What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-03-15 · 172 added, 152 removed, 332 unchanged (49% of the section changed)

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As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

We have developed an innovative suite of purpose-built handheld and desktop mass spectrometry, or Mass Spec, devices for the point-of-need.

Leveraging our proprietary platform technology, we make the extraordinary analytical power of Mass Spec available in devices that are significantly smaller and more accessible than conventional laboratory instruments.

Our Mass Spec devices are used at the point-of-need to interrogate unknown and invisible materials and provide quick, actionable answers to directly address some of the most critical problems in life sciences research, bioprocessing, industrial biotech, forensics and adjacent markets.

We have developed an innovative suite of purpose-built handheld and desktop devices for point-of-need chemical and biochemical analysis.

Leveraging our proprietary mass spectrometry, or Mass Spec, microfluidics, and analytics and machine learning technologies, we make devices that are significantly smaller and more accessible than conventional laboratory instruments.

Our devices are used at the point-of-need to interrogate unknown and invisible materials and provide quick, actionable answers to directly address some of the most critical problems in life sciences research, bioprocessing, pharma/biopharma, forensics and adjacent markets.

The term “products” as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refers to the Maverick, MX908, Rebel, ZipChip Interface, and Maven and related sampling devices.

We create simplified measurement devices that our customers can use as accurate tools where and when their work needs to be done, rather than overly complex and centralized analytical instrumentation.

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Our desktop devices are accelerating development and production of biotherapeutics by identifying and quantifying extracellular species in bioprocessing critical to cell health and productivity.

They sit alongside bioreactors and fermenters producing drug candidates, functional proteins, cell and gene therapies, and synthetic biology derived products.

They sit alongside or are directly connected to bioreactors and fermenters producing drug candidates, functional proteins, cell and gene therapies, and synthetic biology derived products.

We believe the insights and answers our devices provide accelerate workflows, reduce costs, and offer transformational opportunities for our end users.

The term “products” as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refers to the MX908, Rebel, ZipChip Interface, Maven and related sampling devices.

On August 3, 2022, we completed our acquisition of 100% of the registered share capital of Trace pursuant to a share purchase and transfer agreement, for a total purchase price consideration of $17.3 million, comprised of (i) a $14.4 million initial cash payment, (ii) up to $2.0 million contingent cash consideration upon achievement of certain milestones over a twenty-four-month period and (iii) $0.9 million contingent pension liability holdback to be released upon discharging or transferring of such liability from Trace.

Trace is a leading provider of online analysis systems for biotech applications in research, development and production.

Trace’s products are used for monitoring and control of complex processes in industrial pharmaceutical productions under continuous measurement conditions.

On August 3, 2022, we completed our acquisition of 100% of the registered share capital of Trace Analytics GmbH, renamed 908 Devices GmbH, pursuant to a share purchase and transfer agreement, for a total purchase price consideration of $17.3 million, comprised of (i) a $14.4 million initial cash payment, (ii) up to $2.0 million contingent cash consideration upon achievement of certain milestones over a twenty-four-month period and (iii) $0.9 million contingent pension liability holdback to be released upon discharging or transferring of such liability from 908 Devices GmbH.

908 Devices GmbH is a leading provider of online analysis systems for biotech applications in research, development and production.

908 Devices GmbH’s products are used for monitoring and control of complex processes in industrial pharmaceutical productions under continuous measurement conditions.

We expect to integrate acquired sampling technology within future product offerings.

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Further, we expect to incur additional costs associated with operating as a public company.

As a result, we may need additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research and development expenses.

result, we may need additional funding for expenses related to our operating activities, including selling, general and administrative expenses and research and development expenses.

Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.

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See “ Liquidity and Capital Resources .”

Global Economic Conditions Including COVID-19

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

During 2022, our performance was affected by impacts from the COVID-19 pandemic, including supply chain disruptions, delays and rising costs, as well as labor challenges associated with employee absences, remote work, and adjusted work schedules.

Moreover, a significant portion of our field sales, customer training events and other application services have been conducted in person, and the rollout of our new products has historically been supported by our participation at industry conferences, and our ability to participate in these customer and industry events improved in 2022 but remains limited by prohibitions on travel, restricted access to customer locations and large in-person gatherings.

As the situation around COVID-19, including any variants thereof, evolves further, we are continuing to focus on promoting the health, safety and financial security of our employees and serving our customers.

We will continue to monitor supply chain risks and other impacts from the COVID-19 pandemic.

We are monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, including Silicon Valley Bank, or SVB, being closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation, or the FDIC, as receiver on March 10, 2023 and Signature Bank being closed by its New York charter authority on March 12, 2023.

As of March 10, 2023, we had substantially all of our cash and cash equivalents on deposit with SVB and Signature Bank.

We are also monitoring the impacts that these events may have on our customers and vendors.

We are also closely monitoring increased economic uncertainty in the United States and abroad, including volatility in the global markets and the rise and fluctuations in inflation and interest rates.

These developments and the potential worsening of other macro-economic conditions present risks for us and our suppliers.

For example, general inflation in the United States, Europe, EMEA and other geographies has risen to levels not experienced in recent decades, which has led to rising prices for our raw materials and other inputs, as well as rising salaries and travel expenses, which could continue to negatively impact our business by increasing our cost of sales and operating expenses.

