Maxcyte, Inc.: Form 10-Q for the period ended Sep 30, 2021

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our audited consolidated financial statements and related notes for the year ended December 31, 2020, included in our final prospectus dated July 29, 2021 (the “Final Prospectus”), as filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b)(4) on July 30, 2021, as well as the information contained under Management’s Discussion and Analysis of Financial Condition and Results of Operations and "Risk Factors" contained in the Final Prospectus, and “Risk Factors Summary” and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q , and other information provided from time to time in our other filings with the SEC.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements about us and our industry involve substantial risks, uncertainties, and assumptions, including those described in “Risk Factors Summary” and elsewhere in this report. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

• our expected future growth and the success of our business model;
• the potential payments we may receive pursuant to our Strategic Platform Licenses (“SPLs”);
• the size and growth potential of the markets for our products, and our ability to serve those markets, increase our market share and achieve and maintain industry leadership;
• the rate and degree of market acceptance of our products within the cell engineering market;
• the expected future growth of our manufacturing capabilities and sales, support and marketing capabilities;
• our ability to expand our customer base and enter into additional SPLs;
• our ability to accurately forecast and manufacture appropriate quantities of our products to meet commercial demand;
• our expectations regarding development of the cell therapy market, including projected growth in adoption of non-viral delivery approaches and gene editing manipulation technologies;
• our ability to maintain our FDA Master File and Technical Files;
• our research and development for any future products, including our intention to introduce new instruments and processing assemblies and move into new applications;
• the development, regulatory approval, and commercialization of competing products and our ability to compete with the companies that develop and sell such products;
• our ability to retain and hire senior management and key personnel;
• regulatory developments in the United States and foreign countries;
• our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;
• our ability to develop and maintain our corporate infrastructure, including our internal controls;
• our financial performance and capital requirements;
• our expectations regarding our ability to obtain and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others; and
• our use of available capital resources.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors Summary” in this report and under the caption “Risk Factors” and elsewhere in the Final Prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

You should read this Quarterly Report and the documents that we file with the SEC with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Overview

We are a leading commercial cell engineering company focused on providing enabling platform technologies to advance innovative cell-based research as well as next-generation cell therapeutic discovery, development and commercialization. Over the past twenty years, we have developed and commercialized our proprietary Flow Electroporation platform, which facilitates complex engineering through the delivery of molecules into a wide variety of cells. Electroporation is a method of transfection, or the process of deliberately introducing molecules into cells, that involves applying an electric field to temporarily increase the permeability of the cell membrane. This precisely controlled increase in permeability allows the intracellular delivery of molecules, such as genetic material and proteins, that would not normally be able to cross the cell membrane as easily.

Our ExPERT platform, which is based on our Flow Electroporation technology, has been designed to address this rapidly expanding cell therapy market and can be utilized across the continuum of the high-growth cell therapy sector, from discovery and development through commercialization of next-generation, cell-based medicines. The ExPERT family of products includes: three instruments, the ATx, STx and GTx; our portfolio of proprietary single-use processing assemblies, or disposables; and software protocols. We have garnered meaningful expertise in cell engineering via our internal research and development efforts as well as our customer-focused commercial approach, which includes a growing application scientist team. The platform is also supported by a robust intellectual property portfolio with 121 granted U.S. and foreign patents and 66 pending patent applications worldwide (counts based on individual country filings and grants for both direct and regional filings).

From leading commercial cell therapy drug developers and top biopharmaceutical companies to top academic and government research institutions, including the U.S. National Institutes of Health, or NIH, our customers have extensively validated our technology. We believe the features and performance of our platform have led to sustained customer engagement. Our existing customer base ranges from large biopharmaceutical companies, including all of the top 10, and 20 of the top 25, pharmaceutical companies based on 2020 global revenue, to hundreds of biotechnology companies and academic centers focused on translational research.

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 $23.7 million and incurred a net loss of $14.2 million for the nine months ended September 30, 2021. As of September 30, 2021, we had an accumulated deficit of $109.4 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 and field application scientist teams, scaling our manufacturing operations, and 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 in the United States.

