Rapid Micro Biosystems, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated condensed financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited Consolidated Financial Statements and related notes thereto for the year ended December 31, 2022, included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 10, 2023, as amended (the “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 the “Risk Factors” section of the 2022 Form 10-K and this Form 10-Q, 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 are an innovative life sciences technology company that enables the safe and efficient manufacture of pharmaceutical products through our rapid automated microbial quality control ("MQC"), detection platform. We develop, manufacture, market and sell the Growth Direct system and related proprietary consumables, and value-added services to enable rapid MQC testing in the manufacture of biologics, cell and gene therapies, vaccines, sterile injectables, and other healthcare products. Our system delivers the power of industrial automation to bioprocessing and pharmaceutical manufacturing firms by modernizing and digitizing their MQC operations. Our Growth Direct platform, developed with over 15 years of active feedback from our customers, was purpose-built to meet the growing demands posed by the increasing scale, complexity, and regulatory scrutiny confronting global pharmaceutical manufacturing. Our Growth Direct platform comprises the Growth Direct system, optional laboratory information management system ("LIMS") connection software (which the majority of our customers purchase), proprietary consumables, and comprehensive field service, validation services and post-warranty service contracts. Once embedded and validated in our customers’ facilities, our Growth Direct platform provides for recurring revenues through ongoing sales of consumables and service contracts.

Our technology fully automates and digitizes the process of pharmaceutical MQC and is designed to enable our customers to perform this critical testing process more efficiently, accurately, and securely. Our Growth Direct system accelerates time to results by several days, up to a 50% improvement over the traditional method, and reduces MQC testing to a simple two-step workflow, eliminating up to 85% of the manual steps of traditional MQC, generating significant time, operational, and cost savings for our customers. We seek to establish the Growth Direct platform as the trusted global standard in automated MQC by delivering the speed, accuracy, security, and data integrity that our customers depend on to ensure patient safety and consistent drug supply.

Since inception, we have devoted a majority of our resources to designing, developing, and building our proprietary Growth Direct platform and associated products, launching our Growth Direct platform commercially, advancing our technological capabilities, expanding our sales and marketing infrastructure to grow our sales, building a global customer support team to deliver our value-added services, investing in robust manufacturing and supply chain operations to serve our customers globally, and providing general and administrative support for these operations. To date, we have funded our operations primarily with proceeds from sales of redeemable convertible preferred stock, borrowings under loan agreements, revenue from products, services and contracts, and proceeds from our IPO, as well as our cost-reimbursement/cost sharing contracts with the U.S. Department of Health and Human Services Biomedical Advanced Research & Development Authority ("BARDA").

Since our inception, we have incurred net losses in each year. We generated revenue of $6.1 million and $4.7 million for the three months ended September 30, 2023 and 2022, respectively, and incurred net losses of $13.4 million and $16.3 million for those same periods, respectively. As of September 30, 2023, we had an accumulated deficit of $417.2 million. We expect to continue to incur net losses in connection with our ongoing activities, including:

• growing sales of our products in both the United States and international markets by further expanding our sales and marketing capabilities;
• scaling our manufacturing and supply chain processes and infrastructure as well as our service capabilities to meet growing demand for our products and services;
• investing in research and development to develop new products and further enhance our existing products;
• protecting and building on our intellectual property portfolio; and
• attracting, hiring and retaining qualified personnel.

Until such time as we can generate revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings and debt financings. 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 our expansion plans including 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 cash and cash equivalents and investments as of September 30, 2023 enable us to fund our operating expenses and capital expenditure requirements for at least twelve months following the issuance date of the unaudited interim condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “Liquidity and Capital Resources.”

Effects of inflation and interest rates

The current inflationary environment and rising interest rates could have a negative impact on our results of operations, cash flows and overall financial condition. We may experience inflationary pressures on significant cost categories including labor, materials and freight. We continue to monitor the impact of inflation on these costs in order to minimize its effects through productivity improvements and cost reductions. There can be no assurance, however, that our operating results will not be affected by inflation in the future. In addition, inflation and increased interest rates may decrease demand for our Growth Direct systems, as our customers may face economic uncertainty as a result. A decrease in demand for our products or increases in our costs, as well as any steps we may take to mitigate changes, could impact our overall growth. However, the related financial impact cannot be reasonably estimated at this time.