Global Economic Conditions

We are continuing to closely monitor macroeconomic factors, including, but not limited to, continued inflationary and interest rate pressures, challenging capital market conditions and the limited availability of financing alternatives, which may have an impact on our business, results of operations and financial results.

We are closely monitoring continued economic uncertainty in the United States and abroad, including volatility in the global markets and the rise and fluctuations in inflation and interest rates.

These developments and the potential worsening of other macro-economic conditions present risks for us, and our suppliers and customers.

For example, general inflation in the United States, EMEA and other geographies has recently been at levels not experienced in recent decades, which has led to higher prices for our raw materials and other inputs, as well as higher salaries and travel expenses, which could continue to negatively impact our business by increasing our cost of sales and operating expenses.

General inflation could also negatively impact our business if it leads to spending pressure and decreased available capital for our customers to deploy to purchase our products and services.

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The impact of future inflation and interest rate fluctuations on the results of our operations cannot be accurately predicted.

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

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

Challenging capital market conditions and the limited availability of financing alternatives , together with inflationary and interest rates pressures, may contribute to more cautious spending by our customers.

Certain of our pharmaceutical and biotechnology customers, including bioprocessing customers, may evaluate their inventory levels, cash on hand and path to profitability, and institute cost controls and take other actions to reduce or delay purchases of our products and services.

We cannot accurately predict the full impact of current macroeconomic factors on the budgets and capital expenditures of our customers, or the timing of the normalization of customer purchasing patterns.

We are closely monitoring the ongoing military conflict between Russia and Ukraine, and the ongoing hostilities in Israel and the Gaza Strip.

Although we do not directly source any material products or supplies from Russia, Ukraine, Israel or the Gaza Strip, our customers in Europe and the Middle East could be impacted by extended conflicts or an escalation of these conflicts into neighboring countries.

While it is difficult to predict all of the impacts these global economic events and continued inflationary and interest rate pressures will have on our business and to predict the effects of these factors on our customers’ spending in the near term, we believe the long-term opportunity that we see for our products and services remain unchanged.

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

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We expect our device sales to continue to grow as we increase penetration in our existing markets and expand into, or offer new features and solutions that appeal to, new markets.

We plan to grow our device sales in the coming years through multiple strategies including expanding our sales efforts domestically and globally and continuing to enhance the underlying technology and applications for life sciences research related to our Rebel, ZipChip Interface, Maven and related sampling devices.

We plan to grow our device sales in the coming years through multiple strategies including expanding our sales efforts domestically and globally and continuing to enhance the underlying technology and applications for life sciences research related to our Maverick, Rebel, ZipChip Interface, and Maven and related sampling devices.

We regularly solicit feedback from our customers and focus our research and development efforts on enhancing our devices and enabling our customers to use additional applications that address their needs, which we believe in turn helps to drive additional sales of our devices and consumables.

Our sales process varies considerably depending upon the type of customer to whom we are selling.

Our handheld device orders relate to our MX908 as well as components for the Aerosol and Vapor Chemical Agent Detectors (“AVCAD”) sold to our channel partner.

Historically, our handheld devices have been used by state, federal and foreign governments and governmental agencies.

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Given the variability of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our desktop device sales on a period-to-period basis.

Additionally, we have experienced and may continue to experience the impact of laboratory shutdowns and limited access to laboratories, related to COVID-19 on device and consumable sales to these markets.

Recurring revenue

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Recurring revenue was 33% and 35% of total product and service revenue for the years ended December 31, 2023 and 2022, respectively.

Our recurring revenue as a percentage of total product and service revenue will vary based upon new device placements

in the period.

Our recurring revenue as a percentage of total product and service revenue will vary based upon new device placements in the period.

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

Revenue from the sales of consumables will vary by type of device.

We expect that recurring revenue as a percentage of the original device price to be higher for our desktop devices (Rebel, ZipChip Interface, Maven and related sampling devices) than for our handheld device (MX908).

We expect that recurring revenue as a percentage of the original device price to be higher for our desktop devices (Rebel, ZipChip Interface, Maverick, Maven and related sampling devices) than for our handheld device (MX908).

While we sell single-use swab samplers for MX908 to be used in liquid and solid materials analysis, there are a number of other applications that the MX908 can be used for that do not require consumables.

MX908 recurring revenue is also comprised of accessories, such as the Aero module, which can drive the handheld recurring revenue as a percent of overall product and service revenue higher in certain periods.

Rebel and ZipChip Interface require consumables kits for all areas of operations.

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At maximum potential capacity, with continuous operation, the Rebel can consume approximately one 200-sample kit per day.

Maverick devices require consumables, probes and standards for all areas of operations.

Maven and related sampling devices require consumable sets of buffers, probes and biosensors for all areas of operations.

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However, the percentage will be subject to fluctuation based upon our handheld sales in a period.

In addition, our selling price and, consequently, our margins, are higher for those devices and consumables that we sell directly to customers as compared to those that we sell through distributors.

While we expect the mix of direct sales as compared to sales through distributors to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies.

In addition, our selling price and, consequently, our margins, are higher for those devices and consumables that we sell directly to customers as compared to those that we sell through channel partners.

While we expect the mix of direct sales as compared to sales through channel partners to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies.

Future device and consumable selling prices and gross margins may fluctuate due to a variety of factors, including the introduction by others of competing products and solutions.

