908 Devices Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. 908 Devices develops handheld and desktop mass spectrometry instruments and related consumables and services for life sciences, bioprocessing, government, forensics, and other markets. Comparisons below are with Q1 2022 unless stated otherwise. Amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $9.49 million | $8.31 million | Up 14% |
| Gross profit / margin | $4.38 million / 46% | $4.13 million / 50% | Margin down about 3.5 percentage points |
| Operating expenses | $17.40 million | $13.65 million | Up 27% |
| Operating loss | $(13.02) million | $(9.52) million | Loss widened |
| Net loss / diluted loss per share | $(12.53) million / $(0.39) | $(9.42) million / $(0.30) | Loss widened |
| Operating cash flow | $(10.65) million | $(0.47) million | Cash use increased |
Product revenue increased 8% to $7.02 million, while service revenue rose 47% to $2.24 million. Contract revenue decreased 19% to $0.23 million. Recurring revenue grew 67% to $4.18 million and represented 45% of product and service revenue, versus 31% in Q1 2022; device sales declined 8% to $5.08 million. Product and service revenue from government customers increased to $6.18 million from $4.72 million.
At March 31, cash and cash equivalents were $161.2 million, down from $188.4 million at December 31, 2022. Total assets were $218.4 million and stockholders’ equity was $180.6 million. No debt was outstanding at quarter-end; the $15.0 million balance on the $35.0 million revolving facility was repaid in January. The company reported $10.6 million of quarterly operating cash use and $1.2 million of capital expenditures. Management believes available cash and product and service revenue will fund operating and capital requirements for at least 12 months, while noting estimates depend on assumptions.
Material changes and management commentary
- Revenue growth was led by recurring revenue, especially handheld consumables and accessories and extended service contracts. Device sales fell, principally because desktop placements declined.
- Gross profit increased modestly, but gross margin contracted. Management attributed lower product margin to lower production builds, higher non-cash compensation and amortization, and sales mix; service margin improved through better utilization of service infrastructure.
- Research and development expense rose 38% to $5.40 million and selling, general and administrative expense rose 23% to $12.00 million, primarily reflecting headcount, stock compensation, product development, and commercial investment.
- The company expects continued operating losses as it invests in sales, manufacturing, research and development, and commercialization. It expects recurring revenue to increase as its installed base grows, but provided no specific financial guidance in this filing.
- The August 2022 acquisition of Trace Analytics (renamed 908 Devices GmbH) is intended to add sampling technology for future products. Purchase accounting remained preliminary at quarter-end.
Risks, contingencies, and unusual items
- Following the March 2023 failures of Silicon Valley Bank and Signature Bank, the company transferred substantially all cash from those institutions. It disclosed that this transfer caused a default under financial covenants of its SVB revolving facility. No amount was outstanding at quarter-end; the filing does not clearly state whether the default was waived, cured, or otherwise resolved. A $0.5 million debt-extinguishment loss was recorded.
- Customer concentration is material: one customer accounted for 20% of Q1 2023 revenue, and one customer represented 13% of gross receivables at quarter-end. Certain product components also depend on sole, single, or limited-source suppliers.
- Management cited inflation, higher interest rates, possible customer spending delays, supply-chain risks, and uncertain effects of developments in the banking sector. It said COVID-19 no longer significantly affected operations and did not anticipate a significant effect from the end of the U.S. public health emergency.
- Trace earnouts have a maximum potential payment of approximately $2 million, with approximately $1.1 million fair-valued at quarter-end. The pension-plan liability was released; related consideration withheld from sellers was paid in April 2023.
- The company reported no material legal proceedings and no material changes to the risk factors in its 2022 annual report. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the covenant default on the SVB revolver was waived, cured, or remains outstanding, and whether it affects access to the $35 million facility.
- Cash use and runway relative to management’s stated expectation of funding needs for at least 12 months.
- Whether recurring revenue growth and service margin improvement continue, and whether lower device placements or production levels persist.
- Customer and supplier concentration, including the effect of any loss or delay involving major customers or constrained components.
- Final Trace acquisition accounting and the timing and amount of any remaining earnout payments.