Filed Pursuant to Rule 424(b)(3)

Registration No. 333-258775

PROSPECTUS SUPPLEMENT NO. 1

(to prospectus dated April 5, 2022)

img103662486_0.jpg 

 

PROSPECTUS FOR

155,874,248 SHARES OF COMMON STOCK

3,150,000 WARRANTS TO PURCHASE SHARES OF COMMON STOCK AND

3,150,000 SHARES OF COMMON STOCK UNDERLYING WARRANTS OF

MARKFORGED HOLDING CORPORATION

 

This prospectus supplement no. 1 (this “prospectus supplement”) amends and supplements the prospectus dated April 5, 2022 (as supplemented or amended from time to time, the “Prospectus”) which forms a part of our Registration Statement on Form S-1 (Registration Statement No. 333-258775). This prospectus supplement is being filed to update and supplement the information included or incorporated by reference in the Prospectus with the information contained in our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (the “SEC”) on May 12, 2022 (the “Form 10-Q”). Accordingly, we have attached the Form 10-Q to this prospectus supplement.

This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.

Our common stock and warrants are listed on the New York Stock Exchange under the symbols “MKFG” and “MKFG WS”, respectively. On May 11, 2022, the closing price of our common stock was $2.59 per share and the closing price of our warrants was $0.35 per share.

 

Investing in our securities involves risks that are described in the “Risk Factors” section beginning on page 15 of the Prospectus.

Neither the SEC nor any state securities commission has approved or disapproved of the securities to be issued under the Prospectus or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is May 12, 2022.

 

 

 

 


 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission File Number: 001-39453

 

Markforged Holding Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

98-1545859

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

480 Pleasant Street

Watertown, MA

02472

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (866) 496-1805

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

 

Common stock, par value $0.0001 per share

Redeemable Warrants, each whole warrant exercisable for one share of Common Stock, $0.0001 par value

MKFG

MKFG.WS

New York Stock Exchange

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of May 12, 2022, the registrant had 187,930,099 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Condensed Consolidated Financial Statements

1

 

Unaudited Condensed Consolidated Balance Sheets

1

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

Unaudited Statement of Changes in Convertible Preferred Stock and Stockholders' Equity (Deficit)

3

 

Unaudited Condensed Consolidated Statements of Cash Flows

4

 

Unaudited Notes to Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

PART II.

OTHER INFORMATION

33

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

Item 3.

Defaults Upon Senior Securities

66

Item 4.

Mine Safety Disclosures

66

Item 5.

Other Information

66

Item 6.

Exhibits

67

Signatures

68

 

 

 


 

 

 

Risk Factors Summary

 

The risk factors detailed in Item 1A entitled “Risk Factors” in this Quarterly Report on Form 10-Q are the risks that we believe are material to our investors and a reader should carefully consider them. Those risks are not all of the risks we face and other factors not presently known to us or that we currently believe are immaterial may also affect our business if they occur. The following is a summary of the risk factors detailed in Item 1A:

We have a history of net losses and may not be able to achieve profitability for any period in the future or sustain cash flow from operating activities. We have a relatively limited operating history and have experienced rapid growth, which makes evaluating our current business and future prospects difficult and may increase the risk of your investment. Our operating results may fluctuate significantly from period-to-period.
The additive manufacturing industry in which we operate is characterized by rapid technological change, which requires us to continue to develop new products and innovations to meet constantly evolving customer demands and which could adversely affect market adoption of our products.
A pandemic, epidemic, or outbreak of an infectious disease, such as the COVID-19 pandemic, may materially and adversely affect our business and our financial results and could cause a disruption to the development of our products. The COVID-19 pandemic has caused a material on-going disruption to our business beginning in the second quarter of 2020 and the COVID-19 related supply chain disruptions have continued to adversely impact our business.
We face significant competition in our industry. If we are unable to create new products or meet the demands of our customers, our business could be materially adversely affected.
We depend on our network of value-added resellers and our business could be materially adversely affected if they do not meet our expectations.
We depend heavily on third-party suppliers. If they or their facilities become unavailable or inadequate, our business could be adversely affected. We may experience significant delays in the design, production and launch of our additive manufacturing solutions and enhancements to existing products, and we may be unable to successfully commercialize products on our planned timelines.
We rely on a limited number of third-party logistics providers for distribution of our products, and their failure to effectively distribute our products, including because of delays and disruptions caused by current conditions in global shipping capacity would adversely affect our sales.
If demand for our products does not grow as expected, or if market adoption of additive manufacturing does not continue to develop, or develops more slowly than expected, our revenues may stagnate or decline, and our business may be adversely affected.
Defects in new products or in enhancements to our existing products that give rise to product returns or warranty or other claims could result in material expenses, diversion of management time and attention, and damage to our reputation.
We may be unable to consistently manufacture our products to the necessary specifications or in quantities necessary to meet demand at an acceptable cost or at an acceptable performance level. As manufacturing becomes a larger part of our operations, we will become exposed to accompanying risks and liabilities. We depend on a limited number of third-party contract manufacturers for a substantial portion of our manufacturing needs and we depend on a number of suppliers for other parts and components; since the second half of 2021, we have increasingly experienced, and expect to continue to experience, price increases, supply shortages and delays and any such delay, disruption or quality control problems in their operations, including due to the COVID-19 pandemic, could cause harm to our operations, including loss of market share, reduced margins and damage to our brand.
We have experienced, and expect to continue to experience, rapid growth and organizational change since our inception. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and customer satisfaction or attract new employees and customers.
A real or perceived defect, security vulnerability, error or performance failure in our software or technical problems or disruptions caused by our third-party service providers could cause us to lose revenue, damage our reputation and expose us to liability.
Our existing and planned global operations subject us to a variety of risks and uncertainties that could adversely affect our business and operating results. Our business is subject to risks associated with selling machines and other products in non-United States locations. Global economic, political and social conditions and uncertainties in the market that we serve may adversely impact our business.