Factors affecting our performance

We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described under the section titled “Risk Factors” to this Quarterly Report on Form 10-Q and other factors as set forth in Part I, Item 1A of our 2022 Form 10-K.

New customer adoption of the Growth Direct platform

Our financial performance has largely been driven by, and a key factor to our future success will be, our ability to increase the global adoption of our Growth Direct platform in our key markets. We plan to drive global customer adoption through both direct and indirect sales and marketing organizations in North America, Europe, and the Asia-Pacific region.

We are focused on enhancing customer engagement and experience and improving the efficiency and effectiveness of our sales team. We are making targeted investments in these organizations and expect to continue to do so in the future. Examples of these investments include new tools and training for the sales organization, targeted marketing initiatives, expanding lead generation capabilities and hosting Growth Direct demonstrations and other customer-focused events.

Expansion within our existing customer base

There is an opportunity to broaden adoption and increase utilization of our Growth Direct platform throughout our existing customers' organizations as these customers purchase more systems. These additional systems will allow our existing customers to convert more of their test volume at existing locations, to support multiple locations, to meet redundancy requirements, or to increase capacity. As of September 30, 2023, approximately 40% of our customers have purchased Growth Direct systems for multiple sites, and approximately 55% of our customers have purchased multiple Growth Direct systems. Increased utilization amongst existing customers can also occur as customers advance through the Growth Direct platform adoption cycle from early validation of initial applications to validation and conversion of multiple applications on the Growth Direct platform or as the result of new product approvals or increases in their manufacturing volumes for existing products.

Innovating and launching new products on the Growth Direct platform

We believe the depth, scalability and robust capabilities of our Growth Direct platform allow us to address key opportunities and challenges facing MQC testing in the pharmaceutical industry. As an innovative leader in automated MQC testing, we intend to invest in further enhancements in our existing Growth Direct platform as well as end-to-end workflow solutions in our core market. We plan to further invest in research and development to support the expansion of our Growth Direct platform through development and launch of new applications to capture greater share of customer testing volume, new product formats to broaden our ability to serve different market segments and launch of new products and technologies to address adjacent segments of the overall MQC workflow. We plan to continue to hire employees with the necessary scientific and technical backgrounds to enhance our existing products and help us introduce new products to market. We expect to incur additional research and development expenses as a result. By expanding and continuously enhancing the Growth Direct platform, we believe we can drive incremental revenue from existing clients as well as broaden the appeal of our solutions to potential new customers.

Revenue mix

Our revenue is derived from sales of our Growth Direct systems, our LIMS connection software, proprietary consumables, and services. Growth Direct system revenue involves a capital selling process and tends to be somewhat concentrated within a small (but varied) group of customers each year. As a result, it is subject to variability from quarter to quarter.

Key business metrics

We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are representative of our current business; however, we anticipate these may change or be substituted for additional or different metrics as our business grows and evolves.

(dollars in thousands)

(dollars in thousands)

32

Growth Direct system placements

We consider a Growth Direct system to be “placed” upon transfer of control of the system to the customer, at which point the revenue for that system is recognized. We regularly review the number of Growth Direct systems placed and cumulative Growth Direct system placements in each period as a leading indicator of our business performance. Our revenue has historically been driven by, and in the future will continue to be impacted by, the rate of Growth Direct system placements as a reflection of our success selling and delivering our products. We expect our Growth Direct system placements to continue to grow over time as we increase penetration in our existing markets and expand into new markets.

The number of Growth Direct system placements and rate of growth varies from period-to-period due to factors including, but not limited to, Growth Direct system order volume and timing, and access to customer sites (including coronavirus related restrictions in 2022 and the timing of customer site construction activities). As a result, we expect to experience continued variability in our period-to-period number of Growth Direct system placements due to the aforementioned factors.

