908 Devices Inc. (MASS) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

We have developed an innovative suite of purpose-built handheld and desktop mass spectrometry, or Mass Spec, devices for the point-of-need. Leveraging our proprietary platform technology, we make the extraordinary analytical power of Mass Spec available in devices that are significantly smaller and more accessible than conventional laboratory instruments. Our Mass Spec devices are used at the point-of-need to interrogate unknown and invisible materials and provide quick, actionable answers to directly address some of the most critical problems in life sciences research, bioprocessing, industrial biotech, forensics and adjacent markets.

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

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

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

Since our inception, we have incurred significant operating losses. Our ability to generate revenue sufficient to achieve profitability will depend on the successful further development and commercialization of our products. We generated revenue of $46.9 million and $42.2 million for the years ended December 31, 2022 and 2021, respectively, and incurred net losses of $33.6 million and $22.2 million for those same years. As of December 31, 2022, we had an accumulated deficit of $134.2 million. We expect to continue to incur net losses as we focus on growing commercial sales of our products in both the United States and international markets, including growing our sales teams, scaling our manufacturing operations, continuing research and development efforts to develop new products and further enhance our existing products. Further, we expect to incur additional costs associated with operating as a public company. As a result, we may need additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research and development expenses.

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

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

Global Economic Conditions Including COVID-19

We are continuing to closely monitor macroeconomic impacts, including, but not limited to, developments affecting financial institutions and the COVID-19 pandemic and potential recessionary pressures, on our business, results of operations and financial results.

During 2022, our performance was affected by impacts from the COVID-19 pandemic, including supply chain disruptions, delays and rising costs, as well as labor challenges associated with employee absences, remote work, and adjusted work schedules. Moreover, a significant portion of our field sales, customer training events and other application services have been conducted in person, and the rollout of our new products has historically been supported by our participation at industry conferences, and our ability to participate in these customer and industry events improved in 2022 but remains limited by prohibitions on travel, restricted access to customer locations and large in-person gatherings. As the situation around COVID-19, including any variants thereof, evolves further, we are continuing to focus on promoting the health, safety and financial security of our employees and serving our customers. We will continue to monitor supply chain risks and other impacts from the COVID-19 pandemic.

We are monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, including Silicon Valley Bank, or SVB, being closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation, or the FDIC, as receiver on March 10, 2023 and Signature Bank being closed by its New York charter authority on March 12, 2023. As of March 10, 2023, we had substantially all of our cash and cash equivalents on deposit with SVB and Signature Bank. We are also monitoring the impacts that these events may have on our customers and vendors.

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

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

While it is difficult to predict all of the impacts these global economic events, including the COVID-19 pandemic

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

Additional information regarding these global impacts on our business is set forth within this Part I, Item 1A, Risk Factors of this Annual Report on Form 10-K.

Factors affecting our performance

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

Device sales

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

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

Our sales process varies considerably depending upon the type of customer to whom we are selling. Historically, our handheld devices have been used by state, federal and foreign governments and governmental agencies. Our sales process with government customers is often long and involves multiple levels of approvals, testing and, in some cases, trials. Device orders from a government customer are typically large orders and can be impacted by the timing of their capital budgets. As a result, the revenue for our handheld devices can vary significantly from period-to-period and has been and may continue to be concentrated in a small number of customers in any given period.

Our desktop devices are typically used by the pharmaceutical, biotechnology and academia markets. Our sales cycles within these markets tend to vary based on the size of the customer and the number of devices they purchase. Our shortest sales cycles are typically for small laboratories and individual researchers where, in some cases, we receive purchase orders from these customers within three months. Our sales process with other institutions can be longer with most customers submitting purchase orders within six to twelve months. Given the variability of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our desktop device sales on a period-to-period basis. Additionally, we have experienced and may continue to experience the impact of laboratory shutdowns and limited access to laboratories, related to COVID-19 on device and consumable sales to these markets.