 


 

A significant portion of our business depends on sales to the public sector, and our failure to receive and maintain government contracts or changes in the contracting or fiscal policies of the public sector could have a material adverse effect on our business.
We are, and have been in the recent past, subject to business and intellectual property litigation. We could be subject to personal injury, property damage, product liability, warranty and other claims involving allegedly defective products that we supply. We could face liability if our additive manufacturing solutions are used by our customers to print dangerous objects.
If we are unable to adequately protect our proprietary technology or obtain and maintain patent protection for our technology and products or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be impaired.
We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or fail to maintain effective internal control over financial reporting, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.

 

 

 


 

 

EXPLANATORY NOTE

On July 14, 2021, we consummated the merger (the "Merger") contemplated by the Agreement and Plan of Merger, dated as of February 23, 2021 (the “Merger Agreement”), by and among one, a Cayman Islands exempted company limited by shares (“one”), Caspian Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of one (“Merger Sub”), and MarkForged, Inc., a Delaware corporation (“Legacy Markforged”). As a result of the Merger, Legacy Markforged merged with and into Merger Sub with Legacy Markforged surviving as our wholly-owned subsidiary and, following one’s filing of a notice of deregistration and necessary accompanying documents with the Cayman Islands Registrar of Companies, and a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which one was domesticated, one changed its name to “Markforged Holding Corporation.”

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that are forward-looking and as such are not historical facts. This includes, without limitation, statements regarding the financial position, business strategy and the plans and objectives of management for our future operations of Markforged Holding Corporation. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report on Form 10-Q, words such as “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “should”, “strive”, “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

Forward-looking statements in this Quarterly Report on Form 10-Q include, for example, statements about:

the benefits of the Merger and our ability to realize such benefits;
our financial performance;
the effect of uncertainties related to the COVID-19 pandemic and global supply chain disruptions;
the expected growth of the additive manufacturing industry;
our anticipated growth and our ability to achieve and maintain profitability in the future;
the impact of the regulatory environment and complexities with compliance related to such environment on us;
our ability to respond to general economic, political and business conditions;
our ability to access sources of capital, including debt financing and other sources of capital to finance operations and growth;
the success of our marketing efforts and our ability to expand our customer base;
our ability to develop and deliver new products, features and functionality that are competitive and meet market needs;
our ability to maintain an effective system of internal controls over financial reporting;
our ability to remediate our material weaknesses in our internal control of financial reporting;
our ability to grow and manage growth profitably and retain key employees; and
the outcome of legal or governmental proceedings that may be instituted against us.

These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

MARKFORGED HOLDING CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2022 and December 31, 2021

(In thousands, except share data and par value amounts) (Unaudited)

 

 

 

March 31,
2022

 

 

December 31,
2021

 

Assets

 

 

 

Current assets

 

 

 

Cash and cash equivalents

 

$

269,138

 

 

$

288,603

 

Accounts receivable, net

 

 

22,806

 

 

 

26,777

 

Inventory

 

 

12,801

 

 

 

10,377

 

Prepaid expenses

 

 

3,636

 

 

 

3,921

 

Other current assets

 

 

1,887

 

 

 

511

 

Total current assets

 

 

310,268

 

 

 

330,189

 

Property and equipment, net

 

 

6,680

 

 

 

6,349

 

Right-of-use assets

 

 

11,702

 

 

 

 

Other assets

 

 

1,012

 

 

 

776

 

Total assets

 

$

329,662

 

 

$

337,314

 

Liabilities and Stockholders’ Equity

 

 

 

Current liabilities

 

 

 

Accounts payable

 

$

6,653

 

 

$

11,403

 

Accrued expenses

 

 

8,009

 

 

 

7,411

 

Deferred revenue

 

 

6,367

 

 

 

6,288

 

Lease liabilities

 

 

2,962

 

 

 

 

Other current liabilities

 

 

53

 

 

 

310

 

Total current liabilities

 

 

24,044

 

 

 

25,412

 

Long-term deferred revenue

 

 

3,808

 

 

 

3,742

 

Deferred rent

 

 

 

 

 

1,623

 

Contingent earnout liability

 

 

34,826

 

 

 

59,722

 

Long-term lease liabilities

 

 

10,621

 

 

 

 

Other liabilities

 

 

1,953

 

 

 

2,646

 

Total liabilities

 

 

75,252

 

 

 

93,145

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.0001 par value; 1,000,000,000 shares authorized at March 31, 2022 and December 31, 2021; 187,117,960 and 185,993,058 shares issued at March 31, 2022 and December 31, 2021, respectively

 

 

19

 

 

 

19

 

Additional paid-in capital

 

 

325,861

 

 

 

319,859

 

Accumulated deficit

 

 

(71,470

)

 

 

(75,709

)

Total stockholders’ equity

 

 

254,410

 

 

 

244,169

 

Total liabilities and stockholders’ equity

 

$

329,662

 

 

$

337,314

 

 

See notes to the unaudited condensed consolidated financial statements.