Validated systems

We regularly review the number of Growth Direct systems validated and cumulative Growth Direct systems validated in each period as indicators of our business performance. Management focuses on validated Growth Direct systems as a leading indicator of likely future recurring revenue as well as a reflection of our success supporting our customers in validating placed systems. We expect our validated Growth Direct systems to continue to grow over time as we increase our base of cumulative systems placed and then install and validate those systems. After a Growth Direct system is placed with a customer and installed, we work with the customer to validate the system, which typically takes anywhere from three to nine months. Once a validation has been completed, we generally expect our customers to transition from their legacy manual method to our automated method and begin regular utilization of consumables over a period of up to three months after the validation is completed. However, the timeline for such transition may be longer depending on the specific circumstances of each individual customer. In addition, in exceptional cases, we have reacquired Growth Direct systems from customers that were previously placed and, in some cases, previously validated. Our metrics showing cumulative systems placed and cumulative systems validated are not reduced to reflect these reacquired systems.

The number of validated Growth Direct systems and rate of growth varies from period-to-period due to factors including, but not limited to, Growth Direct system placement volume and timing, whether customers have previously validated Growth Direct systems within their site or network, access to customer sites, customer site readiness and the time to install and validate each individual system. As a result, we expect to experience continued fluctuations in our period-to-period number of Growth Direct systems validated due to the aforementioned factors.

Recurring revenue

We regularly assess trends relating to our recurring revenue, which is the revenue from consumables and service contracts, based on our product offerings, our customer base and our understanding of how our customers use our products. Recurring revenue was 55.5% and 61.4% of our total revenue for the three months ended September 30, 2023 and 2022, respectively. Recurring revenue was 63.4% and 63.2% of our total revenue for the nine months ended September 30, 2023 and 2022, respectively. Our recurring revenue as a percentage of the total product and service revenue will generally vary based upon the number of Growth Direct systems placed and the cumulative number of validated systems in the period, as well as other variables such as the volume of tests being conducted and the test application(s) being used on customers' Growth Direct systems.

Components of results of operations

Revenue

We generate revenue from sales of our Growth Direct system (including our LIMS connection software), consumables, validation services, service contracts, and field service. We primarily sell our products and services through direct sales representatives. The arrangements are noncancellable and nonrefundable after ownership passes to the customer.

(in thousands)

(in thousands)

Product revenue

We derive product revenue primarily from the sale of our Growth Direct systems and related consumables as well as our LIMS connection software, which the majority of our customers purchase. As of September 30, 2023, we had placed 135 Growth Direct systems to over 40 customers globally, including two-thirds of the top twenty pharmaceutical companies as measured by revenue and approximately 20% of globally approved cell and gene therapies, including approximately 80% of commercially available CAR-T therapies.

Growth Direct systems

Growth Direct system revenue is a non-recurring product revenue stream that we recognize as revenue upon transfer of control of the system to the customer. The Growth Direct system is fully functional for use by the customer upon delivery. Although we do not require our customers to use our installation and validation services, our customers typically elect to purchase those services from us. As such, transfer of control occurs at shipment or delivery depending on contractual terms.

We expect our Growth Direct system revenue to continue to grow over time as we increase system placements into our existing customers and markets and expand into new customers and markets.

Consumables

Our consumable revenue is a recurring product revenue stream composed of two proprietary consumables to capture test samples for analysis on the Growth Direct system, an Environmental Monitoring ("EM") consumable, and a Water/Bioburden ("W/BB") consumable. Both proprietary consumables support the growth-based compendial method for MQC testing mandated by global regulators and provide results that are comparable to traditional consumables. Our consumables are designed with features that enable automation on the Growth Direct system, with bar coding for tracking and data integrity, and physical characteristics for robotic handling, to support vision detection, and to prevent counterfeiting.

We expect consumable revenue to increase in future periods as our base of cumulative validated Growth Direct systems grows and those systems utilize our consumables on a recurring, ongoing basis.

LIMS Connection Software

Our LIMS connection software is a non-recurring product revenue stream. Although optional, the majority of our customers elect to purchase this software, which allows Growth Direct systems to export result reports and securely link to a customer’s two-way LIMS connection software to completely eliminate manual data entry and drive productivity.