Recurring revenue

We regularly assess trends relating to recurring revenue which includes consumables and services based on our product offerings, our customer base and our understanding of how our customers use our products. Recurring revenue was 35% and 19% of total product and service revenue for the years ended December 31, 2022 and 2021, respectively. Our recurring revenue as a percentage of total product and service revenue will vary based upon new device placements

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in the period. As our device installed base expands, recurring revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our revenue.

Revenue from the sales of consumables will vary by type of device. We expect that recurring revenue as a percentage of the original device price to be higher for our desktop devices (Rebel, ZipChip Interface, Maven and related sampling devices) than for our handheld device (MX908). While we sell single-use swab samplers for MX908 to be used in liquid and solid materials analysis, there are a number of other applications that the MX908 can be used for that do not require consumables. MX908 recurring revenue is also comprised of accessories, such as the Aero module, which can drive the handheld recurring revenue as a percent of overall product and service revenue higher in certain periods. Rebel and ZipChip Interface require consumables kits for all areas of operations. Currently, Rebel customers, who are actively utilizing the device, are consuming on average approximately half a 200-sample kit per month; however, Rebel is a relatively new product and purchasing patterns related to our consumables kits are evolving. We expect that the number of kits sold per month will vary over the short term. In time, we expect Rebel consumables kits sales to become more consistent as our installed base grows and our customers establish usage patterns. At maximum potential capacity, with continuous operation, the Rebel can consume approximately one 200-sample kit per day. Maven and related sampling devices require consumable sets of buffers, probes and biosensors for all areas of operations.

Revenue mix and gross margin

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

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

Product adoption

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

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Key Business Metrics

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

During the years ended December 31, 2022 and 2021, our product placements (units recognized as revenue) by device type were as follows:

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

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

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Components of Our Results of Operations

Revenue

Product and Service Revenue

We generate product and service revenue from the sale of our devices and recurring revenue from the sale of consumables and services. Device sales accounted for 65% and 81% of our product and service revenue for the years ended December 31, 2022 and 2021, respectively. Consumables and service revenue accounted for 35% and 19% of our product and service revenue for the years ended December 31, 2022 and 2021, respectively.

Our current device offerings include:

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

Our consumables consist of:

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

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

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

Licenses and contract revenue

License and contract agreements are arrangements whereby we provide engineering services for the development of our technology platform for specific programs or new and expanding applications of our technologies for future commercial endeavors. Our license and contract agreements are with the U.S. government and commercial entities (who may be contracting with the government). Contracts typically include compensation for labor effort and materials incurred related to the deliverables under the contract. Our license and contract revenue was primarily related to one customer during the years ended December 31, 2022 and 2021.

During the years ended December 31, 2022 and 2021, our revenue was comprised of revenue from the following sources:

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

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

Cost of Revenue, Gross Profit and Gross Margin

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

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

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

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

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

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Operating Expenses

Research and development expenses

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

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

Selling, general and administrative expenses

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

Other Income (Expense)

Interest expense

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

Other income (expense), net

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

Provision for Income Taxes

We have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year or for the research and development tax credits we generated in the United States and have recorded a full valuation allowance against our net deferred assets, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As of December 31, 2022, we had gross federal and state operating loss carryforwards of $92.3 million and $64.0 million, respectively,

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which may be available to offset future taxable income and begin to expire in 2032 and 2025, respectively, of which $57.9 million of federal gross operating losses do not expire. As of December 31, 2022, we also had U.S. federal and state research and development tax credit carryforwards of $5.9 million and $2.8 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2032 and 2029, respectively.

Results of Operations

The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K. The following tables set forth our results of operations for the periods presented:

Comparison of the Years ended December 31, 2022 and 2021

The following table summarizes our results of operations for the years ended December 31, 2022 and 2021:

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Revenue, Cost of revenue and Gross profit