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however, we anticipate these will change or may be substituted for additional or different metrics as our business grows.

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

During the years ended December 31, 2023 and 2022, our product placements (units recognized as revenue) were as follows:

Year Ended December 31,

Product Placements:

ZipChip Interface

Total Product Placements

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

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Cumulative Product Placements:

ZipChip Interface

Cumulative Product Placements

Components of Our Results of Operations

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Our current device offerings include:

● Handheld devices—MX908;

● Desktop devices—Rebel, ZipChip Interface, Maven and related sampling devices.

We sell our devices directly to customers and through distributors.

● Handheld devices—MX908 and AVCAD components;

● Desktop devices—Rebel, ZipChip Interface, Maverick, and Maven and related sampling devices.

We sell our devices directly to customers and through channel partners.

Each of our device sales drives various streams of recurring revenue comprised of consumable product sales and service revenue.

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● ZipChip Interface—microfluidic chip, reagent and assay kits;

● Maverick—calibration kits and accessories;

● Maven and related sampling devices—probes, tubing sets and accessories.

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

Licenses and contract revenue

License and contract agreements are arrangements whereby we provide engineering services for the development of our technology platform for specific programs or new and expanding applications of our technologies for future commercial endeavors.

Our license and contract agreements are with the U.S.

Contract revenue

Contract agreements are arrangements whereby we provide engineering services for the development of our technology platform for specific programs or new and expanding applications of our technologies for future commercial endeavors.

Our contract agreements are with the U.S.

government and commercial entities (who may be contracting with the government).

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Our license and contract revenue was primarily related to one customer during the years ended December 31, 2023 and 2022.

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

During the years ended December 31, 2023 and 2022, our revenue was comprised of revenue from the following sources (in thousands):

Year Ended December 31,

(in thousands)

Product and service revenue:

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Total product and service revenue

License and contract revenue

Contract revenue

Total revenue

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

Year Ended December 31,

(in thousands)

Product and Service Revenue by Device:

Total product and service revenue

Year Ended December 31,

(in thousands)

Product and Service Revenue by Market:

Pharmaceutical/Biotechnology

Academia and other

Total product and service revenue

We sell our products primarily in the United States;

however, we are expanding our global sales efforts as we see traction in our products and assess global market needs.

The majority of our international sales are through a distribution channel.

however, we are continuing to expand our global sales efforts as we see traction in our products and assess global market needs.

The majority of our international sales are through channel partners and to a lesser extent, starting in 2023, through our 908 Devices GmbH subsidiary for our desktop sales in Europe and the United Kingdom.

Cost of Revenue, Gross Profit and Gross Margin

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Cost of revenue for services primarily consists of salaries and other personnel costs, travel related to services provided, facility costs associated with training, warranties and other costs of servicing equipment on a return-to-factory basis and at customer sites.

License and contract cost of revenue primarily consists of salaries and other personnel costs, materials, travel and other direct costs related to the revenue recognized in the period.

The license and contract cost of revenue will vary based upon the type of contract, including whether it is primarily for development services or for both materials and development services.

Contract cost of revenue primarily consists of salaries and other personnel costs, materials, travel and other direct costs related to the revenue recognized in the period.

The contract cost of revenue will vary based upon the type of contract, including whether it is primarily for development services or for both materials and development services.

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

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We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing, which we believe will reduce costs and increase our gross margin.

We expect that our gross profit margin for license and contract will remain consistent for our contracts that are cost reimbursement contracts.

We expect that our gross profit margin for contract will remain consistent for our contracts that are cost reimbursement contracts.

Operating Expenses

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Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of salaries and other personnel costs, and stock-based compensation for our sales and marketing, finance, legal, human resources and general management, as well as professional services, such as legal, audit and accounting services.

professional services, such as legal, audit and accounting services.

We expect selling, general and administrative expenses, amortization of customer relationship and tradename intangibles to increase in future periods as the number of sales, sales application specialists and marketing and administrative personnel grows and we continue to introduce new products, invest in demonstration equipment, broaden our customer base and grow our business.

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Other Income (Expense)

Interest income

Interest income consists of interest earned on our invested cash balances.

Interest expense

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federal or state income tax benefits for the net operating losses we have incurred in each year or for the research and development tax credits we generated in the United States and have recorded a full valuation allowance against our net deferred assets, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized.

As of December 31, 2022, we had gross federal and state operating loss carryforwards of $92.3 million and $64.0 million, respectively,

which may be available to offset future taxable income and begin to expire in 2032 and 2025, respectively, of which $57.9 million of federal gross operating losses do not expire.

We recognized an income tax benefit of $0.2 million and $0 during the years ended December 31, 2023 and 2022, respectively.

The income tax benefit recognized during the year ended December 31, 2023 primarily resulted from a reduction in the deferred tax liabilities recorded as part of our acquisition of 908 Devices GmbH.

As of December 31, 2023, we had gross federal and state operating loss carryforwards of $108.2 million and $77.4 million, respectively, which may be available to offset future taxable income and begin to expire in 2032 and 2025, respectively, of which $73.8 million of federal gross operating losses do not expire.

As of December 31, 2023, we also had U.S.