1


 

MARKFORGED HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

For the three months ended March 31, 2022 and 2021

(In thousands, except share data and per share data) (Unaudited)

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Revenue

$

21,859

 

 

$

20,120

 

Cost of revenue

 

10,253

 

 

 

7,939

 

Gross profit

 

11,606

 

 

 

12,181

 

Operating expenses

 

 

 

 

 

Sales and marketing

 

10,448

 

 

 

7,057

 

Research and development

 

10,567

 

 

 

5,259

 

General and administrative

 

11,743

 

 

 

8,863

 

Total operating expenses

 

32,758

 

 

 

21,179

 

Loss from operations

 

(21,152

)

 

 

(8,998

)

Change in fair value of warrant liabilities

 

693

 

 

 

(1,010

)

Change in fair value of contingent earnout liability

 

24,896

 

 

 

 

Other expense, net

 

(219

)

 

 

(13

)

Interest expense

 

 

 

 

(4

)

Interest income

 

20

 

 

 

2

 

Profit (loss) before income taxes

 

4,238

 

 

 

(10,023

)

Income tax benefit

 

(1

)

 

 

(4

)

Net profit (loss) and comprehensive income (loss)

$

4,239

 

 

$

(10,019

)

Weighted average shares outstanding - basic

 

186,383,312

 

 

 

39,440,986

 

Weighted average shares outstanding - diluted

 

191,100,683

 

 

 

39,440,986

 

Net profit (loss) per share - basic

$

0.02

 

 

$

(0.25

)

Net profit (loss) per share - diluted

 

0.02

 

 

 

(0.25

)

 

See notes to the unaudited condensed consolidated financial statements.

2


 

MARKFORGED HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

For the three months ended March 31, 2022 and 2021

(In thousands, except share data) (Unaudited)

 

 

 

Convertible Preferred Stock

 

 

 

Common Stock

 

 

Additional
Paid-in

 

 

Treasury Stock

 

 

Accumulated

 

 

Total
Stockholders’
Equity

 

 

 

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

 

 

 

Total

 

December 31, 2021

 

 

 

 

$

 

 

 

 

185,993,058

 

 

$

19

 

 

$

319,859

 

 

 

 

 

$

 

 

$

(75,709

)

 

$

244,169

 

 

$

244,169

 

Exercise of common
   stock options

 

 

 

 

 

 

 

 

 

942,836

 

 

 

 

 

 

580

 

 

 

 

 

 

 

 

 

 

 

 

580

 

 

 

580

 

Stock vested under compensation
   plan less shares withheld to cover taxes

 

 

 

 

 

 

 

 

 

182,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based
   compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,285

 

 

 

 

 

 

 

 

 

 

 

 

4,285

 

 

 

4,285

 

Earnout stock-based compensation
   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,137

 

 

 

 

 

 

 

 

 

 

 

 

1,137

 

 

 

1,137

 

Net income and
   comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,239

 

 

 

4,239

 

 

 

4,239

 

March 31, 2022

 

 

 

 

$

 

 

 

 

187,117,960

 

 

$

19

 

 

$

325,861

 

 

 

 

 

$

 

 

$

(71,470

)

 

$

254,410

 

 

$

254,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

 

Common Stock

 

 

Additional
Paid-in

 

 

Treasury Stock

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Deficit

 

 

Total

 

December 31, 2020

 

 

107,592,801

 

 

$

137,497

 

 

 

 

39,510,108

 

 

$

4

 

 

$

5,538

 

 

 

483,479

 

 

$

(1,450

)

 

$

(79,564

)

 

$

(75,472

)

 

$

62,025

 

Exercise of common
   stock options

 

 

 

 

 

 

 

 

 

714,170

 

 

 

 

 

 

356

 

 

 

 

 

 

 

 

 

 

 

 

356

 

 

 

356

 

Stock-based
   compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,194

 

 

 

 

 

 

 

 

 

 

 

 

1,194

 

 

 

1,194

 

Exercise of Series D
   warrants

 

 

20,037

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

Net loss and
   comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,019

)

 

 

(10,019

)

 

 

(10,019

)

March 31, 2021

 

 

107,612,838

 

 

$

137,597

 

 

 

 

40,224,278

 

 

$

4

 

 

$

7,088

 

 

 

483,479

 

 

$

(1,450

)

 

$

(89,583

)

 

$

(83,941

)

 

$

53,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The shares of the Company’s common and convertible preferred stock, prior to the Merger (as defined in Note 1) have been retroactively restated to reflect the exchange ratio of approximately 0.9522514 established in the Merger as described in Note 2.

 

See notes to the unaudited condensed consolidated financial statements.