Impact of COVID-19 on Our Business

We continue to closely monitor the impact of the novel coronavirus (“COVID-19”) pandemic on our business and the geographic regions where we operate. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world.

Impacts to our business as a result of COVID-19 have included disruptions to our manufacturing operations and supply chain caused by facility closures, reductions in operating hours, staggered shifts and other social distancing efforts, decreased productivity and delayed availability of materials or components, limitations on our employees’ and customers’ ability to travel, and delays in product installations, demonstrations, trainings or shipments to and from affected countries and within the United States. Disruptions in our customers’ operations have impacted and may continue to impact our business. In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers and the communities in which we operate, including temporarily closing our offices to visitors and limiting the number of employees in our offices to those that are deemed essential for manufacturing and research purposes, as well as virtualizing, postponing or canceling customer, employee and industry events.

We do not yet know the full impact that the COVID-19 pandemic may have on our business and cannot guarantee that it will not be materially negative. Although we continue to monitor the situation and may adjust our policies as more information and public health guidance become available, the ongoing effects of the COVID-19 pandemic and/or the precautionary measures that we or our customers have implemented or may adopt may create operational and other challenges, any of which could harm our business and results of operations.

Recent Developments

Our registration statement on Form S-1 related to our initial public offering of common stock in the United States (the “IPO”) was declared effective on July 29, 2021, and our common stock began trading on the Nasdaq Global Select Market on July 30, 2021. On August 3, 2021, we issued and sold 15,525,000 shares of common stock in the IPO at a price to the public of $13.00 per share, inclusive of 2,025,000 shares issued pursuant to the full exercise of the underwriters’ option to purchase additional shares. The IPO generated gross proceeds to us of $201.8 million. We received aggregate net proceeds of $184.3 million after deducting aggregate underwriting commissions and offering costs of $17.6 million. We believe that the net proceeds from the IPO, together with our existing cash, will enable us to fund our operating expenses and capital expenditure requirements for the foreseeable future. We have based this estimate on assumptions that may prove to be wrong, however, and we could exhaust our available capital resources sooner than we expect. See “Liquidity and Capital Resources” for more information about our current capital resources.

We have also continued to enter into Strategic Platform License (“SPL”) agreements with our cell therapy customers. These agreements are discussed in more detail in “Results of Operations” below and provide us with revenue from instrument technology access fees and disposables as well as downstream economics on our partners’ programs (both pre- and post-commercial). In the first nine months of 2021, we have signed SPL agreements with Myeloid Therapeutics, Celularity, Inc., and Sana Biotechnology. We continue to grow our SPL pipeline and, while the specific timing of any agreement is uncertain, we believe we have several potential opportunities to sign SPL agreements in the coming months.

We recognized $2.5 million and $2.0 million in program-related milestone revenue in the first nine months of 2021 and 2020, respectively. Although there is uncertainty around the timing and realization of milestones, as they are dependent on the regulatory activities and clinical success of our partners, we are encouraged by the potential for meaningful milestone revenue over the next 12 to 18 months as our partners progress through the clinic towards pivotal trials.

Results of Operations

Comparison of the Three Months Ended September 30, 2021 and 2020

The following table sets forth our results of operations for the periods presented:

(in thousands)

Revenue

We generate revenue principally from the sale of instruments and single-use processing assemblies (“PAs”) and buffer, and from the lease of instruments to our customers. In addition, our SPLs include clinical progress milestones and sales-based payments to us which may also provide material revenues.

In order to evaluate how our sales are trending across key markets, as well as the contribution of program economics from our SPLs, we separately analyze revenue derived from our cell therapy customers and drug discovery customers, as well as the performance-based milestone revenues we recognize under our SPLs. Cell therapy revenues include primarily revenue from instruments sold, annual license fees for instruments under lease, and sales of our proprietary disposables. Drug discovery revenue includes primarily revenue from instruments sold, sales of our proprietary disposables and, occasionally, instruments leased. Program-related revenues include clinical progress milestone and sales-based revenues derived from SPL agreements. Milestone revenues are recognized when a customer achieves the associated milestone event. To date, all Program-related revenue has consisted entirely of pre-commercial milestone revenue.

