# Velo3D, Inc.: Form 10-Q for the period ended Sep 30, 2023 - Company: [Velo3D, Inc.](/companies/velo.md) (CIK 1825079) - Form: 10-Q - Filed: 2023-11-20 - Accepted by EDGAR: Nov 20, 2023, 21:01 ET - Period: 2023-09-30 - Accession: 0001825079-23-000044 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1825079/000182507923000044/velo-20230930.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1825079/000182507923000044/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2023-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2023-07-01 to 2023-09-30 | $23.8m | us-gaap:Revenues | | Revenue | 9 months, 2023-01-01 to 2023-09-30 | $75.8m | us-gaap:Revenues | | Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $22.3m | us-gaap:CostOfRevenue | | Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $68.4m | us-gaap:CostOfRevenue | | Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $1.5m | us-gaap:GrossProfit | | Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $7.4m | us-gaap:GrossProfit | | Research and development | 3 months, 2023-07-01 to 2023-09-30 | $9.8m | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 9 months, 2023-01-01 to 2023-09-30 | $32.8m | us-gaap:ResearchAndDevelopmentExpense | | Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$25.2m | us-gaap:OperatingIncomeLoss | | Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$75.0m | us-gaap:OperatingIncomeLoss | | Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $1.1m | us-gaap:InterestExpense | | Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $1.7m | us-gaap:InterestExpense | | Income tax | 3 months, 2023-07-01 to 2023-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2023-07-01 to 2023-09-30 | −$17.4m | us-gaap:NetIncomeLoss | | Net income | 9 months, 2023-01-01 to 2023-09-30 | −$76.8m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.09 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.40 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.09 | us-gaap:EarningsPerShareBasic | | Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.40 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 197,833,109 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 193,816,804 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$81.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $1.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2023-09-30 | $58.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2023-09-30 | $183.8m | us-gaap:AssetsCurrent | | Total assets | at 2023-09-30 | $230.0m | us-gaap:Assets | | Current liabilities | at 2023-09-30 | $98.9m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2023-09-30 | $127.0m | us-gaap:Liabilities | | Long-term debt | at 2023-09-30 | $80.5m | us-gaap:LongTermDebt | | Shareholders' equity | at 2023-09-30 | $103.0m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 68,603 characters. *The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 and our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon our current expectations, estimates and projections, and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements due to, among other considerations, the matters discussed in the sections titled “Risk Factors” and “Forward-looking Statements” herein.* ### Overview We seek to fulfill the promise of additive manufacturing (“AM”), also referred to as three-dimensional printing (“3D printing”), to deliver breakthroughs in performance, cost, and lead time in the production of high value metal parts. We produce a fully integrated hardware and software solution based on our proprietary laser powder bed fusion (“L-PBF”) technology, which greatly reduces and often eliminates the need for support structures. Our technology enables the production of highly complex, mission-critical parts that existing AM solutions cannot produce without the need for redesign or additional assembly. Our Sapphire family of systems (collectively referred to as the “3D Printers”) give our customers who are in space, aviation, defense, automotive, energy and industrial markets the freedom to design and produce metal parts with complex internal features and geometries that had previously been considered impossible for AM. We believe our technology is years ahead of competitors. Our technology is novel compared to other AM technologies based on its ability to deliver high-value metal parts that have complex internal channels, structures, and geometries. This affords a wide breadth of design freedom for creating new metal parts and it enables replication of existing parts without the need to redesign the part to be manufacturable with AM. Because of these features, we believe our technology and product capabilities are highly valued by our customers. Our customers are primarily original equipment manufacturers (“OEMs”) and contract manufacturers (“CMs”) who look to AM to solve issues with traditional metal parts manufacturing technologies. Traditional manufacturing technologies rely on processes, including casting, stamping and forging, that typically require high volumes to drive competitive costs and have long lead times for production. Our customers look to AM solutions to produce assemblies that are lighter, stronger, and more reliable than those manufactured with traditional technologies. Our customers also expect AM solutions to drive lower costs for low-volume parts and substantially shorter lead times. However, many of our customers have found that legacy AM technologies failed to produce the required designs for the high-value metal parts and assemblies that our customers wanted to produce with AM. As a result, other AM solutions often require that parts be redesigned so that they can be produced and frequently incur performance losses for high-value applications. In contrast, our technology can deliver complex high value metal parts with design advantages, lower costs and faster lead times associated with AM, and generally avoids the need to redesign the parts. As a result, our customers have increasingly adopted our technology into their design and production processes. We believe our value is reflected in our sales patterns, as most customers purchase a single machine to validate our technology and purchase additional systems over time as they embed our technology in their product roadmap and manufacturing infrastructure. We consider this approach a “land and expand” strategy, oriented around a demonstration of our value proposition followed by increasing penetration with key customers. ### Recent Trends and Strategic Realignment We have experienced less revenue growth than expected due to the impact of delayed shipments during the nine months ended September 30, 2023. Further, due to the impact of fourth quarter customer order delays and our bookings to date, we expect additional contraction of revenue growth in the near term. As a result, we now believe that our focus on revenue growth has come at the expense of our cash flow and profitability and our commitment to the highest level of customer service. In October 2023, we made a strategic decision to realign our operations to pivot from emphasizing revenue growth to optimizing our free cash flow, maximizing customer success, reducing expenditures, and improving our operational efficiency. We are undertaking expense reduction and cash savings initiatives as part of a company-wide restructuring and strategic realignment plan to help conserve working capital. The expense reduction and cash saving initiatives include streamlining facilities, managing working capital, reducing capital expenditures, and reducing overall selling, general and administrative expenses. See Note 17, *Subsequent Events*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. In addition, we have also implemented new go-to-market and service strategies to rebuild our bookings and backlog pipeline. Certain of the delays in our fourth quarter customer orders in part relate to transitional disruption resulting from the implementation of these operational realignment initiatives and sales and service strategies. In addition, we believe the uncertainty regarding our financial situation as a result of the negotiations with the holders of our senior secured convertible notes (the “Notes”) may have impacted, and may continue to impact our bookings in the near term. See “—*Liquidity and Capital Resources”* below. ### Key Financial and Operational Metrics We believe that our performance and future success depend on many factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this Quarterly Report titled “*Risk Factors.”* We regularly evaluate several metrics, including the metrics presented in the table below, to measure our performance, identify trends affecting our business, prepare financial projections, make strategic decisions, and establish performance goals for compensation and we periodically review and revise these metrics to reflect changes in our business. | | As of and for the Three Months Ended September 30, 2023 | 2022 | As of and for the Nine Months Ended September 30, 2023 | 2022 | | --- | ---: | ---: | ---: | ---: | | Revenue ($ in millions) | $24 | $19 | $76 | $51 | | Bookings ($ in millions) | $11 | $27 | $47 | $63 | | Backlog ($ in millions) | $6 | $66 | $6 | $66 | *Bookings ($ in millions):* Bookings ($ in millions) are defined as a confirmed order for a 3D printer system in contracted dollars. *Backlog ($ in millions):* Backlog ($ in millions) is defined as the unfulfilled 3D printer systems to be delivered to customers in contracted dollars as of period end. #### Customer Concentration Our operating results for the foreseeable future will continue to depend on sales to a small group of customers. For the three months ended September 30, 2023 and 2022, sales to the top three customers accounted for 51.1% and 66.3%, respectively. Of the top three customers for the three months ended September 30, 2023, all customers were different from the top three customers for the comparable period in 2022. For the nine months ended September 30, 2023 and 2022, sales to the top three customers accounted for 24.7% and 57.4%, respectively. Of the top three customers for the three months ended September 30, 2023 all customers were different from the top three customers for the comparable period in 2022. While our objective is to diversify our customer base, we could continue to be susceptible to risks associated with customer concentration. See “*Risk Factors—Risks Related to Our Business—Risks Related to Our Financial Position and Need for Additional Capital —We expect to rely on a limited number of customers for a significant portion of our near-term revenue”* in our Annual Report on Form 10-K for the year ended December 31, 2022 and see Note 2, *Summary of Significant Accounting Policies—*Concentration of Credit Risk and Other Risks and Uncertainties, in the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022. #### Continued Investment and Innovation We continue to be a customer-focused company working to develop innovative solutions to address customers’ needs and focus on our customers to identify the most impactful areas for research and development as we seek to further improve the capabilities of our AM solutions. We believe this process has contributed significantly to our development of the most advanced metal AM systems in the world. We believe that continued investments in our products are important to our future growth and, as a result, we will invest in enhancing our portfolio of AM solutions through certain research and development projects based on customer demand. ### Impact of World Events In May 2023, the World Health Organization announced that the COVID-19 pandemic no longer qualifies as a global emergency. Nevertheless, we may continue to face various risks and uncertainties related to the effect of the COVID-19 pandemic. For example, we may be impacted by various supply chain constraints, travel restrictions that limit our ability to sell, install and service our additive manufacturing systems, government-enforced workplace restrictions and/or other future pandemic related mandates, which may adversely impact our operations. General economic and political conditions such as recessions, interest rates, fuel prices, actual or perceived instability in the U.S. or global banking systems, inflation, foreign currency fluctuations, international tariffs, social, political and economic risks and acts of war or terrorism (including, for example, the war in Israel and the war in Ukraine and the economic sanctions related to it), have added uncertainty in timing of customer orders and supply chain constraints. During 2022, supply chain challenges increased our material and shipping costs, resulted in shipping delays and impacted our gross margins. We implemented several supply chain and manufacturing improvements in response and intend to continue to focus on driving further operational improvements during 2023 as well as company-wide initiatives to reduce operating costs, as described above under “—*Recent Trends and Strategic Realignment.”* ### Climate Change Material pending or existing climate change-related legislation, regulations, and international accords could have an adverse effect on our business, financial condition, and results of operations, including: (1) material past and/or future capital expenditures for climate-related projects, (2) material indirect consequences of climate-related regulation or business trends, such as the following: decreased/increased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources; increased competition to develop innovative new products that result in lower emissions; increased demand for generation and transmission of energy from alternative energy sources; and any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions and (3) material increased compliance costs related to climate change. In addition, extreme weather and other natural disasters may become more intense or more frequent, which may disrupt our operations or the operations of our suppliers and customers. ### Components of Results of Operations #### Revenue Our revenue is primarily derived from our AM fully integrated hardware and software solution based on our proprietary L-PBF technology. Sapphire, Sapphire 1MZ, Sapphire XC and Sapphire XC 1MZ metal AM printer using our L-PBF technology and Assure quality validation software (collectively referred to as the “3D Printer”). Contracts for 3D Printers also include post-sale customer support services (“Support Services”), except for our distributor partners, which are qualified to perform support services. We sell our fully integrated hardware and software AM solutions through two types of transaction models: a 3D Printer sale transaction and a recurring payment transaction (“Recurring Payment”). Support services are included with a 3D Printer sale transaction and a recurring payment transaction. For 3D Printer sale transactions where the support service period has expired, customers have purchased extended support service contracts. **3D Printer sale transactions -** can be divided into two categories: structured fixed purchase price and sale and utilization (variable consideration) fee model. In the sale and utilization fee model, customers pay a partial amount upfront to acquire the system, which is less than the full purchase price. This amount is then complemented by an hourly usage fee for the duration of the system's life. The variable payments are recognized when there is an event that determines the amount of variable consideration to be paid. Sales with variable consideration represented $3.9 million and $3.1 million of our revenue during the three months ended September 30, 2023 and 2022, respectively. Sales with variable consideration represented $3.9 million and $4.0 million of our revenue during the nine months ended September 30, 2023 and 2022, respectively. For more information, see “—*Critical Accounting Policies and Significant Estimates—Revenue – Variable Consideration”* in Part II, Item 7 “*Management’s Discussion and Analysis of Financial Condition and Results of Operations”* of our Annual Report on Form 10-K for the year ended December 31, 2022. The timeframe from order to completion of the site acceptance test usually occurs over three to six months. As we scale our production, we expect to reduce this timeframe. Contract consideration allocated to the 3D Printer is recognized at a point in time, which occurs upon transfer of control to the customer at shipment. The initial sales of 3D Printers and Support Services are included in one contract and are invoiced together. Contract consideration is allocated between the two performance obligations based on relative fair value. This allocation involves judgement and is periodically updated as new relevant information becomes available. **Recurring payment transactions -** are our leased 3D Printer transactions. We define our Recurring Payment transactions as operating leases. Under the leased 3D Printer transaction, the customer typically pays an amount for a lease which entitles the customer to a base number of hours of usage. For usage above that level, the customer typically pays an hourly usage fee. Most of our leases have a 12-month term, though in some instances the lease term is longer. The Recurring Payment transactions, structured as operating leases, were 2.2% and 6.2% of revenue for the three months ended September 30, 2023 and 2022, respectively. The Recurring Payment transactions were 1.5% and 6.0% of revenue for the nine months ended September 30, 2023 and 2022, respectively. Under this model, the customer typically pays a base rent and variable payments based on usage in excess of a defined threshold. Most of our leases have a 12-month term, though in certain cases the lease term is longer. **Support Services** - are included with most 3D Printer sale transactions and Recurring Payment transactions. Support services consist of field service engineering, phone and email support, preventative maintenance, and limited on and off-site consulting support. A subsequent Extended Support Agreement is available for renewal after the initial contract period based on the then-fair value of the service, which is paid for separately. Support Service revenue is recognized over the contract period beginning with customer performance test acceptance. Other revenue included under 3D Printer sales includes parts and consumables, such as filters, powder or build plates, that are sold to customers and recognized upon transfer of control to the customer at shipment. Other revenue was not material for the three months ended September 30, 2023 and 2022, respectively. #### Cost of Revenue Our cost of revenue includes the “*Cost of 3D Printers,” “Cost of Recurring Payment”* and “*Cost of Support Services.”* Cost of 3D Printers includes the manufacturing cost of our components and subassemblies purchased from vendors for the assembly, as well as raw materials and assemblies, shipping costs and other directly associated costs. Cost of 3D Printers also includes allocated overhead costs from headcount-related costs, such as salaries, stock-based compensation, depreciation of manufacturing related equipment and facilities, and information technology costs. Cost of Recurring Payment includes depreciation of the leased equipment over the useful life of five years less the residual value, and an allocated portion of Cost of Support Services. Cost of Support Services includes the cost of spare or replacement parts for preventive maintenance, installation costs, headcount-related costs such as salaries, stock-based compensation, depreciation of manufacturing related equipment and facilities, and information technology costs. The headcount-related costs are directly associated with the engineers dedicated to remote and on-site support, training, travel costs and other services costs. #### Gross Profit and Gross Margin Our gross profit is revenue less cost of revenue and our gross margin is gross profit as a percentage of revenue. The gross profit and gross margin for our products are varied and are expected to continue to vary from period to period due to the mix of products sold through either a 3D Printer sale transaction or a Recurring Payment transaction, new product introductions and efforts to optimize our operational costs. Other factors affecting our gross profit include changes to our material costs, assembly costs that are themselves dependent upon improvements to yield, and any increase in assembly overhead to support a greater number of 3D Printers sold and markets served. #### Research and Development Expenses Our research and development expenses represent costs incurred to support activities that advance the development of innovative AM technologies, new product platforms and consumables, as well as activities that enhance the capabilities of our existing product platforms. Our research and development expenses consist primarily of salaries and related personnel costs for individuals working in our research and development departments, including stock-based compensation, prototypes, design expenses, information technology costs and software license amortization, consulting and contractor costs, and an allocated portion of overhead costs, including depreciation of property and equipment used in research and development activities. #### Selling and Marketing Expenses Sales and marketing expenses consist primarily of salaries and related personnel costs for individuals working in our sales and marketing departments, including stock-based compensation, costs related to trade shows and events, advertising, marketing promotions, travel costs and an allocated portion of overhead costs, including information technology costs and costs for customer validation. #### General and Administrative Expenses General and administrative expenses consist primarily of salaries and related personnel costs for individuals associated with our executive, administrative, finance, legal, information technology and human resources