3


 

MARKFORGED HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2022 and 2021

(In thousands, except share data) (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Operating Activities:

 

 

 

 

 

 

Net profit (loss)

 

$

4,239

 

 

$

(10,019

)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

Depreciation, amortization, and non-cash lease interest

 

 

1,163

 

 

 

430

 

(Recovery) provision for doubtful accounts

 

 

(43

)

 

 

77

 

Reserve for excess and obsolete inventory

 

 

109

 

 

 

(24

)

Change in fair value of warrant liabilities

 

 

(693

)

 

 

1,010

 

Change in fair value of contingent earnout liability

 

 

(24,896

)

 

 

 

Stock-based compensation expense

 

 

5,422

 

 

 

1,194

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Accounts receivable

 

 

4,014

 

 

 

(1,343

)

Inventory

 

 

(2,533

)

 

 

481

 

Prepaid expenses

 

 

285

 

 

 

(399

)

Other current assets

 

 

(1,376

)

 

 

375

 

Other assets

 

 

(236

)

 

 

17

 

Accounts payable and accrued expenses

 

 

(4,152

)

 

 

2,486

 

Other current liabilities

 

 

(82

)

 

 

57

 

Deferred rent

 

 

 

 

 

336

 

Deferred revenue

 

 

145

 

 

 

(1,266

)

Other non-current lease liabilities

 

 

(613

)

 

 

 

Net cash used in operating activities

 

 

(19,247

)

 

 

(6,588

)

Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(798

)

 

 

(375

)

Net cash used in investing activities

 

 

(798

)

 

 

(375

)

Financing Activities:

 

 

 

 

 

 

Repayment of debt obligations

 

 

 

 

 

(5,022

)

Payment of transaction costs for the Merger

 

 

 

 

 

(2,172

)

Proceeds from exercise of Series D warrants

 

 

 

 

 

100

 

Proceeds from exercise of common stock options

 

 

580

 

 

 

356

 

Net cash provided by (used in) financing activities

 

 

580

 

 

 

(6,738

)

Net change in cash and cash equivalents

 

 

(19,465

)

 

 

(13,701

)

Cash and cash equivalents

 

 

 

 

 

 

Beginning of year

 

 

288,603

 

 

 

58,715

 

End of period

 

$

269,138

 

 

$

45,014

 

Non cash financing and investing activities

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

83

 

 

$

 

Deferred transaction costs included in accounts payable and accrued expenses

 

 

 

 

 

808

 

 

 

 

 

 

 

 

 

See notes to the unaudited condensed consolidated financial statements.

4


 

MARKFORGED HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Organization, Nature of the Business, and Risks and Uncertainties

Organization and Nature of Business

Unless otherwise indicated or the context otherwise requires, references to the “Company” and “Markforged” refer to the consolidated operations of Markforged Holding Corporation and its subsidiaries. References to “AONE” refer to the company prior to the consummation of the Merger and references to “Legacy Markforged” refer to MarkForged, Inc. and its consolidated subsidiaries prior to the consummation of the Merger.

Legacy Markforged was founded in 2013 to transform the manufacturing industry with high strength, cost effective parts using additive manufacturing. Markforged produces and sells 3D printers, materials, software, and other related services worldwide to customers who can build parts strong enough for the factory floor with significantly reduced lead time and cost. The printers print in plastic, nylon, metal, and the parts can be reinforced with carbon fiber for industry leading strength at an affordable price point.

On February 23, 2021, one, a Cayman Islands exempted company (“AONE”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Caspian Merger Sub Inc., a wholly owned subsidiary of AONE (“Merger Sub”), and Legacy Markforged, pursuant to which (i) AONE would deregister as a Cayman Islands company and domesticate as a corporation in the State 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 of Markforged Holding Corporation (the “Merger”). AONE's shareholders approved the transactions contemplated by the Merger Agreement on July 13, 2021, and the Domestication and the Merger were completed on July 14, 2021 (the "Closing").

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. Immediately prior to the Closing, Legacy Markforged repurchased shares of common stock from certain of its stockholders, for a total value of $45.0 million, referred to as the “Employee Transactions”. Total net proceeds upon Closing, net of the Employee Transactions and transaction costs paid at Closing of $27.1 million, were $288.8 million.

Risks and Uncertainties

COVID-19 has had an impact on the Company’s results, since the second quarter of 2020, and the Company is unable to predict the ultimate impact that the virus may have on the business, future results of operations, financial position or cash flows. Further, the COVID-19 impact on the Company is largely dependent on future developments and subsequent government responses. The Company identified potential risks to the business to include certain accounting estimates around its supply chain, accounts receivable, inventory and related reserves, and long-lived assets. As of and for the three months ended March 31, 2022, these risks were assessed and had no material impact on the realizability of accounts receivables, inventories, long- lived assets or the related estimates used in the Company’s condensed consolidated financial statements. There may be changes to those estimates in future periods, and actual results could differ from those estimates.

The Company has funded its operations to date primarily through the sale of convertible preferred stock, the proceeds from the Merger, including the sale of common stock, and the sale of its products. Management believes that existing cash will be sufficient to fund operating and capital expenditure requirements through at least one year after the date these condensed consolidated financial statements are issued. The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.

Note 2. Merger and Reverse Recapitalization

Immediately prior to the Closing the following transactions occurred (prior to the Exchange Ratio discussed below):

all 17,918,211 shares of Legacy Markforged’s outstanding Series Seed convertible preferred stock were converted into an equivalent number of shares of Legacy Markforged common stock on a one-to-one basis;
all 28,725,920 shares of Legacy Markforged’s outstanding Series A convertible preferred stock were converted into an equivalent number of shares of Legacy Markforged common stock on a one-to-one basis;

5


 

all 34,391,480 shares of Legacy Markforged’s outstanding Series B convertible preferred stock were converted into an equivalent number of shares of Legacy Markforged common stock on a one-to-one basis;
all 14,468,290 shares of Legacy Markforged’s outstanding Series C convertible preferred stock were converted into an equivalent number of shares of Legacy Markforged common stock on a one-to-one basis; and
all 17,305,052 shares of Legacy Markforged’s outstanding Series D convertible preferred stock were converted into an equivalent number of shares of Legacy Markforged common stock on a one-to-one basis.