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(in thousands)

Product and service revenue

License and contract revenue

Product revenue

Service revenue

Contract revenue

Total revenue

Cost of revenue:

Product and service cost of revenue

License and contract cost of revenue

Product cost of revenue

Service cost of revenue

Contract cost of revenue

Total cost of revenue

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Loss from operations

Other income (expense):

Other income, net:

Interest income

Interest expense

Other income, net

Total other income (expense), net

Other expense, net

Total other income, net

Loss from operations before income taxes

Benefit for income taxes

Revenue, Cost of revenue and Gross profit

Product and service

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

Year Ended December 31,

(dollars in thousands)

Product and service revenue

Product and service cost of revenue

Product revenue

Product cost of revenue

Gross profit margin

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

Product revenue increased by $2.7 million, or 7%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The increase was primarily related to an increase in handheld sales of $5.8 million, which was due to an increase of $7.9 million in handheld device sales, primarily related to a 32 unit increase in MX908 device placements and shipments of AVCAD components under our subcontract agreement with a commercial entity that holds a U.S.

government prime contract, offset in part by a $2.2 million decrease in consumables and accessories, primarily related to Aero module shipments, an accessory for the MX908, to the US Army in the year ended December 31, 2022

that were not repeated in 2023.

The increase in handheld revenue was offset in part by a decrease of $4.1 million in desktop sales for the year ended December 31, 2023 compared to the year ended December 31, 2022, which was primarily related to a decrease of $3.4 million in desktop device revenue, offset in part by an increase in desktop consumables and accessories for the year ended December 31, 2023.

The decrease in device revenue was driven by a 35 unit decrease in Rebel device placements and an 11 unit decrease in ZipChip Interface placements compared to 2022, offset in part by new product shipments for Maven and Maverick.

Product cost of revenue increased by $2.4 million, or 15%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The increase in product cost of revenue was primarily related to additional volume and material costs for product shipped of approximately $0.9 million, as well as $0.5 million in higher materials and supplies consumed in warranty obligations related primarily to part replacements, $0.3 million in intangibles amortization, and $0.3 million in higher provisions for excess and obsolete materials.

Product gross profit increased by $0.3 million, or 1%, and gross profit margin decreased by 3% for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

The increase in product gross profit was, primarily due to the increased volume in sales.

The decrease in product gross profit margin percentage of 3% is driven primarily by three factors.

These factors, each of which resulted in an approximate 1% decrease in product gross profit margin, were:

an increase in materials and supplies used in warranty obligations, an increase in the provision for excess and obsolete materials, and higher non-cash charges for intangible amortization.

Our service revenue is comprised of revenue from sales of extended warranty and service plans and customer training as follows:

Year Ended December 31,

(dollars in thousands)

Device sales revenue

Consumables and service revenue

Total product and service revenue

Product and service revenue increased by $3.4 million, or 8%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

Device sales accounted for 65% and 81% of our product and service revenue for the years ended December 31, 2022 and 2021, respectively.

Consumables and service revenue accounted for 35% and 19% of our product and service revenue for the years ended December 31, 2022 and 2021, respectively.

The decrease in device sales of $4.5 million was primarily due to a decrease of $5.3 million in handheld device sales from 122 fewer MX908 devices sold.

This decrease was primarily related to shipments to the United States Army, offset in part by an increase in sales within state and local and certain international markets in the year ended December 31, 2022.

The decrease in devices sales was offset in part by a $0.8 million increase in device sales related to our desktop products primarily due to higher average selling prices and channel mix for our Rebel and ZipChip devices, offsetting a 2 unit decrease in desktop devices, and the device revenue from Maven and related sampling device placements in the year ended December 31, 2022.

Consumables and service revenue increased by $7.9 million due to an increase of $3.6 million from handheld accessories and consumables, primarily related to the Aero module and the shipments to the US Army in 2022, an increase in service revenue of $3.4 million and a $0.9 million increase in desktop consumables, mainly from Rebel kit sales.

Product and service cost of revenue increased by $1.8 million, or 10%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase in product and service cost of revenue was primarily related to a $1.5 million increase in personnel related costs, a $0.6 million increase in freight costs and a $0.5 million increase related to volume, mix and production related costs and variances.

These increases were offset in part by a $0.5 million decrease in warranty costs and a $0.5 million decrease in royalty costs, primarily related to lower device sales for the year ended December 31, 2022.

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

Gross profit margin was down slightly at 54% for the year ended December 31, 2022.

License and contract

Service revenue

Service cost of revenue

Gross profit margin

Service revenue increased by $2.7 million, or 38%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The increase was primarily related to an increase in handheld service revenues related to extended service contracts for MX908 devices and to a lesser extent increases in handheld training revenue and revenue from desktop service arrangements.

Service cost of revenue increased by $2.0 million, or 44%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The increase in service cost of revenue was primarily related to a $0.5 million increase in fees paid to contract trainers used to support the higher handheld training revenue, a $0.4 million increase in materials related to servicing the installed base, a $0.2 million increase in stock based compensation and an increase in personnel costs to support the increase in service revenue.

Service gross profit increased by $0.7 million, or 28%, and gross profit margin decreased by 3% for the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to the increase in materials shipped under service arrangements and an increase in the use of independent contract trainers versus internal resources to meet the increased demand for handheld training.

Year Ended December 31,

(dollars in thousands)

License and contract revenue

License and contract cost of revenue

Contract revenue

Contract cost of revenue

Gross profit margin

License and contract revenue increased by $1.3 million, or 116%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase in license and contract revenue was primarily related to activities under our subcontract agreement with a commercial entity that holds a U.S.

government prime contract resulting in $0.9 million higher contract revenue in the year ended December 31, 2022 compared to the year ended December 31, 2021.

