908 Devices Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 8, 2024 (“2023 Form 10-K”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in “Item 1.A. Risk Factors” section of our 2023 Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We have developed an innovative suite of purpose-built handheld and desktop devices for point-of-need chemical analysis. Leveraging complementary analytical technologies including our proprietary mass spectrometry, or Mass Spec, microfluidics, and analytics and machine learning technologies, we make devices that are significantly smaller and more accessible than conventional laboratory instruments. Our devices are used at the point-of-need to interrogate unknown and invisible materials and provide quick, actionable answers to directly address some of the most critical problems in forensics, bioprocessing, pharma/biopharma, life science research and adjacent markets.

We create simplified measurement devices that our customers can use as accurate tools where and when their work needs to be done, rather than overly complex and centralized analytical instrumentation. We believe the insights and answers our devices provide will accelerate workflows, reduce costs, and offer transformational opportunities for our end users.

Front-line workers rely upon our handheld devices to combat the opioid crisis and detect counterfeit pharmaceuticals and illicit materials in the air or on surfaces at levels 1,000 times below their lethal dose. First responders also utilize our handheld devices to detect and identify thousands of hazardous bulk materials. Our desktop devices are accelerating development and production of biotherapeutics by identifying and quantifying extracellular species in bioprocessing critical to cell health and productivity. They sit alongside or are directly connected to bioreactors and fermenters producing drug candidates, functional proteins, cell and gene therapies, and synthetic biology derived products. We believe the insights and answers our devices provide accelerate workflows, reduce costs, and offer transformational opportunities for our end users. The term “products” as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refers to the MX908, ThreatID, ProtectIR, XplorIR, Rebel, ZipChip Interface, Maverick, Maven and related sampling devices.

On April 29, 2024, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) with CAM2 Technologies, LLC (d/b/a RedWave Technology) (“RedWave”), CAM3 HoldCo, LLC, a Connecticut limited liability company (“Seller Entity”), each of the holders of outstanding equity interests of Seller Entity (the “Beneficial Sellers”), and the other parties thereto, pursuant to which the Company purchased all of the outstanding equity interests of RedWave, and the transaction closed on the same day. The purchase price included an initial payment of $45.0 million in cash and 1,497,171 unregistered shares of the Company’s common stock, which reflects closing adjustments relating to working capital, cash and debt adjustments. The cash consideration is subject to additional working capital, cash, debt, and transaction expense adjustments. RedWave is a leading provider of portable FTIR spectroscopic analyzers for rapid chemical identification of bulk materials. FTIR (Fourier Transform Infrared), an optical spectroscopy technology, is highly regarded for its specific substance identification abilities across a broad range of bulk materials. This acquisition provides the Company with an expanded portfolio of handheld chemical analysis devices for forensic workflows that quickly detect and identify unknown solids, liquids, vapors, and aerosols at the point of need. In addition, RedWave bolsters the Company’s desktop portfolio with a line of accessories for pharma Process Analytical Technology (PAT) and industrial QC applications.

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 $24.0 million and $21.6 million for the six months ended June 30, 2024 and 2023, respectively, and incurred net losses of $23.5 million and $21.9 million for those same periods. As of June 30, 2024, we had an accumulated deficit of $194.1 million. We expect to continue to incur net losses as we focus on growing sales of our products in both the United States and international markets, including expanding our sales teams as we grow, scaling our manufacturing operations, continuing research and development efforts to develop new products and further enhance our existing products. Further, we expect to incur additional costs associated with operating as a public company. As a result, we may need additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research and development expenses.

Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Until such time, if ever, as we can generate substantial revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings, debt financings and strategic alliances. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations.

We believe that our existing cash and cash equivalents and revenue from product and service will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “Liquidity and Capital Resources.”

Global Economic Conditions

We are continuing to closely monitor macroeconomic factors, including, but not limited to, continued inflationary and interest rate pressures, challenging capital market conditions and the limited availability of financing alternatives, which may have an impact on our business, results of operations and financial results.