Service revenue

We derive service revenue from validation services, field service including installations, and service contracts sold to our customers. Other than revenue from service contracts, which is recurring service revenue, revenue from all other field services as well as validation services are non-recurring service revenue streams.

We offer our customers validation services (including related documentation) that enable them to replace their existing manual testing method and utilize their Growth Direct systems in compliance with relevant MQC regulations. Validation services are recognized as revenue over time as these services are provided to the customer.

We offer our customers service contracts that can be purchased after the expiration of the one-year assurance warranty that all of our customers receive with the purchase of a Growth Direct system. Under these contracts, they are entitled to receive phone support, emergency on-site maintenance support and preventative maintenance visits. These service contracts generally have fixed fees and a term of one year. We recognize revenue from the sale of service contracts over time as these services are provided over the respective contract term.

We also offer our customers field service which primarily consists of services provided by our field service engineers to install Growth Direct systems at customer sites, perform one-time paid field service, and provide preventative maintenance service during the one-year assurance warranty period. We recognize revenue from installation services, one-time paid field service, and preventative maintenance service during the assurance warranty period over time as these services are provided to the customer.

We expect service revenue to increase in future periods as the number of placed and validated Growth Direct systems grows and we are able to generate increasing non-recurring revenue from validation services and field service for newly placed systems and increasing recurring revenue from service contracts for validated systems.

Costs and operating expenses

Costs of revenue

Cost of product revenue primarily consists of costs for raw material parts and associated freight, shipping and handling costs, salaries and other personnel costs including stock-based compensation expense, contract manufacturer costs, scrap, warranty cost, inventory reserves, royalties, depreciation and amortization expense, allocated information technology and facility-related costs, overhead and other costs related to those sales recognized as product revenue in the period.

Cost of service revenue primarily consists of salaries and other personnel costs including stock-based compensation expense, travel costs, materials consumed when performing installations, validations and other services, allocated information technology and facility-related costs, costs associated with training, and other expenses related to service revenue recognized in the period.

Research and development

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 Growth Direct platform and products, which include:

• employee-related expenses, including costs for salaries, bonuses and other personnel costs including stock-based compensation expense, for employees engaged in research and development functions;
• the cost of developing, maintaining and improving new and existing product designs;
• the cost of hardware and software engineering;
• research materials and supplies;
• external costs of outside consultants engaged to conduct research and development associated with our technology and products; and
• allocated information technology and facility-related costs, which include headcount-related costs for those functions as well as expenses for information technology systems and services, software, rent, maintenance of facilities and insurance as well as related depreciation and amortization.

Our research and development costs are expensed as incurred. We believe that our continued investment in research and development is essential to our long-term competitive position, and we expect these expenses to increase in future periods.

Sales and marketing

Sales and marketing expenses consist primarily of salaries, commissions, benefits and other personnel costs including stock-based compensation expense as well as costs relating to travel, consulting, public relations and allocated information technology and facility-related costs for our employees engaged in sales and marketing activities. We expect sales and marketing expenses to increase in future periods as the number of sales and marketing personnel grows and we continue to expand our geographic reach and capabilities, broaden our customer base and introduce new products.

General and administrative

General and administrative expenses consist primarily of salaries, bonuses and other personnel costs including stock-based compensation expense for our executive, finance, legal, human resources and general management employees, as well as director and officer insurance costs and professional fees for legal, patent, accounting, audit, investor relations, recruiting, consulting, regulatory, compliance, board of directors' fees and other services. General and administrative expenses also include direct and allocated information technology and facility-related costs. General and administrative expenses are expected to increase in future years as the number of administrative personnel grows to support increasing business size and complexity.

Other income (expense)

Interest income, net

Interest income, net is comprised primarily of interest income from investments.

Other income (expense), net

Other income (expense), net primarily consists of other miscellaneous income and expense unrelated to our core operations.

