Unless otherwise indicated or the context otherwise requires, references in this section to "Markforged ," "we," "us," "our" and other similar terms refer toMarkforged Holding Corporation and its subsidiaries after giving effect to the Merger. The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections entitled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."
Business Overview
Our platform, The Digital Forge, is an intuitive additive manufacturing platform powering engineers, designers and manufacturing professionals globally. The Digital Forge combines precise and reliable 3D printers and metal and composite proprietary materials seamlessly with its cloud-based learning software offering to empower manufacturers to create more resilient and agile supply chains. Founded in 2013 by twoMIT -educated engineers,Markforged is based in greaterBoston, Massachusetts , where we have our own in-house manufacturing facility and where we design all of our industrial 3D printers, software and metal and composite proprietary materials. 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$46.1 million and$40.5 million for the six months endedJune 30, 2022 and 2021, respectively, and incurred net profit of$8.3 million and net loss of$21.1 million , respectively, for those same periods. Net profit for the six months endedJune 30, 2022 is inclusive of non-cash mark-to-market gains of$53.3 million . As ofJune 30, 2022 , we had an accumulated deficit of$67.4 million . We expect to continue to incur operating losses as we focus on growing commercial sales of our products in boththe 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 continue to incur additional general and administrative expenses associated with operating as a public company. In addition, we will incur substantial spending to build out the global footprint of our sales network, continue investing in research and development to accelerate product innovation, and fund inorganic growth opportunities. Merger agreement OnFebruary 23, 2021 , one, aCayman Islands exempted company ("AONE"), entered into an Agreement and Plan of Merger (the "Merger Agreement") withCaspian Merger Sub Inc. , a wholly owned subsidiary of AONE ("Merger Sub"), andMarkForged, Inc. ("Legacy Markforged"), pursuant to which (i) AONE would deregister as aCayman Islands company and domesticate as a corporation in theState of Delaware and would be renamed "Markforged Holding Corporation " (the "Domestication") and (ii) Merger Sub would merge with and into Legacy Markforged with Legacy Markforged surviving as a wholly owned subsidiary ofMarkforged Holding Corporation (the "Merger"). AONE's shareholders approved the transactions contemplated by the Merger Agreement onJuly 13, 2021 , and the Domestication and the Merger were completed onJuly 14, 2021 . Cash proceeds of the Merger were funded through a combination of AONE's$132.5 million of cash held in trust (after redemptions of$64.2 million ) and an aggregate of$210.0 million in fully committed common stock transactions at$10.00 per share. Upon closing of the Merger (the "Closing"), Legacy Markforged repurchased shares of common stock from certain of its stockholders, for a total value of$45.0 million of cash on hand (the "Employee Transactions"). Total net proceeds upon the Closing, net of the Employee Transactions and transaction costs paid at the Closing of$27.1 million , were$288.8 million .
Recent Developments
Impact of the COVID-19 Pandemic and Global Supply Chain Disruption
InDecember 2019 , a novel coronavirus disease ("COVID-19") was identified and onMarch 11, 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it is impacting our customers, employees, supply chain, and distribution network, as well as the demand for our products in the markets that we serve. 26 -------------------------------------------------------------------------------- As a result of COVID-19 restrictions on facilities imposed to contain the spread of COVID-19, we experienced delays in shipments and installations as well as decreased utilization of our installed products, leading to a decrease in sales of consumables materials, which had an adverse effect on our revenue, especially in March andApril 2020 . In response, we undertook certain measures to mitigate the impacts of the COVID-19 pandemic on our financial position, cash flows and supply chain, including a reduction in force during 2020 to control headcount related costs. Moreover, we maintain compliance with federal, state and local rules and regulations, which may impact our attrition. Any requirements to impose obligations on our suppliers could impact our supply of raw materials and our results of operation and financial condition could be adversely affected. More recently, we have experienced longer lead-times, higher costs, and delays in procuring parts and materials. For example, we recently experienced longer lead times and capacity constraints in connection with the raw resources required to manufacture our printing material and we are also facing increased prices in connection with the procurement of the electronic components and custom metal fabricated parts for our printers. We are working closely with our suppliers and customers to minimize impacts, and we continue to closely monitor availability and supply of parts and materials required for our business. However, the extent to which our operations may continue to be impacted by the COVID-19 pandemic and related supply-chain disruptions will depend largely on future developments, which are uncertain and cannot be accurately predicted, including the timing, pace and scale of the recovery of global economic conditions. The magnitude of the adverse impact on our financial condition, results of operations and cash flows will depend on the evolution of our supply chain difficulties. For more information on operations and risks related to the pandemic and global supply chain disruptions, please see the section of this Quarterly Report on Form 10-Q titled "Risk Factors - General Risk Factors, The global COVID-19 pandemic has significantly affected our business and operations".