Product and service

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

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Product and service revenue increased by $3.4 million, or 8%, for the year ended December 31, 2022, compared to the year ended December 31, 2021. Device sales accounted for 65% and 81% of our product and service revenue for the years ended December 31, 2022 and 2021, respectively. Consumables and service revenue accounted for 35% and 19% of our product and service revenue for the years ended December 31, 2022 and 2021, respectively. The decrease in device sales of $4.5 million was primarily due to a decrease of $5.3 million in handheld device sales from 122 fewer MX908 devices sold. This decrease was primarily related to shipments to the United States Army, offset in part by an increase in sales within state and local and certain international markets in the year ended December 31, 2022. The decrease in devices sales was offset in part by a $0.8 million increase in device sales related to our desktop products primarily due to higher average selling prices and channel mix for our Rebel and ZipChip devices, offsetting a 2 unit decrease in desktop devices, and the device revenue from Maven and related sampling device placements in the year ended December 31, 2022. Consumables and service revenue increased by $7.9 million due to an increase of $3.6 million from handheld accessories and consumables, primarily related to the Aero module and the shipments to the US Army in 2022, an increase in service revenue of $3.4 million and a $0.9 million increase in desktop consumables, mainly from Rebel kit sales.

Product and service cost of revenue increased by $1.8 million, or 10%, for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in product and service cost of revenue was primarily related to a $1.5 million increase in personnel related costs, a $0.6 million increase in freight costs and a $0.5 million increase related to volume, mix and production related costs and variances. These increases were offset in part by a $0.5 million decrease in warranty costs and a $0.5 million decrease in royalty costs, primarily related to lower device sales for the year ended December 31, 2022.

Product and service gross profit increased by $1.6 million, or 7%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to the increase in recurring revenues, offset in part by investments in our service resources to support our growing installed base and increases in manufacturing infrastructure. Gross profit margin was down slightly at 54% for the year ended December 31, 2022.

License and contract

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License and contract revenue increased by $1.3 million, or 116%, for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in license and contract revenue was primarily related to activities under our subcontract agreement with a commercial entity that holds a U.S. government prime contract resulting in $0.9 million higher contract revenue in the year ended December 31, 2022 compared to the year ended December 31, 2021. The additional increase in license and contract revenue is related to work performed under a prime contract held directly with the U.S. government that concluded in the year ended December 31, 2022.

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License and contract cost of revenue increased $0.1 million, or 25% for the year ended December 31, 2022, compared to the year ended December 31, 2021 due to the mix of contract deliverables across the current contracts.

License and contract gross profit increased by $1.2 million, or 154%, and gross profit margin increased by 12 percentage points for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to the mix in contract deliverables, including alignment of effort completed to date with funding on the contracts resulting in higher contract revenue for the year ended December 31, 2022.

Operating Expenses

Research and development

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Our research and development expenses were $17.5 million for the year ended December 31, 2022, an increase of $4.5 million from research and development expenses of $13.1 million for the year ended December 31, 2021. The increase was due primarily to a $2.5 million increase in salaries and related costs from growing headcount, a $1.2 million increase in stock-based compensation and a $0.4 million increase in materials and supplies related to product development efforts.

Selling, general and administrative expenses

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Our selling, general and administrative expenses were $43.9 million for the year ended December 31, 2022, an increase of $11.6 million from selling, general and administrative expenses of $32.2 million for the year ended December 31, 2021. The increase was due primarily to a $6.3 million increase in salaries and related costs from growing headcount, and a $3.3 million increase in stock-based compensation. The remaining $2.0 million increase during the year ended December 31, 2022 was due primarily to a $1.4 million increase in travel expenses, a $0.6 million increase in IT related subscription fees, a $0.6 million increase related to legal fees, and a $1.2 million increase related to all other selling, general and administrative expenses, which was partially offset by a $1.8 million decrease in allowance for bad debt recorded in the year ended December 31, 2021.

Other Income (Expense)

Interest income

Interest income increased by $1.5 million from $0.5 million for the year ended December 31, 2021. The increase was due to an increase in interest earned from our higher cash and cash equivalent balances from the proceeds from the November 2021 Offering, as well as higher interest rates on our interest bearing accounts.

Interest expense

Interest expense decreased by $0.4 million for the year ended December 31, 2022, from $0.5 million for the year ended December 31, 2021. The decrease was primarily due to lower average outstanding borrowings during the year

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ended December 31, 2022 and a loss on extinguishment of debt of $0.2 million recorded for the year ended December 31, 2021.

