Unless otherwise indicated or the context otherwise requires, references in this section to "Markforged ," "we," "us," "our" and other similar terms refer toMarkforged Holding Corporation and its subsidiaries after giving effect to the Merger. The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections entitled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."
Company overview
Our platform, The Digital Forge, is an intuitive additive manufacturing platform powering engineers, designers and manufacturing professionals globally. The Digital Forge combines precise and reliable 3D printers and metal and composite proprietary materials seamlessly with its cloud-based learning software offering to empower manufacturers to create more resilient and agile supply chains. Founded in 2013 by twoMIT -educated engineers,Markforged is based in greaterBoston, Massachusetts , where we have our own in-house manufacturing facility and where we design all of our industrial 3D printers, software and metal and composite proprietary materials. Since our inception, we have incurred significant operating losses. Our ability to generate revenue sufficient to achieve profitability will depend on the successful further development and commercialization of our products. We generated revenue of$91.2 million and$71.9 million for the years endedDecember 31, 2021 and 2020, respectively, and incurred net profit of$3.9 million including$65.2 million of non-cash mark-to-market gains, and net loss of$18.0 million for those same years. As ofDecember 31, 2021 , we had an accumulated deficit of$75.7 million . We expect to continue to incur net losses as we focus on growing commercial sales of our products in boththe United States and international markets, including growing our sales teams, scaling our manufacturing operations, continuing research and development efforts to develop new products and further enhance our existing products. Further, we expect to continue to incur additional general and administrative expenses associated with operating as a public company. In addition, we will incur substantial additional spending to build out the global footprint of our sales network, continue investing in research and development to accelerate product innovation, and fund inorganic growth opportunities.
RECENT DEVELOPMENTS
Merger Agreement
OnFebruary 23, 2021 , one, aCayman Islands exempted company ("AONE"), entered into an Agreement and Plan of Merger (the "Merger Agreement") withCaspian Merger Sub Inc. , a wholly owned subsidiary of AONE ("Merger Sub"), andMarkForged, Inc. ("Legacy Markforged"), pursuant to which (i) AONE would deregister as aCayman Islands company and domesticate as a corporation in theState of Delaware and would be renamed "Markforged Holding Corporation " (the "Domestication") and (ii) Merger Sub would merge with and into Legacy Markforged with Legacy Markforged surviving as a wholly owned subsidiary ofMarkforged Holding Corporation (the "Merger"). AONE's shareholders approved the transactions contemplated by the Merger Agreement onJuly 13, 2021 , and the Domestication and the Merger were completed onJuly 14, 2021 . Cash proceeds of the Merger were funded through a combination of AONE's$132.5 million of cash held in trust (after redemptions of$64.2 million ) and an aggregate of$210.0 million in fully committed common stock transactions at$10.00 per share. Upon closing of the Merger (the "Closing"), Legacy Markforged repurchased shares of common stock from certain of its stockholders, for a total value of$45.0 million of cash on hand (the "Employee Transactions"). Total net proceeds upon the Closing, net of the Employee Transactions and transaction costs paid at the Closing of$27.1 million , were$288.8 million .