Key Factors Affecting Operating Results
We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the factors discussed below. 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.
Hardware 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 hardware. Management focuses on hardware sales as an indicator of current business success and a leading indicator of likely future recurring revenue from consumables, success plans, and premium software subscriptions. We expect our hardware sales to continue to grow as we increase penetration in our existing markets and expand into new markets. Recurring revenue We regularly assess trends relating to recurring revenue which includes consumables, services, and premium software subscriptions. The consumables revenue stream includes metals, continuous fiber, and chopped fiber materials used by customers as print media. Our services revenue is made up of revenue generated from hardware maintenance contracts (which we also refer to as "Success Plans") and premium software subscriptions. The Success Plan revenue stream primarily consists of hardware maintenance services generally realized over a period of one to three years. Premium software subscriptions relate to certain cloud software solutions sold separately from our standard cloud-based software platform offering that is fully integrated with our hardware. Recurring revenue was 34% and 30% of total revenue for the three months endedJune 30, 2022 and 2021, respectively. Recurring revenue was 34% and 30% of total revenue for the six months endedJune 30, 2022 and 2021, respectively. Our recurring revenue as a percentage of total revenue may vary based upon new product placements in the period as well as consumption trends impacted by macroeconomic factors, customer behavior, and the useful life of our hardware. As our cumulative historical hardware sales increase, recurring revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our total revenue.
Go to market
We believe that we are in a strong position within the industry with our
accessible solutions that offer users design flexibility and industrial strength
parts. Accordingly, we continue to invest in operations and sales channels
necessary to scale our business and continue to gain market share and open new
market opportunities. We have proven an ability to design, manufacture, and
distribute products through channels that provide a high value to customers at
gross margins higher than many of our competitors. In addition to our go to
market strategy, our integrated platform of hardware, software and consumables
has been core to our success and we will continue to drive value through
research and development as we introduce smarter and more adaptive technology
that is expected to
27
--------------------------------------------------------------------------------
improve our integrated platform and, ultimately, the value provided by our 3D
printers. We believe these investments are critical to achieve long-term
scalability, but expect the near term impacts will be a muting of our short term
profitability.
Seasonality
Historically, the sales of our 3D printers have been subject to seasonality and
we have seen higher hardware sales in the third and fourth quarters. We believe
this trend is likely driven by available funds in federal capital budgets at the
end of the third quarter and commercial budgets at year end which they direct
towards the evolution of their manufacturing processes through investments in
additive manufacturing.
Components of Results of Operations
Revenue
The majority of our revenue results from the sale of hardware, including our additive manufacturing products, and related consumables. We deliver products and services primarily through our VAR network,who purchase and resell our products to end users. Hardware and consumables revenue is recognized upon transfer of control to the customer, which is typically the VAR, and generally takes place at the point of shipment. We also generate a portion of our revenue from hardware maintenance services and our premium software subscriptions. Revenue from hardware maintenance services for our additive manufacturing products is primarily generated through one-year or three-year contracts and is recognized ratably over the term of the agreement. Revenue related to software subscriptions is recognized ratably over the term of the subscription. Our VARs may provide installation services, as needed depending on the product.
Cost of revenue
Our cost of revenue consists of the cost of product, software subscriptions, maintenance services, personnel costs, third party logistics, warranty fulfillment costs, and overhead. Cost of products includes the manufacturing cost of our additive manufacturing products and consumables. We primarily utilize third party manufacturers for the production of our additive manufacturing hardware while we utilize our own manufacturing facilities and personnel for the production of our consumables. The costs of revenue for internally manufactured products include the cost of raw materials, labor conversion costs, and overhead related to our manufacturing operations, including depreciation. Cost of maintenance services includes personnel-related costs associated with our customer success teams' provision of remote and on-site support services to our customers and the costs of replacement parts.
Our cost of revenue also includes indirect costs of providing our products and
services to customers which consist primarily of reserves for excess and
obsolete inventory and stock-based compensation.
We expect our cost of revenue to increase in absolute dollars in future periods
as we expect our revenues to continue to grow.