The additional increase in license and contract revenue is related to work performed under a prime contract held directly with the U.S.

government that concluded in the year ended December 31, 2022.

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

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

Contract revenue decreased by $2.0 million, or 84%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The majority of contract revenue, for the years ended December 31, 2023 and 2022, was related to activities under our subcontract agreement with a commercial entity that holds a U.S.

government prime contract, which was concluded in the second quarter of 2023 and represented a decrease of $1.3 million in contract revenue for the year ended December 31, 2023.

The decrease in contract revenue for the year ended December 31, 2023 is also related to the completion of work in 2022 related to a prime contract directly with the U.S.

government and a subcontract agreement with a commercial entity that holds a U.K.

government prime contract.

Contract cost of revenue decreased by $0.3 million, or 75% for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The decrease was primarily due to lower material costs with the subcontract agreement with a commercial entity that holds a U.S.

government prime contract compared to the contract deliverables for the prime contract held directly with the U.S.

government and a subcontract agreement with a commercial entity that holds a U.K.

government prime contract for the year ended December 31, 2022.

Contract gross profit decreased by $1.7 million and gross profit margin decreased by 10% for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to the mix in contract deliverables, including a mix of materials with lower costs during the year ended December 31, 2022, which resulted in a higher gross profit margin for that period, as compared to the year ended December 31, 2023.

Operating Expenses

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Our research and development expenses were $21.9 million for the year ended December 31, 2023, an increase of $4.4 million from research and development expenses of $17.5 million for the year ended December 31, 2022.

The increase was due primarily to a $2.5 million increase in salaries and related costs from growing headcount, a $1.2 million increase in stock-based compensation and a $0.4 million increase in materials and supplies related to product development efforts.

The increase was due primarily to a $2.2 million increase in salaries and related costs from growing our headcount in 2023, a $1.0 million increase in stock-based compensation, and a $1.0 million increase in occupancy related expenses, mainly related to our new facility in North Carolina.

Selling, general and administrative expenses

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Our selling, general and administrative expenses were $46.2 million for the year ended December 31, 2023, an increase of $2.3 million from selling, general and administrative expenses of $43.9 million for the year ended December 31, 2022.

The increase was due primarily to a $6.3 million increase in salaries and related costs from growing headcount, and a $3.3 million increase in stock-based compensation.

The remaining $2.0 million increase during the year ended December 31, 2022 was due primarily to a $1.4 million increase in travel expenses, a $0.6 million increase in IT related subscription fees, a $0.6 million increase related to legal fees, and a $1.2 million increase related to all other selling, general and administrative expenses, which was partially offset by a $1.8 million decrease in allowance for bad debt recorded in the year ended December 31, 2021.

The increase was due primarily to a $1.1 million increase in salaries and related costs from growing our headcount in 2023, a $1.3 million increase in stock-based compensation, a $1.1 million increase in commissions earned, primarily related to handheld device sales, a $0.4 million increase related to software subscriptions and dues, a $0.4 million increase in provision for credit losses and a $0.2 million increase in acquisition-related costs for intangible amortization and accretion and valuation of contingent milestones.

These increases were partially offset by a $1.3 million decrease in insurance costs, primarily related to our director and officers insurance premiums that decreased with market rates for 2023 and a $1.0 million decrease in professional fees for legal, audit, tax and other related costs, partly related to costs incurred with our acquisition of Trace Analytics GmbH during the year ended December 31, 2022.

Other Income (Expense)

Interest income

Interest income increased by $1.5 million from $0.5 million for the year ended December 31, 2021.

The increase was due to an increase in interest earned from our higher cash and cash equivalent balances from the proceeds from the November 2021 Offering, as well as higher interest rates on our interest bearing accounts.

Interest income increased by $4.4 million for the year ended December 31, 2023 from $2.0 million for the year ended December 31, 2022.

The increase was due primarily to higher interest rates on our interest bearing accounts and interest earned on our marketable securities, which were purchase during the year ended December 31, 2023.

Interest expense

Interest expense decreased by $0.4 million for the year ended December 31, 2022, from $0.5 million for the year ended December 31, 2021.

The decrease was primarily due to lower average outstanding borrowings during the year

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

Interest expense increased by $0.1 million for the year ended December 31, 2023 from $0.1 million for the year ended December 31, 2022.

The increase was primarily due to costs incurred in March 2023 related to the write-off of deferred financing costs on our 2022 Revolver, which was in default and later amended in August 2023.

Other income (expense), net

Other income (expense), net was $0.1 million for the year ended December 31, 2022.

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

Other expense, net was $0.1 million for the year ended December 31, 2023 and did not change materially from $0.1 million for the year ended December 31, 2022.

Benefit for Income Taxes

Benefit for income taxes increased by $0.2 million for the year ended December 31, 2023, from $0.0 million for the year ended December 31, 2022.

The income tax benefit recognized during the year ended December 31, 2023 primarily resulted from a reduction in the deferred tax liabilities recorded as part of our acquisition of 908 Devices GmbH.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses.

