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$71.3 million and$64.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively, and incurred a net loss of$14.7 million and net profit of$0.6 million , respectively, for those same periods. Net profit (loss) for the nine months endedSeptember 30, 2022 and 2021 is inclusive of non-cash mark-to-market gains of$52.2 million and$42.9 million , respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$90.4 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 Global Supply Chain Disruption and the COVID-19 Pandemic
We have experienced longer lead-times, higher costs, delays in procuring parts and materials, delays in production, and increased production labor costs. 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. Partially due to these factors, we have experienced a longer and more costly production ramp-up of our new FX20 printer. We are working closely with our suppliers and 29 -------------------------------------------------------------------------------- customers to minimize impacts, and we continue to closely monitor availability of labor and supply of parts and materials required for our business. However, the extent to which our operations may continue to be impacted by 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. 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. The extent to which the COVID-19 pandemic may impact our business going forward will depend on numerous evolving factors that we cannot reliably predict. These factors may adversely impact business spending on manufacturing technology as well as customers' ability to pay for our products and services on an ongoing basis. For more information on operations and risks related to the COVID-19 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 30% and 27% of total revenue for the three months endedSeptember 30, 2022 and 2021, respectively. Recurring revenue was 33% and 29% of total revenue for the nine months endedSeptember 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 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. 30 --------------------------------------------------------------------------------
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 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, any impacts to changes in our manufacturing on our product warranty obligations and freight and logistics costs; and
•
Our ability to directly monetize the capabilities of our software solutions in the future.
We expect our gross margins to fluctuate over time, depending on the factors described above.
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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 believe our research and development department is staffed at a level that enables us to innovate and develop products throughout 2023 and 2024.
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 reorganized our go-to-market team during the fourth quarter of 2022, and expect that costs will stabilize as we continue to optimize our team.
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 believe our general and administrative costs have stabilized as we have completed our investments required to operate as a public company.
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 liabilities and private placement warrant liability. All were accounted for as liabilities as of the date of the Merger, or acquisition, 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. OnAugust 16, 2022 , the Inflation Reduction Act of 2022 was signed into law, with tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases. The Inflation Reduction Act of 2022 will become effective beginning in Fiscal 2024. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes.
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. 32 --------------------------------------------------------------------------------
Comparison of the three months ended
Three Months Ended September 30, (dollars in thousands) 2022 2021 $ Change % Change Revenue$ 25,208 $ 24,045 $ 1,163 5 % Cost of revenue 12,959 10,330 2,629 25 % Gross profit 12,249 13,715 (1,466 ) (11 )% Operating expense Sales and marketing 11,783 10,399 1,384 13 % Research and development 10,421 9,761 660 7 % General and administrative 12,873 15,935 (3,062 ) (19 )% Total operating expense 35,077 36,095 (1,018 ) (3 )% Loss from operations (22,828 ) (22,380 ) (448 ) 2 % Change in fair value of warrant liabilities (448 ) 1,418 (1,866 ) (132 )% Change in fair value of contingent earnout liability (656 ) 42,710 (43,366 ) (102 )% Other expense, net (39 ) (48 ) 9 (19 )% Interest expense (2 ) (6 ) 4 (67 )% Interest income 1,006 6 1,000 NM (Loss) profit before income taxes (22,967 ) 21,700 (44,667 ) (206 )% Income tax benefit (expense) 3 (3 ) 6 (200 )% Net (loss) profit$ (22,970 ) $ 21,703 $ (44,673 ) (206 )% ________________ NM - Not meaningful
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 September 30, (dollars in thousands) 2022 2021 $ Change % Change Revenue$ 25,208 $ 24,045 $ 1,163 5 % Cost of revenue 12,959 10,330 2,629 25 % Gross profit 12,249 13,715 (1,466 ) (11 )% Gross margin 49 % 57 % - (15 )% Comparison of revenue
The following table disaggregates the Company's revenue based on the nature of the products and services:
Three Months Ended September 30, (in thousands) 2022 2021 $ Change % Change Hardware$ 17,571 $ 17,469 $ 102 1 % Consumables 5,568 4,899 669 14 % Services 2,069 1,677 392 23 % Total Revenue$ 25,208 $ 24,045 $ 1,163 5 % Consolidated revenue for the three months endedSeptember 30, 2022 was$25.2 million compared with revenue of$24.0 million for the three months endedSeptember 30, 2021 representing an increase of 5%, primarily driven by increases in consumable and service revenue over the comparable period. 33 -------------------------------------------------------------------------------- Hardware revenue remained consistent during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Overall unit sales decreased over the three months endedSeptember 30, 2022 driven by a shift in sales to higher value next-gen printers, specifically the FX20. Consumables revenue increased approximately 14% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 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 23% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The increase in services revenue was 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 endedSeptember 30, 2022 was$13.0 million compared with cost of revenue of$10.3 million for the three months endedSeptember 30, 2021 representing an increase of 25%. This was primarily due to higher than anticipated costs to produce the initial units of our newest printer, the FX20, principally the cost of mechanical and electronic components, and labor to produce the FX20, and, more broadly across our product portfolio, rising freight and logistics costs. Gross profit for the three months endedSeptember 30, 2022 was$12.2 million compared with gross profit of$13.7 million for the three months endedSeptember 30, 2021 representing an decrease of 11%. Gross profit margin for the three months endedSeptember 30, 2022 was 49% while the gross profit margin for the three months endedSeptember 30, 2021 was 57%. 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 produce the initial units of our newest printer, the FX20. Additionally, gross profit was impacted by increases to freight and logistics expenses in support of production, and a shift in our product mix.