Income tax expense (benefit)

We generated significant taxable losses during the three and nine months ended September 30, 2023 and 2022 and, therefore, have not recorded any U.S. federal or state income tax expense during those periods. However, we did record an immaterial amount of foreign income tax expense during each of those periods. Additionally, as a result of a favorable outcome related to the tax examination for our German subsidiary, we recorded an income tax benefit of $0.6 million for the nine months ended September 30, 2022.

Results of operations

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

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

(in thousands)

Revenue

Product revenue increased by $1.0 million, or 30.9%, with $0.6 million of this increase attributable to a higher volume of system placements in the quarter and the remainder attributable to favorable increases in price and mix related to our consumables.

Service revenue increased by $0.4 million, or 27.1%. The increase in service revenue was primarily due to an increase in revenue from service contracts as a result of an increase in the cumulative number of Growth Direct systems validated and under such contracts. Increases in both installation and validation revenues also contributed to the increase in service revenue.

During 2022, including the third quarter, COVID-19 related restrictions had a negative effect on our product and service revenue. These restrictions have since eased and our increased access to customers has positively impacted our product and service revenue for the three months ended September 30, 2023 as compared to prior periods.

Costs and operating expenses

Costs of revenue

Cost of product revenue increased by $0.1 million, or 1.1%. The increase was driven primarily by costs associated with a higher volume of system placements of $0.4 million, $0.2 million related to consumables mix, and $0.4 million related to a temporary reduction in manufacturing efficiency due to downtime to implement enhancements to our automated consumables manufacturing line. The increase due to these factors was offset by a net reduction in other production costs recognized in the period of $0.9 million due in part to the benefit of higher production volumes.

Cost of service revenue increased by $0.2 million, or 9.4%. This increase was primarily attributable to greater headcount-related costs due to hiring of staff as well as incremental travel costs to support the higher number of validated systems at customer sites.

Research and development

(dollars in thousands)

Research and development expenses increased by $0.1 million, or 4.8%. This increase was primarily due to higher spending on new product development activities, including headcount-related costs, largely offset by lower third party spend.

Sales and marketing

(dollars in thousands)

Sales and marketing expenses decreased by $0.4 million, or 11.0%. This decrease was primarily the result of a reduction in nonrecurring severance-related costs related to our organizational restructuring announced in August 2022 (the "2022 Restructuring"). Excluding the impact of these nonrecurring costs, sales and marketing expenses decreased by $0.1 million in the three months ended September 30, 2023.

General and administrative

(dollars in thousands)

General and administrative expenses decreased by $1.0 million, or 13.7%. The decrease was attributable to a $1.4 million reduction in legal and investor relations-related costs as compared to the prior-year period when we received an unsolicited non-binding proposal from a stockholder to acquire the Company. Additionally, there was an overall net decrease of $0.1 million related to actions taken in connection with our 2022 Restructuring, including employee severance and retention. Higher stock compensation expenses of $0.5 million due mainly to annual equity grants partially offset the decreases described above.

Other income (expense)

Interest income

Interest income increased by $0.5 million, or 90.1%. The increase was due to higher interest rates earned on our investments.

Other (expense) income

Other (expense) income, which is comprised of miscellaneous expenses unrelated to our core business, remained flat for the three months ended September 30, 2023 and 2022.

Income tax expense

Income tax expense was less than $0.1 million for the three months ended September 30, 2023 and 2022. The expense is attributable to an income tax provision related to our German subsidiary.

Comparison of the nine months ended September 30, 2023 and 2022

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

(dollars in thousands)

Revenue

Product revenue increased by $2.5 million, or 30.2%. The increase was primarily due to higher volumes of both system placements and consumable shipments. Service revenue increased by $0.9 million, or 20.7%.

The increase in service revenue was primarily driven by an increase in revenue from service contracts as a result of an increase in the cumulative number of Growth Direct systems validated and under such contracts.

Costs and operating expenses

Costs of revenue

Cost of product revenue increased by $2.1 million or 16.2%. The increase in cost of product revenue was driven by higher volumes of both Growth Direct systems and consumables, which contributed $1.8 million. In addition, a temporary reduction in manufacturing efficiency due in part to downtime to implement enhancements to our automated consumables manufacturing line resulted in $1.2 million of additional cost. Partially offsetting these increased costs were reductions in labor and overhead spending coupled with a benefit from production activities totaling $0.7 million, and a $0.2 million reduction in other costs of product revenue.