Gross profit and gross margin
Our gross profit is calculated based on the difference between our revenues and
cost of revenue. Gross margin is the percentage obtained by dividing gross
profit by our revenue. Our gross profit and gross margin are, or may be,
influenced by a number of factors, including:
•
Market conditions and competition that may impact our pricing;
•
Product mix changes between our printer product lines and consumables trends;
•
Excess and obsolete material related to new product introductions;
•
The impact of COVID-19 and the global supply chain disruptions on the cost to
both procure materials and ship materials and finished goods;
•
Growth in the number of customers utilizing our additive manufacturing products and changes in customer utilization rates, which affects sales of our consumable materials and may result in excess or obsolete inventories;
•
Our cost structure for manufacturing operations, including the impact of inflation, the extent to which we utilize contract manufacturers compared to in-house manufacturing, the ability to achieve economies of scale in our purchase volumes, and any impacts to changes in our manufacturing on our product warranty obligations; and
•
Our ability to directly monetize the capabilities of our software solutions in
the future.
28 --------------------------------------------------------------------------------
We expect our gross margins to fluctuate over time, depending on the factors
described above.
Research and development Our research and development expenses represent costs incurred to support activities that advance the development of innovative additive manufacturing technology, new printer products, development of proprietary printing materials, as well as activities that enhance the functionality of our offerings. Our research and development expenses consist primarily of employee-related personnel expenses, prototypes, facilities costs, and engineering services. We expect research and development costs will increase in absolute dollars over time as we continue to invest in our product portfolio.
Sales and marketing
Sales and marketing expenses consist primarily of personnel-related costs for our sales and marketing departments, costs related to sales commissions, trade shows, advertising, facilities costs, and other demand generation services. We expect our sales and marketing costs will increase over time as we expand our headcount, optimize our reseller network and invest in brand awareness and demand generation.
General and administrative
General and administrative expenses consist primarily of personnel-related costs for our executive leadership and finance, human resources and IT departments. We expect our general and administrative costs will increase over time as we expand our headcount to support growth in our global business.
Change in fair value of derivative liabilities
Change in fair value of derivative liabilities primarily includes the change in fair value of the contingent earnout liability and private placement warrant liability. Each was accounted for as a liability as of the date of the Merger and remeasured to fair value at the end of the reporting period.
Other (expense) income, net
Other (expense) income, net includes other non-operating expenses and income
sources.
Interest expense
Interest expense includes interest accrued on our debt and the amortization of
deferred debt issuance costs.
Interest income
Interest income includes interest earned on deposits and short-term investments.
Income taxes
Our income tax provision consists of an estimate forU.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, changes in deferred tax assets and liabilities and changes in tax law. Due to cumulative losses, we maintain a valuation allowance against ourU.S. and state deferred tax assets.
Results of Operations
The results of operations presented below should be reviewed in conjunction with
the condensed consolidated financial statements and notes included elsewhere in
this Quarterly Report on Form 10-Q. The following tables set forth our results
of operations for the periods presented.
29
--------------------------------------------------------------------------------
Comparison of the three months ended
Three Months Ended June 30,
(dollars in thousands) 2022 2021 $ Change % Change
Revenue $ 24,227 $ 20,419 $ 3,808 19 %
Cost of revenue 11,302 8,496 2,806 33 %
Gross profit 12,925 11,923 1,002 8 %
Operating expense
Sales and marketing 12,873 8,255 4,618 56 %
Research and development 10,387 6,444 3,943 61 %
General and administrative 13,478 7,959 5,519 69 %
Total operating expense 36,738 22,658 14,080 62 %
Loss from operations (23,813 ) (10,735 ) (13,078 ) 122 %
Change in fair value of warrant
liabilities 976 (241 ) 1,217 (505 )%
Change in fair value of contingent
earnout liability 26,742 - 26,742 100 %
Other (expense) income, net (171 ) (104 ) (67 ) 64 %
Interest expense (9 ) (5 ) (4 ) 80 %
Interest income 354 1 353 35300 %
Profit (loss) before income taxes 4,079 (11,084 ) 15,163 (137 )%
Income tax benefit 4 6 (2 ) (33 )%
Net profit (loss) and comprehensive
income (loss) $ 4,075 $ (11,090 ) $ 15,165 (137 )%
Revenue, cost of revenue, and gross margin
We earn revenue from the sale of hardware, consumables, and services contracts. The hardware revenue stream includes 3D metal printers, 3D composite printers, and sintering furnaces. The consumables revenue stream includes metals, continuous fiber, and chopped fiber materials used by customers as print media. The services revenue stream primarily consists of hardware maintenance services and software subscriptions.