Operating expenses
The following table sets forth the components of operating expenses for the
three months ended
Three Months Ended September 30, 2022 2021 Change % % (dollars in thousands) Amount Revenue Amount Revenue $ % Operating expenses Sales and marketing$ 11,783 47 %$ 10,399 43 %$ 1,384 13 % Research and development 10,421 41 % 9,761 41 % 660 7 % General and administrative 12,873 51 % 15,935 66 % (3,062 ) (19 )% Total operating expenses$ 35,077 139 %$ 36,095 150 %$ (1,018 ) (3 )% Sales and marketing expense increased 13% for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily due to increased spending on personnel costs of$1.9 million , which was partially offset by a decline in contractor costs of$1.0 million as more roles were shifted in-house. Events and travel costs increased$0.5 million as more events were held, and rent increased$0.3 million due to the commencement of the newWaltham headquarters lease. The increases in expense are consistent with our increase in headcount over the comparable quarter as we executed on our growth strategy, and increased travel in the current year as a result of the lifting of travel restrictions from the COVID-19 pandemic. These increases were partially offset by a decline in demand generating advertising spending of$0.8 million due to a strategic shift by our marketing team to other advertising avenues. Research and development expense increased 7% for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily due to increases in personnel and contractor costs of$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$0.6 million due to the commencement of the newWaltham headquarters lease. These increases were offset by a decrease in stock-based compensation of$0.7 million due to the graded vested accounting for stock based compensation. In addition there was a decrease in prototype research and development of$0.4 million due to the phase of the development of the FX20 in the third quarter of 2021 versus current projects. General and administrative expenses decreased 19% for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , primarily due to a decrease in stock-based compensation expense of$2.5 million due to the nature of graded vesting of expense, decreased legal expense of$1.5 million , and a decrease in the use of contractors of$0.7 million . Offsetting these decreases, rent expense increased by$0.8 million due to the commencement of the newWaltham headquarters lease and tax compliance costs of$0.2 million . 34 --------------------------------------------------------------------------------
Change in fair value of derivative liabilities and contingent earnout liability, other (expense) income, net, interest expense, and interest income
The following table sets forth Change in fair value of derivative liabilities
for the three months ended
Three Months Ended September 30, (dollars in thousands) 2022 2021 $ Change % Change Change in fair value of derivative liabilities $ (448 )$ 1,418 $ (1,866 ) (132 )% Change in fair value of contingent earnout liability (656 ) 42,710 (43,366 ) (102 )% Other expense, net (39 ) (48 ) 9 (19 )% Interest expense (2 ) (6 ) 4 (67 )% Interest income 1,006 6 1,000 NM Fair value of derivative liabilities increased creating a loss of$1.1 million for the three months endedSeptember 30, 2022 , compared to net income of$44.1 million during the three months endedSeptember 30, 2021 , primarily related to the change in fair value of derivative liabilities for theSPAC earnout shares and the Teton development milestone achievement. The changes in fair value directly correlate with the change in the Company's common stock price over the period, and probability of earnout milestone achievement. The change in interest income is directly correlated to the interest rates during each period, slightly offset by the decrease in the cash balance in short-term investment accounts.