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

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

Challenging capital market conditions and the limited availability of financing alternatives, together with inflationary and interest rates pressures, may contribute to more cautious spending by our customers. Certain of our pharmaceutical and biotechnology customers, including bioprocessing customers, may evaluate their inventory levels, cash on hand and path to profitability, and institute cost controls and take other actions to reduce or delay purchases of our products and services. We cannot accurately predict the full impact of current macroeconomic factors on the budgets and capital expenditures of our customers, or the timing of the normalization of customer purchasing patterns.

We are closely monitoring the ongoing military conflict between Russia and Ukraine, and the ongoing hostilities in Israel and the Gaza Strip. Although we do not directly source any material products or supplies from Russia, Ukraine, Israel or the Gaza Strip, our customers in Europe and the Middle East could be impacted by extended conflicts or an escalation of these conflicts into neighboring countries.

While it is difficult to predict all of the impacts these global economic events and continued inflationary and interest rate pressures will have on our business and to predict the effects of these factors on our customers’ spending in the near term, we believe the long-term opportunity that we see for our products and services remain unchanged.

For further discussion of the possible impacts of these global factors and other risks on our business, see Part I, Item 1A, “Risk Factors,” of our 2023 Form 10-K.

Factors Affecting Our Performance

We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address to sustain our growth and improve our results of operations. Our ability to successfully address the factors below is subject to various risks and uncertainties.

Device sales

Our financial performance has largely been driven by, and in the future will continue to be impacted by, the rate of sales of our handheld and desktop devices. Management focuses on device sales as an indicator of current business success and a leading indicator of likely future recurring revenue from consumables and services. We expect our device sales to continue to grow as we increase penetration in our existing markets and expand into, or offer new features and solutions that appeal to, new markets.

We plan to grow our device sales in the coming years through multiple strategies including expanding our sales efforts domestically and globally and continuing to enhance the underlying technology and applications for bioprocessing and life sciences research related to our Maverick, Rebel, ZipChip Interface, and Maven and related sampling devices. We regularly solicit feedback from our customers and focus our research and development efforts on enhancing our devices and enabling our customers to use additional applications that address their needs, which we believe in turn helps to drive additional sales of our devices and consumables.

Our sales process varies considerably depending upon the type of customer to whom we are selling. Our handheld device orders relate to our MX908, ThreatID, ProtectIR, and XplorIR, as well as components for the Aerosol and Vapor Chemical Agent Detectors (“AVCAD”) sold to our channel partner. Historically, our handheld devices have been used by municipal, state, federal and foreign governments and governmental agencies. Our sales process with government customers is often long and involves multiple levels of approvals, testing and, in some cases, trials. Device orders from a government customer are typically large orders and can be impacted by the timing of their capital budgets. As a result, the revenue for our handheld devices can vary significantly from period-to-period and has been and may continue to be concentrated in a small number of customers in any given period.

Our desktop devices are typically used by the pharmaceutical, biotechnology and academia markets. Our sales cycles within these markets tend to vary based on the size of the customer and the number of devices they purchase. Our shortest sales cycles are typically for small laboratories and individual researchers where, in some cases, we receive purchase orders from these customers within three months. Our sales process with other institutions can be longer with most customers submitting purchase orders within six to twelve months. Given the variability of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our desktop device sales on a period-to-period basis.

Recurring revenue

We regularly assess trends relating to recurring revenue which includes consumables, accessories and services based on our product offerings, our customer base and our understanding of how our customers use our products. Recurring revenue was 41% and 39% of total product and service revenue for the six months ended June 30, 2024 and 2023, respectively. Our recurring revenue as a percentage of total product and service revenue will vary based upon new device placements in the period. As our device installed base expands, recurring revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our revenue.