Impact of the COVID-19 Pandemic and Global Supply Chain Disruption
InDecember 2019 , a novel coronavirus disease ("COVID-19") was identified and onMarch 11, 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it is impacting our customers, employees, supply chain, and distribution network, as well as the demand for our products in the markets that we serve. As a result of COVID-19 restrictions on facilities imposed to contain the spread of COVID-19, we experienced delays in shipments and installations as well as decreased utilization of our installed products, leading to a decrease in sales of consumables 46 -------------------------------------------------------------------------------- materials, which had an adverse effect on our revenue, especially in March andApril 2020 . In response, we undertook certain measures to mitigate the impacts of the COVID-19 pandemic on our financial position, cash flows and supply chain, including a reduction in force during 2020 to control headcount related costs. More recently, we have experienced longer lead-times, higher costs, and delays in procuring parts and materials. For example, we recently experienced longer lead times and capacity constraints in connection with the raw resources required to manufacture our printing material and we are also facing increased prices in connection with the procurement of the electronic components and custom metal fabricated parts for our printers. We are working closely with our suppliers and customers to minimize impacts, and we continue to closely monitor availability and supply of parts and materials required for our business. However, the extent to which our operations may continue to be impacted by the COVID-19 pandemic and related supply-chain disruptions will depend largely on future developments, which are uncertain and cannot be accurately predicted, including the timing, pace and scale of the recovery of global economic conditions. The magnitude of the adverse impact on our financial condition, results of operations and cash flows will depend on the evolution of our supply chain difficulties. OnSeptember 9, 2021 ,President Biden directed theDepartment of Labor's Occupational Safety and Health Administration ("OSHA") to issue an Emergency Temporary Standard ("ETS") requiring that all employers with at least 100 employees ensure that their employees are fully vaccinated for COVID-19 or obtain a negative COVID-19 test at least once a week. However,OSHA withdrew the ETS onJanuary 26, 2022 as an enforceable emergency temporary standard following theSupreme Court's granting of a stay of its enforcement.OSHA explicitly did not withdraw the ETS as a proposed rule, such that it is possible that a permanent rule regarding COVID-19 vaccination and testing requirements will ultimately be issued byOSHA following a formal rulemaking process.President Biden also issued an Executive Order requiring certain COVID-19 precautions for government contractors and their subcontractors, including mandatory employee vaccination (subject to medical and religious exemptions). These requirements for federal contractors have been the subject of multiple lawsuits and enforcement has been enjoined nationwide, with appeals from those decisions pending in multiple federal appellate courts. It is not currently possible to predict the impact on the Company of a permanentOSHA rule, or the requirements for government contractors and their subcontractors, to the extent that suchOSHA rule and requirements for federal contractors are ultimately implemented and enforced. Further, state and local governments inthe United States and in international jurisdictions where we operate may implement vaccine mandates and it is not clear if such mandates will go into effect, or stay in effect; whether any will apply to all employees or only to employeeswho work in the office; and how compliance will be documented. Should such mandates apply to us, we may be required to implement a requirement that all of our employees get vaccinated, subject to limited exceptions. Any requirement to mandate COVID-19 vaccination of our workforce or require our unvaccinated employees to be tested weekly could result in employee attrition and difficulty securing future labor needs. In addition, any requirement to impose obligations on our suppliers under the Executive Order covering government contractors and their subcontractors could impact the price and availability of our supply of raw materials and our results of operations and financial condition could be adversely affected. Our focus on longer term profitability is based on our investments in research and development, our value added reseller ("VAR") network, and go to market strategy. Research and development are core to our growth strategy to enable our platform to expand customer use cases and additive technology. We endeavor to expand and optimize our network of VARs which has been key to our expanding unit economics and global distribution. For more information on operations and risks related to the pandemic and global supply chain disruptions, please see the section of this Annual Report on Form 10-K titled "Risk Factors - General Risk Factors, The global COVID-19 pandemic has significantly affected our business and operations".
Main factors affecting operating results
We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the factors discussed below. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations.
Hardware sales
Our financial performance has largely been driven by, and in the future will
continue to be impacted by, the rate of sales of our hardware. Management
focuses on hardware sales as an indicator of current business success and a
leading indicator of likely future recurring revenue from consumables, success
plans, and premium software subscriptions. We expect our hardware sales to
continue to grow as we increase penetration in our existing markets and expand
into new markets.
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Recurring revenue
We regularly assess trends relating to recurring revenue which includes consumables, services, and premium software subscriptions. The consumables revenue stream includes metals, continuous fiber, and chopped fiber materials used by customers as print media. Our services revenue is made up of revenue generated from hardware maintenance contracts (which we also refer to as "Success Plans") and premium software subscriptions. The Success Plan revenue stream primarily consists of hardware maintenance services generally realized over a period of one to three years. Premium software subscriptions relate to certain cloud software solutions sold separately from our standard cloud-based software platform offering that is fully integrated with our hardware. Recurring revenue was 29% and 27% of total revenue for the years endedDecember 31, 2021 and 2020, respectively. Our recurring revenue as a percentage of total revenue may vary based upon new product placements in the period as well as consumption trends impacted by macroeconomic factors, customer behavior, and the useful life of our hardware. As our cumulative historical hardware sales increase, recurring revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our total revenue.