Provision for income taxes
We recorded a de minimis expense (benefit) for income taxes for the three months
ended
Comparison of the nine months ended
Nine Months Ended September 30, (dollars in thousands) 2022 2021 $ Change % Change Revenue$ 71,294 $ 64,584 $ 6,710 10 % Cost of revenue 34,514 26,729 7,785 29 % Gross profit 36,780 37,855 (1,075 ) -3 % Operating expense Sales and marketing 35,104 25,711 9,393 37 % Research and development 31,375 21,487 9,888 46 % General and administrative 38,094 32,770 5,324 16 % Total operating expense 104,573 79,968 24,605 31 % Loss from operations (67,793 ) (42,113 ) (25,680 ) 61 % Change in fair value of warrant liabilities 1,221 170 1,051 618 % Change in fair value of contingent earnout liability 50,982 42,710 8,272 19 % Other expense, net (429 ) (168 ) (261 ) 155 % Interest expense (11 ) (15 ) 4 (27 )% Interest income 1,380 9 1,371 NM (Loss) profit before income taxes (14,650 ) 593 (15,243 ) NM Income tax benefit 6 (1 ) 7 (700 )% Net (loss) profit$ (14,656 ) $ 594 $ (15,250 ) NM
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. 35 --------------------------------------------------------------------------------
The following table sets forth the changes in the components of gross margin for
the nine months ended
Nine Months Ended September 30, (dollars in thousands) 2022 2021 $ Change % Change Revenue$ 71,294 $ 64,584 $ 6,710 10 % Cost of revenue 34,514 26,729 7,785 29 % Gross profit 36,780 37,855 (1,075 ) (3 )% Gross margin 52 % 59 % - (12 )% Comparison of revenue
The following table disaggregates the Company's revenue based on the nature of the products and services:
Nine Months Ended September 30, (in thousands) 2022 2021 $ Change % Change Hardware$ 48,098 $ 46,039 $ 2,059 4 % Consumables 16,913 14,295 2,618 18 % Services 6,283 4,250 2,033 48 % Total Revenue$ 71,294 $ 64,584 $ 6,710 10 % Consolidated revenue for the nine months endedSeptember 30, 2022 was$71.3 million compared with revenue of$64.6 million for the nine months endedSeptember 30, 2021 representing an increase of 10%, primarily driven by sales of increases in consumable and service revenue over the comparable period, as well as increased sales of our next-gen printers, specifically the FX20. Hardware revenue increased approximately 4% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 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 18% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 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 48% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 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 nine months endedSeptember 30, 2022 was$34.5 million compared with cost of revenue of$26.7 million for the nine months endedSeptember 30, 2021 representing an increase of 29%. This was primarily due to higher than anticipated costs to produce the initial units of our newest printer, the FX20, principally the cost of mechanical and electronic components, and labor to produce the FX20, and, more broadly across our product portfolio, rising freight and logistics costs. Gross profit for the nine months endedSeptember 30, 2022 was$36.8 million compared with gross profit of$37.9 million for the nine months endedSeptember 30, 2021 . Gross profit margin for the nine months endedSeptember 30, 2022 was 52% while the gross profit margin for the nine months endedSeptember 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 produce the initial units of our newest printer, the FX20. Additionally, gross profit was impacted by increases to freight and logistics expenses in support of production, and a shift in our product mix.
Operating expenses
The following table sets forth the components of operating expenses for the nine
months ended
36 --------------------------------------------------------------------------------
Nine Months Ended September 30, 2022 2021 Change % % (dollars in thousands) Amount Revenue Amount Revenue $ % Operating expenses Sales and marketing$ 35,104 49 %$ 25,711 40 %$ 9,393 37 % Research and development 31,375 44 % 21,487 33 % 9,888 46 % General and administrative 38,094 53 % 32,770 51 % 5,324 16 % Total operating expenses$ 104,573 147 %$ 79,968 124 %$ 24,605 31 % Sales and marketing expense increased 37% for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily due to increased spending on personnel costs of$5.7 million , stock-based compensation of$1.4 million , and market development funds of$0.7 million . Events and travel costs increased$2.2 million as COVID-19 restrictions lifted and more events were held compared to the comparable period. In addition, rent expense increased by$0.6 million due to the commencement of the newWaltham headquarters lease. The increases in expense are consistent with our increase in headcount as we execute our growth strategy. These increases were partially offset by a decline in contractor costs of$1.6 million as we shifted roles in-house, and a decline in demand generating advertising spending of$1.5 million due to a strategic shift by our marketing team to other advertising avenues. Research and development expense increased 46% for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily due to increases in personnel and contractor costs of$5.6 million , and stock-based compensation expenses increased$1.6 million . The increase in employee related costs are consistent with our investment in human capital to meet our innovation goals. In addition, rent expense increased by$1.4 million due to the commencement of the newWaltham headquarters lease. General and administrative expenses increased 16% for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily due to increased personnel and contractor costs of$1.6 million , and stock-based compensation of$1.2 million . 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. Rent expense increased by$0.9 million due to the commencement of the newWaltham headquarters lease. Director and officer insurance expense increased by$0.7 million over the comparable period, and software and subscription expense increased by$0.5 million as we invested in new tools to support our public company infrastructure. These increases were slightly offset by a$0.7 million decrease in recruiting costs.
Change in fair value of derivative liabilities and contingent earnout liability, other (expense) income, net, interest expense, and interest income
The following table sets forth change in fair value of derivative liabilities
for the nine months ended
Nine Months Ended September
30,
(dollars in thousands) 2022 2021 $ Change % Change Change in fair value of derivative liabilities $ 1,221 $ 170$ 1,051 618 % Change in fair value of contingent earnout liability 50,982 42,710 8,272 19 % Other expense, net (429 ) (168 ) (261 ) 155 % Interest expense (11 ) (15 ) 4 (27 )% Interest income 1,380 9 1,371 NM Fair value of derivative liabilities decreased creating additional income of$52.2 million for the nine months endedSeptember 30, 2022 , compared to income of$42.9 million during the nine months endedSeptember 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 each period. The change in interest income is directly correlated to the interest rates during each period, slightly offset by a decrease in the cash balance in our short-term investment accounts.
Provision for income taxes
We recorded a de minimis expense (benefit) for income taxes for the nine months
ended
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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) less stock-based compensation expense, net change in fair value of derivative 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 ,$1.0 million , and$0.8 million in the first through third quarters of 2022, respectively, and by$3.7 million ,$0.9 million , and$2.3 million in the first through third quarters of 2021, respectively. To conform to the current period's presentation, we have included non-recurring litigation costs as "non-recurring costs" when presenting the foregoing non-GAAP figures for the year to date period and periods presented for 2021. In addition, other companies, including companies in our industry, may calculate non-GAAP metrics differently or not at all, which reduces the usefulness of this measure as a tool for comparison. We recommend that you review the reconciliation of non-GAAP net profit (loss) to net income (loss), the most directly comparable GAAP financial measure, and that you not rely on any single financial measure to evaluate our business. Non-GAAP Net Profit (Loss) Three Months Ended Nine Months Ended September 30, September 30, (dollars in thousands) 2022 2021 2022 2021 Net (loss) profit$ (22,970 ) $ 21,703 $ (14,656 ) $ 594 Stock compensation expense 5,286 8,424 15,620 11,395 Change in fair value of derivative 448 (1,418 ) (1,221 ) (170 ) liabilities Change in fair value of contingent 656 (42,710 ) (50,982 ) (42,710 ) earnout liability Non-recurring costs 1,427 2,329 4,411 6,962 Non-GAAP net loss$ (15,153 ) $ (11,672 ) $ (46,828 ) $ (23,929 )
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 and cash equivalents balances of$181.8 million as ofSeptember 30, 2022 . We incurred a net loss of$14.7 million and net income of$0.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Currently we generate negative operating cash flows as we pursue further business growth. Our cash and cash equivalents balance as ofSeptember 30, 2022 of$181.8 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. 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 38 -------------------------------------------------------------------------------- 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 nine months ended
The following table sets forth a summary ofMarkforged's cash flows for the periods indicated: Nine Months Ended September 30, Change (dollars in thousands) 2022 2021 $ % Net cash used in operating activities$ (65,317 ) $ (38,795 ) $ (26,522 ) 68 % Net cash used in investing activities (41,629 ) (2,323 ) (39,306 ) NM Net cash provided by financing activities 1,599 279,138 (277,539 ) (99 )% Effect of exchange rate changes on cash (21 ) - (21 ) (100 )% Net change in cash and cash equivalents$ (105,368 ) $ 238,020 $ (343,388 ) (144 )% Cash flow from operations Net cash used in operating activities for the nine months endedSeptember 30, 2022 and 2021 was$65.3 million and$38.8 million , respectively. Operating cash flows and changes in working capital for comparative periods were as follows: Nine Months Ended September 30, (dollars in thousands) 2022 2021 Operating cash flows before changes in working capital $ (44,258 ) $ (27,269 ) Changes in working capital (21,059 ) (11,526 ) Net cash used in operating activities increased by$26.5 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The change in operating cash flows before changes in working capital consists of an increase in net loss of$15.3 million , adjusted for non-cash items, primarily consisting of gains on changes in the fair value of liabilities of$9.3 million , offset by an increase in stock-based compensation expense of$4.2 million , and depreciation, amortization, and non-cash lease interest of$5.0 million . Cash consumed by working capital increased$9.3 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 ; this was primarily driven by increases in inventory as we built additional printers in anticipation of stronger demand for our desktop series in the second half of 2022.
Cash flow from investing activities
Net cash used in investing activities for the nine months endedSeptember 30, 2022 and 2021 was$41.6 million and$2.3 million , respectively. The increase in cash used is directly related to the cash paid for the acquisitions, net of cash acquired, completed in the second and third quarters of 2022.
Cash flow from financing activities
Net cash provided by financing activities was
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 39 -------------------------------------------------------------------------------- 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 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. 40 --------------------------------------------------------------------------------
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.
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