Revenue from the sales of consumables will vary by type of device. We expect that recurring revenue as a percentage of the original device price to be higher for our desktop devices (Rebel, ZipChip Interface, Maverick, Maven and related sampling devices) than for our handheld devices (MX908, ThreatID, ProtectIR, and XplorIR). While we sell single-use swab samplers for MX908 to be used in liquid and solid materials analysis, there are a number of other applications that the MX908 can be used for that do not require consumables. ThreatID, ProtectIR, and XplorIR do not have consumables. Rebel and ZipChip

Interface require consumables kits for all areas of operations. Currently, Rebel customers, who are actively utilizing the device, are consuming on average approximately half a 200-sample kit per month; however, Rebel is a relatively new product and purchasing patterns related to our consumables kits are evolving. We expect that the number of kits sold per month will vary over the short term. In time, we expect Rebel consumables kits sales to become more consistent as our installed base grows and our customers establish usage patterns. At maximum potential capacity, with continuous operation, the Rebel can consume approximately one 200-sample kit per day. Maverick devices require consumables, probes and standards for all areas of operations. Maven and related sampling devices require consumable sets of buffers, probes and biosensors for all areas of operations.

Revenue mix and gross margin

Our revenue is derived from sales of our devices, consumables, accessories and services. There will be fluctuations in mix between devices and recurring from period-to-period. Over time, as our device installed base grows and we see adoption of Rebel, we expect consumables revenue to constitute a larger percentage of product and service revenue. However, the percentage will be subject to fluctuation based upon our handheld sales in a period. In addition, our selling price and, consequently, our margins, are higher for those devices and recurring revenue that we sell directly to customers as compared to those that we sell through channel partners. While we expect the mix of direct sales as compared to sales through channel partners to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies.

Future device and recurring selling prices and gross margins may fluctuate due to a variety of factors, including the introduction by others of competing products and solutions. We aim to mitigate downward pressure on our average selling prices by increasing the value proposition offered by our devices and consumables and accessories, primarily by expanding the applications for our devices and increasing the quantity and quality of data that can be obtained using our consumables.

Product adoption

We monitor our customers’ stages of adoption of our products to provide insight into the timing of future potential sales and to help us formulate financial projections. Typical stages of adoption include testing, trials, pilot and deployment as follows:

• Testing - a customer is actively engaged with internal or external testing of our products. This may include an onsite or virtual demonstration with a salesperson, a customer submitting samples for testing in one of our facilities or testing by a third party.
• Trials - a customer has committed to a trial of one of our products, which may include a defined period to assess functionality of the device in their operational environment (in the field or onsite within the customer’s facility).
• Pilot - a customer commits to the purchase of an initial quantity of devices to deploy in their operational environment to assess a broader opportunity that may grow to tens or hundreds of devices.
• Deployment - a customer has completed testing, a trial, and/or a pilot and intends to roll out the technology across their enterprise (either at a site or throughout the entire organization).

Key Business Metrics

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

During the six months ended June 30, 2024 and 2023, our product placements (units recognized as revenue) were as follows:

The number of product placements vary considerably from period-to-period due to the type and size of our customers and concentrations among larger government customers as described above. We expect continued fluctuations in our period-to-period number of product placements.

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

Components of Our Results of Operations

Revenue

Product and Service Revenue

We generate product and service revenue from the sale of our devices and recurring revenue from the sale of consumables, accessories and services. Device sales accounted for 59% and 61% of our product and service revenue for the six months ended June 30, 2024 and 2023, respectively. Recurring revenue accounted for 41% and 39% of our product and service revenue for the six months ended June 30, 2024 and 2023, respectively.

Our current device offerings include:

• Handheld devices— MX908 ThreatID, ProtectIR, XplorIR and AVCAD components; and
• Desktop devices—Rebel and ZipChip Interface, Maverick, and Maven and related sampling devices.