At the Closing, eligible Legacy Markforged equity holders received or had the right to receive shares of the Company's Common Stock, par value $0.0001 ("Common Stock") at a deemed value of $10.00 per share after giving effect to the exchange ratio of approximately 0.9522514 as defined in the Merger Agreement (the “Exchange Ratio”). Accordingly, immediately following the consummation of the Merger, Legacy Markforged common stock (after giving effect to the conversion of convertible preferred stock to Legacy Markforged common stock and the impact of the Employee Transactions) exchanged into 143,795,504 shares of Common Stock, 18,434,577 shares were reserved for the issuance of Common Stock upon the potential future exercise of Legacy Markforged stock options that were exchanged into Markforged stock options, and 24,065,423 shares of Common Stock were reserved for the potential future issuance of stock options and restricted stock units and 16,066,667 shares of Common Stock and restricted stock units were reserved for the potential future issuance upon achievement of certain earnout conditions described in the Merger Agreement.

In connection with the execution of the Merger Agreement, AONE entered into separate subscription agreements (each a “Subscription Agreement”) with a number of investors (each a “New PIPE Investor”), pursuant to which the New PIPE Investors agreed to purchase, and AONE agreed to sell to the New PIPE Investors, an aggregate of 21,000,000 shares (“PIPE Shares”), of the Common Stock for a purchase price of $10.00 per share and an aggregate purchase price of $210.0 million, in a private placement pursuant to the subscription agreements (the “PIPE Financing”). The PIPE Financing closed simultaneously with the consummation of the Merger.

In connection with the Closing, and under the terms of the Sponsor Support Agreement entered into in connection with the execution of the Merger Agreement, 2,610,000 shares of the 5,220,000 shares of Common Stock held by the Sponsor after giving effect to the Domestication became subject to vesting conditions based on the achievement of certain market-based share price thresholds. These shares will be forfeited if certain price thresholds are not reached by the end of the five year period following the Closing. The Sponsor Earnout Shares will immediately vest in the event of a change of control or a liquidation of Markforged during the five year period following the Closing. As the Earnout Triggering Events have not yet been achieved, these issued and outstanding Sponsor Earnout Shares are treated as contingently recallable.

The number of shares of Common Stock issued immediately following the consummation of the Merger was as follows:

 

 

 

Shares

 

Common stock of one, outstanding prior to Merger (1)

 

 

26,875,000

 

Less redemption of one Class A shares subject to possible redemption

 

 

(6,418,667

)

Common stock of one

 

 

20,456,333

 

Shares issued in PIPE

 

 

21,000,000

 

Merger and PIPE financing shares (2)

 

 

41,456,333

 

Legacy Markforged shares (3)

 

 

143,795,504

 

Total shares of common stock immediately after Merger

 

 

185,251,837

 

(1) Includes AONE Class A shareholders 15,081,333, and AONE Class B shareholders 5,375,000 (2) This includes 2,610,000 contingently forfeitable Sponsor Shares pending the occurrence of the Sponsor Earnout Triggering Event
(3) The number of Legacy Markforged shares was determined from the 151,005,831 shares of Legacy Markforged common stock outstanding immediately prior to the closing of the Merger converted at the Exchange Ratio. All fractional shares were rounded down.

 

 

 

 

The Merger is accounted for as a reverse recapitalization under accounting principles generally accepted in the United States ("'GAAP"). This determination is primarily based on Legacy Markforged stockholders comprising a relative majority of the voting power of Markforged and having the ability to nominate the members of the Board, Legacy Markforged’s operations prior to the acquisition comprising the only ongoing operations of Markforged, and Legacy Markforged’s senior management comprising a majority of the senior management of Markforged. Under this method of accounting, AONE is treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of Markforged represent a continuation of the financial statements of Legacy Markforged with the Merger being treated as the equivalent of Markforged issuing stock for the net assets of AONE, accompanied by a recapitalization. The net assets of AONE are stated at historical costs, with no goodwill or other intangible assets recorded. Operations prior to the Merger are presented as those of Markforged. All periods prior to the Merger have

6


 

been retrospectively adjusted using the Exchange Ratio for the equivalent number of shares outstanding immediately after the Merger to effect the reverse recapitalization. Additionally, upon the consummation of the Merger, the Company issued 41,456,333 shares of Common Stock for the previously issued AONE common stock and PIPE Shares that were outstanding at the Closing Date.

In connection with the Merger, the Company raised $360.9 million of proceeds including the contribution of $215.1 million of cash held in AONE’s trust account from its initial public offering, net of redemptions of AONE public stockholders of $64.2 million, and $210.0 million of cash in connection with the PIPE financing. The Company incurred $34.5 million of transaction costs, consisting of banking, legal, and other professional fees, of which $18.5 million were incurred by AONE and paid from AONE's trust account at closing and $16.0 million incurred by Legacy Markforged. Of the total transaction costs, $2.0 million was recognized as an expense in the condensed consolidated statements of operations as part of general and administrative expenses and the balance was a reduction to additional paid-in capital.