The following table sets forth the changes in the components of gross margin for
the three months ended
Three Months Ended June 30,
(dollars in thousands) 2022 2021 $ Change % Change
Revenue $ 24,227 $ 20,419 $ 3,808 19 %
Cost of revenue 11,302 8,496 2,806 33 %
Gross profit 12,925 11,923 1,002 8 %
Gross margin 53 % 58 % - (9 )%
Comparison of revenue
The following table disaggregates the Company’s revenue based on the nature of
the products and services:
Three Months Ended June 30,
(in thousands) 2022 2021 $ Change % Change
Hardware $ 16,011 $ 14,331 $ 1,680 12 %
Consumables 5,889 4,780 1,109 23 %
Services 2,327 1,308 1,019 78 %
Total Revenue $ 24,227 $ 20,419 $ 3,808 19 %
Consolidated revenue for the three months ended June 30, 2022 was $24.2 million
compared with revenue of $20.4 million for the three months ended June 30, 2021
representing an increase of 19%, primarily driven by sales of our next-gen
printers, specifically the FX20, as well as increases in consumable and service
revenue over the comparable period.
Hardware revenue increased approximately 12% for the three months ended June 30,
2022 compared to the three months ended June 30, 2021 . The increase in revenue
was primarily due to a shift in sales to FX20 printers from legacy printers.
Consumables
30
--------------------------------------------------------------------------------
revenue increased approximately 23% for the three months ended June 30, 2022
compared to the three months ended June 30, 2021 . The increase in consumables
revenue was due to the increase in active printers being utilized in the field
as a result of the incremental volume of new printer sales in the prior year.
Services revenue increased approximately 78% for the three months ended June 30,
2022 compared to the three months ended June 30, 2021 , including $0.4 million
from reaching certain milestones of two long-term customers. The increase in
services revenue was further driven by an increase in the percentage of hardware
units sold with a warranty and maintenance contract during the preceding year,
as well as the introduction of software subscription services, including Eiger
Fleet and Blacksmith.
Cost of revenue and gross profit
Consolidated cost of revenue for the three months endedJune 30, 2022 was$11.3 million compared with cost of revenue of$8.5 million for the three months endedJune 30, 2021 representing an increase of 33%. This was primarily due to an increase in the cost of mechanical and electronic components, labor to support increased hardware and material sales, and rising freight and logistics costs. Gross profit for the three months endedJune 30, 2022 was$13.0 million compared with gross profit of$11.9 million for the three months endedJune 30, 2021 representing an increase of 9%. Gross profit margin for the three months endedJune 30, 2022 was 53% while the gross profit margin for the three months endedJune 30, 2021 was 58%. The decline in consolidated gross profit is primarily due to the increased costs to procure supplies of mechanical and electronic components and increases in the cost of labor to support production; increases to freight and logistics expenses in support of production; a shift in our product mix; and, the introduction of our newest printer, the FX20.
Operating expenses
The following table sets forth the components of operating expenses for the
three months ended
Three Months Ended June 30,
2022 2021 Change
% %
(dollars in thousands) Amount Revenue Amount Revenue $ %
Operating expenses
Sales and marketing $ 12,873 53 % $ 8,255 40 % $ 4,618 56 %
Research and development 10,387 43 % 6,444 32 % 3,943 61 %
General and administrative 13,478 56 % 7,959 39 % 5,519 69 %
Total operating expenses $ 36,738 152 % $ 22,658
111 %
Sales and marketing expense increased 56% for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 , primarily due to increased spending on personnel costs of$1.9 million , tradeshow and event expenses of$0.7 million , stock-based compensation of$0.5 million , market development funds of$0.4 million , and director and officer liability insurance premiums of$0.4 million . Consistent with the increase in events, travel related expenses increased by$0.5 million . The increases in expense are consistent with our increase in headcount as we execute our growth strategy. Research and development expense increased 61% for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 , primarily due to increases in personnel and contractor costs of$1.7 million . Stock-based compensation expenses increased$1.2 million . The increase in employee related costs are consistent with our investment in human capital to meet our innovation goals. Rent expense increased by$0.8 million due to the commencement of the newWaltham headquarters lease. Additionally, director and officer liability insurance premiums increased by$0.4 million over the comparable period. General and administrative expenses increased 69% for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 , primarily due to increased stock-based compensation expenses of$1.4 million , increased personnel and contractor costs of$1.0 million , one-time transaction costs of$0.9 million related to acquisitions, director and officer liability insurance premiums of$0.5 million , software and subscriptions of$0.4 million , and$0.2 million increase in audit fees over the comparative period. The additions to our management team, and corresponding increases in personnel costs, are consistent with our plans to position the company for future growth and to support our public company infrastructure. These increases were slightly offset by a$0.2 million decrease in recruiting costs. Rent expense increased by$0.2 million due to the commencement of the newWaltham headquarters lease. 31 --------------------------------------------------------------------------------
Change in fair value of warrant liabilities and contingent earnout liability
The following table sets forth Change in fair value of derivative liabilities
for the three months ended
Three Months Ended June 30,
(dollars in thousands) 2022 2021 $ Change % Change
Change in fair value of warrant
liabilities $ 976 $ (241 ) $ 1,217 (505 )%
Change in fair value of contingent
earnout liability 26,742 - 26,742 100 %
Fair value of derivative liabilities decreased creating additional income of
$27.7 million for the three months ended June 30, 2022 , compared to a loss of
$0.2 million during the three months ended June 30, 2021 , primarily related to
the change in fair value of the derivative liability for the earnout shares. The
changes in fair value directly correlate with the change in the Company's common
stock price between March 31, 2022 and June 30, 2022 .