Go to the market
We believe that we are in a strong position within the industry with our accessible solutions that offer users design flexibility and industrial strength parts. Accordingly, we continue to invest in operations and sales channels necessary to scale out business and continue to gain market share and open new market opportunities. We have proven an ability to design, manufacture, and distribute products through channels that provide a high value to customers at gross margins higher than many of our competitors. In addition to our go to market strategy, our integrated platform of hardware, software and consumables has been core to our success and we will continue to drive value through research and development as we introduce smarter and more adaptive technology that is expected to improve our integrated platform and, ultimately, the value provided by our 3D printers. We believe these investments are critical to achieve long-term scalability, but expect the near term impacts will be a muting of our short term profitability.
Seasonality
Historically, the sales of our 3D printers have been subject to seasonality and we have seen higher hardware sales in the third and fourth quarters. We believe this trend is likely driven by available funds in federal capital budgets at the end of the third quarter and commercial budgets at year end which they direct towards the evolution of their manufacturing processes through investments in additive manufacturing.
Components of operating results
Income
The majority of our revenue results from the sale of hardware, including our additive manufacturing products, and related consumables. We deliver products and services primarily through our VAR network,who purchase and resell our products to end users. Hardware and consumables revenue is recognized upon transfer of control to the customer, which is typically the VAR, and generally takes place at the point of shipment. We also generate a portion of our revenue from hardware maintenance services and our premium software subscriptions. Revenue from hardware maintenance services for our additive manufacturing products is primarily generated through one-year or three-year contracts and is recognized ratably over the term of the agreement. Revenue related to software subscriptions is recognized ratably over the term of the subscription. Our VARs may provide installation services, as needed depending on the product.
Revenue cost
Our cost of revenue consists of the cost of product, software subscriptions, maintenance services, personnel costs, third party logistics, warranty fulfillment costs, and overhead. Cost of products includes the manufacturing cost of our additive manufacturing products and consumables. We primarily utilize third party manufacturers for the production of our additive manufacturing hardware while we utilize our own manufacturing facilities and personnel for the production of our consumables. The costs of revenue for internally manufactured products include the cost of raw materials, labor conversion costs, and overhead related to our manufacturing operations, including depreciation. Cost of maintenance services includes personnel-related costs associated with our customer success teams' provision of remote and on-site support services to our customers and the costs of replacement parts.
Our cost of revenue also includes the overhead costs associated with providing our products and services to customers, which consist primarily of reserves for excess and obsolete inventory and stock-based compensation.
We expect our cost of products to increase in absolute dollars over future periods as we expect our products to continue to grow.
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Gross profit and gross margin
Our gross profit is calculated based on the difference between our revenue and the cost of revenue. The gross margin is the percentage obtained by dividing the gross margin by our revenues. Our gross profit and gross margin are, or may be, influenced by a number of factors, including:
•
Market conditions and competition which may impact our prices;
•
Product line changes between our printer product lines and consumable trends;
•
The impact of COVID-19 and global supply chain disruptions on the cost of sourcing materials and shipping materials and finished goods;
•
Growth in the number of customers utilizing our additive manufacturing products and changes in customer utilization rates, which affects sales of our consumable materials and may result in excess or obsolete inventories;
•
Our cost structure for manufacturing operations, including the extent to which we utilize contract manufacturers compared to in-house manufacturing, the ability to achieve economies of scale in our purchase volumes, and any impacts to changes in our manufacturing on our product warranty obligations; and
•
Our ability to directly monetize the capabilities of our software solutions in the future.
We expect our gross margins to fluctuate over time, depending on the factors described above.
Research and development Our research and development expenses represent costs incurred to support activities that advance the development of innovative additive manufacturing technology, new printer products, development of proprietary printing materials, as well as activities that enhance the functionality of our offerings. Our research and development expenses consist primarily of employee-related personnel expenses, prototypes, facilities costs, and engineering services. We expect research and development costs will increase in absolute dollars over time as we continue to invest in our product portfolio.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs for our sales and marketing departments, costs related to sales commissions, trade shows, advertising, facilities costs, and other demand generation services. We expect our sales and marketing costs will increase over time as we expand our headcount, optimize our reseller network and invest in brand awareness and demand generation.
general and administrative
General and administrative expenses consist primarily of personnel-related costs for our executive leadership and finance, human resources and IT departments. We expect our general and administrative costs will increase over time as we expand our headcount to support growth in our global business, our VAR network and our customer base.