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

Our consumables consist of:

• MX908—accessories and swabs;
• Rebel—consumables kit with a microfluidic chip and standards;
• ZipChip Interface—microfluidic chip, reagent and assay kits;
• Maverick—calibration kits and accessories; and
• Maven and related sampling devices—probes, tubing sets and accessories.

Rebel and ZipChip Interface consumables can only be used with our devices and there are no alternative after-market options that can be used as a substitute. Each chip is used for a defined number of samples (or runs). We recognize revenue from the sale of consumables as the consumable products are shipped.

We also offer our customers extended warranty and service plans. Our extended warranty and service plans are offered for periods beyond the standard one-year warranty that all of our customers receive. These extended warranty and service plans generally have fixed fees and terms ranging from one additional year to four additional years. We recognize revenue from the sale of extended warranty and service plans over the respective coverage period, which approximates the service effort provided by us.

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

Contract revenue

Contract agreements are arrangements whereby we provide engineering services for the development of our technology platform for specific programs or new and expanding applications of our technologies for future commercial endeavors. Our contract agreements are with the U.S. government and commercial entities (who may be contracting with the government). Contracts typically include compensation for labor effort and materials incurred related to the deliverables under the contract. Our contract revenue was related to one customer during the six months ended June 30, 2024 and 2023, respectively.

During the three and six months ended June 30, 2024 and 2023, our revenue was comprised of revenue from the following sources:

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

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

Cost of Revenue, Gross Profit and Gross Margin

Product cost of revenue primarily consists of costs for raw material parts and associated freight, shipping and handling costs, royalties, contract manufacturer costs, salaries and other personnel costs, overhead, amortization of intangibles and other direct costs related to those sales recognized as product revenue in the period.

Cost of revenue for services primarily consists of salaries and other personnel costs, travel related to services provided, facility costs associated with training, warranties and other costs of servicing equipment on a return-to-factory basis and at customer sites. Contract cost of revenue primarily consists of salaries and other personnel costs, materials, travel and other direct costs related to the revenue recognized in the period. The contract cost of revenue will vary based upon the type of contract, including whether it is primarily for development services or for both materials and development services.

We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases and depending on how many contracts we have ongoing at any given point in time and the stage of those contracts.

Gross profit is calculated as revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including: market conditions that may impact our pricing, sales mix among devices, sales mix changes among consumables, excess and obsolete inventories, our cost structure for manufacturing operations relative to volume, and product warranty obligations. Our gross profit in future periods will vary based upon our channel mix and may decrease based upon our distribution channels and the potential to establish original equipment manufacturing channels for certain components of our technology platform which would have a lower gross margin.

We expect that our gross profit margin for product and service will increase over the long term as our sales and production volumes increase and our cost per unit decreases due to efficiencies of scale. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing, which we believe will reduce costs and increase our gross margin. We expect that our gross profit margin for contract will remain consistent for our contracts that are cost reimbursement contracts.

Operating Expenses

Research and development expenses

Research and development expenses consist primarily of costs incurred for our research activities, product development, hardware and software engineering and consultant services and other costs associated with our technology platform and products, which include:

• employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and hardware and software development functions;
• the cost of maintaining and improving our product designs, including third party development costs for new products and materials for prototypes;
• research materials and supplies; and
• facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance.

We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods.

Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales and marketing, finance, legal, human resources and general management, as well as professional services, such as legal, audit and accounting services. We expect selling, general and administrative expenses, amortization of customer relationship and tradename intangibles to increase in future periods as the number of sales, sales application specialists and marketing and administrative personnel grows and we continue to introduce new products, invest in demonstration equipment, broaden our customer base and grow our business. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Other Income (Expense)

Interest income

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

Interest expense

Interest expense consists of interest expense associated with outstanding borrowings under our loan and security agreements and the amortization of deferred financing costs and debt discounts associated with such arrangements.

Other income (expense), net

Other income (expense), net consists of interest income from our cash and cash equivalents, miscellaneous other income and expense unrelated to our core operations.