Provision for income taxes
We recorded a de minimis expense for income taxes for the three months ended
Comparison of the six months ended
Six Months Ended June 30,
(dollars in thousands) 2022 2021 $ Change % Change
Revenue $ 46,086 $ 40,539 $ 5,547 14 %
Cost of revenue 21,555 16,435 5,120 31 %
Gross profit 24,531 24,104 427 2 %
Operating expense
Sales and marketing 23,321 15,312 8,009 52 %
Research and development 20,954 11,703 9,251 79 %
General and administrative 25,221 16,822 8,399 50 %
Total operating expense 69,496 43,837 25,659 59 %
Loss from operations (44,965 ) (19,733 ) (25,232 ) 128 %
Change in fair value of warrant
liabilities 1,669 (1,251 ) 2,920 (233 )%
Change in fair value of contingent
earnout liability 51,638 - 51,638
Other expense, net (390 ) (117 ) (273 ) 233 %
Interest expense (9 ) (9 ) - -
Interest income 374 3 371 12367 %
Profit (loss) before income taxes 8,317 (21,107 ) 29,424 (139 )%
Income tax (benefit) expense 3 2 1 50 %
Net profit (loss) and comprehensive
income (loss) $ 8,314 $ (21,109 ) $ 29,423 (139 )%
Revenue, cost of revenue, and gross margin
We earn revenue from the sale of hardware, consumables, and services contracts. The hardware revenue stream includes 3D metal printers, 3D composite printers, and sintering furnaces. The consumables revenue stream includes metals, continuous fiber, and chopped fiber materials used by customers as print media. The services revenue stream primarily consists of hardware maintenance services and software subscriptions.
The following table sets forth the changes in the components of gross margin for
the six months ended
Six Months Ended June 30,
(dollars in thousands) 2022 2021 $ Change % Change
Revenue $ 46,086 $ 40,539 $ 5,547 14 %
Cost of revenue 21,555 16,435 5,120 31 %
Gross profit 24,531 24,104 427 2 %
Gross margin 53 % 59 % - (10 )%
32
--------------------------------------------------------------------------------
Comparison of revenue
The following table disaggregates the Company’s revenue based on the nature of
the products and services:
Six Months Ended June 30,
(in thousands) 2022 2021 $ Change % Change
Hardware $ 30,527 $ 28,569 $ 1,958 7 %
Consumables 11,345 9,397 1,948 21 %
Services 4,214 2,573 1,641 64 %
Total Revenue $ 46,086 $ 40,539 $ 5,547 14 %
Consolidated revenue for the six months ended June 30, 2022 was $46.1 million
compared with revenue of $40.5 million for the six months ended June 30, 2021
representing an increase of 14%, primarily driven by sales of our next-gen
printers, specifically the FX20, as well as increases in consumable and service
revenue over the comparable period.
Hardware revenue increased approximately 7% for the six months ended June 30,
2022 compared to the six months ended June 30, 2021 . The increase in revenue was
primarily due to a shift in sales to FX20 printers from legacy printers. This
increase was partially offset by a decrease in units sold of other high value
composite printers, largely driven by the $8.0 million transaction that occurred
in the fourth quarter of 2020 and contributed $1.2 million to hardware revenue
in the first quarter of 2021. Consumables revenue increased approximately 21%
for the six months ended June 30, 2022 compared to the six months ended June 30,
2021 ; this was due to the increase in active printers being utilized in the
field as a result of the incremental volume of new printer sales in the prior
year. Services revenue increased approximately 64% for the six months ended June
30, 2022 compared to the six months ended June 30, 2021 , driven primarily by an
increase in the percentage of hardware units sold with a warranty and
maintenance contract during the preceding year, as well as the introduction of
software subscription services, including Eiger Fleet and Blacksmith.