functions, including stock-based compensation, professional fees for legal, audit and compliance, accounting and consulting services, general corporate costs, facilities, rent, information technology costs, insurance, bad debt expenses and an allocated portion of overhead costs, including equipment and depreciation and other general and administrative expenses. #### Interest Expense Interest expense primarily consists of interest incurred under our outstanding debt and finance leases. #### Gain (Loss) on Fair Value of Warrants Gain (loss) on valuation of warrant liabilities relates to the changes in the fair value of warrant liabilities, including liabilities related to the public warrants and private placement warrants, which are subject to remeasurement at each balance sheet date. #### Gain (Loss) on Fair value of Contingent Earnout Liabilities Gain (loss) on valuation of contingent earnout liabilities relates to the changes in fair value of the contingent earnout liabilities in connection with the earnout shares, which are subject to remeasurement at each balance sheet date. See Note 10, *Equity Instruments—Contingent Earnout Liabilities*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. #### Gain (loss) on Fair value of Debt Derivatives Gain (loss) on valuation of debt derivatives relates to the non-cash fair value change of the debt derivatives driven by the change in stock price. See Note 10, *Equity Instruments*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. #### Loss on Debt Extinguishment Loss on debt extinguishment relates to the loss recorded in accordance with the termination of our third amended and restated loan and security agreement, as amended (the “Loan Agreement”), originally entered into with Silicon Valley Bank (“SVB”). See Note 9, *Long–Term Debt*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. #### Other Income (Expense), Net Other income (expense), net includes interest earned on our bank sweep account, gains and losses on disposals of fixed assets and other miscellaneous income/expenses. #### Income Taxes No provision for federal and state income taxes was recorded for any periods presented due to projected losses, and we maintained a full valuation allowance on the deferred tax assets as of September 30, 2023 and September 30, 2022. We will continue to review our conclusions about the appropriate amount of the valuation allowance on a quarterly basis. If we were to generate profits, the U.S. valuation allowance position could be reversed in the foreseeable future. We expect a benefit to be recorded in the period the valuation allowance reversal is recorded and a higher effective tax rate in periods following the valuation allowance reversal. ### Results of Operations ### Comparison of the Three Months Ended September 30, 2023 and 2022: The following table summarizes our historical results of operations for the periods presented: *(In thousands, except for percentages)* | Revenue | Three Months Ended September 30, 2023 | 2022 | Change% | | | --- | ---: | ---: | ---: | ---: | | 3D Printer | $21,428 | $16,537 | $4,891 | 29.6% | | Recurring payment | 531 | 1,183 | (652) | (55.1)% | | Support services | 1,849 | 1,395 | 454 | 32.5% | | Total Revenue | 23,808 | 19,115 | 4,693 | 24.6% | | Cost of revenue | | | | | | 3D Printer | 20,273 | 16,574 | 3,699 | 22.3% | | Recurring payment | 111 | 656 | (545) | (83.1)% | | Support services | 1,936 | 2,006 | (70) | (3.5)% | | Total cost of revenue | 22,320 | 19,236 | 3,084 | 16.0% | | Gross profit | 1,488 | (121) | 1,609 | (1329.8)% | | Operating expenses | | | | | | Research and development | 9,819 | 12,558 | (2,739) | (21.8)% | | Selling and marketing | 5,772 | 5,632 | 140 | 2.5% | | General and administrative | 11,118 | 9,642 | 1,476 | 15.3% | | Total operating expenses | 26,709 | 27,832 | (1,123) | (4.0)% | | Loss from operations | (25,221) | (27,953) | 2,732 | (9.8)% | | Interest expense | (1,107) | (129) | (978) | 758.1% | | Gain on fair value of warrants | 1,587 | (6,612) | 8,199 | (124.0)% | | Gain on fair value of contingent earnout liabilities | 10,810 | (40,885) | 51,695 | (126.4)% | | Loss on fair value of debt derivatives | (3,648) | — | (3,648) | 100.0% | | Loss on debt extinguishment | (253) | — | (253) | 100.0% | | Other income, net | 436 | 384 | 52 | 13.5% | | Income (loss) before provision for income taxes | (17,396) | (75,195) | 57,799 | (76.9)% | | Provision for income taxes | — | — | — | —% | | Net income (loss) | $(17,396) | $(75,195) | $57,799 | (76.9)% | 42 #### Revenue The following table presents the revenue disaggregated by products and service type, as well as the percentage of total revenue. *(In thousands, except for percentages)* | | Three Months Ended September 30, 2023 | | 2022 | | Change% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | 3D Printer sales | $21,428 | 90.0% | $16,537 | 86.5% | $4,891 | 29.6% | | Recurring payment | 531 | 2.2% | 1,183 | 6.2% | (652) | (55.1)% | | Support services | 1,849 | 7.8% | 1,395 | 7.3% | 454 | 32.5% | | Total Revenue | $23,808 | 100.0% | $19,115 | 100.0% | $4,693 | 24.6% | Total revenue for the three months ended September 30, 2023 and 2022 was $23.8 million and $19.1 million, respectively, an increase of $4.7 million, or 24.6%. 3D Printer sales were $21.4 million and $16.5 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $4.9 million. The improvement in revenue was due to a change in our product mix toward more Sapphire XC systems compared to Sapphire systems and fewer launch customer and early reservation shipments at discounted prices, resulting in an increase in the average selling price. The 3D Printer sales included parts and consumables revenue. Recurring Payment, structured as an operating lease, was $0.5 million and $1.2 million for the three months ended September 30, 2023 and 2022, respectively. The decrease was primarily attributable to a decrease in the number of 3D Printer systems in service generating Recurring Payment revenue as of September 30, 2023, compared to the number of 3D Printer systems in service as of September 30, 2022. Our Support Service revenue was $1.8 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively. The increase was primarily attributable to the increase in the number of 3D Printer systems in service as of September 30, 2023, compared to the number of 3D Printers in service as of September 30, 2022. As discussed above, due to the impact of fourth quarter customer order delays and our bookings to date, we expect additional contraction of revenue growth in the near term, as we focus on the implementation of our operational realignment initiatives and go-to-market and service strategies, and because of the uncertainty regarding our financial situation as a result of the negotiations with the holders of the Notes. In the medium term, we expect the demand for the Sapphire family of systems, primarily the Sapphire XC to drive future revenue growth. We also expect our Recurring Payment and Support Service revenue to increase as the number of systems we have in the field increases. As of September 30, 2023, our backlog for firm orders was $6 million for 3D Printers. If we are able to resolve our negotiations with the holders of the Notes, we expect our new sales strategy, especially in the defense and aerospace industries, will begin to yield positive results in the coming year 2024. In connection with our realignment strategy, we are taking a strategic approach to our marketing and selling efforts to provide an improved customer experience, which we expect will enhance our efforts to introduce our technology to new customers and expand our existing customer network to increase demand. #### Cost of Revenue The following table presents the Cost of Revenue disaggregated by product and service type, as well as the percentage of total cost of revenue. *(In thousands, except for percentages)* | Cost of Revenue | Three Months Ended September 30, 2023 | | 2022 | | Change% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Cost of 3D Printers | $20,273 | 90.8% | $16,574 | 86.2% | $3,699 | 22.3% | | Cost of Recurring Payment | 111 | 0.5% | 656 | 3.4% | (545) | (83.1)% | | Cost of Support Services | 1,936 | 8.7% | 2,006 | 10.4% | (70) | (3.5)% | | Total Cost of Revenue | $22,320 | 100.0% | $19,236 | 100.0% | $3,084 | 16.0% | Total cost of revenue for the three months ended September 30, 2023 and 2022 was $22.3 million and $19.2 million, respectively, an increase of $3.1 million, or 16.0%. Cost of 3D Printers was $20.3 million and $16.6 million for the three months ended September 30, 2023 and 2022, respectively. The increase of $3.7 million was due to a change in our product mix towards more Sapphire XC systems, which have a higher total per system cost compared to the Sapphire, for the three months ended September 30, 2023 compared to 2022. Cost of Recurring Payment was $0.1 million and $0.7 million for the three months ended September 30, 2023 and 2022, respectively. This decrease of $0.5 million was due to a decrease in the number of 3D Printer systems in service incurring costs related to Recurring Payment revenue as of September 30, 2023, compared to September 30, 2022. Cost of Support Services was $1.9 million and $2.0 million for the three months ended September 30, 2023 and 2022, respectively. Cost of Support Services decreased by $0.1 million, although there were more 3D Printers in service as of September 30, 2023, compared to September 30, 2022, Cost of Support Services decreased on a per unit basis. Field service engineering support costs related to the ramp-up of the Sapphire XC, Sapphire 1MZ and Sapphire XC 1MZ systems in the field have been offset by the benefits of preventative maintenance we performed and enhancements we made to system reliability performance. We expect Cost of Support Services to continue to decrease on a per unit basis as the Sapphire XC, Sapphire 1MZ and Sapphire XC 1MZ system performance improves. We expect our Cost of Support Services will increase with the delivery of more 3D Printer systems to customers. Cost of revenue as a percentage of revenue was 93.8% and 100.6% for the three months ended September 30, 2023 and 2022, respectively. The decrease in the cost of revenue as a percentage of revenue was primarily due to a per system reduction in material costs for our Sapphire family of systems and improved manufacturing efficiency offset by the change in our product mix towards more Sapphire XC systems compared to Sapphire systems. We continue to focus on reducing our material costs through improved purchasing and inventory planning, accelerating production cycle times and improving efficiencies on the production floor, to lower our cost of revenue. We expect our cost of revenue as a percentage of revenue to continue to improve as we address material costs and manufacturing efficiency, and as our production volume increases and system reliability performance improves. #### Gross Profit and Gross Margin Total gross profit (loss) was $1.5 million and $(0.1) million for the