Provision for Income Taxes

We have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year or for the research and development tax credits we generated in the United States and have recorded a full valuation allowance against our net deferred assets, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized.

We recognized an income tax benefit of $0.1 million and $0.1 million during the six months ended June 30, 2024 and 2023, respectively. The income tax benefit recognized during the six months ended June 30, 2024 and 2023, primarily resulted from a reduction in the deferred tax liabilities recorded as part of our acquisition of 908 Devices GmbH.

As of December 31, 2023, we had gross federal and state operating loss carryforwards of $108.2 million and $77.4 million, respectively, which may be available to offset future taxable income and begin to expire in 2032 and 2025, respectively, of which $73.8 million of federal gross operating losses do not expire. As of December 31, 2023, we also had U.S. federal and state research and development tax credit carryforwards of $7.2 million and $3.4 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2032 and 2030, respectively.

Results of Operations

Comparison of the three months ended June 30, 2024 and 2023

The following table summarizes our results of operations for the three months ended June 30, 2024 and 2023:

(in thousands)

Revenue, Cost of Revenue and Gross Profit

Product

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

(dollars in thousands)

Product revenue increased by $0.7 million, or 7%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The increase was primarily related to $2.6 million in product revenue from our recently acquired FTIR products, offset in part by a $1.2 million decrease in MX908 related handheld product revenue, mainly due to a decrease in device placements, as well as a $0.7 million decrease in desktop product revenue, mainly due to five fewer desktop device placements for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Product cost of revenue decreased by $0.1 million, or 1%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The decrease in product cost of revenue was primarily related to an increase in production resulting in a $0.7 million increase in labor and overhead absorption for the three months ended June 30, 2024, as well as $0.2 million in lower warranty costs, offset in part by $0.4 million in higher intangible amortization and $0.3 million in higher personnel related costs, partly related to our RedWave acquisition.

Product gross profit increased by $0.7 million, or 15%, and gross profit margin increased by four percentage points for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase in product gross profit was primarily due to favorable timing of production and lower warranty costs, but also due to the increase in product revenues.

Service

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

(dollars in thousands)

Service revenue increased by $1.3 million, or 56%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The increase was primarily related to an increase in handheld service revenues related to extended service contracts for MX908 devices and our recently acquired FTIR products, and to a lesser extent, an increase in handheld training revenue.

Service cost of revenue increased by $0.4 million, or 26%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The increase in service cost of revenue was primarily related to a $0.2 million increase in material costs and contract trainers used to support the higher handheld training revenue, but also due to a $0.2 million increase in personnel and other operating costs primarily related to our RedWave acquisition.

Service gross profit increased by 105% and gross profit margin increased by 12% for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, primarily due to an increase in service volume related to training and extended service contracts, leveraging our investments in personnel and service infrastructure.

Contract

(dollars in thousands)

Contract revenue decreased by less than $0.1 million, or 31%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. During the three months ended June 30, 2024 we recognized contract revenue with a new commercial entity. The contract revenue for the three months ended June 30, 2023, was related to activities under our subcontract agreement with a commercial entity that holds a U.S. government prime contract, which was concluded in the second quarter of 2023.

Contract cost of revenue increased by 42% for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The decrease was primarily due to the level of labor and materials incurred related to our new contract revenue with a commercial entity, compared to the lower costs incurred in our contract during the three months ended June 30, 2023.

Contract gross profit decreased by $0.1 million for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to the reduced level of funding to cover costs in our new contract compared to our prior arrangement during the three months ended June 30, 2023.

Operating Expenses

Research and development

(dollars in thousands)

Our research and development expenses were $6.4 million for the three months ended June 30, 2024, an increase of $0.9 million from research and development expenses of $5.5 million for the three months ended June 30, 2023. The increase was partly due to the increased expenses from the RedWave acquisition and was due primarily to a $0.3 million increase in personnel and related costs, a $0.2 million increase in stock-based compensation, a $0.1 million increase in project spend related to materials and consulting, and a $0.2 million increase in depreciation and occupancy related expenses, mainly related to our facility in North Carolina.