Cost of revenue and gross profit
Consolidated cost of revenue for the six months endedJune 30, 2022 was$21.6 million compared with cost of revenue of$16.4 million for the six months endedJune 30, 2021 representing an increase of 31%. This was primarily due to an increase in the cost of mechanical and electronic components, labor to support increased hardware and material sales, and rising freight and logistics costs. Gross profit for the six months endedJune 30, 2022 was$24.5 million compared with gross profit of$24.1 million for the six months endedJune 30, 2021 . Gross profit margin for the six months endedJune 30, 2022 was 53% while the gross profit margin for the six months endedJune 30, 2021 was 59%. The decline in consolidated gross profit is primarily due to the increased costs to procure supplies of mechanical and electronic components and increases in the cost of labor to support production; freight and logistics expenses in support of production; a shift in our product mix; and, the introduction of our newest printer, the FX20.
Operating expenses
The following table sets forth the components of operating expenses for the six
months ended
Six Months Ended June 30,
2022 2021 Change
% %
(dollars in thousands) Amount Revenue Amount Revenue $ %
Operating expenses
Sales and marketing $ 23,321 51 % $ 15,312 38 % $ 8,009 52 %
Research and development 20,954 45 % 11,703 29 % 9,251 79 %
General and administrative 25,221 55 % 16,822 41 % 8,399 50 %
Total operating expenses $ 69,496 151 % $ 43,837
108 %
Sales and marketing expense increased 52% for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 , primarily due to increased spending on personnel costs of$3.2 million , stock-based compensation of$1.3 million , director and officer liability insurance premiums of$0.8 million , and market development funds of$0.5 million . Tradeshows and event expenses increased by$0.5 million , internal meeting and event costs increased by$0.5 million , and travel related expenses increased by$0.7 million . The increases in expense are consistent with our increase in headcount as we execute our growth strategy. Research and development expense increased 79% for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 , primarily due to increases in personnel and contractor costs of$4.4 million . Stock-based compensation expenses increased$2.3 million and prototype R&D increased by$0.7 million . The increase in employee related costs are consistent with our 33 -------------------------------------------------------------------------------- investment in human capital to meet our innovation goals. Rent expense increased by$0.9 million due to the commencement of the newWaltham headquarters lease. Additionally, director and officer liability insurance premiums increased by$0.7 million over the comparable period. General and administrative expenses increased 50% for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 , primarily due to increased stock-based compensation expenses of$3.7 million , increased personnel and contractor costs of$2.1 million , due diligence expenses of$1.0 million related to acquisitions, director and officer liability insurance premiums of$0.9 million , software and subscriptions of$0.3 million , and$0.3 million increase in audit fees over the comparative period. The increases are consistent with the additions to our management team to position the company for future growth, and additional key personnel to support our public company infrastructure, and additional public company costs that began being incurred after the Merger. These increases were slightly offset by a$0.2 million decrease in recruiting costs.
Change in fair value of warrant liabilities and contingent earnout liability
The following table sets forth change in fair value of derivative liabilities
for the six months ended
Six Months Ended June 30,
(dollars in thousands) 2021 2020 $ Change % Change
Change in fair value of warrant
liabilities $ 1,669 $ (1,251 ) $ 2,920 (233 )%
Change in fair value of contingent
earnout liability 51,638 - 51,638 100 %
Fair value of derivative liabilities decreased creating additional income of
$53.3 million for the six months ended June 30, 2022 , compared to loss of $1.3
million during the six months ended June 30, 2021 , primarily related to the
change in fair value of the derivative liability for the Markforged Earnout
Shares issued in connection with the Merger. The changes in fair value directly
correlate with the change in our common stock price between December 31, 2021
and June 30, 2022 .