The following table provides details regarding the sources of our revenue for the periods presented:

(in thousands, except percentages)

Total revenue for the three months ended September 30, 2021 was $10.1 million, an increase of $3.4 million, or 50%, compared to revenue of $6.8 million during the three months ended September 30, 2020.

Our overall increase in revenue was primarily driven by growth in sales and licenses of instruments, and sales of disposables, in each case to cell therapy customers, as well as an increase in program-related revenue. In the cell therapy market, instrument sales and licenses of instruments increased by $1.5 million which was primarily due to continued high levels of capital invested in companies operating in our target markets, while disposable sales increased by $0.2 million, as a result of the continued progression of our cell therapy partners’ therapeutic development programs. In the drug discovery market, the $0.1 million decrease was primarily driven by a $0.3 million decrease in instrument sales, partially offset by a $0.3 million increase in sales of disposables. The $1.8 million increase in program-related revenues resulted from clinical progress of our SPL customers, consistent with the expected variability of milestone revenues given the small number of individual triggering events which currently generate this portion of revenue. We expect program-related revenue to experience variability for some time, although we anticipate that it may moderate as the volume of SPLs and associated milestones grows.

We expect total revenue to increase over time as our markets grow and we are able to secure additional instrument and disposable sales and as the percentage of our installed base that are under cell therapy license agreements increases. We expect revenue from instruments licensed to cell therapy customers to continue to grow as those customers move their existing drug development programs into later-stage clinical trials and advance their preclinical pipeline programs into clinical development. In addition, we expect new customers to emerge and contribute to these revenues, particularly given the underlying growth in the cell therapy pipeline among companies in this market, continued availability of capital to support such companies, and in particular the switch by some of these cell therapy companies away from viral to non-viral approaches. We expect, however, that our revenue will fluctuate from period to period due to the timing of securing product sales and licenses, the inherently uncertain nature of the timing of our partner’s milestone achievements and our dependence on the program decisions of our partners.

Costs of Goods Sold and Gross Profit

Costs of goods sold primarily consists of costs for instrument and processing assembly components, contract manufacturer costs, salaries, overhead and other direct costs related to sales recognized as revenue in the period. Costs of goods sold associated with instrument lease revenue consists of leased equipment depreciation. Gross profit is calculated as revenue less costs of goods sold. 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 sales mix among instruments, disposables and milestones, the specific mix among types of instruments or disposables, the proportion of revenues associated with instrument leases as opposed to sales, changes in the costs to produce our various products, the launch of new products or changes in existing products, our cost structure for manufacturing including changes in production volumes, and the pricing of our products which may be impacted by market conditions.

During the three months ended September 30, 2021, gross margin was 91%, compared to 89% in the same period of 2020. The increase in gross margin was principally due to increased milestone revenues, which have no associated cost of goods sold. Our margins depend on the revenue mix from instruments, PAs and potential milestones under SPLs. We price our instruments at a premium given what we believe to be the broad benefits of our platform, and the limited availability of alternative, clinically validated non-viral delivery approaches. However, the market for non-viral delivery is highly competitive, and introduction of a GMP-grade platform by a competitor that delivers similar performance across a similar diversity of cell types could negatively impact our business and lead to increased price pressure that negatively impacts our gross margins.

In addition, part of our growth strategy is to expand into new regional markets, which could require the use of distributors and/or our participation in more competitive environments, which could impact our ability to price our instruments at a premium and could negatively impact our ability to enter into SPLs on terms similar to those currently in effect.

(in thousands, except percentages)

Costs of goods sold increased by $0.2 million, or 28%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily driven by higher sales of instruments and disposables.