Note 3. Summary of Significant Accounting Policies

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company’s fiscal year end is December 31 and, unless otherwise stated, all years and dates refer to the fiscal year.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the regulations of the U.S Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The condensed consolidated financial statements include the Company’s accounts and those of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the financial information for the interim periods presented reflects all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the Company’s financial position, results of operations, and cash flows. The results reported in these condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022.

Reporting Currency

The Company’s reporting currency is the U.S. Dollar, while the functional currencies of its foreign subsidiaries are their respective local currencies. The effect of foreign currency translation was immaterial for all periods presented.

Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s significant estimates include allowance for doubtful accounts, reserve for excess and obsolete inventory, fair value of contingent earnout liability, fair value of earnout share awards, fair value of the private placement warrant liability and assumptions in revenue recognition. Actual results could differ from those estimates.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based on management’s assessment of the collectability of the accounts receivable which considers historical write-off experience and any specific risks identified in customer collection matters.

7


 

The following presents the changes in the balance of the Company’s allowance for doubtful accounts:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2022

 

 

2021

 

Balance at beginning of period

 

$

1,021

 

 

$

1,070

 

Additions

 

 

128

 

 

 

77

 

Write – offs

 

 

(7

)

 

 

(1

)

Recoveries

 

 

(171

)

 

 

(134

)

Balance at end of period

 

$

971

 

 

$

1,012

 

 

Fair Value of Financial Instruments

The Company is required to provide information according to the fair value hierarchy based on the observability of the inputs used in the valuation techniques. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

 

Level 1

Quoted prices in active markets for identical assets or liabilities

 

Level 2

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

The following table presents information about the Company’s assets and liabilities that are measured at fair value as of March 31, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation:

 

 

 

Fair Value Measurements

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds included in cash and cash equivalents

 

$

267,526

 

 

$

 

 

$

 

 

$

267,526

 

Contingent earnout liability

 

 

 

 

 

 

 

 

34,826

 

 

 

34,826

 

Private placement warrant liability

 

 

 

 

 

 

 

 

1,953

 

 

 

1,953

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds included in cash and cash equivalents

 

$

286,890

 

 

$

 

 

$

 

 

$

286,890

 

Contingent earnout liability

 

 

 

 

 

 

 

 

59,722

 

 

 

59,722

 

Private placement warrant liability

 

 

 

 

 

 

 

 

2,646

 

 

 

2,646

 

 

The Company remeasures its Common Stock Warrants (as defined below) and Private Placement Warrants (as defined below) at fair value at each reporting period using Level 3 inputs via the Black-Scholes option-pricing model and Binomial Lattice Model, respectively. The valuation of the earnout shares is based on a Monte Carlo simulation. The significant assumptions used in preparing the above models are disclosed in Note 12 Stock Warrants and Note 11 Earnout. All Silicon Valley Bank ("SVB") warrants were exercised in June 2021. There were no transfers between levels during the periods presented.

 

(in thousands)

 

Contingent Earnout Liability

 

 

Private Placement Warrant Liability

 

 

SVB Warrant Liability

 

Fair Value as of December 31, 2020

 

$

 

 

$

 

 

$

545

 

Change in fair value

 

 

 

 

 

 

 

 

1,010

 

Fair Value as of March 31, 2021

 

$

 

 

$

 

 

$

1,555

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of December 31, 2021

 

$

59,722

 

 

$

2,646

 

 

$

 

Change in fair value

 

 

(24,896

)

 

 

(693

)

 

 

 

Exercise of common stock warrants

 

 

 

 

 

 

 

 

 

Fair Value as of March 31, 2022

 

$

34,826

 

 

$

1,953

 

 

$

 

 

8


 

Concentration of Credit Risk

Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents held on deposit at one financial institution and accounts receivable. The Company does not require collateral from customers for amounts owed. At March 31, 2022, one customer represented 12% of the accounts receivable balance and at December 31, 2021 no one customer represented greater than 10% of the accounts receivable balance. For the three months ended March 31, 2022, one customer represented 11% of the total revenue. For the three months ended March 31, 2021, no one customer represented more than 10% of total revenue. Historically, the Company has not experienced any significant credit loss related to any individual customer.

Impairment of Long-Lived Assets

The Company evaluates whether events or circumstances have occurred that indicate that the estimated remaining useful life of its long-lived assets may warrant reassessment or that the carrying value of these assets may not be recoverable. When a triggering event is identified, management assesses the recoverability of the asset group, which is the lowest level where identifiable cash flows are largely independent, by comparing the expected undiscounted cash flows of the asset group to the carrying value. When the carrying value is not recoverable and an impairment is determined to exist, the asset group is written down to fair value. The Company did not identify any triggering events or record any impairment during the three months ended March 31, 2022 and 2021.

Sales and Marketing

Advertising costs, a component of sales and marketing expenses, were $1.0 million during the three months ended March 31, 2022, respectively, compared to $1.8 million for the three months ended March 31, 2021.

Warranty Reserves

Substantially all of the Company’s hardware products are covered by a standard assurance warranty of one year. In the event of a failure of a product covered by this warranty, the Company may repair or replace the product, at its option. The Company’s warranty reserve reflects estimated material and labor costs for potential or actual product issues for which the Company expects to incur an obligation. The Company periodically assesses the appropriateness of the warranty reserve and adjusts the amount as necessary. If the data used to calculate the appropriateness of the warranty reserve are not indicative of future requirements, additional or reduced warranty reserves may be necessary.