Selling, general and administrative expenses

(dollars in thousands)

Our selling, general and administrative expenses were $14.6 million for the three months ended June 30, 2024, an increase of $3.4 million from selling, general and administrative expenses of $11.2 million for the three months ended June 30, 2023. The increase was partly due to the increased expenses from the RedWave acquisition and was due primarily to a $2.1 million increase in investment bank, legal and accounting fees primarily related to our acquisition of RedWave, $0.6 million increase in salaries and related costs, a $0.3 million increase in stock-based compensation, a $0.2 million increase in travel and related costs and a $0.2 million increase in marketing and related costs.

Other Income

Interest income

Interest income decreased by $0.6 million for the three months ended June 30, 2024 from $1.7 million for the three months ended June 30, 2023. The decrease was due to the lower cash, cash equivalent and marketable securities balance, primarily due to the average balance during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, mainly due to the use of cash with the RedWave acquisition.

Other expense, net

Other expense, net for the three months ended June 30, 2024 did not change materially from the three months ended June 30, 2023.

Benefit for Income Taxes

Benefit for income taxes was $0.1 million for the three months ended June 30, 2024, relatively unchanged from the three months ended June 30, 2023, and resulted from a reduction in the deferred tax liabilities recorded as part of our acquisition of 908 Devices GmbH.

Comparison of the six months ended June 30, 2024 and 2023

The following table summarizes our results of operations for the six months ended June 30, 2024 and 2023:

(in thousands)

Revenue, Cost of Revenue and Gross Profit

Product

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

(dollars in thousands)

Product revenue increased by $0.9 million, or 5%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase was primarily related to $2.6 million in product revenue from our recently acquired FTIR products and $1.5 million related to component shipments under our subcontract agreement with a commercial entity that holds a U.S. government prime contract. These increases were offset in part by a $2.1 million decrease in MX908 related handheld product revenue, mainly due to fewer device placements, as well as a $1.1 million decrease in desktop product revenue, mainly due to 13 fewer desktop device placements, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Product cost of revenue decreased by $0.6 million, or 8%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The decrease in product cost of revenue was primarily related to an increase in production resulting in a $1.3 million increase in labor and overhead absorption and a $0.8 million decrease in materials and supplies consumed in production related activities, for the six months ended June 30, 2024, offset in part by $0.5 million in higher costs related to the higher product volume, $0.4 million in higher amortization of intangibles and $0.6 million in higher personnel related costs.

Product gross profit increased by $1.5 million, or 19%, and gross profit margin increased by seven percentage points for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase in product gross profit was primarily due to favorable timing of production and lower material costs, but also due to favorable channel mix for the six months ended June 30, 2024.

Service

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

(dollars in thousands)

Service revenue increased by $1.8 million, or 40%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase was primarily related to an increase in handheld service revenues related to extended service contracts for MX908 devices and to lesser extent, our recently acquired FTIR products, as well as an increase in handheld training revenue and handheld service upgrades.

Service cost of revenue increased by $0.9 million, or 32%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase in service cost of revenue was primarily related to a $0.5 million increase in material costs and contract trainers used to support the higher handheld training revenue, but also due to a $0.4 million increase in personnel and other operating costs, partly related to our RedWave acquisition.

Service gross profit increased by 51% , and gross profit margin increased by three percentage points for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, primarily due to an increase in in service volume related to training and extended service contracts, leveraging our investments in personal and service infrastructure.

Contract

(dollars in thousands)

Contract revenue decreased by $0.3 million, or 73%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. During the six months ended June 30, 2024 we recognized contract revenue with a new commercial entity. Contract revenue for the six months ended June 30, 2023, was related to activities under our subcontract agreement with a commercial entity that holds a U.S. government prime contract, which was concluded in the second quarter of 2023.

Contract cost of revenue decreased by 25% for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The decrease was primarily due to the lower contract revenue and related costs to perform under the contract during the six months ended June 30, 2024.

Contract gross profit decreased by $0.2 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to the reduced level of funding and the lower gross profit with our new contract compared to our prior arrangement during the six months ended June 30, 2023.

Operating Expenses

Research and development

(dollars in thousands)

Our research and development expenses were $12.2 million for the six months ended June 30, 2024, an increase of $1.2 million from research and development expenses of $10.9 million for the six months ended June 30, 2023. The increase was partly due to the increased expenses from the RedWave acquisition and was due primarily to a $0.6 million increase in personnel and related costs, a $0.3 million increase in stock-based compensation, and a $0.4 million increase in depreciation and occupancy related expenses, mainly related to our facility in North Carolina.

Selling, general and administrative expenses

(dollars in thousands)

Our selling, general and administrative expenses were $26.5 million for the six months ended June 30, 2024, an increase of $3.3 million from selling, general and administrative expenses of $23.2 million for the six months ended June 30, 2023. The increase was partly due to the increased expenses from the RedWave acquisition and was due primarily to a $2.5 million increase in banker, legal and accounting fees, mainly related to our acquisition of RedWave, a $0.9 million increase in salaries and related costs, a $0.6 million increase in stock-based compensation and a $0.4 million increase in travel and related costs. These increases were partially offset by a $0.5 million decrease in severance and related costs, a $0.2 million decrease in valuation of contingent consideration, a $0.2 million decrease in third party commissions and a $0.1 million decrease in insurance costs.

Other Income

Interest income

Interest income increased by $0.2 million for the six months ended June 30, 2024 from $2.7 million for the six months ended June 30, 2023. The decrease was due to the lower cash, cash equivalent and marketable securities balance, primarily due to the average balance during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, partly due to the use of cash with the RedWave acquisition. This decrease was offset in part by higher interest rates on our interest bearing accounts during the six months ended June 30, 2024.

Interest expense

Interest expense decreased by $0.6 million for the six months ended June 30, 2024 from $0.6 million for the six months ended June 30, 2023. The decrease was primarily due to costs incurred in March 2023 related to the write-off of deferred financing costs on our 2022 Revolver, which was in default and later amended in August 2023.

Other expense, net

Other expense, net for the six months ended June 30, 2024 did not change materially from the six months ended June 30, 2023.

Benefit for Income Taxes

Benefit for income taxes was $0.1 million for the six months ended June 30, 2024, relatively unchanged from the six months ended June 30, 2023, and resulted from a reduction in the deferred tax liabilities recorded as part of our acquisition of 908 Devices GmbH.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily with proceeds from sales of redeemable preferred stock, borrowings under loan agreements and revenue from sales of our products and services and contract revenue, proceeds from our initial public offering in December 2020, and with proceeds from an underwritten public offering in November 2021. As of June 30, 2024, we had cash, cash equivalents and marketable securities of $77.4 million. We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Our future funding requirements will depend on many factors, including:

• market uptake of our products and growth into new and existing markets;
• the cost of our research and development efforts to expand the applications of our current devices and to create enhanced products with our platform of technologies;
• the cost of expanding our commercial operations, including distribution capabilities, and accelerating planned investments, such as hiring additional support, service, and sales management in Europe, Asia Pacific and Latin America, bolstering our infrastructure in these regions;
• the cost of acquiring complementary businesses, products, services or technologies, when and if required;
• the success of our existing collaborations and our ability to enter additional collaborations in the future;
• the effect of competing technological and market developments; and
• the level of our selling, general and administrative expenses.

On November 2, 2022, we entered into a Loan and Security Agreement, or the 2022 Revolver, with Silicon Valley Bank, or the Lender.

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

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

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

On March 10, 2023, the Lender, also one of our financial institutions, was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation, or FDIC, as receiver.

