Unaudited Condensed Interim Financial Information

The condensed consolidated balance sheet at December 31, 2022 was derived from audited consolidated financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2023 and results of operations for the three and six months ended June 30, 2023 and 2022 and statements of stockholders’ equity for the three and six months ended June 30, 2023 and 2022 and cash flows for the six months ended June 30, 2023 and 2022 have been made. The Company’s results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023 or any other period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, revenue recognition and accounts receivable, the valuation of inventory, fair value of assets acquired and liabilities assumed in acquisitions and the valuation of stock-based awards. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Due to rising inflation and higher interest rates, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require further updates to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of these condensed consolidated financial statements. These estimates may change, as new events occur and additional information is obtained. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions.

Risk of Concentrations of Credit, Significant Customers and Significant Suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains the majority of its cash and cash equivalents with three financial institutions that management believes to be of high credit quality. The Company has not experienced any other-than-temporary losses with respect to its cash and cash equivalents and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Significant customers are those that accounted for 10% or more of the Company’s total revenue or accounts receivable. For the three months ended June 30, 2023, three customers represented 13%, 12% and 10% of total revenue, respectively. For the comparable three months ended June 30, 2022, one customer represented 17% of total revenue, respectively. For the six months ended June 30, 2023 and 2022, one customer represented 14% and 19% of total revenue, respectively. As of June 30, 2023, two customers accounted for 26% and 14% of gross accounts receivable, respectively. As of December 31, 2022, two customers accounted for 20% and 12% of gross accounts receivable, respectively.

Certain of the components included in the Company’s products are obtained from a sole source, a single source or a limited group of suppliers. Although the Company seeks to reduce dependence on those limited sources of suppliers and manufacturers, the partial or complete loss of certain of these sources, or the requirement to establish a new supplier for the

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components, could have a material adverse effect on the Company’s operating results, financial condition and cash flows and damage its customer relationships.

Accounts Receivable

Accounts receivable are presented net of an allowance for credit losses, which is an estimate of amounts that may not be collectible. The Company performs ongoing credit evaluations of its customers and monitors economic conditions to identify facts and circumstances that may indicate its receivables are at risk of collection. The Company provides reserves against accounts receivable for estimated credit losses, if any, that may result from a customer’s inability to pay based on the composition of its accounts receivable, current economic conditions and historical credit loss activity. Amounts deemed uncollectible are charged or written-off against the reserve. As of June 30, 2023 and December 31, 2022, the Company recorded $0.1 million allowance and less than $0.1 million allowance for credit losses, respectively.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Balances at beginning of period	$	25	$	1,750	$	25	$	1,750
Provision for credit losses, net of recoveries		108		—		108		—
Balances at end of period	$	133	$	1,750	$	133	$	1,750

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

●

Level 1 — Quoted prices in active markets for identical assets or liabilities.

●

Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

●

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company's financial instruments consist primarily of cash equivalents, marketable securities, accounts receivable, accounts payable, accrued expenses and contingent consideration. The Company’s cash equivalents and marketable securities, consisting of money market funds (a level 1 measurement) and U.S. Treasury notes (a level 2 measurement), are carried at fair value, determined according to the fair value hierarchy described above (see Note 3, Fair value measurements). The carrying values of the Company’s accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. The carrying value of the Company’s long-term debt approximates its fair value (a level 2 measurement) at each balance sheet date due to its variable interest rate, which approximates a market interest rate. The Company’s contingent consideration is measured at its fair value at each balance sheet date using unobservable inputs in the valuation methodology (a level 3 measurement).

Marketable Securities

The Company’s marketable securities (non-equity instruments) are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations.

When the fair value is below the amortized cost of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the consolidated statements of operations. Credit losses are recognized

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through the use of an allowance for credit losses account in the consolidated balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the consolidated statements of operations. There were no credit losses recorded during the six months ended June 30, 2023.

Goodwill and Intangible Assets

Goodwill is not amortized, but is evaluated for impairment on an annual basis, or on an interim basis when events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of goodwill, the Company must make assumptions regarding the estimated future cash flows, and other factors, to determine the fair value of these assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges against these assets in the reporting period in which the impairment is determined.

The Company tests goodwill for impairment at the reporting unit level, which is the operating segment. The Company has the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment. If as a result of the quantitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be required. The quantitative goodwill impairment test requires the management to estimate and compare the fair value of the reporting unit with its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets, goodwill is not impaired. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss up to the amount of goodwill.

Intangible assets with a finite useful life are recorded at cost, net of accumulated amortization and are amortized on a straight-line basis over their estimated useful lives as follows:



Customer Relationships		8 years
Developed Technology		15 years
Software		3 years
Trade Name		2 years

The Company reviews other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or an asset group may not be recoverable. In evaluating long-lived assets for recoverability, we estimate the undiscounted future cash flows that are expected from the use of each asset or asset group. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, impairment losses are measured and recorded for the excess of an asset's carrying value over its fair value. To determine the fair value of long-lived assets, the Company utilizes the valuation technique or techniques deemed most appropriate based on the nature of the asset or asset group, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.

Revenue Recognition

The Company recognizes revenue from sales to customers under ASC 606, Revenue from Contracts with Customers (“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.

For a contract with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation on a relative standalone selling price basis using the Company’s 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 the Company may use third party pricing for similar products or services or estimate the standalone selling price, which is set by management.

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Allocation of the transaction price is determined at the contract’s inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied.

Product and Service Revenue

The Company derives product and service 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 the Company’s customers, in an amount that reflects the consideration the Company expects 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 the Company, control transfers to the customer at a point in time. To indicate the transfer of control, the Company 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. The Company’s principal terms of sale are freight on board (“FOB”) shipping point, or equivalent, and, as such, the Company primarily transfers control and records 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.

The Company recognizes a receivable at the point in time at which it has an unconditional right to payment. Such receivables are not contract assets. Payment terms for customer orders, including for each of the Company’s primary performance obligations, are typically 30 to 90 days after the shipment or delivery of the product, and such payments typically do not include payments that are variable, dependent on specified factors or events. In limited circumstances, there exists a right of return for a product if agreed to by the Company. Revenue is only recognized for those goods that are not expected to be returned such that it is probable that there will not be a significant reversal of cumulative revenue. Service arrangements commonly call for payments in advance of performing the work (e.g., extended warranty/service contracts), upon completion of the service or a mix of both. The Company does not enter into significant financing agreements or other forms of variable consideration.

Contract assets arise from unbilled amounts in customer arrangements when revenue recognized exceeds the amount billed to the customer and the Company’s right to payment is not only subject to the passage of time. The Company had no contract assets related to product or service revenue as of June 30, 2023 or December 31, 2022.

Contract liabilities represent the Company’s obligation to transfer goods or services to a customer for which it has received consideration (or the amount is due) from the customer. The Company has determined that its only contract liability related to product and service revenue is deferred revenue, which consists of amounts that have been invoiced but that have not been recognized as revenue. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue and amounts expected to be recognized as revenue beyond 12 months of the balance sheet date are classified as noncurrent deferred revenue.

The following is a summary of the activity of the Company’s deferred revenue related to product and service revenue (in thousands):


	Six Months Ended June 30,
	2023		2022
Balances at beginning of period	$	16,510	$	14,521
Recognition of revenue included in balance at beginning of the period		(3,811)		(2,494)
Revenue deferred during the period, net of revenue recognized		6,589		3,863
Balances at end of period	$	19,288	$	15,890

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The amount of deferred revenue equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such deferred revenue amounts related to product and service revenue are expected to be recognized in the future as follows (in thousands):


	June 30,		December 31,
	2023		2022
Deferred revenue expected to be recognized in:
One year or less	$	10,814	$	7,514
One to two years		5,425		4,750
Three years and beyond		3,049		4,246
	$	19,288	$	16,510

Contract Revenue

The Company generates 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 the Company has also had such contracts with commercial partners. The Company’s contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“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 condensed consolidated balance sheet, until the Company provides 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 the Company does not conclude that it is probable that a significant reversal of cumulative revenue will occur, a contract asset is generated until the Company is permitted to bill for costs incurred, which is classified as prepaid expense and other current assets in the accompanying condensed consolidated balance sheet. In some cases, payments received in advance under contract 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 the Company meets 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, the Company evaluates the proper revenue recognition on a contract by contract basis, as each contract generally contains terms specific to the underlying agreement which result in differing performance obligations and payment terms (cost plus, fixed price agreements among others). For revenue recognized under the cost-to-cost measure of progress basis, the Company continually assesses total costs expected to be incurred and if such costs require adjustment to the measure of progress, the Company records such adjustment as a change in estimate on a cumulative catch-up basis in the period of adjustment.