Cost of service revenue increased by $0.7 million, or 12.0%. This increase was primarily attributable to headcount-related costs due to hiring of staff as well as incremental travel costs to support the growing number of validated systems at customer sites.

Research and development

(dollars in thousands)

Research and development expenses remained relatively flat, increasing less than $0.1 million, or 0.4%. This increase was primarily due to higher spending on new product development activities, including headcount-related costs, largely offset by lower third party spend.

Sales and marketing

(dollars in thousands)

Sales and marketing expenses decreased by $0.7 million, or 6.5%. This decrease was primarily due to a reduction in nonrecurring severance-related costs as well as lower compensation and benefit related costs as a result of headcount reductions made as part of our 2022 Restructuring, the latter of which impacted our non-quota carrying portion of our sales organization. Excluding the impact of the nonrecurring severance-related costs, sales and marketing expenses decreased by $0.1 million in the nine months ended September 30, 2023.

General and administrative

(dollars in thousands)

General and administrative expenses decreased by $0.3 million, or 1.5%. This decrease was attributable to a $0.8 million decrease in third-party spend due to cost savings initiatives implemented as part of our 2022 Restructuring, a $0.7 million reduction in legal and investor relations-related costs following an unsolicited non-binding proposal from a stockholder to acquire the Company in June 2022, a $0.4 million reduction in business insurance premiums and a $0.1 million decrease in other expenses. These decreases were largely offset by several increases including the $0.6 million impact of the retention bonus program we put into place in connection with our 2022 Restructuring, which replaced the annual bonus for eligible employees in 2022 and thereby decreased net bonus expense in the prior-year period. Additionally, higher stock compensation expenses of $0.6 million due mainly to annual equity grants made in the first quarter of 2023 and higher depreciation expense of $0.5 million related to capital improvements we made to our Lexington, Massachusetts back-up manufacturing facility in 2022 partially offset the decreases described above.

Other income (expense)

Interest income

Interest income increased $2.2 million, or 234.6% due to higher interest rates earned on our investments.

Other (expense) income

Other (expense) income, which is comprised of miscellaneous expenses unrelated to our core business, remained relatively flat for the nine months ended September 30, 2023 and 2022.

Income tax expense (benefit)

Income tax expense (benefit) was expense of less than $0.1 million for the nine months ended September 30, 2023 compared to a benefit of $0.6 million for the nine months ended September 30, 2022. Both the expense and the benefit recorded related to our German subsidiary. During the nine months ended September 30, 2022, we adjusted an uncertain tax liability we had recorded for that subsidiary as a result of the favorable outcome of an examination for the tax years 2016 through 2018, resulting in an income tax benefit in that period.

Liquidity and capital resources

Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily through proceeds from sales of redeemable convertible preferred stock, borrowings under loan agreements, revenue from sales of our products and services as well as under our contracts with BARDA and proceeds from our IPO.

We believe that our cash, cash equivalents and short- and long-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least twelve months following the date the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, were issued.

As of September 30, 2023, we had the following cash and investment-related assets on our condensed consolidated balance sheet (in thousands):

Contractual obligations and commitments

In October 2013, we entered into an operating lease for office and manufacturing space in Lowell, Massachusetts, which expires in July 2026. The terms of the lease include options for a one-time, five-year extension of the lease and early termination of the lease in July 2024 as well as a $0.7 million tenant improvement allowance which has been drawn down in full. In March 2022, we amended this lease to increase the amount of facility space subject to the lease and extend the expiration of the lease from July 2026 to July 2029. The terms of the amendment include options for a one-time, five-year extension of the lease and early termination of the lease in July 2026 (subject to an early termination fee) as well as a $0.3 million tenant improvement allowance. Monthly rent payments are fixed and future minimum lease payments under the lease (as amended) are $3.8 million as of September 30, 2023, including $0.6 million in short-term obligations.