Warranty reserves are included within accrued expenses on the condensed consolidated balance sheets. The following table presents changes in the balance of the Company’s warranty reserve:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2022

 

 

2021

 

Balance at beginning of period

 

$

658

 

 

$

564

 

Additions to warranty reserve

 

 

286

 

 

 

267

 

Claims fulfilled

 

 

(139

)

 

 

(293

)

Balance at end of period

 

$

805

 

 

$

538

 

 

Warranty reserve is recorded through cost of revenue in the condensed consolidated statements of operations and comprehensive income (loss).

Segment Information

The Company determines its chief operating decision maker (“CODM”) based on the person responsible for making resource allocation decisions. Operating segments are components of the business for which the CODM regularly reviews discrete financial information. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions.

Common Stock Warrant Liabilities

The Company assumed 5,374,984 publicly-traded warrants (“Public Warrants”) and 3,150,000 private placement warrants originally issued by AONE (“Private Placement Warrants” and, together with the Public Warrants, the “Common Stock Warrants”) upon the Merger, all of which were issued in connection with AONE’s initial public offering and subsequent overallotment and entitle the holder to purchase one share of the Common Stock at an exercise price of $11.50 per share. The Common Stock Warrants became

9


 

exercisable the later of 30 days after the Company completed the Merger or 12 months from the closing of AONE’s initial public offering, but can be terminated on the earlier of 5 years after the Merger, liquidation of the Company, or the Redemption Date as determined by the Company. During the three months ended March 31, 2022, no Public Warrants or Private Placement Warrants were exercised. The Public Warrants are publicly traded and are exercisable for cash unless certain conditions occur which would permit a cashless exercise, such as the failure to have an effective registration statement related to the shares issuable upon exercise or redemption by the Company under certain conditions. The Private Placement Warrants are not redeemable for cash so long as they are held by the initial purchasers or their permitted transferees but may be redeemable for common stock if certain other conditions are met. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants are redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

The Company evaluated the Public Warrants and Private Placement Warrants and concluded that the Private Placement Warrants do not meet the criteria to be classified within stockholders’ equity. The agreement governing the Common Stock Warrants includes a provision that, if applied, could result in a different settlement value for the Private Placement Warrants depending on their holder. Because the holder of an instrument is not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Private Placement Warrants are not considered to be “indexed to the Company’s own stock.” As the Private Placement Warrants meet the definition of a derivative, the Company recorded these warrants as liabilities on the consolidated balance sheet at fair value, with subsequent changes in their respective fair values recognized in the condensed consolidated statements of operations and comprehensive income (loss) at each reporting date as part of change in fair value of derivative liabilities, as described in Note 12. The provisions referenced above are not applicable to the Public Warrants which do not have differing settlement provisions based on the warrant holder. The Public Warrants are not precluded from being considered indexed to the Company’s stock and were recognized at fair value in stockholders’ equity on the closing of the Merger.

Contingent Earnout Liability

In connection with the Reverse Recapitalization and pursuant to the Merger Agreement, A-Star, the sponsor of AONE (the "Sponsor") surrendered 2,610,000 shares ("Sponsor Earnout Shares") and eligible Markforged equity holders were entitled to receive as additional merger consideration 14,666,667 shares of the Company’s Common Stock ("Markforged Earnout Shares") upon the Company achieving certain Earnout Triggering Events (as described in the Merger Agreement and Note 11). The contingent obligations to issue Markforged Earnout Shares in respect of Markforged common stock and release from lock-up Sponsor Earnout Shares, are accounted for as liability classified instruments in accordance with Accounting Standards Codification Topic 815-40, as the Earnout Triggering Events that determine the number of Sponsor and Markforged Earnout Shares required to be released or issued, as the case may be, include events that are not solely indexed to the fair value of common stock of Markforged. The liability was recognized at the reverse recapitalization date and is subsequently remeasured at each reporting date with changes in fair value recorded in the condensed consolidated statements of operations.

Markforged Earnout Shares issuable to employees with vested equity awards and Earnout RSUs (as described in the Merger Agreement) issuable to employees with unvested equity awards are considered a separate unit of account from the Markforged Earnout Shares issuable in respect of Markforged common stock and are accounted for as equity classified stock compensation. The Earnout Shares issuable to employees with vested equity awards are fully vested upon issuance, thus there is no requisite service period and the value of these shares is recognized as a one-time stock compensation expense for the grant date fair value. Earnout RSUs are contingent upon an employee completing a service vesting condition, and as such, reflect a transaction in which the Company acquires employee services by offering to issue its shares, the amount of which is based in part on the Company’s share price. Expense related to Earnout RSUs is recognized using graded vesting over the requisite service period for the Earnout RSUs.

The estimated fair values of the Sponsor Earnout Shares, Markforged Earnout Shares, and Earnout RSUs were determined by using a Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis over the five-year Earnout Period as defined in Note 11. The preliminary estimated fair values of Sponsor Earnout Shares, Markforged Earnout Shares, and Earnout RSUs were determined using the most reliable information available, including the current Company Common Stock price, expected volatility, risk-free rate, expected term and dividend rate.