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

On August 4, 2023, we entered into a Default Waiver and First Amendment to Loan and Security Agreement with the Lender, or the Amended 2022 Revolver, in which the Lender waived its rights and remedies against the Company and amended the 2022 Revolver. The Amended 2022 Revolver provides for a revolving line of credit of up to $10.0 million. The Company is permitted to make interest-only payments on the revolving line of credit through November 3, 2025, at which time all outstanding indebtedness shall be immediately due and payable. The outstanding principal amount of any advance shall accrue interest at a floating rate per annum equal to the greater of (i) four and one-half percent (4.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%). The Company’s obligations under the Amended 2022 Revolver are secured by substantially all of the Company’s assets, excluding its intellectual property, which is subject to a negative pledge. The revolving line of credit under the Amended 2022 Revolver terminates on November 3, 2025. As of June 30, 2024, there were no balances outstanding under the Amended 2022 Revolver.

Pursuant to the Amended 2022 Revolver, the Lender waived filing any legal action or instituting or enforcing any rights and remedies it may have had against the Company in connection with the Company’s failing to maintain all of its operating accounts, depository accounts and excess cash with the Lender, as previously required under the 2022 Revolver. The Company recorded a credit of $0.3 million during the three months ended September 30, 2023 related to the previously recorded early termination penalties.

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

We may seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, channel partner or licensing arrangements. We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Future debt financing, if available, may involve covenants, in addition to our existing covenants, restricting our operations or our ability to incur additional debt or potentially limiting our ability to obtain new debt financing or the refinance of our existing debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we do not have or are not able to obtain sufficient funds, we may have to delay development or commercialization of our products. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations.

Cash Flows

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

(in thousands)

Operating Activities

During the six months ended June 30, 2024, net cash used in operating activities was $22.4 million, primarily resulting from our net loss of $23.5 million and net cash used in changes in our operating assets and liabilities of $6.7 million, partially offset by noncash charges of $7.8 million. Net cash used in changes in our operating assets and liabilities for the six months ended June 30, 2024, consisted primarily of a $3.1 million decrease from changes in inventory, a $1.7 million decrease from changes in deferred revenue, and a $1.4 million decrease from changes in accounts payable and accrued expenses, partially offset by a $0.7 million increase from changes in prepaid expenses and other current assets.

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

Investing Activities

During the six months ended June 30, 2024, net cash used in investing activities was $50.9 million, due to $44.8 million increase from the acquisition of RedWave and $30.2 million increase from purchases of marketable securities, partially offset by $24.4 million proceeds from maturities of marketable securities.

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

Financing Activities

Cash used in financing activities during the six months ended June 30, 2024 was $0.9 million, consisting primarily of $1.0 million in payments for withholding taxes on vested equity awards and $0.4 million of contingent consideration related to the release of the $0.5 million milestone paid in February 2024, partially offset by $0.5 million proceeds from issuance of common stock.

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

Critical Accounting Policies and Significant Judgments and Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

For a further discussion of our critical accounting policies, please refer to Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and our 2023 Report on Form 10-K. There were no significant changes to our critical accounting policies for the six months ended June 30, 2024.

Recently Issued Accounting Pronouncements

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

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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the 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. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

We acquired RedWave Technology on April 29, 2024. The financial results of RedWave Technology are included in our unaudited consolidated financial statements as of June 30, 2024 and for the quarter then ended. As this acquisition occurred in the second quarter of 2024, the scope of our assessment of our internal control over financial reporting does not include RedWave Technology. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from the scope of our assessment in the year such business is acquired.

Other than the foregoing, there have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our operations and financial results are subject to various risks and uncertainties. A detailed discussion of the risks that affect our business is included in the section titled “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 8, 2024, or 2023 Form 10-K. There have been no material changes to our risk factors during the six months ended June 30, 2024 from those discussed in our 2023 Form 10-K.