Gross profit increased by $3.2 million, or 53%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily driven by increased revenue from instrument and disposable sales, licensed instruments and program-related revenue.

We expect that our cost of goods sold will generally increase or decrease as our instrument and disposables revenue increases or decreases. We expect our gross margin to benefit from realization of the economics from our SPL agreements, to the extent that such milestones grow to be a significant proportion of overall revenues, as there is no cost of goods sold associated with such revenue. However, realization and timing of these potential milestone revenues is uncertain.

Operating Expenses

Research and Development

(in thousands, except percentages)

Research and development expenses consist primarily of costs incurred for our research activities related to advancing our technology and development of applications for our technology, including research into specific applications and associated data development, process development, product development (e.g., development of instruments and disposables, including hardware and software engineering) and design and other costs not directly charged to inventory or cost of goods sold.

These expenses principally include employee-related costs, such as salaries, benefits, incentive compensation, stock-based compensation, and travel, as well as consultant services, facilities, and laboratory supplies and materials. We expense research and development costs as incurred in the period in which the underlying activity is undertaken.

For periods through the first half of 2021, our research and development expenses included costs associated with developing the CARMA platform principally for a concluded clinical trial. There were no material CARMA-related expenses in the third quarter of 2021. As a result of our strategic decision to focus on out-licensing this platform, we will no longer incur any material CARMA-related expenses in future periods.

Research and development expenses decreased by $1.7 million, or 39%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The decrease was primarily driven by a $2.5 million decrease in CARMA expenses as a result of the wind-down of CARMA operations, partially offset by a $0.4 million increase in stock-based compensation expenses primarily due to stock price appreciation and a $0.3 million increase in headcount, occupancy and lab expenses.

We believe that our continued investment in research and development is essential to our long-term competitive position. We expect to continue to incur substantial research and development expenses as we invest in research and development to support our customers, develop new uses for our existing technology and develop improved and/or new offerings for our customers and partners. As a result, we expect that our research and development expenses, excluding CARMA-related expenses, will continue to increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.

Sales and Marketing

(in thousands, except percentages)

Our sales and marketing expenses consist primarily of salaries, commissions and other variable compensation, benefits, stock-based compensation and travel costs for employees within our commercial sales and marketing functions, as well as third-party costs associated with our marketing activities.

Sales and marketing expenses increased by $1.2 million, or 58%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily driven by a $0.6 million increase in compensation expenses as a result of increases in headcount and a $0.3 million increase in stock-based compensation primarily due to stock price appreciation.

We expect our sales and marketing expenses to increase in future periods as we expand our commercial sales, marketing and business development teams, product offerings, expand our collaboration efforts, increase our presence globally, and increase marketing activities to drive awareness and adoption of our products.

General and Administrative

(in thousands, except percentages)

General and administrative expenses primarily consist of salaries, benefits, stock-based compensation and travel costs for employees in our executive, accounting and finance, legal, corporate development, human resources, and office administration functions as well as professional services fees, such as consulting, audit, tax and legal fees, general corporate costs, facilities and allocated overhead expenses and costs associated with being a Nasdaq and AIM listed public company such as director fees, U.K. NOMAD and broker fees, investor relations consultants and insurance costs.

General and administrative expense increased by $3.3 million, or 144%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily driven by a $0.9 million increase in compensation expense associated with headcount and salary increases, a $1.0 million increase in stock-based compensation primarily due to stock price appreciation, and a $1.1 million increase in expenses associated with the costs of our common stock being listed on the Nasdaq stock exchange, as well as legal and professional services.

We expect that our general and administrative expenses will continue to increase in absolute dollars in future periods, primarily due to increased headcount to support anticipated growth in the business and due to incremental costs associated with operating as a public company listed on a U.S. exchange, including insurance (particularly directors and officers insurance), costs to comply with the rules and regulations applicable to companies listed on a U.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and stock exchange listing standards, investor relations and professional services. We expect these expenses to vary from period to period as a percentage of revenue.