In June 2021, we entered into a sublease agreement for office and back-up manufacturing space in Lexington, Massachusetts, which expires in June 2029. The sublease includes an option to terminate the sublease in July 2026, subject to an early termination fee. Monthly rent payments are fixed and future minimum lease payments over the term of the sublease are $4.3 million as of September 30, 2023, including $0.7 million in short-term obligations. Concurrent with entering into the sublease agreement, we executed an option agreement with the property owner which provides us the option to enter into a new direct lease for our Lexington, Massachusetts facility for an additional five years following expiration of the sublease.

Cash flows

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

Operating activities

During the nine months ended September 30, 2023, net cash used in operating activities was $35.6 million, a decrease of $11.3 million compared to the prior-year period. The lower use of net cash was primarily as a result of lower inventory purchases, the timing of payments to vendors, and increased receipts of our accounts receivable.

Investing activities

During the nine months ended September 30, 2023, net cash provided by investing activities was $32.1 million, compared to net cash used in investing activities of $106.3 million during the nine months ended September 30, 2022. The change was largely attributable to fewer purchases of investments and of property and equipment, as well as an increase in investment maturities.

Financing activities

During the nine months ended September 30, 2023, net cash provided by financing activities was $0.2 million, a decrease of $0.4 million compared to the nine months ended September 30, 2022, which was primarily related to a reduction in proceeds from stock option exercises.

Nasdaq Notice of Failure to Satisfy a Continued Listing Rule

On September 13, 2023, we received a notification letter from the Nasdaq Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market LLC notifying us that the bid price for our Class A common stock, par value $0.01 per share, had closed below $1.00 per share for thirty (30) consecutive business days (July 31, 2023 through September 11, 2023) and that, as a result, we were not in compliance with the minimum bid price requirement for continued inclusion on the Nasdaq Global Select Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). On September 26, 2023, we were informed by the Staff that we regained compliance with the Bid Price Requirement following ten (10) consecutive business days (September 12, 2023 through September 25, 2023) during which the closing bid price of our common stock was equal to or greater than $1.00 per share, and that this matter was closed.

Seasonality

Our revenues vary from quarter to quarter as a result of factors such as our customers’ budgetary cycles and extended summer vacation periods that can impact our ability to deliver products and provide onsite services to our customers during those periods. We expect this volatility to continue for the foreseeable future, which may cause fluctuations in our operating results and financial metrics.

Critical accounting estimates

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. Our estimates are based on our 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.

Our significant accounting policies are described in more detail in Note 2 — Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2022 Form 10-K, other than as disclosed in Note 2 — Summary of Significant Accounting Policies — to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Recently issued accounting pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 — Summary of Significant Accounting Policies — to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Emerging growth company status

The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, and our financial statements may not be comparable to other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.

We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of the IPO, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.

Further, even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and inflationary pressure. There has been no material change in our exposure to market risks from that discussed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our 2022 Form 10-K.

Limitations on effectiveness of controls and procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of disclosure controls and procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our disclosure controls and procedures are designed to ensure (a) that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer to allow timely decisions regarding required disclosures. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Investing in our common stock involves a high degree of risk. Information regarding risk factors appears in "Part I, Item 1A. Risk Factors" of our 2022 Form 10-K. Aside from the below, there have been no material changes in our risk factors from those previously disclosed in our 2022 Form 10-K.

Risks Related to the Financial Services Industry

Conditions in the banking system and financial markets, including the failure of banks and financial institutions, could have an adverse effect on our operations and financial results.

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10 and March 12, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank, Signature Bank and Silvergate Capital Corp, respectively, after each bank was unable to continue their operations. Since then, additional financial institutions have experienced similar failures and have been placed into receivership. It is possible that other banks will face similar difficulty in the future.

Although we do not maintain any deposit accounts, credit agreements or letters of credit with any financial institution currently in receivership, we are unable to predict the extent or nature of the impacts of these evolving circumstances at this time. If, for example, other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened. While it is not possible at this time to predict the extent of the impact that the failure of these financial institutions or the high market volatility and instability of the banking sector could have on economic activity and our business in particular, the failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact our business, financial condition and results of operations.