The contingent earnout liability is categorized as a Level 3 fair value measurement (see Fair Value of Financial Instruments accounting policy as described above) because the Company estimated projections during the Earnout Period utilizing unobservable inputs. Contingent earnout payments involve certain assumptions requiring significant judgment and actual results can differ from assumed and estimated amounts.

10


 

Leases

Prior to January 1, 2022, the Company accounted for leases in accordance with FASB Accounting Standards Codification (“ASC”) ASC 840, Leases. At lease inception, the Company determined if an arrangement was an operating or capital lease. For operating leases, the Company recognized rent expense, inclusive of rent escalations, on a straight-line basis over the lease term.

Effective on January 1, 2022, the Company accounts for leases in accordance with ASC Topic 842, Leases (“ASC 842”). In accordance with ASC 842, the Company determines whether an arrangement is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date, when control of the underlying asset is transferred from the lessor to the lessee, as operating or finance leases and records a right-of-use (“ROU”) asset and a lease liability on the consolidated balance sheet for all leases with an initial lease term of greater than 12 months. The Company has elected to not recognize leases with a lease term of 12 months or less on the balance sheet and will recognize lease payments for such short-term leases as an expense on a straight-line basis over the lease term.

The Company enters into contracts that contain both lease and non-lease components. Non-lease components may include maintenance, utilities, and other operating costs. For leases of real estate, the Company combines the lease and associated non-lease components in its lease arrangements as a single lease component. Variable costs, such as utilities or maintenance costs, are not included in the measurement of right-of-use assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.

Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease if readily determinable. If the rate implicit is not readily determinable, the Company utilizes its incremental borrowing rate based upon the available information at the lease commencement date. ROU assets are further adjusted for initial direct costs, prepaid rent, or incentives received. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Finance lease assets are amortized to depreciation expense using the straight-line method over the shorter of the useful life of the related asset or the lease term. Finance lease payments are bifurcated into (i) a portion that is recorded as interest expense and (ii) a portion that reduces the finance liability associated with the lease. The Company did not have any finance leases as of the date of adoption or during the three months ended March 31, 2022.

Recently Adopted Accounting Pronouncements

The Company is provided the option to adopt new or revised accounting guidance as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“the JOBS Act”) either (1) within the same periods as those otherwise applicable to public business entities, or (2) within the same time periods as private companies, including early adoption when permissible. With the exception of standards the Company elected to early adopt, when permissible, the Company has elected to adopt new or revised accounting guidance within the same time period as private companies.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). The guidance improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and certain inconsistencies in application. Under current GAAP, an acquirer generally recognizes contract assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The amendments in this update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. The guidance is effective for annual reporting periods beginning after December 15, 2022, including interim periods therein. Early adoption is permitted, including in an interim period for which the financial statements have not been issued. If early adopting in an interim period, the Company is required to apply the amendments to all prior business combinations that have occurred since the beginning of the fiscal year that includes the interim period of application. The Company adopted ASU 2021-08 in October 2021 and the adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, as subsequently amended (collectively, “ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors), and replaces the existing guidance in ASC 840, Leases.

The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine the recognition pattern of lease expense over the term of the lease. In addition, a lessee is required to record (i) a right-of-use asset and a lease liability on its balance sheet for all leases with accounting lease terms of more than 12 months regardless of whether it is an operating or financing lease and (ii) lease expense in its consolidated statement of operations and comprehensive income (loss) for operating leases

11


 

and amortization and interest expense in its consolidated statement of operations and comprehensive income (loss) for financing leases. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases under ASC 840. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), which added an optional transition method that allows companies to adopt the standard as of the beginning of the year of adoption as opposed to the earliest comparative period presented. This guidance is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted.

The Company adopted ASC 842 during the quarter ended March 31, 2022, with an effective date of January 1, 2022, using the modified retrospective transition approach which uses the effective date as the date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840. The Company has elected to apply the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or the capitalization of initial direct costs for any existing leases.

Upon its adoption of ASC 842 on January 1, 2022, the Company recognized operating lease right-of-use assets and related operating lease liabilities, which increased the Company’s total assets and total liabilities by $12.2 million and $14.0 million, respectively. The adoption of ASC 842 did not have a material impact on the Company’s consolidated statement of operations and comprehensive income (loss) or statement of cash flows and did not impact retained earnings.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires immediate recognition of expected credit losses for financial assets carried at amortized cost, including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets, held at the reporting date to be measured based on historical experience, current conditions and reasonable supportable forecasts. The new credit loss model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective for the Company on January 1, 2023. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on its condensed consolidated financial statements.

Note 4. Revenue

Contract Balances

For the three months ended March 31, 2022, the Company recognized $1.9 million from the deferred revenue account balance as of December 31, 2021. For the three months ended March 31, 2021, the Company recognized $2.0 million from the deferred revenue account balance as of December 31, 2020.

Deferred revenue is expected to be recognized when the Company provides hardware maintenance services or contractual performance obligations for which the customer has already provided payment with $5.5 million expected to be recognized in the remainder of 2022, $2.9 million expected to be recognized in 2023, $1.5 million expected to be recognized in 2024, and $0.3 million thereafter.

Disaggregation of Revenue

The following table disaggregates the Company’s revenue based on the nature of the products and services:

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2022

 

 

2021

 

Hardware

 

$

14,517

 

 

$

14,239