To date, we have funded our operations primarily with proceeds from sales of redeemable preferred stock, borrowings under loan agreements and revenue from sales of our products and services and license and contract revenue, proceeds from our IPO in December 2020, and, most recently, with proceeds from our underwritten public offering in November 2021.

As of December 31, 2022, we had cash and cash equivalents of $188.4 million.

To date, we have funded our operations primarily with proceeds from sales of redeemable preferred stock, borrowings under loan agreements and revenue from sales of our products and services and license and contract revenue, proceeds from our IPO in December 2020, and our underwritten public offering in November 2021.

As of December 31, 2023, we had cash and cash equivalents of $121.0 million and marketable securities of $24.6 million, which were held for working capital purposes and for investment in growth opportunities.

Our marketable securities consist of U.S.

treasury securities.

We believe that our existing cash and cash equivalents will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months.

We do not believe that the events that have impacted SVB and Signature Bank will impact our ability to operate for at least the next twelve months.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

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The 2021 Revolver subjects us to various customary covenants, including requirements as to financial reporting and financial covenants (including an unrestricted minimum cash level of $10.0 million), and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or make other distributions on capital stock other than dividends payable solely in capital stock, to redeem capital stock, to enter into in-bound licensing agreements, to engage in transactions with affiliates, and to encumber our intellectual property.

Events of default under the 2021 Revolver include

failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to us.

Events of default under the 2021 Revolver include failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to us.

Upon the occurrence of an event of default and until such event of default is no longer continuing, the annual interest rate will be 5.0% above the otherwise applicable rate.

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No amounts were outstanding upon termination of the 2021 Revolver.

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

The 2022 Revolver provides for a revolving line of credit of up to $35.0 million.

We are permitted to make interest-only payments on the revolving line of credit through November 2, 2025, at which time all outstanding indebtedness shall be immediately due and payable.

The outstanding principal amount of any advance shall accrue interest at a floating rate per annum equal to the greater of (i) three and one-half percent (3.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%).

Our obligations under the 2022 Revolver are secured by substantially all of our assets, excluding our intellectual property, which is subject to a negative pledge.

The revolving line of credit under the 2022 Revolver terminates on November 2, 2025.

On November 2, 2022, we entered into a Loan and Security Agreement, or the 2022 Revolver, with Silicon Valley Bank, or the Lender.

The 2022 Revolver provided for a revolving line of credit of up to $35.0 million.

We were permitted to make interest-only payments on the revolving line of credit through November 2, 2025, at which time all outstanding indebtedness would be immediately due and payable.

The outstanding principal amount of any advance accrued interest at a floating rate per annum equal to the greater of (i) three and one-half percent (3.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%).

Our obligations under the 2022 Revolver were secured by substantially all of our assets, excluding our intellectual property, which was subject to a negative pledge.

The revolving line of credit under the 2022 Revolver was scheduled to terminate on November 2, 2025.

The 2022 Revolver also contained certain financial covenants, including a requirement that the amount of unrestricted and unencumbered cash minus advances under the 2022 Revolver was not less than the amount equal to the

greater of (i) $10.0 million or (ii) nine (9) months of cash burn.

The 2022 Revolver contained customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, our ability to change the principal nature of our business, dispose of our business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem our capital stock, engage in transactions with affiliates or otherwise encumber our intellectual property, in each case, subject to customary exceptions.

As of December 31, 2023, there were no balances outstanding under the 2022 Revolver.

As of December 31, 2022, the outstanding principal balance under the 2022 Revolver was $15.0 million, which was repaid in full on January 4, 2023.

The interest rate applicable to borrowing under the 2022 Revolver was 7.0% as of December 31, 2022.

The 2022 Revolver also contains certain financial covenants, including a requirement that the amount of unrestricted and unencumbered cash minus advances under the 2022 Revolver, is not less than the amount equal to the greater of (i) $10.0 million or (ii) nine (9) months of cash burn.

The 2022 Revolver contains customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, our ability to change the principal nature of our business, dispose of our business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem our capital stock, engage in transactions with affiliates or otherwise encumber our intellectual property, maintain no more than $3.6 million in non-SVB accounts at any point in time, in each case, subject to customary exceptions.

As of March 14, 2023, the ability to access the 2022 Revolver will be dependent on maintaining compliance with certain financial covenants, including maintaining the appropriate amount of deposits with SVB, and SVB being able to fulfill its obligations if we were to draw down under the 2022 Revolver.

Please refer to Note 19 to our consolidated financial statements for further discussion regarding the potential impacts of the closure of SVB.

We may seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, distribution, or licensing arrangements.

On March 10, 2023, the Lender, also one of our financial institutions, was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation, or FDIC, as receiver.

As of March 31, 2023, the Company had transferred substantially all its cash, cash equivalents and marketable securities away from the Lender and deposited the funds with new financial institutions.

As a result of the transfer of the Company’s cash, cash equivalents and marketable securities, the Company was in default, of its financial covenants under the 2022 Revolver.

The Company recorded a loss on extinguishment of $0.5 million in the three months ended March 31, 2023, which was included in interest expense in the condensed consolidated statements of operations.

On August 4, 2023, we entered into a Default Waiver and First Amendment to Loan and Security Agreement with the Lender, or the Amended 2022 Revolver, in which the Lender waived its rights and remedies against the Company and amended the 2022 Revolver.

The Amended 2022 Revolver provides for a revolving line of credit of up to $10.0 million.