Change in fair value of derivative liabilities
Change in fair value of derivative liabilities primarily includes the change in fair value of the contingent earnout liability and private placement warrant liability. Each was accounted for as a liability as of the date of the Merger and remeasured to fair value at the end of the reporting period.
Other expenses
Other expenses include other non-operating expenses.
Interest expense
Interest expense includes accrued interest on our debt and amortization of deferred issue costs.
49 --------------------------------------------------------------------------------
interest income
Interest income includes interest earned on deposits and short-term investments.
Income taxes
Our income tax provision consists of an estimate forU.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, changes in deferred tax assets and liabilities and changes in tax law. Due to cumulative losses, we maintain a valuation allowance against ourU.S. and state deferred tax assets.
Operating results
The results of operations presented below should be considered in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K. The following tables present our results of operations for the periods presented.
Comparison of the year ended
Year Ended December 31,
(dollars in thousands) 2021 2020 $ Change % Change
Revenue $ 91,221 $ 71,851 $ 19,370 27 %
Cost of revenue 38,368 29,921 8,447 28 %
Gross profit 52,853 41,930 10,923 26 %
Operating expense
Sales and marketing 35,966 22,413 13,553 60 %
Research and development 32,155 17,176 14,979 87 %
General and administrative 45,772 20,080 25,692 128 %
Total operating expense 113,893 59,669 54,224 91 %
Loss from operations (61,040 ) (17,739 ) (43,301 ) 244 %
Change in fair value of warrant
liabilities 1,808 (175 ) 1,983 NM
Change in fair value of contingent
earnout liability 63,407 - 63,407 100 %
Other expense (265 ) (9 ) (256 ) NM
Interest expense (16 ) (98 ) 82 (84 )%
Interest income 17 147 (130 ) (88 )%
Profit (loss) before income taxes 3,911 (17,874 ) 21,785 (122 )%
Income tax (benefit) expense 56 111 (55 ) (50 )%
Net profit (loss) and comprehensive
income (loss) $ 3,855 $ (17,985 ) $ 21,840 (121 )%
__________________
NM - Not meaningful
Revenue, Cost of Revenue and Gross Margin
We earn revenue from the sale of hardware, consumables, and service contracts. The hardware revenue stream includes 3D composite printers, 3D metal printers, and sintering furnaces. The consumables revenue stream includes chopped fiber materials, metals, and continuous fiber used by customers as print media. The services revenue stream primarily consists of warranty and maintenance contracts and software subscriptions.
The following table presents the evolution of the components of the gross margin for the years ended
Year Ended December 31,
(dollars in thousands) 2021 2020 $ Change % Change
Revenue $ 91,221 $ 71,851 $ 19,370 27 %
Cost of revenue 38,368 29,921 8,447 28 %
Gross profit 52,853 41,930 10,923 26 %
Gross margin 58 % 58 % - -
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Revenue Comparison
The following table breaks down the Company’s revenues according to the nature of the products and services:
Year Ended December 31,
(in thousands) 2021 2020 $ Change % Change
Hardware $ 64,974 $ 52,119 $ 12,855 25 %
Consumables 19,567 15,498 4,069 26 %
Services 6,680 4,234 2,446 58 %
Total Revenue $ 91,221 $ 71,851 $ 19,370 27 %
Consolidated turnover for the year ended
compared to the turnover of the previous year of
Hardware revenue increased approximately 25% for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily driven by more hardware units of our industrial composite and metal printers sold. Consumables revenue increased 26% primarily driven by the increase in material utilization by active printers in the field, the incremental volume as a result of new printer sales, and the return of certain printers to active duty following inactivity caused by the COVID-19 pandemic. Service revenue increased 58% primarily driven by an increase in the number of hardware units sold, which have a warranty and maintenance contract, as well as the introduction of software subscription services, including Eiger Fleet and Blacksmith.