three months ended September 30, 2023 and 2022, respectively. As a percentage of revenue, the gross margin was 6.3% and (0.6)% for the three months ended September 30, 2023 and 2022, respectively. The higher gross profit for the three months ended September 30, 2023 was primarily attributable to higher average selling prices for our Sapphire family of systems, and improved manufacturing efficiencies, during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. Our gross profit and gross margin are influenced by a number of factors, including: - Product mix of Sapphire, and Sapphire XC systems; - Average selling prices for our systems; - Trends in materials and shipping costs; - Production volumes that may impact factory overhead absorption; - System reliability performance; and - Impact of product mix changes, including new product introductions, and other factors, on our Cost of Support Services During the remainder of 2023, we expect our gross margins will remain relatively flat while we continue to focus on improving our average selling prices, reductions in material costs, and improvements to manufacturing efficiency. #### Research and Development Expenses Research and development expenses were $9.8 million and $12.6 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $2.8 million. The decrease in research and development expenses in 2023 was driven by a $2.9 million decrease in purchased materials, a $0.4 million decrease in headcount, salaries and employee-related expenses, and a decrease of $0.2 million in other operating expenses, offset by an increase of $0.7 million in stock-based compensation . We expect research and development costs to decrease for the remainder of 2023 as our Sapphire family of systems mature. We will invest in enhancing our portfolio of AM solutions through certain research and development projects based on customer demand. #### Selling and Marketing Expenses Selling and marketing expenses were $5.8 million and $5.6 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $0.2 million. The increase was attributable to an increase of $0.5 million in stock-based compensation, a $0.4 million increase in headcount, salaries and employee-related expenses, and a $0.1 million increase in general marketing initiatives, offset by an $0.8 million decrease in European marketing costs. We expect selling and marketing expenses to decrease for the remainder of 2023 as we implement our realignment strategy. During the remainder of 2023, we intend to focus on certain markets that show strong attendance at additive manufacturing conferences to build product awareness. #### General and Administrative Expenses General and administrative expenses were $11.1 million and $9.6 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $1.5 million. The increase was attributable to a $0.9 million increase in headcount, salaries and employee-related expenses, a $0.5 million increase in public company-related expenses in advisory, legal and accounting fees and insurance, and a $0.3 million increase in stock-based compensation, offset by a $0.2 million decrease in facilities expenses. We expect general and administrative expenses to increase for the remainder of 2023 due to one-time charges related to our reduction in force of approximately $1.0 million to $2.0 million and charges to consolidate our facilities of approximately $2.0 million to $3.0 million. We continue to focus on our company-wide initiatives to reduce operating costs for the remainder of 2023 as we implement our realignment strategy by reducing our general and administrative expenses through reducing outside consultants, managing effective facility spending and negotiating with vendors for improved pricing. #### Interest Expense Interest expense was $1.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. We expect our interest expense will increase as a result of our recent issuance of the Notes (for further information, see “—Liquidity and Capital Resources” and Note 9, *Long-Term Debt*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report). #### Gain (loss) on Fair Value of Warrants The change in fair value of warrants resulted in a gain of $1.6 million and a loss of $6.6 million for the three months ended September 30, 2023 and 2022, respectively, and was related to the non-cash fair value change of the warrant liabilities driven by the change in our stock price. #### Gain (loss) on Fair value of Contingent Earnout Liabilities The change in fair value of the contingent earnout liability was a gain of $10.8 million and a loss of $40.9 million for the three months ended September 30, 2023 and 2022, respectively, and was related to the non-cash fair value change of the contingent earnout liabilities driven by the change in our stock price. #### Loss on Fair value of Debt Derivatives The change in fair value of the debt derivatives was a loss of $3.6 million for the three months ended September 30, 2023, and was related to the non-cash fair value change of the debt derivatives driven by the change in our stock price. #### Loss on Debt Extinguishment The loss on debt extinguishment was $0.3 million for the three months ended September 30, 2023, and was related to the termination of the Loan Agreement with Silicon Valley Bank. #### Other Income, Net Other income, net was $0.4 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively. #### Income Taxes No provision for federal and state income taxes was recorded for both the three months ended September 30, 2023 and 2022 due to projected losses, and we maintained a full valuation allowance on the deferred tax assets as of September 30, 2023 and December 31, 2022. We will continue to review our conclusions about the appropriate amount of the valuation allowance on a quarterly basis. If we were to generate profits in 2023 and beyond, the U.S. valuation allowance position could be reversed in the foreseeable future. We expect a benefit to be recorded in the period the valuation allowance reversal is recorded and a higher effective tax rate in periods following the valuation allowance reversal. ### Results of Operations ### Comparison of the Nine Months Ended September 30, 2023 and 2022: The following table summarizes our historical results of operations for the periods presented: *(In thousands, except for percentages)* | Revenue | Nine Months Ended September 30, 2023 | 2022 | Change% | | | --- | ---: | ---: | ---: | ---: | | 3D Printer | $69,193 | $44,336 | $24,857 | 56.1% | | Recurring payment | 1,141 | 3,042 | (1,901) | (62.5)% | | Support services | 5,422 | 3,599 | 1,823 | 50.7% | | Total Revenue | 75,756 | 50,977 | 24,779 | 48.6% | | Cost of revenue | | | | | | 3D Printer | 61,975 | 42,686 | 19,289 | 45.2% | | Recurring payment | 893 | 2,059 | (1,166) | (56.6)% | | Support services | 5,495 | 5,106 | 389 | 7.6% | | Total cost of revenue | 68,363 | 49,851 | 18,512 | 37.1% | | Gross profit | 7,393 | 1,126 | 6,267 | 556.6% | | Operating expenses | | | | | | Research and development | 32,820 | 38,438 | (5,618) | (14.6)% | | Selling and marketing | 18,054 | 17,864 | 190 | 1.1% | | General and administrative | 31,569 | 27,191 | 4,378 | 16.1% | | Total operating expenses | 82,443 | 83,493 | (1,050) | (1.3)% | | Loss from operations | (75,050) | (82,367) | 7,317 | (8.9)% | | Interest expense | (1,671) | (362) | (1,309) | 361.6% | | Gain (loss) on fair value of warrants | (138) | 11,039 | (11,177) | (101.3)% | | Gain (loss) on fair value of contingent earnout liabilities | 3,000 | 58,110 | (55,110) | (94.8)% | | Loss on fair value of debt derivatives | (3,648) | — | (3,648) | 100.0% | | Loss on debt extinguishment | (253) | — | (253) | 100.0% | | Other income, net | 965 | 993 | (28) | (2.8)% | | Income (loss) before provision for income taxes | (76,795) | (12,587) | (64,208) | 510.1% | | Provision for income taxes | — | — | — | —% | | Net income (loss) | $(76,795) | $(12,587) | $(64,208) | 510.1% | 47 #### Revenue The following table presents the revenue disaggregated by products and service type, as well as the percentage of total revenue. *(In thousands, except for percentages)* | | Nine Months Ended September 30, 2023 | | 2022 | | Change% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | 3D Printer sales | $69,193 | 91.3% | $44,336 | 87.0% | $24,857 | 56.1% | | Recurring payment | 1,141 | 1.5% | 3,042 | 6.0% | (1,901) | (62.5)% | | Support services | 5,422 | 7.2% | 3,599 | 7.0% | 1,823 | 50.7% | | Total Revenue | $75,756 | 100.0% | $50,977 | 100.0% | $24,779 | 48.6% | Total revenue for the nine months ended September 30, 2023 and 2022 was $75.8 million and $51.0 million, respectively, an increase of $24.8 million, or 48.6%. 3D Printer sales were $69.2 million and $44.3 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $24.9 million, or 56.1%. The improvement in revenue was due to more systems sold, a mix of higher production volumes, and change in our product mix toward more Sapphire XC systems compared to Sapphire systems, and fewer launch customer and early reservation shipments at discounted prices resulting in an increase in the average selling price. The 3D Printer sales included parts and consumables revenue. Recurring Payment, structured as an operating lease, was $1.1 million and $3.0 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease was primarily attributable to a decrease in the number of 3D Printer systems in service generating Recurring Payment revenue as of September 30, 2023, compared to the number of 3D Printer systems in service as of September 30, 2022. In addition, one system that was originally executed through a Recurring Payment transaction was subsequently purchased through a 3D Printer sale transaction, and two systems executed through a Recurring Payment transaction were returned in the nine months ended September 30, 2023. Our Support Service revenue was $5.4 million and $3.6 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily attributable to a significant increase in the number of 3D Printer systems in service as of September 30, 2023, compared to the number of 3D Printers in service as of September 30, 2022. #### Cost of Revenue The following table presents the Cost of Revenue disaggregated by product and service type, as well as the percentage of total cost of revenue. *(In thousands, except for percentages)* | Cost of Revenue | Nine Months Ended September 30, 2023 | | 2022 | | Change% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Cost of 3D Printers | $61,975 | 90.7% | $42,686 | 85.6% | $19,289 | 45.2% | | Cost of Recurring Payment | 893 | 1.3% | 2,059 | 4.1% | (1,166) | (56.6)% | | Cost of Support Services | 5,495 | 8.0% | 5,106 | 10.3% | 389 | 7.6% | | Total Cost of Revenue | $68,363 | 100.0% | $49,851 | 100.0% | $18,512 | 37.1% | Total cost of revenue for the nine months ended September 30, 2023 and 2022 was $68.4 million and $49.9 million, respectively, an increase of $18.5 million, or 37.1%. Cost of 3D Printers was $62.0 million and $42.7 million for the nine months ended September 30, 2023 and 2022, respectively. The