Provision for income taxes
We recorded a de minimis expense for income taxes for the six months ended
30, 2022
Non-GAAP Net Profit (Loss)
In addition to our financial results determined in accordance withU.S. generally accepted accounting principles ("GAAP"), we believe that the below non-GAAP net profit (loss) financial measure, that excludes one-time charges and certain non-cash items, is useful in evaluating the performance of our business. We define non-GAAP net profit (loss) as net profit (loss) and comprehensive income (loss) less stock-based compensation expense, net change in fair value of warrant liabilities and contingent earnout liabilities, and certain non-recurring expenses. We monitor non-GAAP net profit (loss) as a measure of our overall business performance, which enables us to analyze our past and future performance without the effects of non-cash items and/or one-time charges. While we believe that non-GAAP net profit (loss) is useful in evaluating our business, non-GAAP net profit (loss) is a non-GAAP financial measure that has limitations as an analytical tool. Non-GAAP net profit (loss) can be useful in evaluating our performance by eliminating the effect of financing and non-cash expenses such as stock-based compensation, however, we may incur such expenses in the future which could impact future results. We also believe that the presentation of the non-GAAP financial measures in this Quarterly Report on Form 10-Q provides an additional tool for investors to use in comparing our core business and results of operations over multiple periods with other companies in our industry, many of which present similar non-GAAP financial measures to investors. Investors should note that beginning with the second quarter of 2022, we have modified the presentation of "non-recurring costs" included in non-GAAP gross margin, non-GAAP operating profit (loss), non-GAAP net profit (loss) and non-GAAP earnings per share metrics to include certain non-recurring litigation costs. We use these metrics to provide an understanding of the results of our core business performance and believe these non-recurring litigation costs are reflective of one-time expenses that are not indicative of the performance of our core business' operations. This change increases "non-recurring costs" by$0.6 million and$1.0 million in the first and second quarters of 2022, respectively, and by$3.7 million and$0.9 million in the first and second quarters of 2021, respectively. To conform to the current period's presentation, we have included non-recurring litigation costs as "non-recurring costs" when presenting the foregoing non-GAAP figures for the year to date period and periods presented for 2021. In addition, other companies, including companies in our industry, may calculate non-GAAP metrics differently or not at all, which reduces the usefulness of this measure as a tool for comparison. 34 -------------------------------------------------------------------------------- We recommend that you review the reconciliation of non-GAAP net profit (loss) to net income (loss), the most directly comparable GAAP financial measure, and that you not rely on any single financial measure to evaluate our business. Non-GAAP Net Profit (Loss) Three Months Ended For the Six Months June 30, Ended June 30, (dollars in thousands) 2022 2021 2022 2021 Net profit (loss) and$ 4,075 $ (11,090 ) $ 8,314 $ (21,109 ) comprehensive income (loss) Stock compensation expense 4,912 1,777 10,334 2,971 Change in fair value of warrant (976 ) 241 (1,669 ) 1,251 liabilities Change in fair value of contingent (26,742 ) - (51,638 ) - earnout liability Non-recurring costs1 1,937 930 2,984 4,633 Non-GAAP net loss$ (16,794 ) $ (8,142 ) $ (31,675 ) $ (12,254 )
1 Non-recurring expenses primarily relate to transaction and litigation
expenses. Expenses for the six months ended
non-recurring costs incurred in the first quarter of 2022.
Liquidity and Capital Resources
We have historically funded our operations primarily through the sale of convertible preferred stock, the proceeds from the Merger and reverse recapitalization including the sale of common stock, and the sale of our products. Since inception we have focused on growth, which has required ongoing investment to support scaling of our business, research and development efforts, and day to day operations. We had cash balances of$243.2 million as ofJune 30, 2022 . We incurred net profit of$8.3 million and net loss of$21.1 million for the six months endedJune 30, 2022 and 2021, respectively. As noted in the "Recent Developments" section, we completed the Merger with AONE in 2021. At Closing we received$288.8 million in cash, which we expect to provide funding for the build out of the global footprint of our sales network, continued investing in research and development to accelerate product innovation, as well as the potential funding of inorganic growth opportunities. Currently we generate negative operating cash flows as we pursue further business growth. Our cash and cash equivalents balance as ofJune 30, 2022 of$243.2 million is more than sufficient to meet the working capital and capital expenditure needs for the next 12 months following the filing for this Quarterly Report on Form 10-Q, including the future payment of$32.0 million due upon closing the Digital Metal acquisition (refer to Note 20 of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of The Digital Forge platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition.