Revenue Cost and Gross Margin
Consolidated cost of revenue for the year endedDecember 31, 2021 was$38.4 million compared with cost of revenue of$29.9 million for the year endedDecember 31, 2020 representing an increase of 28%, primarily due to an increase in the volume and cost of mechanical and electronic components and labor to support increased hardware sales, offset by efficiencies in hardware production. The increased costs were largely driven by the labor shortages and supply chain constraints that were prevalent in the market throughout 2021. Gross profit for the year endedDecember 31, 2021 was$52.9 million compared with gross profit of$41.9 million for the year endedDecember 31, 2020 representing an increase of 26%. Gross profit margin for the years endingDecember 31, 2021 and 2020 was 58%. Operating expenses
The following table shows the components of operating expenses for the years ended
Year Ended December 31,
2021 2020 Change
% %
(dollars in thousands) Amount Revenue Amount Revenue $ %
Operating expenses
Sales and marketing $ 35,966 39 % $ 22,413 31 % $ 13,553 60 %
Research and development 32,155 35 % 17,176 24 % 14,979 87 %
General and administrative 45,772 50 % 20,080 28 % 25,692 128 %
Total operating expenses $ 113,893 125 % $ 59,669
83%
Sales and marketing expenses increased 60% for the year endedDecember 31, 2021 , primarily due to an increase in headcount and related costs of$3.0 million , external contractor costs of$3.0 million , advertising expense of$3.0 million , and stock-based compensation expense of$1.6 million . There was also an increase in trade show participation and related expenses of$0.8 million . The increase in sales and marketing expense is directly correlated to our growth strategy as additional personnel, contractors, and advertising efforts were deployed to increase sales and brand recognition. Research and development expenses increased 87% for the year endedDecember 31, 2021 primarily due to an increase in headcount and related costs of$6.0 million , stock-based compensation of$3.8 million , prototype research and development costs of$1.8 million , and external contractor costs of$1.1 million . The increase in research and development expenses is directly related to the continued investment in product growth and development. The latest product introduced to the public, the FX20 industrial 3D printer, debuted inNovember 2021 . 51 -------------------------------------------------------------------------------- General and administrative expenses increased 128% in the year endedDecember 31, 2021 primarily due to an increase in headcount and related costs of$6.4 million and stock-based compensation expense of$10.8 million . These increases were driven by additions to our management team to position the company for future growth and additional key personnel to support our public company infrastructure. There were various other expenses incurred due to the Merger, including an increase in legal fees of$3.0 million , contractor expenses of$2.0 million , and transaction expenses of$2.0 million related to our public offering.
Change in fair value of liabilities related to warrants and contingent price supplements, and other charges
The following table shows changes in fair value and other expenses for the years ended
Year Ended December 31,
(dollars in thousands) 2021 2020 $ Change % Change
Change in fair value of warrant
liabilities $ 1,808 $ (175 ) $ 1,983 NM
Change in fair value of contingent
earnout liability 63,407 - 63,407 100 %
Other expense (265 ) (9 ) (256 ) NM
_________________
NM - Not meaningful
Fair value of derivative liabilities decreased creating additional income of
$65.2 million for the year ended December 31, 2021 compared to the year ended
December 31, 2020 , primarily related to the change in fair value of the
derivative liability for the earnout shares of $63.4 million , calculated as the
change in value between the Closing of $123.1 million and the value as of
December 31, 2021 of $59.7 million . The change in fair value of the Private
Placement Warrants (as defined below) issued since the Closing was $3.1 million .
The changes in fair value directly correlate with the change in the Company's
common stock price between the Closing date of July 14, 2021 and December 31,
2021 . The offsetting change of $1.3 million is due to the increase in fair value
of the warrants held prior to the Merger.
The increase in other expense was primarily due to the $0.1 million increase in
foreign exchange loss driven by the increase of sales to foreign countries, and
a $0.1 million increase in franchise tax.
Provision for income taxes
We have recorded a de minimis provision for income taxes for the two years ended
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with
generally accepted accounting principles (“GAAP”), we believe that Adjusted EBITDA, a non-GAAP financial measure, has been useful in evaluating the performance of our business. However, we intend to discontinue using Adjusted EBITDA as a financial measure from 2022.
We define EBITDA, a non-GAAP financial measure used in calculating Adjusted
EBITDA, as net profit (loss) and comprehensive income (loss) less interest
income, interest expense, income tax expense, and depreciation and amortization
expense. We define Adjusted EBITDA, a non-GAAP financial measure, as EBITDA less
stock-based compensation expense, net change in fair value of warrant
liabilities and contingent earnout liabilities, and non-recurring transaction
costs.