increase of $19.3 million was due to an increase in the number of 3D Printers sold in the nine months ended September 30, 2023, compared to the number of 3D Printers sold in the nine months ended September 30, 2022. In addition, the change in our product mix towards more Sapphire XC systems, which have a higher total per system cost compared to the Sapphire, has increased the cost of 3D Printers for the nine months ended September 30, 2023 compared to 2022. Cost of Recurring Payment was $0.9 million and $2.1 million for the nine months ended September 30, 2023 and 2022, respectively. This decrease of $1.2 million was due to a decrease in the number of 3D Printer systems in service incurring costs related to Recurring Payment revenue as of September 30, 2023, compared to September 30, 2022. Cost of Support Services was $5.5 million and $5.1 million for the nine months ended September 30, 2023 and 2022, respectively. This increase of $0.4 million in Cost of Support Services was primarily attributable to the costs for preventative maintenance, costs incurred to enhance system reliability performance, and field service engineering labor costs due to more 3D Printers in service as of September 30, 2023, compared to September 30, 2022. However, field service engineering support costs related to the ramp of the Sapphire XC, Sapphire 1MZ and Sapphire XC 1MZ systems in the field, have been offset by the benefits of preventative maintenance we performed and enhancements we made to system reliability performance. Cost of revenue as a percentage of revenue was 90.2% and 97.8% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the cost of revenue as a percentage was primarily due to a per system reduction in material costs for our Sapphire family of systems and improved manufacturing efficiency offset by the change in our product mix towards more Sapphire XC systems compared to Sapphire systems. #### Gross Profit and Gross Margin Total gross profit was $7.4 million and $1.1 million for the nine months ended September 30, 2023 and 2022, respectively. As a percentage of revenue, the gross margin was 9.8% and 2.2% for the nine months ended September 30, 2023 and 2022, respectively. The higher gross profit for the nine months ended September 30, 2023 was primarily attributable to higher average selling prices for our Sapphire family of systems, and improved manufacturing efficiencies, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. #### Research and Development Expenses Research and development expenses were $32.8 million and $38.4 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $5.6 million. The decrease in research and development expenses in 2023 was driven by a $5.8 million decrease in purchased materials, and a $1.5 million decrease in other operating expenses, offset by an increase of $0.1 million for additional headcount, salaries and employee-related expenses, and a $1.6 million increase in stock-based compensation. #### Selling and Marketing Expenses Selling and marketing expenses were $18.1 million and $17.9 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $0.2 million. The increase was attributable to a $1.3 million increase in stock-based compensation, a $0.6 million increase in marketing initiatives, trade shows and branding expenses, and a $0.4 million increase in additional headcount, salaries and employee-related expenses, offset by a $2.1 million decrease in European marketing costs. #### General and Administrative Expenses General and administrative expenses were $31.6 million and $27.2 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $4.4 million. The increase was attributable to a $1.3 million increase for additional headcount, salaries and employee-related benefits, a $0.2 million increase in facilities expenses, a $1.5 million increase in stock-based compensation, and a $1.4 million increase in public company-related expenses in advisory, legal and accounting fees and insurance. #### Interest Expense Interest expense was $1.7 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively. #### Gain (loss) on Fair Value of Warrants The change in fair value of warrants resulted in a loss of $0.1 million and a gain of $11.0 million for the nine months ended September 30, 2023 and 2022, respectively, and was related to the non-cash fair value change of the warrant liabilities driven by the change in our stock price. #### Gain (loss) on Fair value of Contingent Earnout Liabilities The change in fair value of the contingent earnout liability was a gain of $3.0 million and $58.1 million for the nine months ended September 30, 2023 and 2022, respectively, and was related to the non-cash fair value change of the contingent earnout liabilities driven by the change in our stock price. #### Loss on Fair value of Debt Derivatives The change in fair value of the debt derivatives was a loss of $3.6 million for the nine months ended September 30, 2023, and was related to the non-cash fair value change of the debt derivatives driven by the change in our stock price. #### Loss on Debt Extinguishment The loss on debt extinguishment was $0.3 million for the nine months ended September 30, 2023, and was related to the termination of the Loan Agreement with Silicon Valley Bank. #### Other Income, Net Other income, net was $1.0 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively. #### Income Taxes No provision for federal and state income taxes was recorded for both the nine months ended September 30, 2023 and 2022 due to projected losses, and we maintained a full valuation allowance on the deferred tax assets as of September 30, 2023 and December 31, 2022. ### Liquidity and Capital Resources As of September 30, 2023, we had raised net proceeds of $447.9 million, comprised of approximately $66 million from the offering of $70.0 million aggregate principal amount of Notes (the “Initial Notes”), which closed on August 10, 2023, $18.4 million from the ATM Offering (described below), $278.3 million from the Merger and related private placement of shares of our common stock (the “PIPE Financing”), which closed on September 29, 2021, and $150.0 million from the issuance of redeemable convertible preferred stock (series A to series D), third-party financing and convertible notes. We have incurred net losses of $76.8 million and $12.6 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 and December 31, 2022, we had $71.6 million and $80.2 million in cash, cash equivalents and short-term investments, respectively, and an accumulated deficit of $296.6 million and $219.8 million, respectively. Our business requires substantial amounts of cash for operating activities, including salaries and wages paid to our employees, component and sub-assembly purchases, general and administrative expenses, and others. Our purchase commitments per terms and conditions with suppliers and vendors are cancellable in whole or in part prior to shipment. Non-cancellable purchase commitments (purchase orders) of $30.8 million for parts and assemblies are due upon receipt and will primarily be delivered in the remainder of 2023 and first half of 2024. If inventory is shipped, we will accrue a liability under accrued expenses. We have no other commitment and contingencies, except for the operating leases. See Note 8, *Leases*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for further discussion. As further described in Note 9, *Long-Term Debt* in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, the Notes require us to maintain minimum levels of quarterly revenue through the quarter ended June 30, 2026. As of the filing date of this Quarterly Report, we were not in compliance with the minimum revenue covenant for the quarter ended September 30, 2023 and, as a result, the holders of the Notes have the right to declare the Notes due and payable in cash in an amount equal to the Event of Default Acceleration Amount (as defined in the Notes). In addition, as discussed above, we have experienced less revenue growth than expected due to the impact of delayed shipments during the nine months ended September 30, 2023. Further, due to the impact of fourth quarter customer order delays and our bookings to date, we expect additional contraction of revenue growth in the near term. We have been negotiating a proposed amendment to the Notes with the holders thereof, which we anticipate completing in November 2023; however, we may not be able to obtain a waiver or an amendment on favorable terms or at all. If a waiver or amendment is not agreed to by the holders of the Notes, we do not have sufficient capital to satisfy the outstanding principal and interest due, and the holders may foreclose on our assets securing the Notes. Accordingly, as the Company was not in compliance with the minimum quarterly revenue covenant and the Notes are now callable by the Investor, we believe that there is substantial doubt about our ability to continue as a going concern for the twelve-month period following the filing date of this Quarterly Report. Even if we are able to agree an amendment with the holders of the Notes, we expect that we will need to engage in additional financings to fund our operations in the near-term as well as to respond to business challenges and opportunities, including the need to repay the Notes, provide working capital, develop new features or enhance our products, expand our manufacturing capacity, improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, subject to our compliance with the covenants in the Notes, we expect we will need to engage in equity or debt financings to secure additional funds, including seeking additional capital from public or private offerings of our equity or debt securities, electing to repay, restructure or refinance our existing indebtedness, or electing to borrow additional amounts under new credit lines or from other sources. We may also seek to raise additional capital, including from offerings of our equity or debt securities, on an opportunistic basis when we believe there are suitable opportunities for doing so. For example, on November 14, 2022, we filed with the SEC a shelf registration statement (the “Shelf Registration Statement”) that was subsequently declared effective on November 21, 2022 and permits us to sell from time-to-time additional shares of our common stock or other securities in one or more offerings in amounts, at prices and on the terms that we will determine at the time of offering for aggregate gross sale proceeds of up to $300.0 million, of which we may offer and sell up to $40.0 million shares of our common stock from time to time pursuant to an “at-the-market” offering (the “ATM Offering”) sales agreement (the “ATM Sales Agreement”) we entered into in January 2023 with Needham & Company, LLC (“Needham”), as agent, subject to the terms and conditions described in the ATM Sales Agreement and SEC rules and regulations. Furthermore, the Notes require us, on or before December 31, 2023, to establish a new “at-the-market” offering program with aggregate