The Company is permitted to make interest-only payments on the revolving line of credit through November 3, 2025, at which time all outstanding indebtedness shall be immediately due and payable.

The outstanding principal amount of any advance shall accrue interest at a floating rate per annum equal to the greater of (i) four and one-half percent (4.50%) and (ii) the “prime rate” as published in The Wall Street Journal for the relevant period minus one-half percent (0.50%).

The Company’s obligations under the Amended 2022 Revolver are secured by substantially all of the Company’s assets, excluding its intellectual property, which is subject to a negative pledge.

The revolving line of credit under the Amended 2022 Revolver terminates on November 3, 2025.

As of December 31, 2023, there were no balances outstanding under the Amended 2022 Revolver.

Pursuant to the Amended 2022 Revolver, the Lender waived filing any legal action or instituting or enforcing any rights and remedies it may have had against the Company in connection with the Company’s failing to maintain all of its operating accounts, depository accounts and excess cash with the Lender, as previously required under the 2022 Revolver.

The Company recorded a credit of $0.3 million during the three months ended September 30, 2023 related to the previously recorded early termination penalties.

The Amended 2022 Revolver also contains certain financial covenants, including a requirement that the Company maintain $20.0 million on account at or through the Lender and that the amount of unrestricted and unencumbered cash minus advances under the Amended 2022 Revolver, is not less than the amount equal to the greater of (i) $10.0 million or (ii) nine (9) months of cash burn.

The Amended 2022 Revolver contains customary representations and warranties, as well as certain non-financial covenants, including limitations on, among other things, the Company’s ability to change the principal nature of its business, dispose of the Company’s business or property, engage in any change of control transaction, merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness or liens, pay dividends or make other distributions on capital stock, redeem the Company’s capital stock, engage in transactions with affiliates or otherwise encumber the Company’s intellectual property, in each case, subject to customary exceptions.

We may seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, channel partner or licensing arrangements.

We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all.

If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution.

If we raise additional funds by issuing equity or equity-linked

securities, our stockholders may experience dilution.

Future debt financing, if available, may involve covenants, in addition to our existing covenants, restricting our operations or our ability to incur additional debt or potentially limiting our ability to obtain new debt financing or the refinance of our existing debt.

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Cash used in investing activities

Cash provided by financing activities

Cash (used in) provided by financing activities

Effect of foreign exchange rate changes on cash and cash equivalents

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Operating Activities

During the year ended December 31, 2023, net cash used in operating activities was $25.1 million, primarily resulting from our net loss of $36.4 million and net cash used in changes in our operating assets and liabilities of $1.6 million, partially offset by noncash charges of $12.9 million.

Net cash used in changes in our operating assets and liabilities for the year ended December 31, 2023, consisted primarily of a $3.9 million decrease from changes in inventory and a $1.6 million decrease from changes in operating lease liabilities, partially offset by a $1.7 million increase from changes in right-of-use operating lease assets, a $2.0 million increase from changes in accounts payable and accrued expenses and a $0.7 million increase from changes in account receivable.

During the year ended December 31, 2022, net cash used in operating activities was $21.0 million, primarily resulting from our net loss of $33.6 million, partially offset by net cash provided by changes in our operating assets and liabilities of $3.3 million and noncash charges of $9.3 million.

Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2022, consisted primarily of a $5.9 million increase from changes in account receivable, a $1.9 million increase from changes in deferred revenue and a $1.2 million increase in right-of-use operating lease assets, partially offset by a $5.5 million decrease from changes in inventory and a $1.3 million decrease from operating lease liabilities.

During the year ended December 31, 2021, net cash used in operating activities was $29.1 million, primarily consisting of net cash used in changes in our operating assets and liabilities of $12.4 million and our net loss of $22.2 million, partially offset by $5.5 million in non-cash charges which include a $2.5 million stock-based compensation expense and a $1.7 million provision for doubtful accounts.

Net cash used in changes in our operating assets and liabilities for the year ended December 31, 2021 consisted primarily of an increase in account receivable of $11.3 million and an increase in inventory of $4.5 million and an increase in prepaid expenses and other current assets of $4.1 million, partially offset by a $5.4 million increase in deferred revenue and a $2.8 million increase in account payable and accrued expenses.

Investing Activities

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

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

During the year ended December 31, 2023, net cash used in investing activities was $26.4 million, due to $48.9 million in purchases of marketable securities, partially offset by $24.5 million in proceeds from maturities of marketable securities and $2.0 million in purchases of property and equipment.

During the year ended December 31, 2022, net cash used in investing activities was $15.8 million, due primarily to $13.8 million used with the acquisition of Trace Analytics GmbH that occurred in August 2022 and $2.0 million in purchases of other property and equipment.

Financing Activities

Cash used in financing activities during the year ended December 31, 2023, was $15.9 million, consisting primarily of the repayment of $15.0 million outstanding under the 2022 Revolver and $1.1 million in payments for contingent

consideration related to the release of the $0.9 million assignment of the pension liability in connection with our acquisition of Trace Analytics GmbH and the $0.2 million initial fair value of contingent consideration, related to the $0.5 million initial milestone achievement in August 2023, that was paid in 2023.

Cash provided by financing activities during the year ended December 31, 2022, was $1.2 million, consisting primarily of proceeds from the issuance of common stock upon option exercises.