We have historically monitored Adjusted EBITDA as a measure of our overall
business performance, which enables us to analyze our performance without the
effects of non-cash items and one-time charges. While we believe that Adjusted
EBITDA has historically been useful in evaluating our business, Adjusted EBITDA
is a non-GAAP financial measure that has limitations as an analytical tool.
Adjusted EBITDA can be useful in evaluating our performance by eliminating the
effect of financing, capital expenditures, and non-cash expenses such as
stock-based compensation, however, we may incur such expenses in the future
which could impact future results. We also believe that the presentation of the
non-GAAP financial measures in this Annual Report on Form 10-K provides an
additional tool for investors to use in comparing our core business and results
of operations over multiple periods with other companies in our industry, many
of which present similar non-GAAP financial measures to investors.
In addition, other companies, including companies in our industry, may calculate
Adjusted EBITDA differently or not at all, which reduces the usefulness of this
measure as a tool for comparison.
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A summary of our cash flows from operating, investing and financing activities
is provided below. We recommend that you review the reconciliation of Adjusted
EBITDA to net profit (loss) and comprehensive income (loss), the most directly
comparable GAAP financial measures, and that you not rely on any single
financial measure to evaluate our business.
Adjusted EBITDA
For the Year
Ended December 31,
(dollars in thousands) 2021 2020
Net profit (loss) and comprehensive income (loss) $ 3,855 $ (17,985 )
Interest income (17 ) (147 )
Interest expense 16 98
Income tax expense 56 111
Depreciation and amortization 1,720 1,795
EBITDA $ 5,630 $ (16,128 )
Stock compensation expense 18,930 2,569
Change in fair value of warrant liabilities (1,808 )
175
Change in the fair value of the contingent liability related to the price supplement (63,407)
- Transaction costs expensed 1,996 - Adjusted EBITDA$ (38,659 ) $ (13,384 )
Cash and capital resources
We have historically funded our primary operations through the sale of convertible preferred stock offerings, the proceeds from the Merger and reverse recapitalization including the sale of common stock, and the sale of our products. Since inception we have focused on growth which has required ongoing investment to support scaling of our business, research and development efforts, and day to day operations. We had a cash and cash equivalents balance of$288.6 million as ofDecember 31, 2021 . We incurred net profit of$3.9 million , including$65.2 million of non-cash mark-to-market gains, and net loss of$18.0 million for the years endedDecember 31, 2021 and 2020, respectively. As noted in the "Recent Developments" section, we completed the Merger with AONE in 2021. At Closing we received$288.8 million in cash, which we expect to provide funding for the build out of the global footprint of our sales network, continued investing in research and development to accelerate product innovation, as well as the potential funding of inorganic growth opportunities. Our material cash requirements from known contractual and other obligations relate to minimum operating lease obligations as ofDecember 31, 2021 that are as follows: 2022 -$5.5 million ; 2023 -$8.3 million ; 2024 -$7.5 million ; 2025-$7.6 million ; 2026 -$7.8 million ; and subsequent years -$31.4 million . Currently we generate negative operating cash flows as we pursue further business growth. Our cash and cash equivalents balance as ofDecember 31, 2021 of$288.6 million is more than sufficient to meet the working capital and capital expenditure needs for the next 12 months following the filing for this Annual Report on Form 10-K. Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of The Digital Forge platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition. 53 --------------------------------------------------------------------------------
Cash flow
For the years ended
The following table sets forth a summary ofMarkforged's cash flows for the periods indicated: Year Ended December 31, Change (dollars in thousands) 2021 2020 $ %
Net cash used in operating activities
$ (39,243 ) 608 % Net cash used in investing activities (3,788 ) (522 ) (3,266 ) 626 % Net cash provided by financing activities 279,378 5,928 273,450 NM
Net change in cash and cash equivalents
$ 230,942 NM _________________ NM - Not meaningful Cash flow from operations Net cash used in operating activities for the years endedDecember 31, 2021 and 2020 was$45.7 million and$6.5 million , respectively. Operating cash flows and changes in working capital for comparative periods were as follows: Year Ended December 31, (dollars in thousands) 2021 2020
Operating cash flow before working capital
Changes in working capital
(7,401 ) 6,359 The changes in working capital for the year endedDecember 31, 2021 were due to the growth of the business which caused increases in accounts receivable of$10.4 million , inventory of$4.0 million , and prepaid expenses of$2.4 million . Offsetting these asset increases were increases in accounts payable and accrued expenses of$7.3 million and deferred revenue of$0.9 million . The change in working capital for the year endedDecember 31, 2020 was primarily attributable to deferred revenue increasing by approximately$5.0 million due to a significant sale in the fourth quarter.