available, accessible, and unused capacity to generate gross proceeds to us of at least $75,000,000 as of December 31, 2023. For more information, see Note 16, *At-the-Market Offering*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. However, our recent and projected financial results, our existing event of default under the Notes and the related conditions that raise substantial doubt about our ability to continue as a going concern, and general concerns among potential investors and creditors about our financial well-being, may make taking such actions on commercially reasonable terms especially difficult. Our ability to meet our cash requirements depends on, among other things, our operating performance, competitive and industry developments, and financial market conditions, all of which are significantly affected by business, financial, economic, political, and other factors, many of which we may not be able to control or influence. To the extent that our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected. As described above, we are undertaking expense reduction and cash savings initiatives as part of a company-wide restructuring and strategic realignment plan to help conserve working capital. The expense reduction and cash saving initiatives include streamlining facilities, managing working capital, reducing capital expenditures, and reducing overall selling, general and administrative expenses. #### Debt Facilities As of September 30, 2023, our debt arrangements comprised the Initial Notes issued to certain affiliated institutional investors pursuant to a securities purchase agreement dated August 10, 2023 (the “Securities Purchase Agreement”) and our indenture dated as of August 14, 2023 (the “Base Indenture”) between us and U.S. Bank Trust Company, National Association, a national banking association, as trustee (the “Trustee”), as supplemented by a first supplemental indenture dated as of August 14, 2023, between us and the Trustee (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”). As described above, on August 14, 2023, we used approximately $22 million of the net proceeds from the offering of the Initial Notes to repay all outstanding obligations under our third amended and restated loan and security agreement, as amended, with SVB. In connection with the repayment of the debt, our third amended and restated loan and security agreement, as amended, was terminated and is no longer available to us. Following the repayment and termination, as of November 14, 2023, we have $70.0 million of Notes outstanding. We do not hedge our exposure to changes in interest rates. A 10% change in interest rates would not have a material impact on annualized interest expense. For more information, see Note 9, *Long-Term Debt*, in the notes to the condensed consolidated financial statements in this Quarterly Report. ### Cash Flow Summary The following table summarizes our cash flows for the nine months ended September 30, 2023 and 2022: *(In thousands)* | | Nine Months Ended September 30, 2023 | 2022 | Change | | --- | ---: | ---: | ---: | | Net cash (used in) operating activities | $(81,109) | $(92,154) | $11,045 | | Net cash (used in) provided by investing activities | $31,055 | $(74,507) | $105,562 | | Net cash (used in) provided by financing activities | $76,213 | $(537) | $76,750 | #### Operating Activities Net cash used in operating activities for the nine months ended September 30, 2023 was $81.1 million, consisting primarily of a net loss of $76.8 million, non-cash loss of $25.0 million described below, and a decrease in net operating assets of $29.4 million. The decrease in net operating assets was comprised of a decrease from accounts payable of $1.6 million, a decrease from contract liabilities of $10.3 million, a decrease from other net operating assets of $9.4 million, a decrease from accounts receivable of $3.4 million due to timing of customer payments, a decrease in accrued expenses and other current liabilities of $4.4 million, and a decrease from inventories of $3.7 million for Sapphire XC, Sapphire 1MZ and Sapphire XC 1MZ system production, offset by an increase from prepaid expenses of $3.5 million related to insurance and vendor prepayments. The noncash loss of $25.0 million consisted of the loss on fair value of debt derivatives of $3.6 million, the loss on debt extinguishment of $0.3 million, the loss on fair value of warrants of $0.1 million, depreciation and amortization of $4.5 million and stock-based compensation expense of $19.5 million, partially offset by the gain on fair value of contingent earnout liabilities of $3.0 million. Net cash used in operating activities for the nine months ended September 30, 2022 was $92.2 million, consisting primarily of a net loss of $12.6 million, noncash income of $50.7 million described below, and a decrease in net operating assets of $28.8 million. The decrease in net operating assets was primarily comprised of a decrease from inventories of $41.8 million for Sapphire and Sapphire XC system production, a decrease from other net operating assets of $0.2 million, and a decrease in accounts receivable of $8.1 million due to timing of customer payments, partially offset by an increases of prepaid expenses of $7.3 million related to insurance and vendor prepayments, an increase in accrued expenses and other current liabilities of $10.1 million, and an increase from contract liabilities of $3.8 million. The noncash income of $50.7 million primarily consisted of the change in fair value of warrants of $11.0 million and the gain in fair value of contingent earnout liabilities of $58.1 million, partially offset by depreciation and amortization and stock-based compensation expense. We expect our cash used in operating activities to decrease, driven by working capital requirements stabilizing related to efforts for expense reduction and cash savings initiatives as part of the company wide restructuring and strategic realignment plan for the remainder of 2023, which may be offset by one-time severance payments and other benefits and one-time cost related to our facilities consolidation. #### Investing Activities Net cash provided by investing activities during the nine months ended September 30, 2023 was $31.1 million, consisting of property and equipment purchases of $1.1 million and production of equipment for lease to customers of $3.0 million, offset by maturities of available-for-sale investment securities of $35.1 million. Net cash used in investing activities during the nine months ended September 30, 2022 was $74.5 million, consisting of property and equipment purchases of $12.2 million, production of equipment for lease to customers of $4.2 million and purchases of available-for-sale investments of $87.7 million, partially offset by maturities of available-for-sale investment securities of $29.6 million. We expect our capital expenditures, to decrease in the remainder of 2023 as we intend to limit the number of 3D Printer systems as equipment for lease to customers and because we completed the construction of our manufacturing facility in 2022. #### Financing Activities Net cash provided by financing activities during the nine months ended September 30, 2023 was $76.2 million, consisting of proceeds of $65.7 million from the issuance of the Initial Notes, net of issuance costs, proceeds of $18.4 million from the issuance of common stock, net of issuance costs, pursuant to the ATM Offering, proceeds of $14.0 million drawn from the revolver facility, proceeds of $1.6 million drawn from the secured equipment loan facility and proceeds of $0.4 million from the issuance of common stock upon exercise of stock options, partially offset by $17.0 million in repayment of the revolver facility and $7.0 million in repayment of equipment loans. Net cash used in financing activities during the nine months ended September 30, 2022 was $0.5 million, consisting of repayments of $8.1 million for loan refinance, partially offset by $6.7 million of proceeds from the loan refinance and $1.2 million of proceeds from the issuance of common stock upon exercise of stock options. We expect cash provided by financing activities to increase by issuing new equity or incurring new debt to continue operations, subject to our compliance with the covenants in the Notes. Our future cash requirements and the adequacy of available funds will depend on many factors, including our operating performance, competitive and industry developments, and financial market conditions. ### Off-Balance Sheet Arrangements As of September 30, 2023 and December 31, 2022, we did not have any off-balance sheet arrangements. ### Recent Accounting Pronouncements For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on Velo3D’s condensed consolidated financial statements, see Note 2, *Summary of Significant Accounting Policies*, in the notes to the condensed consolidated financial statements in this Quarterly Report. ### Implications of Being an Emerging Growth Company Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. We are an “emerging growth company” as defined in Section 2(A) of the Securities Act and have elected to take advantage of the benefits of this extended transition period. We will elect to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public business entities and nonpublic business entities until the earlier of the date we (a) are no longer an emerging growth company or (b) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used. Please refer to Note 2. *Summary of Significant Accounting Policies,* of the condensed consolidated financial statements included elsewhere in this Quarterly Report for the recent accounting pronouncements adopted and the recent accounting pronouncements not yet adopted for the nine months ended September 30, 2023 and 2022. We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the last date of our fiscal year in which we are deemed to be a “large accelerated filer” under the rules of the SEC or (d) the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the previous three years. ### Implications of Being a Smaller Reporting Company We are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited consolidated financial statements. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We will remain a smaller reporting company and may take advantage of certain scaled disclosures available to smaller reporting companies until the last day of the fiscal year in which (a) the market value of our voting and nonvoting common stock held by non-affiliates equals or exceeds $250.0 million measured on the last business day of that year’s second fiscal quarter and (b) our annual revenue equals or exceeds $100.0 million during the most recently completed fiscal year or our voting and nonvoting common stock held by non-affiliates equals or exceeds $700.0 million measured on the last business day of that year’s second fiscal quarter. ### Critical Accounting Policies and Significant Estimates Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. We evaluated the development and selection of our critical accounting policies and estimates and believe that the following involve a higher degree of judgement or complexity and are most significant to reporting our results of operations and financial position and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgements used in the preparation of our condensed consolidated financial statements. Actual results could differ materially from those estimates and assumptions, and those differences could be material to our condensed consolidated financial statements. We re-evaluate our estimates on an ongoing basis. For more information, see Note 2, *Summary of Significant Accounting Policies,* included in the notes to the condensed consolidated financial statements in this Quarterly Report, and *Critical Accounting Policies and Significant Estimates* in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022. ## Market risk As filed, 834 characters. As described in more detail elsewhere in this Quarterly Report, we were not in compliance with the minimum revenue covenant under the Notes for the quarter ended September 30, 2023. As a result, the holders of the Notes have the right to declare the Notes due and payable in cash in an amount equal to the Event of Default Acceleration Amount (as defined in the Notes). We have been negotiating a proposed amendment to the Notes with the holders thereof, which we anticipate completing in November 2023; however, we may not be able to obtain a waiver or an amendment on favorable terms or at all. If a waiver or amendment is not agreed to by the holders of the Notes, we do not have sufficient capital to satisfy the outstanding principal and interest due, and the holders of the Notes may foreclose on our assets securing the Notes. ## Controls and procedures As filed, 8,615 characters. ### Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (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 an issuer in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our management, with participation of our Chief Executive Officer and Chief Financial Officer, 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 September 30, 2023. Based upon this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below. ### Material Weaknesses in Internal Control over Financial Reporting As described Part II, Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2022, we identified material weaknesses in our internal control over financial reporting. These material weaknesses have not been remediated as of September 30, 2023. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses are as follows: - We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience, and training commensurate with our accounting and financial reporting requirements. Additionally, the lack of a sufficient complement of personnel resulted in an inability to consistently establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, among other things, insufficient segregation of duties in our finance and accounting functions. This material weakness contributed to the following additional material weaknesses. - We did not design and maintain effective controls over the segregation of duties related to journal entries and account reconciliations. Specifically, certain personnel have the ability to both (i) create and post journal entries within our general ledger system and (ii) prepare and review account reconciliations. - We did not design and maintain effective controls over inventory. Specifically, we did not design and maintain effective controls over the existence, accuracy and completeness of inventory, the completeness and presentation of accrued inventory purchases, the completeness and accuracy of related expenses. - We did not design and maintain effective controls over the presentation of contract assets and liabilities. These material weaknesses resulted in adjustments to accounts receivable, inventory, other current assets, current and non-current contract liabilities, accrued expenses and other current liabilities, which were recorded prior to the issuance of the consolidated financial statements as of and for the years ended December 31, 2019, 2020 and 2021 and as of and for the interim periods ended September 30, 2021 and December 31, 2021; adjustments to inventory, cost of revenue, research and development expense, contract assets and contract liabilities as of and for the year ended December 31, 2022; and adjustments to current and non-current contract liabilities as of and for the interim period ended June 30, 2022. Additionally, these material weaknesses could result in a misstatement of substantially all of our accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. - We did not design and maintain effective controls over certain information technology (“*IT”*) general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain effective: - user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate company personnel; and - program change management controls to ensure that information technology program and data changes affecting certain financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately. These IT deficiencies did not result in a misstatement to the consolidated financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all consolidated financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined these deficiencies in the aggregate constitute a material weakness. ### Remediation Measures for Remaining Material Weaknesses in Internal Control over Financial Reporting We have taken measures to remediate the material weaknesses remaining as of September 30, 2023, including the following: hired additional accounting and IT personnel to bolster our reporting, technical accounting and IT capabilities; provided ongoing training for our personnel on accounting, financial reporting and internal control over financial reporting; engaged a third-party to assist in designing and implementing controls, including controls related to segregation of duties and IT general controls; designing and implementing controls to formalize roles and review responsibilities to align with our team’s skills and experience and designing and implementing controls over segregation of duties; designing and implementing controls over the preparation and review of journal entries and account reconciliations, and designing and implementing controls over the existence, accuracy and completeness of inventory, the completeness and presentation of accrued inventory purchases, the completeness and accuracy of related expenses, and controls over the presentation of contract assets and liabilities; and designing and implementing IT general controls, including controls over the review and update of user access rights and privileges and program change management controls. We are making progress toward the effectiveness of our internal control over financial reporting and disclosure controls and procedures. The measures that we are taking are subject to continued testing, ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the measures we are taking will fully remediate these material weaknesses in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting, which may necessitate additional implementation and evaluation time. We will continue to assess the effectiveness of our internal control over financial reporting and take steps to remediate the known material weaknesses expeditiously. ### Changes in Internal Control over Financial Reporting There were no changes in internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ## Risk factors As filed, 17,110 characters. *Investing in our securities involves risks. You should consider carefully the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2022 in the section titled Part I, Item 1A. “Risk Factors, together with all of the other information in this Quarterly Report, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, before deciding whether to purchase any of our securities. Our business, results of operations, financial condition, and prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of these risks actually occur, our business, results of operations, financial condition, and prospects could be materially and adversely affected* *Except for as set forth below, there have been no material changes in the risk factors described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.* ### Risks Related to Our Financial Position and Need for Additional Capital ***Our failure to satisfy certain financial covenants under the Notes raises substantial doubt about our ability to continue as a going concern.*** As described Note 9, *Long-Term Debt*, in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, the Notes require us to maintain minimum levels of quarterly revenue through the quarter ended June 30, 2026. As of the filing date of this Quarterly Report, we were not in compliance with the minimum revenue covenant for the quarter ended September 30, 2023 and, as a result, the holders of the Notes have the right to declare the Notes due and payable in cash in an amount equal to the Event of Default Acceleration Amount (as defined in the Notes). In addition, we have experienced less revenue growth than expected due to the impact of delayed shipments during the nine months ended September 30, 2023. Further, due to the impact of fourth quarter customer order delays and our bookings to date, we expect additional contraction of revenue growth in the near term. We have been negotiating a proposed amendment to the Notes with the holders thereof, which we anticipate completing in November 2023; however, we may not be able to obtain a waiver or an amendment on favorable terms or at all. If a waiver or amendment is not agreed to by the holders of the Notes, we do not have sufficient capital to satisfy the outstanding principal and interest due, and the holders may foreclose upon the assets securing the Notes. Accordingly, as the Company was not in compliance with the minimum quarterly revenue covenant and the Notes are now callable by the Investor, we believe that there is substantial doubt about our ability to continue as a going concern for the twelve-month period following the filing date of this Quarterly Report. Our conclusion that there is substantial doubt about our ability to continue as a going concern may be viewed unfavorably by current and prospective investors, as well as by analysts and creditors. As a result, this conclusion may make it more difficult for us to raise the additional financing necessary to continue to operate our business. In addition, this conclusion may make it more difficult for us to sell our products and meet our sales forecasts, which may further impede our ability to raise additional financing. If we become unable to continue as a going concern, we may find it necessary to file a petition for reorganization under Title 11 of the U.S. Code in order to provide us additional time to identify an appropriate solution to our financial situation and implement a plan of reorganization aimed at improving our capital structure. ***We expect to require additional capital to fund our operations in the near-term, and this capital might not be available on acceptable terms, if at all.