Interest and Other Income (Expense)

(in thousands, except percentages)

Interest and other expense slightly increased for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily driven by the MidCap warrant valuation adjustments, partially offset by decrease in interest expense driven by the repayment of the MidCap loan in March 2021. We currently maintain no outstanding debt facility. Interest and other income and expense was immaterial for the three months ended September 30, 2021 and 2020.

Comparison of the Nine Months Ended September 30, 2021 and 2020

The following table sets forth our results of operations for the periods presented:

(in thousands)

Revenue

The following table provides details regarding the sources of our revenue for the periods presented:

(in thousands, except percentages)

Total revenue for the nine months ended September 30, 2021 was $23.7 million, an increase of $6.1 million, or 34%, compared to revenue of $17.7 million during the nine months ended September 30, 2020.

Our overall increase in revenue was primarily driven by growth in sales and licenses of instruments, sales of disposables to cell therapy customers and program-related milestone revenue. In the cell therapy market, revenue from instrument sales and licenses of instruments increased by $3.8 million, which was primarily due to continued high levels of capital invested in companies operating in our target markets, while disposables sales increased by $1.2 million as a result of the continued progression of our cell therapy partners’ clinical development programs. In the drug discovery market, the $0.6 million increase was due to a $0.9 million increase in sales of disposables, which was driven by sales of newly introduced multi-well processing assemblies, partially offset by a $0.4 million decrease in sales of instruments. The $0.5 million increase in program-related revenues resulted from expected variability from period to period in the level of program-related revenue given the small number of individual triggering events which currently generate this portion of revenue. We expect program-related revenue to experience variability for some time, although we anticipate that it may moderate as the volume of SPLs and associated milestones grows.

Costs of Goods Sold and Gross Profit

(in thousands, except percentages)

Cost of goods sold increased by $0.6 million, or 30%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily driven by higher sales of instruments and disposables.

Gross profit increased by $5.5 million, or 35%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily driven by increased revenue from instrument and disposable sales, licensed instruments and program-related revenue.

Operating Expenses

Research and Development

(in thousands, except percentages)

Research and development expenses decreased by $0.8 million, or 6%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was primarily driven by a $3.2 million decrease in CARMA expenses as a result of the wind-down of CARMA operations, partially offset by a $1.0 million increase in compensation expenses associated with headcount increases, a $0.7 million increase in stock-based compensation primarily due to stock price appreciation, a $0.3 million increase in lab supplies expenses and a $0.2 million increase in occupancy expenses.

Sales and Marketing

(in thousands, except percentages)

Sales and marketing expenses increased by $3.0 million, or 50%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily driven by a $1.9 million increase in compensation expenses as a result of increases in headcount and commissions on sales and a $0.7 million increase in stock-based compensation primarily due to stock price appreciation and a $0.2 million increase in marketing expenses.

General and Administrative

(in thousands, except percentages)

General and administrative expense increased by $7.9 million, or 139%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily driven by a $2.5 million increase in compensation expense associated with headcount and salary increases, a $2.4 million increase in stock-based compensation primarily due to stock price appreciation, a $1.7 million increase in expenses including legal and professional services, a $0.5 million increase in expense associated with the costs of our common stock being listed on the Nasdaq stock exchange, and a $0.5 million increase in occupancy, depreciation and other general expenses.

Interest and Other Income (Expense)

(in thousands, except percentages)

Interest and other income were immaterial in the nine months ended September 30, 2021 and 2020. Interest and other expense increased by $0.5 million, or 92%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily driven by the termination fees associated with repayment before maturity of the MidCap loan and the fair value change of common stock warrants.

Liquidity and Capital Resources

Since our inception, we have experienced losses and negative cash flows from operations. For the three and nine months ended September 30, 2021, we incurred net losses of $2.7 million and $14.2 million, respectively. As of September 30, 2021, we had an accumulated deficit of $109.4 million. To date, we have funded our operations primarily with proceeds from sales of common stock, borrowings under loan agreements and from revenues associated with sales and licenses of our products to customers. As of September 30, 2021, we had cash and cash equivalents and short-term investments of $255.9 million. On August 3, 2021, we completed our IPO, generating gross proceeds of $201.8 million. We received net proceeds of $184.3 million after deducting aggregate underwriting commissions and offering expenses of $17.6 million.

We expect to incur increased near term operating losses as we continue to invest in expanding our business through growing our sales and marketing efforts, continued research and development, product development and expanding our product offerings. Based on our current business plan, we believe the net proceeds from the IPO, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for the foreseeable future.

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 acceptance of our products;
• the cost and timing of establishing additional sales, marketing and distribution capabilities;
• the cost of our research and development activities and successful development of data supporting use of our products for new applications, and timely launch of new features and products;
• our ability to enter into additional SPLs and licenses for clinical use of our platform in the future;
• changes in the amount of capital available to existing and emerging customers in our target markets;
• the effect of competing technological and market developments; and
• the level of our selling, general and administrative expenses.

If we are unable to execute on our business plan and adequately fund operations, or if the business plan requires a level of spending in excess of cash resources, we will have to seek additional equity or debt financing. If additional financings are required from outside sources, we may not be able to raise such capital on terms acceptable to us or at all.

To the extent that we raise additional capital through the sale of equity or debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making product acquisitions, making capital expenditures or declaring dividends. 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 are unable to raise additional capital when desired, we may have to delay development or commercialization of future products. We also may have to reduce marketing, customer support or other resources devoted to our existing products.

Cash Flows

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

(in thousands)

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2021 was $9.7 million, and consisted primarily of our net loss of $14.2 million, offset in part by net non-cash expenses of $7.2 million, including stock-based compensation of $5.5 million, warrant liability fair value adjustments of $0.6 million, and depreciation and amortization expenses of $1.0 million. We also had net cash outflows of $2.7 million due to net changes in our operating assets and liabilities. Net changes in our operating assets and liabilities consisted primarily of an increase in deferred revenue (consisting primarily of unrecognized instrument license revenue) of $1.5 million and a decrease in the net effect of our right-of-use assets and lease liabilities of $0.2 million, partially offset by a $2.5 million increase in prepaid expenses (other current assets), a $0.4 million decrease in accounts payable and accrued expenses, a $0.8 million increase in accounts receivable, a $0.3 million increase in inventory and a $0.3 million increase in other non-current assets.

Net cash used in operating activities for the nine months ended September 30, 2020 was $6.9 million, and consisted primarily of our net loss of $9.2 million, offset in part by non-cash expenses of $2.6 million, including stock-based compensation of $1.7 million and depreciation and amortization expenses of $0.8 million. We also had net cash outflows of $0.3 million due to changes in our operating assets and liabilities. Net changes in our operating assets and liabilities consisted primarily of an increase in deferred revenue of $1.5 million, partially offset by a $0.5 million decrease in accounts payable and accrued expenses, a $0.8 million increase in inventory, a $0.4 million increase in accounts receivable and a $0.4 million increase in other current and non-current assets.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2021 was $183.6 million, which was primarily attributable to net purchases of short-term marketable securities of $180.9 million, as well as purchases of property and equipment of $0.9 million, capitalized new product development costs of $1.5 million and capitalized lease-related expenses of $0.3 million. Purchases of short-term marketable securities are made as part of ordinary course investing activities in compliance with our investment policy which has as its primary objective preservation of principal.

Net cash used in investing activities during the nine months ended September 30, 2020 was $16.2 million, which was primarily attributable to net purchase of short-term marketable securities of $14.5 million and purchases of property and equipment of $1.7 million.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2021 was $233.5 million, which was primarily attributable to net proceeds of $236.1 million, including $51.8 million from the issuance of common stock in the first quarter and $184.3 million from the IPO in the third quarter of 2021, and proceeds of $2.4 million from the exercise of stock options, partially offset by the repayment of the Midcap loan of $4.9 million.