Cash flow from investing activities
Net cash used in investing activities for the years endedDecember 31, 2021 and 2020 was$3.8 million and$0.5 million , respectively. The increase in cash used of$3.3 million was primarily due to an increase in investments in property and equipment as we continue to grow and invest in machinery and equipment, as well as headcount related costs such as computers and software.
Cash flow from financing activities
Cash provided by financing activities was$279.4 million and$5.9 million for the years endedDecember 31, 2021 and 2020, respectively. The increase in cash provided of$273.4 million was primarily due to the net cash proceeds related to the Merger. At Closing we received$288.8 million in cash, compared with the$5.0 million proceeds received inApril 2020 related to our borrowings under the PPP Loan program.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP and require management to make certain estimates and assumptions that impact the reported balances of assets, liabilities, revenue, and expenses. On an ongoing basis, as required by GAAP, we update our estimates and assumptions. The actual results may differ from our estimates if our circumstances and conditions that occur do not align with our assumptions.
Income
Our customer contracts include multiple products and services. We are required
to perform allocations of the contract value to the products and services deemed
to be distinct performance obligations by GAAP in order to recognize revenue at
the appropriate time. These allocations are based on a relative standalone
selling price methodology, which requires us to determine the standalone selling
price for each performance obligation. We utilize selling prices from standalone
sales of the product or service when available.
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However, certain products are not sold on a standalone basis or do not have a
sufficient history of standalone sales and we are required to estimate the
standalone selling price for the purposes of our allocation. We utilize market
information, historical selling practices, and other available information to
produce as accurate an estimate as possible. However, to the extent our pricing
practices change or estimated selling prices differ from actual standalone sales
in the future, the timing of our revenue recognition in contracts with multiple
products and services may change.
Inventory
Inventory is stated at average costs subject to impairment when carrying value is in excess of the net realizable value. The costs included materials, labor, and manufacturing overhead related to the acquisition of raw materials and production into finished goods. The net realizable value considers our intent and ability to utilize the inventory prior to perishing as well as the estimated selling price and costs of completion and sale. We regularly review our inventory on hand, product development plans, and sales forecasts to identify carrying values in excess of net realizable value.
Stock-based compensation
Compensation costs related to stock-based compensation for employees is measured using the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 718 Compensation-Stock Compensation. We recognize compensation costs related to stock options granted based on the estimated fair value of the award on the date of grant. The methodology used to estimate the grant date fair value of stock awards is described below and in Note 3. Summary of Significant Accounting Policies in the accompanying consolidated financial statements.
Valuation of common shares
One of the inputs to the estimate of grant date fair value of stock awards is the fair value of our common stock. There has been no public market for our equity instruments through the consummation of the Merger; as a result, the estimated fair value of our common shares has historically been determined by our board of directors as of the grant date. The assumptions used to determine the estimated fair value of our common stock are based on numerous objective and subjective factors, combined with management's judgment, including:
•
contemporaneous third-party valuations of our common stock;
•
external market conditions affecting our industry and trends within the industry;
•
the rights, preferences and privileges of our convertible preferred stock over those of our common stock;
•
our financial condition and results of operations, including our liquidity and capital resources;
•
the likelihood of a liquidity event occurring, such as an initial public offering or sale given prevailing market conditions;
•
the history and nature of our business, industry trends and the competitive environment;
•
the lack of marketability of our common stock; and
•
stock market conditions affecting comparable public companies.