*** Even if we are able to agree an amendment with the holders of the Notes, we expect that we will need to engage in additional financings to fund our operations in the near-term as well as to respond to business challenges and opportunities, including the need to repay the Notes, provide working capital, develop new features or enhance our products, expand our manufacturing capacity, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, subject to our compliance with the covenants in the Notes, we expect we will need to engage in equity or debt financings to secure additional funds, including seeking additional capital from public or private offerings of our equity or debt securities, electing to repay, restructure or refinance our existing indebtedness, or electing to borrow additional amounts under new credit lines or from other sources. We may also seek to raise additional capital, including from offerings of our equity or debt securities on an opportunistic basis when we believe there are suitable opportunities. For example, on November 14, 2022, we filed with the SEC a shelf registration statement (the “Shelf Registration Statement”) that was subsequently declared effective on November 21, 2022 and permits us to sell from time to time additional shares of our common stock or other securities in one or more offerings in amounts, at prices and on the terms that we will determine at the time of offering for aggregate gross sale proceeds of up to $300.0 million, of which we may offer and sell up to $40.0 million shares of our common stock from time to time pursuant to an “at-the-market” offering sales agreement (the “ATM Sales Agreement”) we entered into in February 2023 with Needham, as agent, subject to the terms and conditions described in the ATM Sales Agreement and SEC rules and regulations. Furthermore, the Notes require us, on or before December 31, 2023, to establish a new “at-the-market” offering program with aggregate available, accessible and unused capacity to generate gross proceeds to us of at least $75,000,000 as of December 31, 2023. However, our recent and projected financial results, our existing event of default under the Notes and the related conditions that raise substantial doubt about our ability to continue as a going concern, and general concerns among potential investors and creditors about our financial well-being may make taking such actions on commercially reasonable terms especially difficult. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. Our ability to raise additional capital when needed may be adversely affected by external factors beyond our control, including changes in the political climate, geopolitical actions, changes in market interest rates or foreign exchange rates, market volatility in the trading prices for our common stock and other technology companies, a recession, depression, high inflation or other sustained adverse market event, and the COVID-19 pandemic. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to fund our operations in the near-term as well as to respond to business challenges and opportunities could be significantly impaired, and our business may be adversely affected. ### Risks Related to Our Business and Industry ***Market conditions, economic uncertainty or downturns could adversely affect our business and operating results.*** In recent years, the United States and other significant markets have experienced cyclical downturns and worldwide economic conditions remain uncertain, including as a result of the COVID-19 pandemic, supply chain disruptions, the war in Ukraine and the war in Israel, instability in the U.S. and global banking systems, rising fuel prices, increasing interest rates or foreign exchange rates and high inflation and the possibility of a recession. Economic uncertainty and associated macroeconomic conditions make it extremely difficult for our customers and us to accurately forecast and plan future business activities, and could cause our customers to slow spending on our products, which could delay and lengthen sales cycles. A significant downturn in economic activity, or general spending on additive manufacturing systems, may cause our current or potential customers to react by reducing their capital and operating expenditures in general or by specifically reducing their spending on additive manufacturing systems and related technologies. Moreover, competitors may respond to challenging market conditions by lowering prices and attempting to lure away our customers. We cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally, or in any industry. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and operating results could be adversely affected. For example, instability in the U.S. banking system has resulted in the failure of several U.S. banks, including the closure of SVB by banking regulators in March 2023. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments or to access financing may be threatened, which could have a material adverse effect on our business and financial condition. ### Risks Related to Our Notes ***The terms of the Notes restrict our current and future operations. Upon an event of default, we may not be able to make any accelerated payments under the Notes or our other permitted indebtedness.*** On August 10, 2023, we entered into a securities purchase agreement with certain affiliated institutional investors for the purchase and sale of up to $105 million in aggregate principal amount of our senior secured convertible notes. We issued $70 million in aggregate principal amount of the Initial Notes on August 14, 2023 (the “Initial Closing”). In addition, we have granted the investors the right to purchase up to an additional $35 million in aggregate principal amount of the Notes (the “Additional Notes”) so long as the notice to exercise such option is provided no later than the first anniversary of the Initial Closing. The Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest. In particular, the Notes contain customary affirmative and negative covenants (including covenants that limit our ability to incur debt, make investments, transfer assets, engage in certain transactions with affiliates and merge with other companies, in each case, other than those permitted by the Notes) and events of default. Furthermore, we are required to maintain a minimum of $30 million of unrestricted cash and cash equivalents and to maintain minimum levels of quarterly revenue through the quarter ended June 30, 2026. Our ability to meet the financial tests under the Notes can be affected by events beyond our control, and we may be unable to meet them. A breach of the covenants or restrictions under the Notes or under the agreements governing any of our other permitted indebtedness could result in an event of default under the applicable indebtedness. Such a default may allow holders of the Notes or the holders or lenders of our other permitted indebtedness, as appropriate, to accelerate the related indebtedness, which may result in the acceleration of other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, such lenders or holders could terminate commitments to lend money, if any. Furthermore, if we were unable to repay the Notes or other permitted indebtedness, then due and payable, secured lenders could proceed against the assets, if any, securing such indebtedness. In the event such lenders or holders accelerate the repayment of the Notes or our other permitted borrowings, we may not have sufficient assets to repay that indebtedness. A default would also significantly diminish the market price of our common stock. In particular, as described in more detail above, we were not in compliance with the minimum revenue covenant under the Notes for the quarter ended September 30, 2023, and it is probable that we will not be able to maintain compliance with the minimum levels of quarterly revenue during the twelve-month period following the filing date of this Quarterly Report. As a result, the holders of the Notes have the right to declare the Notes due and payable in cash in an amount equal to the Event of Default Acceleration Amount (as defined in the Notes). We have been negotiating a proposed amendment to the Notes with the holders thereof, which we anticipate completing in November 2023; however, we may not be able to obtain a waiver or an amendment on favorable terms or at all. If a waiver or amendment is not agreed to by the holders of the Notes, we do not have sufficient capital to satisfy the outstanding principal and interest due, and the holders of the Notes may foreclose on our assets securing the Notes. Furthermore, as a result of these restrictions, we may be limited in how we conduct and grow our business, or unable to compete effectively or to take advantage of new business opportunities. These restrictions may affect our ability to grow in accordance with our strategy. ***Servicing the Notes requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our obligations under the Notes or our other permitted indebtedness.*** Even if we are able to agree to an amendment with the holders of the Notes, our ability to make scheduled payments of principal or to pay interest on or to refinance the Notes or our other permitted indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are beyond our control. As of September 30, 2023, we have outstanding $70.0 million of Initial Notes, and the terms of the Initial Notes require us to pay approximately $80.5 million to repay the full principal amount of the Initial Notes at maturity or any other time; however, as noted above, if the holders accelerate the Notes as a result of the existing event of default, we would be required to pay the Event of Default Acceleration Amount. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under the Notes or our other permitted indebtedness and, in particular, we expect that we will need to engage in additional financings to fund our operations in the near-term, the terms of which may be onerous or highly dilutive. If we are unable to generate such cash flow and obtain such additional financing, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, or refinancing or restructuring our indebtedness on terms that may be unfavorable. We may not prepay the Notes without the consent of the holders, and our ability to refinance the Notes or our other permitted indebtedness will also depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Notes or our other indebtedness. ***Conversion of the Notes may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.*** The conversion of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock. Filed Nov 20, 2023. Source: SEC EDGAR, the filing index for accession 0001825079-23-000044. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.