Net cash provided by financing activities during the nine months ended September 30, 2020 was $28.8 million, which was primarily attributable to net proceeds of $28.6 million from the issuance of common stock.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of September 30, 2021 consisted of operating lease obligations. On May 27, 2021, we entered into an operating lease for new office, lab and warehouse/manufacturing space. The lease for the new facility consists of three phases, with Phase 1 estimated to commence by the end of 2021, and the lease of all phases is estimated to expire on July 27, 2035. We and the landlord each have a one-time right to terminate Phase 3 of the lease associated with 13,543 square feet during a defined time window. We will design and construct the leasehold improvements with the approval of the landlord. The landlord will reimburse us for costs of property improvements up to amounts specified in the lease. The total incremental non-cancellable lease payments under the new lease agreements are approximately $24.6 million through the lease term.

On June 8, 2021, we exercised our option to early terminate the terms of one of our existing office space lease arrangements. The amended office lease expires on June 7, 2022.

As of September 30, 2021, operating lease obligations included $1.2 million in payments due under our lease of office and laboratory space under operating lease agreements that expire in October 2023. In August 2021, we terminated a finance lease and as of September 30, 2021, we do not have any finance lease obligations.

Purchase orders or contracts for the purchase of supplies and other goods and services are based on our current procurement or development needs and are generally fulfilled by our vendors within short time horizons.

Critical Accounting Policies and Significant Judgments and Estimates

We have prepared our condensed consolidated financial statements in accordance with U.S. GAAP. Our preparation of these condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates from those disclosed in our consolidated financial statements and the related notes and other financial information included in the Final Prospectus.

JOBS Act Accounting Election

We are an “emerging growth company,” or EGC, under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107 of the JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of the delayed adoption of new and revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as private entities. We also intend to rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

We will remain an EGC until the earliest of (i) December 31, 2026, (ii) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (iii) the date on which we have issued more than $1 billion in non-convertible debt during the previous rolling three-year period, or (iv) the date on which we are deemed to be a “large accelerated filer” under SEC rules.

Recent 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 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Interest Rate Risk

We are exposed to market risk for changes in interest rates related primarily to balances of our financial instruments including cash and cash equivalents and short-term investments. As of September 30, 2021, we had cash and cash equivalents and short-term investments of $255.9 million, which consisted primarily of money market funds and commercial paper. The primary objective of our investment approach is to preserve principal and provide liquidity. As of September 30, 2021, we held money market fund securities of $20.5 million, short-term corporate debt of $5.2 million and short-term commercial paper of $227.9 million. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates in the United States. A 10% change in the level of market interest rates would not have a material effect on our business, financial condition or results of operations.

Foreign Currency Risk

We are exposed to financial risks as a result of exchange rate fluctuations between the U.S. dollar and certain foreign currencies and the volatility of these rates. In the normal course of business, we earn revenue primarily denominated in U.S. Dollars as well as in Euros and British Pounds. We incur expenses primarily in U.S. Dollars as well as in Euros, British Pounds and other currencies. Our reporting currency is the U.S. Dollar. We hold our cash primarily in U.S. Dollars as well as in Euros and British Pounds. We do not expect that foreign currency gains or losses will have a material effect on our financial position or results of operations in the foreseeable future. We have not entered into any hedging arrangements with respect to foreign currency risk. As our international operations grow, we will continue to reassess our approach to managing risks relating to fluctuations in currency exchange rates.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of our “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 SEC’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.

Based on our evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective as of September 30, 2021 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Our business is subject to numerous risks. You should carefully consider the risks and uncertainties described in this report under the caption “Risk Factors Summary,” in addition to other information contained in this report as well as our other public filings with the SEC from time to time.

There have been no material changes to the risk factors set forth in the Final Prospectus filed with the SEC on July 30, 2021, which are incorporated herein by reference. However, the risk factors described in this report and in the Final Prospectus are not the only risks that we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any such risks materialize, it could have a material adverse effect on our business, financial condition, results of operations and growth prospects and cause the trading price of our common stock to decline.