Estimates of the fair value of our common shares consider our most recently available third-party valuations of common shares and have historically coincided with an issuance of convertible preferred shares. We issued our Series D convertible preferred stock onMarch 13, 2019 . The Company subsequently engaged third party valuation specialists to perform valuation estimates of our common stock as ofMarch 13, 2020 ,September 30, 2020 ,March 31, 2021 , andJune 10, 2021 . For theMarch 13, 2019 valuation, we used the Option Pricing Method (OPM), which models each class of equity securities as a call option with a unique claim on our assets. The OPM treatsMarkforged common stock and convertible preferred stock as call options on an equity value with exercise prices based on the liquidation preference of our convertible preferred stock. The common stock is modeled as a call option with a claim on the equity value at an exercise price equal to the remaining value immediately after our convertible preferred stock is liquidated. The exclusive reliance on the OPM untilMarch 2020 was appropriate when the range of possible future outcomes was difficult to predict and resulted in a highly speculative forecast. For theMarch 13, 2020 valuation, we used a combination of the income and market approaches. Specifically, we used the guideline public company method under the market approach, employing guideline public multiples as an input, and the discounted cash flow method under the income approach. We then weighted the indicated values from each approach to arrive at the fair value of equity as of the valuation date. 55 -------------------------------------------------------------------------------- For theSeptember 30, 2020 ,March 31, 2021 andJune 10, 2021 valuations, we used a probability-weighted expected return method ("PWERM"), which was performed in accordance with the guidance outlined in theAmerican Institute of Certified Public Accountants , or AICPA, Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values forMarkforged , assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. For theSeptember 30, 2020 valuation, we assigned a 10% probability that aSPAC exit will be completed bySeptember 30, 2021 and a 90% probability of staying private. For theMarch 31, 2021 and theJune 10, 2021 valuation, we assigned a 95% probability of completing the Merger with AONE and a 5% probability of remaining a private entity. We then used the OPM to arrive at a valuation given the assumptions. We considered all objective and subjective factors that we believed to be relevant for each valuation conducted in accordance with the AICPA's Practice Aid, including our best estimate of our business condition, prospects, operating performance, and potential future outcomes as of each valuation date. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock. Subsequent to closing the Merger discussed in this Annual Report on Form 10-K we will no longer have a need to rely on such complex valuation estimates and will rely on observable market prices to determine the fair value of our common stock.
Liability related to common share purchase warrants
We assumed 5,374,984 Public Warrants and 3,150,000 Private Placement Warrants upon the Closing, 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 Common Stock at an exercise price of$11.50 per share. The Warrants became exercisable at the later of 30 days after Closing or 12 months from the closing of AONE's initial public offering, but can be terminated on the earlier of five years after the Closing, our liquidation, or the redemption date as determined by us. We evaluated the 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 our ordinary shares, the Private Placement Warrants are not considered to be "indexed to the Company's own stock." Such a provision precludes us from classifying the Private Placement Warrants in stockholders' equity. As the Private Placement Warrants meet the definition of a derivative, we recorded these warrants as liabilities on the consolidated balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statements of operations and comprehensive income (loss) at each reporting date. The provisions referenced above are not applicable to the Public Warrants which do not have differing settlement provisions based on the warrant holder, and therefore the Public Warrants are not precluded from being considered indexed to our stock and were recognized at fair value in stockholders' equity at Closing.
Possible liability related to price supplements
The contingent obligations to issue Markforged Earnout Shares in respect of
Legacy Markforged common stock and release from lock-up Sponsor Earnout Shares,
are accounted for as liability classified instruments in accordance with
Accounting Standards Codification ("ASC") 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 our Common Stock. The liability
was recognized at the Closing and is subsequently remeasured at each reporting
date with changes in fair value recorded in the consolidated statements of
operations and comprehensive income (loss). The valuation of the Markforged
Earnout Shares and the surrendered Sponsor shares is based on a Monte Carlo
simulation valuation model using a distribution of potential outcomes on a
monthly basis over the Earnout period using the most reliable information
available.
Markforged Earnout Shares issuable to employees with vested equity awards and
Earnout RSUs are considered a separate unit of account from the Markforged
Earnout Shares issuable in respect of Legacy Markforged common stock and are
accounted for as equity classified stock compensation. The Markforged 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 we acquire
employee services by offering to issue our shares, the amount of which is based
in part on the share price of our Common Stock. Expense related to Earnout RSUs
is recognized ratably over the requisite service period for the Earnout RSUs.
The fair value of the earnout will increase or decrease uniformly with the
current price of our publicly traded common stock.
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Recent accounting statements
Refer to Note 3 of
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