The Company includes the unconstrained amount of consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, as required under ASC 606, the Company re-evaluates the estimated consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.

Contract assets arise from unbilled amounts in customer arrangements when revenue recognized exceeds the amount billed to the customer and the Company’s right to payment is not just subject to the passage of time. The Company includes contract assets within prepaid and other current assets in the accompanying condensed consolidated balance sheet. The Company had contract assets related to contract revenue totaling less than $0.1 million and $0.4 million, respectively, as of June 30, 2023 and December 31, 2022.

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Contract liabilities represent the Company’s obligation to transfer goods or services to a customer for which it has received consideration (or the amount is due) from the customer. As of June 30, 2023, the Company had no contract liabilities. The Company recognizes deferred revenue by first allocating from the beginning deferred revenue balance to the extent that the beginning deferred revenue balance exceeds the revenue to be recognized. Billings during the period are added to the deferred revenue balance to be recognized in future periods. As of June 30, 2023, the Company’s wholly- or partially-unsatisfied performance obligations totaled less than $0.1 million related to contract agreements entered prior to period end, which the Company expects to recognize in 2023.

Distribution Channels

A majority of the Company’s revenue is generated by sales in conjunction with its distribution partners, such as its international distributors and, in the United States, for end customers where a government contract is required or a customer has a pre-existing relationship. When the Company transacts with a distribution partner, its contractual arrangement is with the partner and not with the end-use customer. Whether the Company transacts business with and receives the order from a distribution partner or directly from an end-use customer, its revenue recognition policy and resulting pattern of revenue recognition for the order are the same.

Disaggregated Revenue

The Company’s product and service revenue consists of sales of devices and recurring revenue which includes consumables, accessories and the sale of service and extended warranty plans. The following table presents the Company’s revenue by revenue stream (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Product and service revenue:
Device sales revenue	$	7,959	$	7,755	$	13,042	$	13,287
Recurring revenue		3,990		2,853		8,169		5,350
Total product and service revenue		11,949		10,608		21,211		18,637
Contract revenue		145		498		370		775
Total revenue	$	12,094	$	11,106	$	21,581	$	19,412

The following table presents the Company’s product and service revenue by device type (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Handheld revenue:
Device sales revenue	$	6,503	$	5,431	$	10,249	$	8,731
Recurring revenue		2,319		1,506		4,745		2,676
Total handheld revenue		8,822		6,937		14,994		11,407
Desktop revenue:
Device sales revenue		1,456		2,323		2,793		4,556
Recurring revenue		1,671		1,348		3,424		2,674
Total desktop revenue		3,127		3,671		6,217		7,230
Total product and service revenue	$	11,949	$	10,608	$	21,211	$	18,637

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Revenue based on the end-user entity type for the Company’s product and service revenue are presented below (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Government	$	8,812	$	7,002	$	14,992	$	11,719
Pharmaceutical/Biotechnology		3,106		3,577		6,158		6,705
Academia and other		31		29		61		213
Total product and service revenue	$	11,949	$	10,608	$	21,211	$	18,637

The following table disaggregates the Company’s revenue from contracts with customers by geography, which are determined based on the customer location (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
United States	$	7,857	$	9,460	$	14,350	$	15,512
Europe, Middle East and Africa		3,954		1,245		5,942		2,601
Asia Pacific		221		391		797		1,273
Americas other		62		10		492		26
	$	12,094	$	11,106	$	21,581	$	19,412

International sales are comprised primarily of product and service revenue, with the majority of contract revenue being attributable to North America.

Foreign currency

The Company translates assets and liabilities of its foreign subsidiaries at rates in effect at the end of the reporting period. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in accumulated other comprehensive loss.

Other Comprehensive income (Loss)

Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are excluded from net loss as these amounts are recorded directly as an adjustment to shareholders' equity, net of tax. The Company's other comprehensive income (loss) was composed of foreign currency translation adjustments and unrealized gains/losses on available-for-sale marketable securities.

Net Income (Loss) per Share

The Company has one class of shares outstanding and basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares assuming the dilutive effect of any potential dilutive securities outstanding for the fiscal year. Potential dilutive securities include warrants, stock options, restricted stock units, and shares to be purchased under the Company’s employee stock purchase plan. For periods in which the Company reports a net loss, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Business combination

Under the acquisition method of accounting, the Company generally recognizes the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The excess consideration over

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the aggregate value of tangible and intangible assets, net of liabilities assumed, is recorded as goodwill. These valuations require significant estimates and assumptions, especially with respect to intangible assets.

The Company estimates the fair value of the contingent consideration earnouts using the Monte Carlo Simulation or probability weighted scenario depending on the nature of the contingent consideration and updates the fair value of the contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments. To the extent that these estimates change in the future regarding the likelihood of achieving these targets, the Company may need to record material adjustments to its accrued contingent consideration. Such changes in the fair value of contingent consideration are recorded as contingent consideration expense or income in the consolidated statements of operations.

The Company uses the income approach to determine the fair value of certain identifiable intangible assets including customer relationships and developed technology. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. The Company bases its assumptions on estimates of future cash flows, expected growth rates, expected trends in technology, probabilities of customer renewals, etc. The Company bases the discount rates used to arrive at a present value as of the date of acquisition on the time value of money and certain industry-specific risk factors. The Company believes the estimated purchased customer relationships, developed technology, software and trade name amounts determined represent the fair value at the date of acquisition and do not exceed the amount a third-party would pay for the assets.

Recently Adopted Accounting Pronouncements

The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected not to “opt out” of the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new standard adjusts the accounting for assets held at amortized costs basis, including marketable securities accounted for as available for sale, and trade receivables. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For public entities except smaller reporting companies, the guidance is effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. For non-public entities and smaller reporting companies, the guidance was effective for annual reporting periods beginning after December 15, 2021. In November 2019, the FASB issued ASU No. 2019-10, which deferred the effective date for non-public entities to annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early application is allowed. The Company adopted this standard effective January 1, 2023 and deemed no material impact on our condensed consolidated financial statements.

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3. Fair Value Measurements

The following tables present the Company’s fair value hierarchy for its assets and liabilities that are measured at fair value on a recurring basis (in thousands):


	Fair Value Measurements at June 30, 2023 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - Money market funds	$	90,527	$	—	$	—	$	90,527
Cash equivalents - U.S. Treasury securities		—		9,969		—		9,969
Marketable securities - U.S. Treasury securities		—		19,691		—		19,691
Total assets measured at fair value	$	90,527	$	29,660	$	—	$	120,187
Other current liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	973	$	973
Other long-term liabilities:
Acquisition-related contingent consideration		—		—		156		156
Total liabilities measured at fair value	$	—	$	—	$	1,129	$	1,129


	Fair Value Measurements at December 31, 2022 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - Money market funds	$	27,866	$	—	$	—	$	27,866
	$	27,866	$	—	$	—	$	27,866
Other current liabilities:
Acquisition-related contingent consideration	$	—	$	—	$	343	$	343
Acquisition-related contingent consideration - pension liability		—		—		900		900
		—		—		1,243		1,243
Other long-term liabilities:
Acquisition-related contingent consideration		—		—		555		555
Total liabilities measured at fair value	$	—	$	—	$	1,798	$	1,798

Money Market Funds

Money market funds were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. There were no transfers between Level 1, Level 2 or Level 3 during the six months ended June 30, 2023 or 2022.

Marketable Securities

U.S. Treasury securities were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.

Contingent Consideration

Acquisition-related contingent consideration is measured and reported at fair value using the Monte Carlo simulation method or probability weighted scenario based on the unobservable inputs, which are significant to the fair value and classified with Level 3 of the fair value hierarchy. The amount is contingent based on the acquired business’ performance for the milestones ranging from the date of acquisition to June 30, 2024.

The unobservable inputs used in the fair value measurements include the probabilities of successful achievement of certain technological integration targets, forecasted results or targets, volatility, and discount rates. The total maximum payments due related to the technological integration and revenue targets is approximately $2 million, of which the value as of June 30, 2023 is approximately $1.1 million. During the six months ended June 30, 2023, the Company received notice that the pension obligation had been transferred and no longer in Trace’s name and therefore the Company released the $0.9 million assignment

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of the pension liability. The Trace acquisition consideration withheld in respect of the pension plan was paid out to the sellers in April 2023.

The weighted average probability of achieving the technology integration target is approximately 95%. The average estimated revenue volatility and discount rate are approximately 40.9% and 23.0%, respectively. Increases or decreases in these assumptions may result in a higher or lower fair value measurement, respectively. The following table provides a roll-forward of the fair value of the Company’s contingent consideration, for which fair value is determined using Level 3 inputs (in thousands):


Balance as of December 31, 2022	$	1,798
Accretion - earnout		231
Release of pension liability		(900)
Balance as of June 30, 2023	$	1,129

Please refer to Note 13, Acquisition, for further details. Changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in our consolidated statements of operations until the arrangement is settled.

4. Marketable Securities

Marketable securities by security type consisted of the following (in thousands):


	June 30, 2023
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Credit Losses		Fair Value

Cash equivalents - U.S. Treasury securities		9,932		37		—		—		9,969
Marketable securities - U.S. Treasury securities		19,616		75		—		—		19,691
	$	29,548	$	112	$	—	$	—	$	29,660

The Company did not have marketable securities as of December 31, 2022.

5. Inventory

Inventory consisted of the following (in thousands):


	June 30,		December 31,
	2023		2022
Raw materials	$	9,579	$	8,343
Work-in-progress		2,916		2,722
Finished goods		1,640		1,448
	$	14,135	$	12,513

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6. Goodwill and Intangible Assets, net

Goodwill

As of June 30, 2023, the carrying amount of goodwill was $10.2 million. The following is a roll forward of the Company’s goodwill balance (in thousands):


	Six Months Ended
	June 30, 2023
Balances at beginning of period	$	10,050
Foreign currency impact		135
Balances at end of period	$	10,185

The Company evaluates goodwill at least annually on November 1, as well as whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.

Intangible Assets, net

Intangible assets, net consists of the following (in thousands):


	June 30, 2023
	Cost		Accumulated Amortization		Translation adjustments		Net Book Value
Customer Relationships	$	3,142	$	(371)	$	191	$	2,962
Developed Technology		4,967		(312)		309		4,964
Software		254		(68)		14		200
Trade Name		61		(29)		4		36
	$	8,424	$	(780)	$	518	$	8,162


	December 31, 2022
	Cost		Accumulated Amortization		Translation adjustments		Net Book Value
Customer Relationships	$	3,142	$	(163)	$	150	$	3,129
Developed Technology		4,967		(137)		243		5,073
Software		254		(30)		11		235
Trade Name		61		(13)		3		51
	$	8,424	$	(343)	$	407	$	8,488

Amortization expense for intangible assets was recorded in the following expense categories of its condensed consolidated statements of operations (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Product cost of revenue	$	107	$	—	$	213	$	—
Selling, general and administrative expenses		112		—		224		—
	$	219	$	—	$	437	$	—

Estimated future amortization expense for the intangible assets as of June 30, 2023 are as following (in thousands):


2023 (six months)	$	442
2024		870
2025		851
2026		779
2027		774
Thereafter		4,446
	$	8,162

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7. Accrued Expenses

Accrued expenses consisted of the following (in thousands):


	June 30,		December 31,
	2023		2022
Accrued employee compensation and benefits	$	2,506	$	4,909
Accrued warranty		854		1,119
Accrued professional fees		729		677
Contingent consideration		973		1,243
Accrued other		972		899
	$	6,034	$	8,847

Changes in the Company’s product warranty obligation were as follows (in thousands):


	Six Months Ended June 30,
	2023		2022
Accrual balance at beginning of period	$	1,119	$	1,593
Provision for new warranties		341		1,166
Settlements and adjustments made during the period		(606)		(1,476)
Accrual balance at end of period	$	854	$	1,283

8. Long-Term Debt

2021 Revolver

On March 11, 2021, the Company entered into an Amended and Restated Loan and Security Agreement (the “2021 Revolver”) to replace a Loan and Security Agreement, as amended (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 bore interest at an annual rate equal to the greater of (i) one-half percent (0.5%) above the prime rate or (ii) four percent (4.0%) and were scheduled to mature on March 11, 2024. Borrowings were collateralized by substantially all of the Company’s property, excluding intellectual property, which was subject to a negative pledge. The 2021 Revolver subjected the Company 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 the Company’s ability to dispose of its business or property, to change its 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 the Company’s 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 the Company’s intellectual property. Events of default under the 2021 Revolver included failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to the Company. Upon the occurrence of an event of default and until such event of default was no longer continuing, the annual interest rate would be five percent (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, the Company used $14.5 million of proceeds from the 2021 Revolver to repay all amounts then due on the existing term loan. The Company accounted for the transaction as a debt extinguishment and recorded a loss on extinguishment of $0.2 million, which was included in interest expense in the consolidated statements of operations and comprehensive loss.

On November 2, 2022, the Company satisfied in full all of its outstanding obligations and voluntarily terminated the 2021 Revolver. The Company did not incur any early termination penalties in connection with the termination of the 2021 Revolver. The amount outstanding under the 2021 Revolver was fully repaid in October 2022 and no amounts were outstanding upon termination of the 2021 Revolver.

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2022 Loan Revolver

On November 2, 2022, the Company entered into a Loan and Security Agreement (the “2022 Revolver”), by and between, the Company, as borrower, and Silicon Valley Bank (“SVB”), as lender.

The 2022 Revolver provided for a revolving line of credit of up to $35.0 million. The Company was permitted to make interest-only payments on the revolving line of credit through November 2, 2025, at which time all outstanding indebtedness would be immediately due and payable. The outstanding principal amount of any advance accrued interest at a floating rate per annum equal to the greater of (i) three and one-half percent (3.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%). The Company’s obligations under the 2022 Revolver were secured by substantially all of the Company’s assets, excluding its intellectual property, which was subject to a negative pledge. The revolving line of credit under the 2022 Revolver was scheduled to terminate on November 2, 2025.

As of June 30, 2023, there were no balances outstanding under the 2022 Revolver. As of December 31, 2022, the outstanding principal balance under the 2022 Revolver was $15.0 million, which was repaid in full on January 4, 2023. The interest rate applicable to borrowing under the 2022 Revolver was 7.0% as of December 31, 2022.

The 2022 Revolver also contained certain financial covenants, including a requirement that the amount of unrestricted and unencumbered cash minus advances under the 2022 Revolver, was not less than the amount equal to the greater of (i) $10.0 million or (ii) nine (9) months of cash burn. The 2022 Revolver contained customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, the Company’s ability to change the principal nature of its business, dispose of the Company’s business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem the Company’s capital stock, engage in transactions with affiliates or otherwise encumber the Company’s intellectual property, in each case, subject to customary exceptions.

On March 10, 2023, SVB, one of our financial institutions, was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver.

On March 12, 2023, the U.S. Department of the Treasury, Federal Reserve Board, and FDIC released a joint statement announcing that the FDIC would complete its resolution of SVB in a manner that fully protected all depositors and that depositors would have access to all of their money starting March 13, 2023.

As of March 31, 2023, the Company had transferred substantially all its cash and cash equivalents away from SVB and deposited the funds with new financial institutions. As a result of the transfer of the Company’s cash, cash equivalents and marketable securities, the Company was in default, and continued to be in default as of June 30, 2023, of its financial covenants under the 2022 Revolver. The Company recorded a loss on extinguishment of debt of $0.5 million in the three months ended March 31, 2023, which was included in interest expense in the condensed consolidated statements of operations and comprehensive loss.

On August 4, 2023, the Company entered into a Default Waiver and First Amendment to Loan and Security Agreement (the “Amended 2022 Revolver”), by and between, the Company, as borrower, and SVB, as lender. The Amended 2022 Revolver provides for a revolving line of credit of up to $10.0 million. The Company is permitted to make interest-only payments on the revolving line of credit through November 2, 2025, at which time all outstanding indebtedness shall be immediately due and payable. The outstanding principal amount of any advance shall accrue interest at a floating rate per annum equal to the greater of (i) four and one-half percent (4.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%). The Company’s obligations under the Amended 2022 Revolver are secured by substantially all of the Company’s assets, excluding its intellectual property, which is subject to a negative pledge. The revolving line of credit under the Amended 2022 Revolver terminates on November 2, 2025.

Pursuant to the Amended 2022 Revolver, SVB waived filing any legal action or instituting or enforcing any rights and remedies it may have had against the Company in connection with the Company’s failing to maintain all of its operating accounts, depository accounts and excess cash with SVB, as previously required prior to the effectiveness of the Amended 2022 Revolver.

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The Amended 2022 Revolver also contains certain financial covenants, including a requirement that the Company maintain $20.0 million on account at or through SVB and the amount of unrestricted and unencumbered cash minus advances under the Amended 2022 Revolver is not less than the amount equal to the greater of (i) $10.0 million or (ii) nine (9) months of cash burn. The Amended 2022 Revolver contains customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, the Company’s ability to change the principal nature of its business, dispose of the Company’s business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem the Company’s capital stock, engage in transactions with affiliates or otherwise encumber the Company’s intellectual property, in each case, subject to customary exceptions.

9. Equity and Net Income (Loss) per Share

Equity

As of June 30, 2023, the Company’s certificate of incorporation authorized the Company to issue up to 5,000,000 shares of preferred stock, all of which is undesignated.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are not entitled to receive dividends, unless declared by the board of directors.

As of June 30, 2023, and December 31, 2022, the Company had outstanding warrants for the purchase of 92,703 shares of common stock at an exercise price of $9.17 per share, of which warrants for the purchase of 49,078 shares and 43,625 shares expire in 2027 and 2028, respectively.

Net Income (Loss) per Share

The Company only has one class of shares outstanding and basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock awards. For periods in which the Company reports a net loss, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. As the Company has reported a net loss during the three and six months ended June 30, 2023 and 2022, basic net loss per share is the same as diluted net loss per share. The Company excluded the following potential shares of common stock, presented based on amounts outstanding at each period end, from the computation of diluted net income (loss) per share attributable to common stockholders for the three and six months ended June 30, 2023 and 2022 as the impact of including such common stock equivalents would have been anti-dilutive:


	June 30,
	2023	2022
Warrants to purchase common stock	92,703	92,703
Options to purchase common stock	2,499,439	2,764,916
Performance stock units	53,794	—
Restricted stock units	1,867,917	254,482
	4,513,853	3,112,101

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10. Stock-Based Compensation

The Company recorded stock-based compensation expense for all stock awards in the following expense categories of its condensed consolidated statements of operations (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Cost of revenue	$	140	$	86	$	255	$	149
Research and development expenses		732		421		1,327		681
Selling, general and administrative expenses		1,706		1,387		3,162		2,353
	$	2,578	$	1,894	$	4,744	$	3,183

As of June 30, 2023, there was $17.7 million of unrecognized compensation cost related to unvested restricted stock units (“RSUs”) that is expected to be recognized over a weighted average period of 3.0 years.

In March 2023, the compensation committee of the Company’s board of directors granted an aggregate of 53,794 performance-based restricted stock units, (“PSUs”) under the 2020 Stock Option and Incentive Plan to the Company’s chief executive officer. Each PSU is equivalent in value to one share of the Company’s common stock. The maximum payout percentage for all PSUs granted by the Company is 100%.

The vesting of the shares underlying the PSUs is subject to the achievement of stock price levels pre-established by the compensation committee at the grant date. The PSUs are subject to the market and service conditions and valued using the Monte Carlo simulation model, which requires certain assumptions, including the risk-free interest rate, expected volatility, and the estimated dividend yield. The risk-free interest rate used in the Monte Carlo simulation model is based on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the performance period on the PSUs. The performance period of the PSUs represents the period of time between the PSU grant date and the end of the performance period. Expected volatility is based on historical data of the peers and certain indices over the most recent time period equal to the performance period.

11. Leases

The Company’s primary operating lease obligations consists of various leases for office space in Massachusetts, North Carolina and Braunschweig, Germany.

There have been no material changes to the Company’s leases during the six months ended June 30, 2023, other than noted herein. For additional information, read Note 13, Leases, to the consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2022.

In July 2022, the Company entered into a new operating lease agreement in Morrisville, North Carolina (the “New NC Lease”), to expand the Company’s research and development activities focused on its desktop offerings and enable the ability to standup an additional manufacturing site for the Company. The New NC Lease is for approximately 13,300 rentable square feet and is for a term of 88 months with total lease costs of approximately $4.0 million. The New NC Lease commenced in March 2023.

In October 2022, Trace entered into a new operating lease agreement in Braunschweig, Germany, as its existing lease was expiring and to increase the existing manufacturing site and set up European base of operations for the Company. The lease in Braunschweig is for approximately 7,500 rentable square feet and commenced in January 2023. The lease in Braunschweig is for a term of 60 months with total lease costs of approximately $0.4 million.

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The components of lease expense under ASC 842 were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	485	$	583	$	969	$	1,165
Short-term lease cost		16		11		32		20
Variable lease cost		27		2		54		4
	$	528	$	596	$	1,055	$	1,189

Supplemental disclosure of cash flow information related to leases was as follows (in thousands):


	Six Months Ended June 30,
	2023		2022
Cash paid for amounts included in the measurement of operating lease liabilities	$	961	$	894
Operating lease liabilities arising from obtaining right-of-use assets	$	3,014	$	—

The weighted-average remaining lease term and discount rate were as follows:


	June 30,		December 31,
	2023		2022
Weighted-average remaining lease term - operating leases (in years)	4.25		2.75
Weighted-average discount rate - operating leases	8.5	%	9.5	%

The interest rate implicit in lease contracts is typically not readily determinable and as such, the Company uses its incremental borrowing rate based on information available at the lease commencement date, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment.

Future annual minimum lease payments under operating leases as of June 30, 2023 are as follows (in thousands):


2023 (six months)	$	1,156
2024		2,431
2025		2,001
2026		580
2027		594
Thereafter		1,347
Total future minimum lease payments		8,109
Less: imputed interest		(1,287)
Total operating lease liabilities	$	6,822

12. Commitments and Contingencies

Royalty Arrangements

The Company has entered into royalty arrangements with two parties whereby the Company owes low- to mid-single digit royalty percentages related to revenue that is derived pursuant to in-licensed technologies. Royalty obligations are expensed when incurred or over the minimum royalty periods and have not been material. Some of the arrangements include minimum royalties over a defined term.

The future minimum royalty payments are $0.1 million per year through the end of the patents’ lives. The Company has the right to terminate the agreements with written notice.

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401(k) Savings Plan

The Company has a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the board of directors. On October 1, 2021, the Company commenced an employer match program whereby the Company matches 100% of the first 3% that each employee contributes to the plan, capped at a maximum of $3,500 per year per employee. During the six months ended June 30, 2023 and 2022, the Company made $0.3 million, respectively, in contributions to the plan.

Contingent Consideration – Earnout and Pension Liability

The Company agreed to pay three milestone based earnouts under the Trace purchase agreement for the total potential payout of $2.0 million. Milestones are based on target revenues and technical integration of Trace systems and knowledge and range to June 30, 2024.

During the six months ended June 30, 2023, the Company received notice that the pension obligation had been transferred and no longer in Trace’s name and therefore the Company released the $0.9 million assignment of the pension liability. The Trace acquisition consideration withheld in respect of the pension plan was paid out to the sellers in April 2023. See Note 13, Acquisition.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with its executive officers and members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or services as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not currently aware of any indemnification claims and had not accrued any liabilities related to such obligations in its condensed consolidated financial statements as of June 30, 2023.

Legal Proceedings

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings.

13. Acquisition

On August 3, 2022, the Company entered into a share purchase and transfer agreement and completed its acquisition of 100% of the registered share capital of Trace, for total purchase price consideration of $17.3 million, comprised of (i) a $14.4 million initial cash payment, (ii) up to $2.0 million contingent cash consideration upon achievement of certain milestones over a twenty four month period and (iii) $0.9 million contingent pension liability holdback to be released upon discharging or transferring of such liability from Trace.

Trace is a leading provider of online analysis systems for biotech applications in research, development and production. Trace’s products are used for monitoring and controlling of complex processes in industrial pharmaceutical productions under continuous measurement conditions. The Company expects to integrate acquired sampling technology within future product offerings.

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The Company has accounted for the acquisition of Trace as a purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets acquired and liabilities assumed from Trace have been recorded as of the acquisition date, at their respective fair values, and consolidated with those of the Company.

The Company has allocated the purchase price to the net tangible and intangible assets based on their fair values as of August 3, 2022.

The following table presents the final allocation of the acquisition date purchase consideration for the transaction including the contingent consideration and the allocation of the purchase consideration (in thousands):


Consideration Transferred:
Cash paid	$	14,400
Net cash and working capital adjustment		113
Contingent consideration - pension liability		900
Contingent consideration - earnout		737
Total consideration transferred	$	16,150

Assets acquired and liabilities assumed:
Cash and cash equivalents	$	638
Accounts receivable		168
Inventory		364
Prepaid expenses and other current assets		11
Property and equipment, net		32
Intangible assets
Customer Relationships		3,142
Developed Technology		4,967
Software		254
Trade Name		61
Goodwill		9,566
Indemnification assets		917
Pension liability		(917)
Accounts payable, accrued expenses and other current liabilities		(306)
Deferred tax liability, net		(2,672)
Other liabilities		(75)
Total	$	16,150

The excess of the purchase price over the fair value of the acquired businesses' net assets represents cost and revenue synergies specific to the companies, and has been allocated to goodwill, which is not tax deductible. Intangible assets acquired have finite life and are amortized per our accounting policy. See Note 2 for the amortization periods.

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14. Segment Reporting and Geographic Data

The Company has determined that it operates in one segment (see Note 2). See Note 2 for revenue by country. Long-lived assets by geography are summarized as follows (in thousands):


	June 30,		December 31,
	2023		2022
Long-lived assets⁽¹⁾ by country:
United States	$	9,555	$	7,852
All other countries		521		63
Total long-lived assets	$	10,076	$	7,915

(1)

Long-lived assets exclude goodwill, other intangible assets and other assets.

Item 2. 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 unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023 (“2022 Form 10-K”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, 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 “Item 1.A. Risk Factors” section of our 2022 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 devices for point-of-need chemical and biochemical analysis. Leveraging our proprietary mass spectrometry, or Mass Spec, microfluidics, and analytics and machine learning technologies, we make devices that are significantly smaller and more accessible than conventional laboratory instruments. Our 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, pharma/biopharma, forensics and adjacent markets.

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, ZipChip Interface, Maven and related sampling devices.

On August 3, 2022, we entered into a share purchase and transfer agreement and completed our acquisition of 100% of the registered share capital of Trace, for a total purchase price consideration of $17.3 million, comprised of (i) a $14.4 million initial cash payment, (ii) up to $2.0 million contingent cash consideration upon achievement of certain milestones over a twenty-four-month period and (iii) $0.9 million contingent pension liability holdback to be released upon discharging or transferring of such liability from Trace. Trace is a leading provider of online analysis systems for biotech applications in research, development and production. Trace’s products are used for monitoring and control of complex processes in industrial pharmaceutical productions under continuous measurement conditions. We expect to integrate acquired sampling technology within future product offerings.

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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 $21.6 million and $19.4 million for the six months ended June 30, 2023 and 2022, respectively, and incurred net losses of $21.9 million and $17.5 million for those same periods. As of June 30, 2023, we had an accumulated deficit of $156.1 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 may need 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 and revenue from product and service will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months. 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.”

Global Economic Conditions

We are continuing to closely monitor macroeconomic impacts, including, but not limited to, continued inflationary and interest rate pressures, challenging capital markets and financing alternatives and developments affecting financial institutions on our business, results of operations and financial results.

We are closely monitoring continued economic uncertainty in the United States and abroad, including volatility in the global markets and the rise and fluctuations in inflation and interest rates. These developments and the potential worsening of other macro-economic conditions present risks for us, and our suppliers and customers. For example, general inflation in the United States, EMEA and other geographies has risen to levels not experienced in recent decades, which has led to rising prices for our raw materials and other inputs, as well as rising salaries and travel expenses, which could continue to negatively impact our business by increasing our cost of sales and operating expenses. General inflation could also negatively impact our business if it leads to spending pressure and decreased available capital for our customers to deploy to purchase our products and services.

In addition, the United States Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation. Inflation, together with increased interest rates, may cause our customers to reduce or delay orders for our goods and services thereby causing a decrease in or change in timing of sales of our products and services. The impact of future inflation and interest rate fluctuations on the results of our operations cannot be accurately predicted.

There also continues to be a challenging environment for the public capital markets and other financing alternatives to raise cash, which, together with inflationary and interest rates pressures, may be contributing to more cautious spending by our customers. Certain of our pharmaceutical and biotechnology customers, including bioprocessing customers, may evaluate their inventory levels, cash on hand and path to profitability, and institute cost controls and take other actions to reduce or delay purchases of our products and services. We cannot accurately predict the extent of the full impact on the budgets and capital expenditures of our customers, or the timing of the normalization of customer purchasing patterns.

We are also monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, including SVB, being closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver on March 10, 2023, Signature Bank being closed by its New York State Department of

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Financial Services on March 12, 2023, and other financial institutions. We are also monitoring the impacts that these events may have on our customers and vendors. Despite the steps taken to date by U.S. agencies to protect depositors, and the subsequent acquisition of SVB by First-Citizens Bank & Trust Company, the follow-on effects of the events surrounding the SVB and Signature Bank failures and pressure on other banks are unknown, and could include failures of other financial institutions to which we may encounter direct or indirect exposure. The extent of such impacts is uncertain, and there may be additional risks that we have not yet identified. We continue to monitor the situation on U.S. financial institutions and potential impact on our business.

While conditions related to the COVID-19 pandemic generally have improved further in the first half of 2023 compared to fiscal 2022, and our business operations are no longer significantly impacted, we will continue to monitor supply chain risks and other potential lingering impacts. On April 10, 2023, the U.S. announced that the public health emergency related to COVID-19 ended. The Company does not anticipate significant impact from the expiration of the public health emergency.

While it is difficult to predict all of the impacts these global economic events and developments affecting financial institutions, and rising inflation and interest rates will have on our business and to predict the effects of these factors on our customers’ spending in the near term, we believe the long-term opportunity that we see for our products and services remain unchanged.

For further discussion of the possible impacts of these global factors and other risks on our business, see Part I, Item 1A, “Risk Factors,” of our 2022 Form 10-K.

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 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.

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, ZipChip Interface, Maven and related sampling devices. 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.

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.

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Recurring revenue

We regularly assess trends relating to recurring revenue which includes consumables, accessories and services based on our product offerings, our customer base and our understanding of how our customers use our products. Recurring revenue was 39% and 29% of total product and service revenue for the six months ended June 30, 2023 and 2022, 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 recurring revenue as a percentage of the original device price to be higher for our desktop devices (Rebel, ZipChip Interface, Maven and related sampling devices) 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 approximately half a 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. Maven and related sampling devices require consumable sets of buffers, probes and biosensors for all areas of operations.

Revenue mix and gross margin

Our revenue is derived from sales of our devices, consumables, accessories and services. There will be fluctuations in mix between devices and recurring 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 recurring revenue 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 recurring 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 and accessories, 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:

●

Testing—a customer is actively engaged with internal or external testing of our products. This may include an onsite or virtual demonstration with a salesperson, a customer submitting samples for testing in one of our facilities or testing by a third party.

●

Trials—a customer has committed to a trial of one of our products, which may include a defined period to assess functionality of the device in their operational environment (in the field or onsite within the customer’s facility).

●

Pilot—a customer commits to the purchase of an initial quantity of devices to deploy in their operational environment to assess a broader opportunity that may grow to tens or hundreds of devices.

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●

Deployment—a customer has completed testing, a trial, and/or a pilot and intends to roll out the technology across their enterprise (either at a site or throughout the entire organization).

Key Business Metrics

We regularly review the number of product placements and cumulative product placements as key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions. We group our products into handheld and desktop devices that have average selling prices that are meaningful and are actively being sold to our customer base. 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 three and six months ended June 30, 2023 and 2022, our product placements (units recognized as revenue) were as follows:


	Three Months Ended June 30,		Six Months Ended June 30,
	2023	2022	2023	2022
Product Placements:
Handheld	107	102	169	165
Desktop	15	22	31	42

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 expect continued fluctuations in our period-to-period number of product placements.

Our cumulative product placements consist of the following number of devices:


	June 30,
	2023	2022
Cumulative Product Placements:
Handheld	2,189	1,815
Desktop	401	327

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, accessories and services. Device sales accounted for 61% and 71% of our product and service revenue for the six months ended June 30, 2023 and 2022, respectively. Recurring revenue accounted for 39% and 29% of our product and service revenue for the six months ended June 30, 2023 and 2022, respectively.

Our current device offerings include:

●

Handheld devices—MX908; and

●

Desktop devices—Rebel and ZipChip Interface, Maven and related sampling devices.

We sell our devices directly to customers and through distributors. Each of our device sales drives various streams of recurring revenue comprised of consumable and accessory product sales and service revenue.

Our consumables consist of:

●

MX908—accessories and swabs;

●

Rebel—consumables kit with a microfluidic chip and standards;

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●

ZipChip Interface—microfluidic chip, reagent and assay kits; and

●

Maven and related sampling devices—probes, tubing sets and accessories.

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.

We expect consumables and service revenue to increase in future periods as our installed base grows and we are able to generate recurring sales.

Contract revenue

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 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 contract revenue was primarily related to one customer during the three and six months ended June 30, 2023 and was comprised of three customers during the three and six months ended June 30, 2022.

During the three and six months ended June 30, 2023 and 2022, our revenue was comprised of revenue from the following sources:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Product and service revenue:
Device sales revenue	$	7,959	$	7,755	$	13,042	$	13,287
Recurring revenue		3,990		2,853		8,169		5,350
Total product and service revenue		11,949		10,608		21,211		18,637
Contract revenue		145		498		370		775
Total revenue	$	12,094	$	11,106	$	21,581	$	19,412

Our product and service revenue is comprised of sales of our handheld and desktop devices and related consumables, accessories and service contracts to end-users in the government, pharmaceuticals/biotechnology and academia markets as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Government	$	8,812	$	7,002	$	14,992	$	11,719
Pharmaceutical/Biotechnology		3,106		3,577		6,158		6,705
Academia and other		31		29		61		213
Total product and service revenue	$	11,949	$	10,608	$	21,211	$	18,637

We sell our products primarily in the United States; however, we continue to expand our global sales efforts as we see traction in our products and assess global market needs. The majority of our international sales are through a distribution channel.

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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, amortization of intangibles 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. 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 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.

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 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:

●

employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and hardware and software development functions;

●

the cost of maintaining and improving our product designs, including third party development costs for new products and materials for prototypes;

●

research materials and supplies; and

●

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance.

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, amortization of customer relationship and tradename intangibles 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

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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 income

Interest income consists of interest earned on our invested cash balances.

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 the three and six months ended June 30, 2023, our interest expense also includes our loss on debt extinguishment resulting from the write off of the initial fees incurred and potential termination fees related to our 2022 Revolver.

Other income (expense), net

Other income (expense), net 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 and have recorded a full valuation allowance against our net deferred assets, 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, 2022, we had gross federal and state operating loss carryforwards of $92.3 million and $64.0 million, respectively, which may be available to offset future taxable income and begin to expire in 2032 and 2025, respectively, of which $57.9 million of federal gross operating losses do not expire. As of December 31, 2022, we also had U.S. federal and state research and development tax credit carryforwards of $5.9 million and $2.8 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2032 and 2029, respectively.

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Results of Operations

Comparison of the three months ended June 30, 2023 and 2022

The following table summarizes our results of operations for the three months ended June 30, 2023 and 2022:


	Three Months Ended June 30,
	2023		2022		Change

	(in thousands)
Revenue:
Product revenue	$	9,595	$	9,082	$	513
Service revenue		2,354		1,526		828
Contract revenue		145		498		(353)
Total revenue		12,094		11,106		988
Cost of revenue:
Product cost of revenue		4,800		3,304		1,496
Service cost of revenue		1,448		1,057		391
Contract cost of revenue		52		111		(59)
Total cost of revenue		6,300		4,472		1,828
Gross profit		5,794		6,634		(840)
Operating expenses:
Research and development		5,525		4,293		1,232
Selling, general and administrative		11,208		10,710		498
Total operating expenses		16,733		15,003		1,730
Loss from operations		(10,939)		(8,369)		(2,570)
Other income (expense):
Interest income		1,689		293		1,396
Interest expense		—		(15)		15
Other expense, net		(167)		(8)		(159)
Total other income, net		1,522		270		1,252
Loss from operations before income taxes		(9,417)		(8,099)		(1,318)
Benefit for income taxes		71		—		71
Net loss	$	(9,346)	$	(8,099)	$	(1,247)

Revenue, Cost of Revenue and Gross Profit

Product

Our product revenue is comprised of revenue from sales of devices and related accessories and consumables and service as follows:


	Three Months Ended June 30,						Change
	2023			2022			Amount			%

	(dollars in thousands)
Product revenue	$	9,595		$	9,082		$	513		6	%
Product cost of revenue		4,800			3,304			1,496		45	%
Gross profit	$	4,795		$	5,778		$	(983)		(17)	%
Gross profit margin		50	%		64	%		(14)	%

Product revenue increased by $0.5 million, or 6%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase was primarily related to $1.1 million in higher handheld device revenues resulting from five additional placements and a higher average selling price resulting from channel mix with more devices placed through distribution in the prior year period. In addition, consumable and accessory revenue increased $0.3 million during the three months ended June 30, 2023, compared to the prior year period, with the increase split across both desktops and handhelds.

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These increases were offset, in part, by a $0.8 million decrease in desktop device sales, primarily related to a nine unit decrease in Rebel device placements for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Product cost of revenue increased by $1.5 million, or 45%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase in product cost of revenue was primarily related to $0.5 million in higher costs related to unabsorbed facility and labor overhead from lower production builds in the three months ended June 30, 2023, compared to the three months ended June 30, 2022, which was the highest build quarter in calendar year 2022. In addition cost of revenue increased $0.5 million due to higher materials and supplies consumed in warranty and production activities, $0.2 million from higher product revenue volume, $0.2 million in material costs from the mix of products sold, and $0.1 million in intangibles amortization.

Product gross profit decreased by $1.0 million, or 17%, and gross profit margin decreased by fourteen percentage points for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The decreases in product gross profit margin was primarily due to lower production builds in the three months ended June 30, 2023 resulting in an approximately five percentage point decrease, an increase in materials and supplies used in warranty and production activities resulting in an approximately five percentage point decrease, higher non-cash charges for intangible amortization of approximately one percentage points and a gross profit decrease related to the product mix, mainly with the handheld accessory and consumables that have a lower gross profit contribution, compared to handheld devices.

Service

Our service revenue is comprised of revenue from sales of extended warranty and service plans and customer training as follows:


	Three Months Ended June 30,						Change
	2023			2022			Amount			%

	(dollars in thousands)
Service revenue	$	2,354		$	1,526		$	828		54	%
Service cost of revenue		1,448			1,057			391		37	%
Gross profit	$	906		$	469		$	437		93	%
Gross profit margin		38	%		31	%		7	%

Service revenue increased by $0.8 million, or 54%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase was primarily related to an increase in handheld service revenues related to extended service contracts for MX908 devices and to a lesser extent increases in handheld training revenue and desktop service arrangements.

Service cost of revenue increased by $0.4 million, or 37%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase in service cost of revenue was primarily related to higher personnel costs to support the increase in service revenue as well as an increase in contract trainers used to support the higher handheld training revenue.

Service gross profit increased by $0.4 million, or 93%, and gross profit margin increased by seven percentage points for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to the ability to leverage the fixed infrastructure with the service team across both handhelds and desktops.

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Contract


	Three Months Ended June 30,						Change
	2023			2022			Amount			%

	(dollars in thousands)
Contract revenue	$	145		$	498		$	(353)		(71)	%
Contract cost of revenue		52			111			(59)		(53)	%
Gross profit	$	93		$	387		$	(294)		(76)	%
Gross profit margin		64	%		78	%		(14)	%

Contract revenue decreased by $0.4 million, or 71%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The majority of contract revenue for the three months ended June 30, 2023, was related to activities under our subcontract agreement with a commercial entity that holds a U.S. government prime contract and funding was relatively unchanged in the three months ended June 30, 2023, compared to the prior year period. The decrease in contract revenue for the three months ended June 30, 2023 is primarily related to the completion of work in 2022 related to a prime contract directly with the U.S. government and a subcontract agreement with a commercial entity that holds a U.K. government prime contract.

Contract cost of revenue decreased by $0.1 million, or 53%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily related to the reduction in material costs related to the contract deliverables for the prime contract held directly with the U.S. government and a subcontract agreement with a commercial entity that holds a U.K. government prime contract for the three months ended June 30, 2022.

Contract gross profit decreased by $0.3 million and gross profit margin decreased by 14 percentage points for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily due to the mix in contract deliverables, including a mix of materials with lower costs during the three months ended June 30, 2023, which resulted in a higher gross profit margin for that period, as compared to the three months ended June 30, 2022.

Operating Expenses

Research and development


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Research and development expenses	$	5,525		$	4,293		$	1,232	29	%
Percentage of total revenue		46	%		39	%

Our research and development expenses were $5.5 million for the three months ended June 30, 2023, an increase of $1.2 million from research and development expenses of $4.3 million for the three months ended June 30, 2022. The increase was due primarily to a $0.5 million increase in salaries and related costs from the impact of headcount added in 2022, a $0.3 million increase in stock-based compensation and a $0.2 million increase in occupancy related expenses.

Selling, general and administrative expenses


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Selling, general and administrative expenses	$	11,208		$	10,710		$	498	5	%
Percentage of total revenue		93	%		96	%

Our selling, general and administrative expenses were $11.2 million for the three months ended June 30, 2023, an increase of $0.5 million from selling, general and administrative expenses of $10.7 million for the three months ended June 30, 2022. The increase was due primarily to a $0.3 million increase in stock-based compensation, a $0.2 million increase in acquisition-related costs for intangible amortization and valuation of contingent milestones, a $0.2 million increase is personnel related costs and a $0.1 million increase in a provision for credit losses. These increases were partially offset by a $0.4 million

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decrease in insurance costs, primarily related to our director and officer insurance premiums that decreased with market rates for 2023.

Other Income

Interest income

Interest income increased by $1.4 million for the three months ended June 30, 2023 from $0.3 million for the three months ended June 30, 2022. The increase was primarily due to higher interest rates on our interest bearing accounts.

Other income (expense), net

Other income (expense), net was $0.2 million for the three months ended June 30, 2023 and did not change materially from the three months ended June 30, 2022.

Comparison of the six months ended June 30, 2023 and 2022

The following table summarizes our results of operations for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023		2022		Change

	(in thousands)
Revenue:
Product revenue	$	16,617	$	15,589	$	1,028
Service revenue		4,594		3,048		1,546
Contract revenue		370		775		(405)
Total revenue		21,581		19,412		2,169
Cost of revenue:
Product cost of revenue		8,586		6,276		2,310
Service cost of revenue		2,718		2,126		592
Contract cost of revenue		99		247		(148)
Total cost of revenue		11,403		8,649		2,754
Gross profit		10,178		10,763		(585)
Operating expenses:
Research and development		10,923		8,198		2,725
Selling, general and administrative		23,211		20,455		2,756
Total operating expenses		34,134		28,653		5,481
Loss from operations		(23,956)		(17,890)		(6,066)
Other income:
Interest income		2,706		464		2,242
Interest expense		(551)		(35)		(516)
Other expense, net		(200)		(53)		(147)
Total other income, net		1,955		376		1,579
Loss from operations before income taxes		(22,001)		(17,514)		(4,487)
Benefit for income taxes		122		—		122
Net loss	$	(21,879)	$	(17,514)	$	(4,365)

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Revenue, Cost of Revenue and Gross Profit

Product

Our product revenue is comprised of revenue from sales of devices and related accessories and consumables as follows:


	Six Months Ended June 30,						Change
	2023			2022			Amount			%

	(dollars in thousands)
Product revenue	$	16,617		$	15,589		$	1,028		7	%
Product cost of revenue		8,586			6,276			2,310		37	%
Gross profit	$	8,031		$	9,313		$	(1,282)		(14)	%
Gross profit margin		48	%		60	%		(12)	%

Product revenue increased by $1.0 million, or 7%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The increase was primarily related to $1.2 million in higher consumable and accessory revenue, which included a $0.8 million increase in handheld accessories and consumables. The increase in consumable and accessory revenue was offset in part by a decrease in device sales of $0.2 million which was due to a decrease of $1.7 million in desktop device sales, primarily related to a 20 unit decrease in Rebel device placements, offset in part by an increase of $1.5 million in handheld device sales for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, which was attributable to higher device placements and higher average selling prices primarily due to channel mix with direct sales.

Product cost of revenue increased by $2.3 million, or 37%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The increase in product cost of revenue was primarily related to $0.7 million in higher costs related to unabsorbed facility and labor overhead from lower production builds in the six months ended June 30, 2023 compared to the six months ended June 30, 2022, $0.6 million in higher materials and supplies consumed in warranty and production activities, $0.3 million in material costs from higher product volume, $0.2 million in intangibles amortization and a $0.2 million increase in shipping costs.

Product gross profit decreased by $1.3 million, or 14%, and gross profit margin decreased by twelve percentage points for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily due the lower production builds in the six months ended June 30, 2023 resulting in an approximately four percentage point decrease, an increase in materials and supplies used in warranty and production activities resulting in an approximately four percentage point decrease, the higher non-cash charges for intangible amortization of approximately one percentage point and a gross profit decrease related to the product mix with the handheld accessory and consumables that have a lower gross profit contribution, compared to handheld devices.

Service

Our service revenue is comprised of revenue from sales of extended warranty and service plans and customer training as follows:


	Six Months Ended June 30,						Change
	2023			2022			Amount			%

	(dollars in thousands)
Service revenue	$	4,594		$	3,048		$	1,546		51	%
Service cost of revenue		2,718			2,126			592		28	%
Gross profit	$	1,876		$	922		$	954		103	%
Gross profit margin		41	%		30	%		11	%

Service revenue increased by $1.5 million, or 51%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The increase was primarily related to an increase in handheld service revenues related to extended service contracts for MX908 devices and to a lesser extent increases in handheld training revenue and desktop service arrangements.

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Service cost of revenue increased by $0.6 million, or 28%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The increase in service cost of revenue was primarily related to higher personnel costs to support the increase in service revenue as well as an increase in contract trainers used to support the higher handheld training revenue.

Service gross profit increased by $1.0 million, or 103%, and gross profit margin increased by eleven percentage points for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily due to the ability to leverage the fixed infrastructure with the service team across both handhelds and desktops.

Contract


	Six Months Ended June 30,						Change
	2023			2022			Amount			%

	(dollars in thousands)
Contract revenue	$	370		$	775		$	(405)		(52)	%
Contract cost of revenue		99			247			(148)		(60)	%
Gross profit	$	271		$	528		$	(257)		(49)	%
Gross profit margin		73	%		68	%		5	%

Contract revenue decreased by $0.4 million, or 52%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The majority of contract revenue, for the six months ended June 30, 2023, was related to activities under our subcontract agreement with a commercial entity that holds a U.S. government prime contract. The decrease in contract revenue for the six months ended June 30, 2023 is primarily related to the completion of work in 2022 related to a prime contract directly with the U.S. government and a subcontract agreement with a commercial entity that holds a U.K. government prime contract.

Contract cost of revenue decreased by $0.1 million, or 60% for the six months ended June 30, 2023, compared to the six months ended June 30, 2023 had lower material costs with the subcontract agreement with a commercial entity that holds a U.S. government prime contract compared to the contract deliverables for the prime contract held directly with the U.S. government and a subcontract agreement with a commercial entity that holds a U.K. government prime contract for the six months ended June 30, 2022.

Contract gross profit decreased by $0.2 million and gross profit margin increased by 5 percentage points for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to the mix in contract deliverables, including a mix of materials with lower costs during the six months ended June 30, 2023, which resulted in a higher gross profit margin for that period, as compared to the six months ended June 30, 2022.

Operating Expenses

Research and development


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Research and development expenses	$	10,923		$	8,198		$	2,725	33	%
Percentage of total revenue		51	%		42	%

Our research and development expenses were $10.9 million for the six months ended June 30, 2023, an increase of $2.7 million from research and development expenses of $8.2 million for the six months ended June 30, 2022. The increase was due primarily to a $1.2 million increase in salaries and related costs from the impact of headcount added in 2022, a $0.6 million increase in stock-based compensation, a $0.4 million increase in occupancy related expenses, and a $0.2 million increase in program spend, mainly consulting related to product development efforts.

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Selling, general and administrative expenses


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Selling, general and administrative expenses	$	23,211		$	20,455		$	2,756	13	%
Percentage of total revenue		108	%		105	%

Our selling, general and administrative expenses were $23.2 million for the six months ended June 30, 2023, an increase of $2.8 million from selling, general and administrative expenses of $20.5 million for the six months ended June 30, 2022. The increase was due primarily to a $1.5 million increase in salaries and related costs from the impact of headcount added in 2022, a $0.8 million increase in stock-based compensation, a $0.3 million increase in acquisition-related costs for intangible amortization and valuation of contingent milestones and, a $0.2 million increase in travel expenses and marketing-related spend. These increases were partially offset by a $0.7 million decrease in insurance costs, primarily related to our director and officers insurance premiums that decreased with market rates for 2023.

Other Income

Interest income

Interest income increased by $2.2 million for the six months ended June 30, 2023 from $0.5 million for the six months ended June 30, 2022. The increase was due to higher interest rates on our interest bearing accounts.

Interest expense

Interest expense increased by $0.5 million for the six months ended June 30, 2023 from less than $0.1 million for the six months ended June 30, 2022. The increase was primarily due to a loss on extinguishment of debt of $0.5 million recorded for the write off of the initial fees incurred and potential termination fees related to our 2022 Revolver.

Other expense, net

Other expense, net was $0.2 million for the six months ended June 30, 2023 and did not change materially from the six months ended June 30, 2022.

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 contract revenue, proceeds from our initial public offering in December 2020, and, most recently, with proceeds from an underwritten public offering in November 2021. As of June 30, 2023, we had cash, cash equivalents and marketable securities of $152.7 million. We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months.

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:

●

market uptake of our products and growth into new and existing markets;

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the cost of our research and development efforts to expand the applications of our current devices and to create enhanced products with our platform of technologies;

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the cost of expanding our commercial operations, including distribution capabilities, and accelerating planned investments, such as hiring additional support, service, and sales management in Europe, Asia Pacific and Latin America, bolstering our infrastructure in these regions;

●

the cost of acquiring complementary businesses, products, services or technologies, when and if required;

●

the success of our existing collaborations and our ability to enter additional collaborations in the future;

●

the effect of competing technological and market developments; and

●

the level of our selling, general and administrative expenses.

On March 11, 2021, the Company entered into the 2021 Revolver 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 bore interest at an annual rate equal to the greater of (i) one-half percent (0.5%) above the prime rate or (ii) four percent (4.0%), and were scheduled to mature on March 11, 2024. Borrowings were collateralized by substantially all of the Company’s property, excluding intellectual property, which was subject to a negative pledge. The 2021 Revolver subjected the Company 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 the Company’s ability to dispose of its business or property, to change its 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 the Company’s 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 the Company’s intellectual property. Events of default under the 2021 Revolver included failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to the Company. Upon the occurrence of an event of default and until such event of default was no longer continuing, the annual interest rate would be five percent (5.0%) above the otherwise applicable rate.

On November 2, 2022, we entered into the 2022 Revolver.

The 2022 Revolver provided for a revolving line of credit of up to $35.0 million. We were permitted to make interest-only payments on the revolving line of credit through November 2, 2025, at which time all outstanding indebtedness would be immediately due and payable. The outstanding principal amount of any advance accrued interest at a floating rate per annum equal to the greater of (i) three and one-half percent (3.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%). Our obligations under the 2022 Revolver were secured by substantially all of our assets, excluding our intellectual property, which was subject to a negative pledge. The revolving line of credit under the 2022 Revolver was scheduled to terminate on November 2, 2025.

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million or (ii) nine (9) months of cash burn. The 2022 Revolver contained customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, our ability to change the principal nature of our business, dispose of our business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem our capital stock, engage in transactions with affiliates or otherwise encumber our intellectual property, in each case, subject to customary exceptions.

On March 10, 2023, SVB, one of our financial institutions, was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver.

As of March 31, 2023, the Company had transferred substantially all its cash and cash equivalents away from SVB and deposited the funds with new financial institutions. As a result of the transfer of the Company’s cash, cash equivalents and marketable securities, the Company was in default, and continued to be in default as of June 30, 2023, of its financial covenants under the 2022 Revolver. The Company recorded a loss on extinguishment of $0.5 million in the three months ended March 31, 2023, which was included in interest expense in the condensed consolidated statements of operations and comprehensive loss.

On August 4, 2023, the Company entered into the Amended 2022 Revolver, by and between, the Company, as borrower, and SVB, as lender. The Amended 2022 Revolver provides for a revolving line of credit of up to $10.0 million. The Company is permitted to make interest-only payments on the revolving line of credit through November 2, 2025, at which time all outstanding indebtedness shall be immediately due and payable. The outstanding principal amount of any advance shall accrue interest at a floating rate per annum equal to the greater of (i) four and one-half percent (4.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%). The Company’s obligations under the Amended 2022 Revolver are secured by substantially all of the Company’s assets, excluding its intellectual property, which is subject to a negative pledge. The revolving line of credit under the Amended 2022 Revolver terminates on November 2, 2025.

The Amended 2022 Revolver also contains certain financial covenants, including a requirement that the Company maintain $20.0 million on account at or through SVB and the amount of unrestricted and unencumbered cash minus advances under the Amended 2022 Revolver, is not less than the amount equal to the greater of (i) $10.0 million or (ii) nine (9) months of cash burn. The Amended 2022 Revolver contains customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, the Company’s ability to change the principal nature of its business, dispose of the Company’s business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem the Company’s capital stock, engage in transactions with affiliates or otherwise encumber the Company’s intellectual property, in each case, subject to customary exceptions.

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.

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Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:


	Six Months Ended June 30,
	2023		2022

	(in thousands)
Cash used in operating activities	$	(18,529)	$	(10,876)
Cash used in investing activities		(21,121)		(689)
Cash (used in) provided by financing activities		(15,782)		597
Effect of foreign exchange rate changes on cash and cash equivalents		6		—
Net decrease in cash, cash equivalents and restricted cash	$	(55,426)	$	(10,968)

Operating Activities

During the six months ended June 30, 2023, net cash used in operating activities was $18.5 million, primarily resulting from our net loss of $21.9 million and net cash used in changes in our operating assets and liabilities of $3.4 million, partially offset by noncash charges of $6.8 million. Net cash used by changes in our operating assets and liabilities for the six months ended June 30, 2023 consisted primarily of a $1.7 million decrease from changes in inventory and a $0.9 million decrease from changes in accounts payable and accrued expenses.

During the six months ended June 30, 2022, net cash used in operating activities was $10.9 million, primarily resulting from our net loss of $17.5 million, partially offset by net cash provided by changes in our operating assets and liabilities of $2.8 million and noncash charges of $3.8 million. Net cash provided by changes in our operating assets and liabilities for the six months ended June 30, 2022 consisted primarily of a $5.3 million increase from changes in accounts receivable and a $1.4 million increase from changes in deferred revenue, partially offset by a $3.9 million decrease from changes in inventory and a $1.0 million decrease from changes in accounts payable and accrued expenses.

Investing Activities

During the six months ended June 30, 2023, net cash used in investing activities was $21.1 million, due to $19.6 million in purchases of marketable securities and $1.5 million in purchases of property and equipment.

During the six months ended June 30, 2022, net cash used in investing activities was $0.7 million, due to purchases of property and equipment.

Financing Activities

Cash used in financing activities during the six months ended June 30, 2023 was $15.8 million, consisting primarily of the repayment of $15.0 million outstanding under the 2022 Revolver and a $0.9 million payment for release of pension liability.

Cash provided by financing activities during the six months ended June 30, 2022, was $0.6 million, consisting primarily of proceeds from issuance of common stock upon option exercises. We also paid off and drew down $30.0 million under the 2021 Revolver resulting in no net proceeds by June 30, 2022.

Critical Accounting Policies and Significant Judgments and Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our condensed 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 condensed 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.

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For a further discussion of our critical accounting policies, please refer to Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and our 2022 Report on Form 10-K. There were no significant changes to our critical accounting policies for the six months ended June 30, 2023.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and is incorporated herein by reference.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company, as defined in Rule 12b-2 under the Exchange Act for this reporting period and are not required to provide the information required under this item.

Item 4. Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently party to any material legal proceedings.

Item 1A. Risk Factors.

Our operations and financial results are subject to various risks and uncertainties. A detailed discussion of the risks that affect our business is included in the section titled “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023, or 2022 Form 10-K. There have been no material changes to our risk factors during the three months ended June 30, 2023 from those discussed in our 2022 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

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Item 6. Exhibits.


Exhibit Number		Description

31.1		Certification of Chief Executive Officer of the Registrant Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer of the Registrant Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1†		Certification of Chief Executive Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2†		Certification of Chief Financial Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.18		Default Waiver and First Amendment to Loan and Security Agreement, dated as of August 4, 2023, by and between 908 Devices Inc. and Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (successor by purchase to the Federal Deposit Insurance Corporation as Receiver for Silicon Valley Bridge Bank, N.A. (as successor to Silicon Valley Bank)) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-39815) filed with the SEC on August 8, 2023)
101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

104		Cover Page Data File (the cover page XBRL tags are embedded within the iXBRL document).

†

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of 908 Devices Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	908 DEVICES INC.

Date: August 8, 2023	By:	/s/ Kevin J. Knopp, Ph.D.
		Kevin J. Knopp, Ph.D. Chief Executive Officer (Principal Executive Officer)

Date: August 8, 2023	By:	/s/ Joseph H. Griffith IV
		Joseph H. Griffith IV Chief Financial Officer (Principal Financial Officer)

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908 Devices (MASS) 10-Q2023 Q2 Quarterly report

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