Cash flows
For the six months ended
The following table sets forth a summary ofMarkforged's cash flows for the periods indicated: Six Months Ended June 30, Change (dollars in thousands) 2022 2021 $ %
Net cash used in operating activities
$ (25,190 ) 154 % Net cash used in investing activities (3,564 ) (1,039 ) (2,525 ) 243 % Net cash provided by (used in) financing activities 1,181 (8,148 ) 9,329 (114 )%
Net change in cash and cash equivalents
$ (18,386 ) 72 % 35
--------------------------------------------------------------------------------
Cash flow from operations
Net cash used in operating activities for the six months endedJune 30, 2022 and 2021 was$41.4 million and$16.4 million , respectively. Operating cash flows and changes in working capital for comparative periods were as follows: Six Months Ended June 30, (dollars in thousands) 2022 2021 Operating cash flows before changes in working capital $ (30,749 ) $ (15,612 ) Changes in working capital (10,825 ) (772 ) Net cash used in operating activities was$41.6 million for the six months endedJune 30, 2022 , consisting of$8.3 million of net income, adjusted for non-cash items, which primarily consist of gains on changes in the fair value of liabilities of$53.3 million , stock-based compensation expense of$10.3 million , and depreciation, amortization, and non-cash lease interest of$3.6 million . Cash consumed by working capital increased$10.8 million for the six months endedJune 30, 2022 due to the cyclical nature of the business, which results in higher sales and related costs in the third and fourth quarters. This led to increases in inventory in preparation of higher product demand causing an increase in inventory of$9.1 million and other current assets of$2.0 million . In addition, there was an decrease of$2.0 million to other non-current lease liabilities. These cash uses were partially offset by a decline in prepaid of expenses of$2.6 million due to the timing of when annual expenses are paid. Net cash used in operating activities was$16.4 million for the six months endedJune 30, 2022 , primarily consisting of$21.1 million of net loss, adjusted for non-cash items, primarily stock-based compensation of$3.0 million , and cash consumed by working capital increased by$0.1 million .
Cash flow from investing activities
Net cash used in investing activities for the six months endedJune 30, 2022 and 2021 was$3.6 million and$1.0 million , respectively. The increase in cash used is directly related to the cash paid for the Teton acquisition, net of cash acquired, of$2.0 million .
Cash flow from financing activities
Net cash provided by financing activities was$1.2 million for the six months endedJune 30, 2022 and net cash used in financing activities was$8.1 million for the six months endedJune 30, 2021 . The change in financing activities was primarily due to the repayment of the Paycheck Protection Program ("PPP") loan of$5.0 million and payment of transaction costs related to the Merger of$4.0 million during the six months endedJune 30, 2021 . This was slightly offset by an increase in proceeds from the exercise of stock options of$1.0 million over the comparable period.
Critical accounting policies and estimates
Our discussion and analysis of our financial condition and results of operations are based on the historical consolidated and condensed financial statements included elsewhere herein. We prepared these financial statements in conformity withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. We routinely evaluate these estimates, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Our results may differ from these estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Changes in these estimates could materially affect our financial position, results of operations or cash flows. See the "Critical Accounting Policies and Estimates" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3, "Significant Accounting Policies" in the Notes to Consolidated Financial Statements included within our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 31, 2022 . Acquisitions We account for business combinations using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at their respective estimated fair values as of the acquisition date. The excess of the fair value of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. While we use our best estimates and judgments, our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. We continue to collect information and reevaluate these 36 --------------------------------------------------------------------------------
estimates and assumptions quarterly and record any adjustments to our
preliminary estimates to goodwill provided that we are within the measurement
period.
The judgments made in determining the estimated fair value assigned to the assets acquired, as well as the estimated useful life of each asset, can materially impact the consolidated statements of operations of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. In determining the estimated fair value for intangible assets, we typically utilize the income approach, which discounts the projected future net cash flow using a discount rate deemed appropriate by management that reflects the risks associated with such projected future cash flow. Significant estimates and assumptions include revenue growth rates and discount rates. Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
Goodwill is not amortized, but is reviewed at least annually for impairment or earlier, if an indication of impairment exists. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We have the option of first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test for goodwill or we can perform the quantitative impairment test without performing the qualitative assessment. In performing the qualitative assessment, we consider certain events and circumstances specific to the reporting unit and to the entity as a whole, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the results of the quantitative test indicate the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, goodwill is deemed impaired and is written down to the extent of the difference between the fair value of the reporting unit and the carrying value. The Company evaluates definite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future operations. If indicators of impairment are present, the Company then compares the estimated undiscounted cash flows that the asset group is expected to generate to its carrying value. If such assets are impaired, the impairment recognized is measured as the amount by which the carrying amount of the asset group exceeds its fair value. We will complete our annual impairment test in the fourth quarter of 2022. We will continue to monitor and evaluate the carrying values. If market and economic conditions or business performance deteriorate, this could increase the likelihood of us recording an impairment charge.
Recent accounting pronouncements
Refer to Note 3 of our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q for the recent accounting
pronouncements that we have adopted and have not yet adopted.
JOBS Act accounting election
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. The JOBS Act permits companies with emerging growth company status to delay adopting new or revised accounting standards until those standards apply to private companies. We intend to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. Accordingly, our financial statements may not be comparable to companies that comply with the new or revised accounting standards as of public company effective dates.
We intend to rely on the other exemptions and reduced reporting requirements
provided by the JOBS Act.
37
——————————————————————————–
© Edgar Online, source