Other income (expense), net

Other income (expense), net was $0.1 million for the year ended December 31, 2022. Other income (expense), net did not change materially from other income (expense), net of $0.2 million for the year ended December 31, 2021.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily with proceeds from sales of redeemable preferred stock, borrowings under loan agreements and revenue from sales of our products and services and license and contract revenue, proceeds from our IPO in December 2020, and, most recently, with proceeds from our underwritten public offering in November 2021. As of December 31, 2022, we had cash and cash equivalents of $188.4 million. We believe that our existing cash and cash equivalents will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months. We do not believe that the events that have impacted SVB and Signature Bank will impact our ability to operate for at least the next twelve months.

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

On March 11, 2021, we entered into an Amended and Restated Loan and Security Agreement, or the 2021 Revolver, with Signature Bank, to replace our 2019 Loan and Security Agreement, or the 2019 Loan. The 2021 Revolver created a revolving line of credit totaling $25.0 million and eliminated the existing term loan. Borrowings under the revolving line of credit bear interest at an annual rate equal to the greater of (i) one-half percent (0.5%) above the prime rate or (ii) 4.0% and mature on March 11, 2024. Borrowings are collateralized by substantially all of our property, excluding intellectual property, which is subject to a negative pledge. The 2021 Revolver subjects us to various customary covenants, including requirements as to financial reporting and financial covenants (including an unrestricted minimum cash level of $10.0 million), and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or make other distributions on capital stock other than dividends payable solely in capital stock, to redeem capital stock, to enter into in-bound licensing agreements, to engage in transactions with affiliates, and to encumber our intellectual property. Events of default under the 2021 Revolver include

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failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to us. Upon the occurrence of an event of default and until such event of default is no longer continuing, the annual interest rate will be 5.0% above the otherwise applicable rate.

The terms of the 2021 Revolver required that the existing term loan outstanding under the 2019 Loan be repaid with an advance under the line of credit. Accordingly, on March 11, 2021, we used $14.5 million of proceeds from the revolving line of credit to repay all amounts then due on the existing term loan. We also borrowed an additional $0.5 million from the 2021 Revolver in March 2021. On November 2, 2022, we satisfied in full all of our obligations and voluntarily terminated 2021 Revolver. We did not incur any early termination penalties in connection with the termination of the 2021 Revolver. No amounts were outstanding upon termination of the 2021 Revolver.

On November 2, 2022, we entered into a Loan and Security Agreement with Silicon Valley Bank (the “2022 Revolver”).

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

As of December 31, 2022, the outstanding principal balance under the 2022 Revolver was $15.0 million, which was repaid in full on January 4, 2023. The interest rate applicable to borrowing under the 2022 Revolver was 7.0% as of December 31, 2022.

The 2022 Revolver also contains certain financial covenants, including a requirement that the amount of unrestricted and unencumbered cash minus advances under the 2022 Revolver, is not less than the amount equal to the greater of (i) $10.0 million or (ii) nine (9) months of cash burn. The 2022 Revolver contains customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, our ability to change the principal nature of our business, dispose of our business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem our capital stock, engage in transactions with affiliates or otherwise encumber our intellectual property, maintain no more than $3.6 million in non-SVB accounts at any point in time, in each case, subject to customary exceptions.

As of March 14, 2023, the ability to access the 2022 Revolver will be dependent on maintaining compliance with certain financial covenants, including maintaining the appropriate amount of deposits with SVB, and SVB being able to fulfill its obligations if we were to draw down under the 2022 Revolver. Please refer to Note 19 to our consolidated financial statements for further discussion regarding the potential impacts of the closure of SVB.

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

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Cash Flows

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

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Operating Activities

During the year ended December 31, 2022, net cash used in operating activities was $21.0 million, primarily resulting from our net loss of $33.6 million, partially offset by net cash provided by changes in our operating assets and liabilities of $3.3 million and noncash charges of $9.3 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2022, consisted primarily of a $5.9 million increase from changes in account receivable, a $1.9 million increase from changes in deferred revenue and a $1.2 million increase in right-of-use operating lease assets, partially offset by a $5.5 million decrease from changes in inventory and a $1.3 million decrease from operating lease liabilities.

During the year ended December 31, 2021, net cash used in operating activities was $29.1 million, primarily consisting of net cash used in changes in our operating assets and liabilities of $12.4 million and our net loss of $22.2 million, partially offset by $5.5 million in non-cash charges which include a $2.5 million stock-based compensation expense and a $1.7 million provision for doubtful accounts. Net cash used in changes in our operating assets and liabilities for the year ended December 31, 2021 consisted primarily of an increase in account receivable of $11.3 million and an increase in inventory of $4.5 million and an increase in prepaid expenses and other current assets of $4.1 million, partially offset by a $5.4 million increase in deferred revenue and a $2.8 million increase in account payable and accrued expenses.

Investing Activities

During the year ended December 31, 2022, net cash used in investing activities was $15.8 million, due primarily to $13.8 million used with the acquisition of Trace that occurred in August, 2022 and purchases of other property and equipment.

During the year ended December 31, 2021, net cash used in investing activities was $0.7 million, due to purchases of laboratory and demonstration equipment.

Financing Activities

Cash provided by financing activities during the year ended December 31, 2022, was $1.2 million, consisting primarily of proceeds from the issuance of common stock upon option exercises. We also paid off and drew down $60.0 million under the 2022 Revolver and 2021 Revolver, resulting in no net proceeds during the year ended December 31, 2022.

Cash provided by financing activities during the year ended December 31, 2021, was $94.7 million, consisting primarily of proceeds of $94.8 million from the issuance of common stock in an underwritten public offering that closed in November 2021, partially offset by $0.8 million payments of offering costs related to our public offering. We also received net proceeds from borrowings under the 2021 Revolver of $15.0 million. We used proceeds of $14.5 million

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from the revolving line of credit to repay our previously outstanding borrowings under our loan and security agreement. Prior to repayment of our loan and security agreement, we had made principal payments of $0.5 million.

Contractual Obligations

We have operating lease obligations for office space and certain equipment, which have remaining lease terms ranging from less than one year to approximately seven years. The total future minimum payments under such leases are $9.1 million as of December 31, 2022, of which $2.2 million is expected to be paid in 2023.

At times, we have purchase orders or contracts for the purchase of supplies and other goods and services. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short time horizons.

We have also entered into license agreements under which we are obligated to make royalty payments in the 2% to 5% range, subject to a minimum royalty fee of $0.1 million annually. We have not included future payments under these agreements in the table of contractual obligations above since the payment obligations under these agreements are contingent upon generating product sales. We have not included annual minimum royalty payments in the table above because, although the amounts and timing are known, we cannot currently determine the final termination date of the agreement and, as a result, we cannot determine the total amounts of such payments we will be required to make under the agreements.

During the fiscal year ended December 31, 2022, we made no cash contributions to our foreign pension plan, assumed as a part of Trace acquisition.

Critical Accounting Policies and Significant Judgments and Estimates

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

While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue from sales to customers under Accounting Standards Codification 606, Revenue from Contracts with Customers, or ASC 606 by applying the following five steps: (1) identification of the contract, or contracts, with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue when, or as, performance obligations are satisfied.

For a contract with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation on a relative standalone selling price basis using our best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers; however, when prices in standalone sales are not available, we may use third party pricing for similar products or services or estimate the standalone selling price, which is set by management.

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

Product and Service Revenue

We derive revenue primarily from the sale of handheld and desktop products and related consumables and services. Revenue is recognized when control of the promised products consumables or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products, consumables or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of accounting under ASC 606. For devices and consumables sold by us, control transfers to the customer at a point in time. To indicate the transfer of control, we must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is other than perfunctory, the customer must have accepted the product or service. Our principal terms of sale are freight on board, or FOB, shipping point, or equivalent, and, as such, we primarily transfer control and record revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB shipping point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. If a performance obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition for that performance obligation is deferred until such commitments have been fulfilled. For extended warranty and support, control transfers to the customer over the term of the arrangement. Revenue for extended warranty and support is recognized based upon the period of time elapsed under the arrangement as this period represents the transfer of benefits or services under the agreement.

License and Contract Revenue

We generate revenue from short and long-term contracts associated with the design and development and delivery of detection devices or related design and support services. To date, these contracts are primarily with the U.S. government or commercial entities contracting with the U.S. government, but we have also had such contracts with commercial partners. Our contracts with the U.S. government typically are subject to the Federal Acquisition Regulation, or FAR, and are priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods or services provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer.

Under the typical payment terms of U.S. government fixed-price contracts, the customer pays in accordance with the terms of the specific agreement, but generally through progress payments. If these progress payments are made in advance, these payments are recorded as a contract liability, classified as deferred revenue within the accompanying consolidated balance sheet, until we provide the underlying services. For U.S. government cost-type contracts, the customer generally pays for actual costs incurred within a short period of time. For contracts with commercial partners, payments are made in accordance with the terms of the specific agreement. For agreements which call for milestone payments, to the extent we do not conclude that it is probable that a significant reversal of cumulative revenue will occur, a contract asset is generated until we are permitted to bill for costs incurred, which is classified as unbilled receivables in the accompanying consolidated balance sheet. In some cases, payments received in advance under license agreements are recorded as deferred revenue and recognized over the respective contract term, absent any other performance obligations.

Generally, revenue for long-term contracts is recognized based upon the cost-to-cost measure of progress, provided that we meet the criteria associated with transferring control of the good or service over time such as not creating an asset with an alternative use and having an enforceable right to payment for completed performance. However, we evaluate the proper revenue recognition on a contract by contract basis, as each contract generally contains terms specific to the underlying agreement which result in differing performance obligations and payment terms (cost plus, fixed price agreements among others). For revenue recognized under the cost-to-cost measure of progress basis, we

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continually assess total costs expected to be incurred and if such costs require adjustment to the measure of progress, we record such adjustment as a change in estimate on a cumulative catch-up basis in the period of adjustment.

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

Distribution Channels

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

Stock-Based Compensation

We measure stock-based option awards granted to employees, consultants and directors based on their fair value on the date of grant using the Black-Scholes option-pricing model. Compensation expense for those awards is recognized, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. The straight-line method of expense recognition is applied to all awards with service-only conditions, while the graded vesting method is applied to all grants with both service and performance conditions. Forfeitures are recorded as they occur instead of estimating forfeitures that are expected to occur.

The Black-Scholes option-pricing model uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield.

Valuation of Inventory

Inventory is valued at the lower of cost or net realizable value. Cost is computed using the first-in, first-out method. We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, record charges to write down inventories to their estimated net realizable value, after evaluating historical sales, future demand, market conditions and expected product life cycles. Such charges are classified as cost of revenue in the consolidated statements of operations and comprehensive loss. Any write-down of inventory to net realizable value creates a new cost basis.

Goodwill

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

We test goodwill for impairment at the reporting unit level, which is the operating segment, in the fourth quarter of every year. We have the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment. If as a result of the quantitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be

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required. The quantitative goodwill impairment test requires the management to estimate and compare the fair value of the reporting unit with its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets, goodwill is not impaired. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss up to the amount of goodwill.

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

Business combination

Under the acquisition method of accounting, we generally recognize the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The excess consideration over the aggregate value of tangible and intangible assets, net of liabilities assumed, is recorded as goodwill. These valuations require significant estimates and assumptions, especially with respect to intangible assets.

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

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

If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements may be exposed to potential impairment of the intangible assets and goodwill. The determination of fair value is considered a critical accounting estimate because the valuation techniques mentioned use significant estimates and assumptions, including projected future revenues, a hypothetical royalty rate, the expected economic life of the asset, tax rates and a discount rate that reflects the level of risk associated with the future earnings attributable to the asset.

During the measurement period, which is up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.

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Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K.

Inflation Risk

During the last two years, inflation and changing prices have not had a material effect on our business. We are unable to predict whether inflation or changing prices will materially affect our business in the foreseeable future.

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