We also paid off and drew down $60.0 million under the 2022 Revolver and 2021 Revolver, resulting in no net proceeds during the year ended December 31, 2022.

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

We also received net proceeds from borrowings under the 2021 Revolver of $15.0 million.

We used proceeds of $14.5 million

from the revolving line of credit to repay our previously outstanding borrowings under our loan and security agreement.

Prior to repayment of our loan and security agreement, we had made principal payments of $0.5 million.

Contractual Obligations

We have operating lease obligations for office space and certain equipment, which have remaining lease terms ranging from less than one year to approximately seven years.

We have operating lease obligations for office space and certain equipment, which have remaining lease terms ranging from two to seven years.

The total future minimum payments under such leases are $7.0 million as of December 31, 2023, of which $2.4 million is expected to be paid in 2024.

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Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short time horizons.

We have also entered into license agreements under which we are obligated to make royalty payments in the 2% to 5% range, subject to a minimum royalty fee of $0.1 million annually.

We have not included future payments under these agreements in the table of contractual obligations above since the payment obligations under these agreements are contingent upon generating product sales.

We have not included annual minimum royalty payments in the table above because, although the amounts and timing are known, we cannot currently determine the final termination date of the agreement and, as a result, we cannot determine the total amounts of such payments we will be required to make under the agreements.

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

We have also entered into a license agreement under which we are obligated to make royalty payments in the low single digit percent range.

We have not included future payments under this agreement in the table of contractual obligations above since the payment obligations under this agreement are contingent upon generating product sales.

During the fiscal years ended December 31, 2023 and 2022, we made no cash contributions to our foreign pension plan, assumed as a part of Trace Analytics GmbH acquisition.

The plan was transferred and the Company was released from the pension obligation in April 2023.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP.

Our consolidated financial statements are prepared in accordance with GAAP.

The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements.

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(1) identification of the contract, or contracts, with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue when, or as, performance obligations are satisfied.

For a contract with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation on a relative standalone selling price basis using our best estimate of the standalone selling price of each distinct product or service in the contract.

of each distinct product or service in the contract.

The primary method used to estimate standalone selling price is the price observed in standalone sales to customers;

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Revenue for extended warranty and support is recognized based upon the period of time elapsed under the arrangement as this period represents the transfer of benefits or services under the agreement.

License and Contract Revenue

Contract Revenue

We generate revenue from short and long-term contracts associated with the design and development and delivery of detection devices or related design and support services.

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Generally, revenue for long-term contracts is recognized based upon the cost-to-cost measure of progress, provided that we meet the criteria associated with transferring control of the good or service over time such as not creating an asset with an alternative use and having an enforceable right to payment for completed performance.

However, we evaluate the proper revenue recognition on a contract by contract basis, as each contract generally contains terms specific to the underlying agreement which result in differing performance obligations and payment terms (cost plus, fixed price agreements among others).

For revenue recognized under the cost-to-cost measure of progress basis, we

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

However, we evaluate the proper revenue recognition on a contract by contract basis, as each contract generally contains terms

specific to the underlying agreement which result in differing performance obligations and payment terms (cost plus, fixed price agreements among others).

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

We include the unconstrained amount of consideration in the transaction price.

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Distribution Channels

A majority of our revenue is generated by sales in conjunction with our distribution partners, such as our international distributors and in the United States for end customers where a government contract is required or a customer has a pre-existing relationship.

When we transact with a distribution partner, our contractual arrangement is with the partner and not with the end-use customer.

Whether we transact business with and receive the order from a distribution partner or directly from an end-use customer, our revenue recognition policy and resulting pattern of revenue recognition for the order are the same.

A majority of our revenue is generated by sales in conjunction with our channel partners, such as our international channel partners and in the United States for end customers where a government contract is required or a customer has a pre-existing relationship.

When we transact with a channel partner, our contractual arrangement is with the partner and not with the end-use customer.

Whether we transact business with and receive the order from a channel partner or directly from an end-use customer, our revenue recognition policy and resulting pattern of revenue recognition for the order are the same.

Stock-Based Compensation

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We test goodwill for impairment at the reporting unit level, which is the operating segment, in the fourth quarter of every year.

We have the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment.

If as a result of the quantitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be

We have the option of performing a qualitative assessment to determine whether further impairment testing

is necessary before performing the quantitative assessment.

If as a result of the quantitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be required.

The quantitative goodwill impairment test requires the management to estimate and compare the fair value of the reporting unit with its carrying value.

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We review other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or an asset group may not be recoverable.

In evaluating long-lived assets for recoverability, we estimate the future cash flows that are expected from the use of each assets.

In evaluating long-lived assets for recoverability, we estimate the future cash flows that are expected from the use of each asset.

Impairment losses are measured and recorded for the excess of an asset's carrying value over its fair value.

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These valuations require significant estimates and assumptions, especially with respect to intangible assets.

We estimate the fair value of the contingent consideration earnouts using the Monte Carlo Simulation or probability weighted scenario depending on the nature of the contingent consideration and updates the fair value of the contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments.

We estimate the fair value of the contingent consideration earnouts using the Monte Carlo Simulation or probability weighted scenario depending on the nature of the contingent consideration and update the fair value of the contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments.

To the extent that these estimates change in the future regarding the likelihood of achieving these targets, we may need to record material adjustments to our accrued contingent consideration.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis