RAPID MICRO BIOSYSTEMS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. 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.
Overview
We are an innovative life sciences technology company that enables the safe and efficient manufacture of pharmaceutical products through our rapid automated microbial quality control, or MQC, detection platform. We develop, manufacture, market and sell the Growth Direct system and related proprietary consumables, and value-added services to enable rapid MQC testing in the manufacture of biologics, cell and gene therapies, vaccines, sterile injectables, and other healthcare products. Our system delivers the power of industrial automation to bioprocessing and pharmaceutical manufacturing firms by modernizing and digitizing their MQC operations. Our Growth Direct platform, developed with over 15 years of active feedback from our customers, was purpose-built to meet the growing demands posed by the increasing scale, complexity, and regulatory scrutiny confronting global pharmaceutical manufacturing. Our Growth Direct platform comprises the Growth Direct system, optional laboratory information management system, or LIMS, connection software (which the majority of our customers purchase), proprietary consumables, and comprehensive field service, validation services and post-warranty service contracts. Once embedded and validated in our customers' facilities, our Growth Direct platform provides for recurring revenues through ongoing sales of consumables and service contracts. Our technology fully automates and digitizes the process of pharmaceutical MQC and is designed to enable our customers to perform this critical testing process more efficiently, accurately, and securely. Our Growth Direct platform accelerates time to results by several days, a 50% improvement over the traditional method, and reduces MQC testing to a simple two-step workflow, eliminating up to 85% of the manual steps of traditional MQC, generating significant time, operational, and cost savings for our customers. We seek to establish the Growth Direct as the trusted global standard in automated MQC by delivering the speed, accuracy, security, and data integrity compliance that our customers depend on to ensure patient safety and consistent drug supply. Since inception, we have devoted a majority of our resources to designing, developing, and building our proprietary Growth Direct platform and associated products, launching our Growth Direct platform commercially, expanding our sales and marketing infrastructure to grow our sales, building a global customer support team to deliver our value-added services, investing in robust manufacturing and supply chain operations to serve our customers globally, and providing general and administrative support for these operations. Prior to our IPO, we funded our operations primarily with proceeds from sales of preferred stock, borrowings under loan agreements and product and service sales as well as our cost-reimbursement contract with theU.S. Department of Health and Human Services Biomedical Advanced Research & Development Authority , or BARDA. All funding under this contract was fully earned by the fourth quarter of 2021. OnJuly 19, 2021 , we closed an initial public offering of our Class A common stock, or the IPO, which resulted in the sale of 7,920,000 shares of our Class A common stock at a public offering price of$20.00 per share, before underwriting discounts. The IPO resulted in gross proceeds of$158.4 million and net proceeds of approximately$143.8 million after deducting underwriting discounts, commissions and estimated offering expenses payable by us. Additionally, onAugust 4, 2021 , the underwriters exercised their overallotment option in part and purchased 1,086,604 shares of Class A common stock at the initial public offering price of$20.00 per share less discounts and commissions. The overallotment option exercise resulted in net proceeds of approximately$20.2 million . Immediately prior to the completion of the IPO, all of the outstanding shares of our Series A1, Series B1, Series C1 and Series D1 preferred stock converted into 24,200,920 shares of Class A common stock and all of the outstanding shares of our Series C2 and Series D2 converted into 6,903,379 shares of Class B common stock. As ofDecember 31, 2021 , no shares of our preferred stock remained outstanding. OnAugust 11, 2022 , our board of directors approved an organizational restructuring plan, or the Restructuring Plan, to right-size our cost structure based on our lowered 2022 outlook. The Restructuring Plan involved an approximately 20% reduction in our workforce, including employees, contractors and temporary employees, which was focused on non-commercial functions. We recorded a restructuring charge of$1.1 million in the third quarter of 2022 primarily related to severance, employee benefits, outplacement and related costs under the Restructuring Plan. When it was announced, we 61 -------------------------------------------------------------------------------- Table of Contents expected the Restructuring Plan to result in approximately$8.0 -$9.0 million in annualized cost savings by year end in 2023, with cost savings beginning in the first quarter of 2023. We are investing, and expect to continue to invest, a portion of these savings in key growth initiatives including enhancing commercial execution and key product development programs that are expected to drive future revenue growth. OnAugust 12, 2022 , we announced our board of directors' decision to reject an unsolicited, non-binding proposal we received from a shareholder to acquire all of our outstanding common stock for$5.00 per share in cash and to commence a process to review our strategic alternatives. OnDecember 1, 2022 , we announced the conclusion of our strategic alternative review process. As a result of the process, our board of directors determined that the best path to deliver shareholder value is for us to continue executing our strategy to improve our commercial execution to drive system placement growth, advance our new product development programs and expand the market for our Growth Direct system. Since our inception, we have incurred net losses in each year. We generated revenue of$17.1 million and$23.2 million for the years endedDecember 31, 2022 and 2021, respectively, and incurred net losses of$60.8 million and$73.5 million for those same years. As ofDecember 31, 2022 , we had an accumulated deficit of$375.9 million . We expect to continue to incur net losses in connection with our ongoing activities, including:
•growing sales of our products in both
•scaling our manufacturing and supply chain processes and infrastructure to meet growing demand for our products;
•investing in research and development to develop new products and further enhance our existing products;
•protecting and building on our intellectual property portfolio; and
•attracting, hiring and retaining qualified personnel.
Until such time as we can generate revenue sufficient to achieve profitability, we expect to finance our operations through a combination of equity offerings and debt financings. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue our expansion plans including the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations. We believe that our cash, cash equivalents and investments as ofDecember 31, 2022 will enable us to fund our operating expenses and capital expenditure requirements for at least twelve months following the date these consolidated financial statements were issued. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "Liquidity and Capital Resources."
Coronavirus update
In response to the coronavirus pandemic and various resulting government
directives, we took proactive measures to protect the health and safety of our
employees, customers, and partners, while maintaining our ability to supply and
service our customers. We continue to monitor the implications of the ongoing
coronavirus pandemic on our business, as well as our customers' and suppliers'
businesses.
As access to customer sites and in-person engagement continued to gradually
improve in the second half of 2022, we gained deeper insight into the challenges
the pandemic created for our customers in advancing capital purchasing
decisions. As a result, we took actions to improve aspects of our sales process
and sales team training, which we expect to enhance the consistency and
effectiveness of our sales team.
While disruptions due to coronavirus, and its variants, are currently expected
to be temporary, there is considerable uncertainty around their duration. We
expect these disruptions to continue to impact our operating results. However,
the related financial impact and duration of these disruptions cannot be
reasonably estimated at this time.
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Effects of inflation and interest rates
The current inflationary environment and rising interest rates could have a negative impact on our results of operations, cash flows and overall financial condition. We may experience inflationary pressures on significant cost categories including labor, materials and freight. We continue to monitor the impact of inflation on these costs in order to minimize its effects through productivity improvements and cost reductions. There can be no assurance, however, that our operating results will not be affected by inflation in the future. In addition, inflation and increased interest rates may decrease demand for our Growth Direct systems, as our customers may face economic uncertainty or higher cost of capital as a result. A decrease in demand for our products or increases in our costs, as well as any steps we may take to mitigate changes, could impact our overall growth. However, the related financial impact cannot be reasonably estimated at this time.
Factors affecting our performance
We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by multiple factors as described below, each of which presents growth opportunities and challenges for our business. Our ability to successfully address these opportunities and challenges is subject to various risks and uncertainties, including those described under the heading "Risk Factors."
New customer adoption of the Growth Direct platform
Our financial performance has largely been driven by, and a key factor to our future success will be, our ability to increase the global adoption of our Growth Direct platform in our key markets. We plan to drive global customer adoption through both direct and indirect sales and marketing organizations inNorth America ,Europe ,Asia , andAustralia . Our focus is on enhancing customer engagement and experience and improving the efficiency and effectiveness of our sales team. We are making targeted investments in these organizations and expect to continue to do so in the future. Examples of these investments include new tools and training for the sales organization, targeted marketing, expanding lead generation capabilities and hosting customer-related Growth Direct demonstrations.
Expansion within our existing customer base
There is an opportunity to increase broader adoption and utilization of our Growth Direct platform throughout our existing customers' organizations by existing customers purchasing more systems. These additional systems will allow our existing customers to convert more of their test volume at existing locations, to support multiple locations, to meet redundancy requirements, or to increase capacity. As ofDecember 31, 2022 , approximately 45% of our customers have purchased Growth Direct systems for multiple sites, and approximately 55% of our customers have purchased multiple Growth Direct systems. Increased utilization amongst existing customers can also occur as customers advance through the Growth Direct platform adoption cycle from early validation of initial applications to validation and conversion of multiple applications on the Growth Direct platform or as the result of increasing manufacturing volumes.
Innovating and launching new products on the Growth Direct platform
We believe the depth, scalability and robust capabilities of our Growth Direct
platform allow us to address key opportunities and challenges facing MQC testing
in the pharmaceutical industry. As an innovative leader in automated MQC
testing, we intend to invest in further enhancements in our existing Growth
Direct platform as well as end-to-end workflow solutions in our core market. We
plan to further invest in research and development to support the expansion of
our Growth Direct platform through development and launch of new applications to
capture greater share of customer testing volume, new product formats to broaden
our ability to serve different market segments and launch of new products and
technologies to address adjacent segments of the overall MQC workflow. We plan
to continue to hire employees with the necessary scientific and technical
backgrounds to enhance our existing products and help us introduce new products
to market. We expect to incur additional research and development expenses as a
result. By expanding and continuously enhancing the Growth Direct platform, we
believe we can drive incremental revenue from existing clients as well as
broaden the appeal of our solutions to potential new customers.
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Revenue mix
Our revenue is derived from sales of our Growth Direct systems, our LIMS connection software, proprietary consumables, services and our cost-reimbursement contract with BARDA. Growth Direct system revenue involves a capital selling process and tends to be somewhat concentrated within a small (but varied) group of customers each year, so it is subject to variability from quarter to quarter. As our base of validated Growth Direct systems continues to grow, we expect our recurring revenue (consumables and service contracts) to grow at a faster rate than our non-recurring revenues (Growth Direct systems, validation and other services), which we expect to drive variability and longer-term trends in our revenue mix. Our non-commercial revenue has historically been generated from long-term contracts with BARDA. All funding awarded to-date under our contract with BARDA was fully earned by the fourth quarter of 2021. We are now in the process of closing out our BARDA contract, which includes a true-up of actual reimbursable costs to those previously billed at provisional rates for each year of performance. Once the amount of each annual true-up is determined and approved by BARDA and they identify available funds to reimburse us for that amount, we expect to enter into a contract modification and invoice BARDA for the true-up amount, at which point we will recognize corresponding incremental non-commercial revenue in that amount. Based on the above and our current expectations for the timing of the true-up process. We anticipate recognizing the annual true-ups as non-commercial revenue as outlined above, which we currently expect to take place after over a period of up to several years.
Key business metrics
We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are representative of our current business; however, we anticipate these may change or be substituted for additional or different metrics as our business grows and evolves.
Year Ended
December 31, Change
2022 2021 Amount %
(dollars in thousands)
Systems placed:
Systems placed in period 9 29 -20 (69.0 %)
Cumulative systems placed 125 116 9 7.8 %
Systems validated:
Systems validated in period 19 33 -14 (42.4 %)
Cumulative systems validated 103 84 19 22.6 %
Product and service revenue - total $ 17,133 $ 21,637 $ (4,504) (20.8 %)
Product and service revenue - recurring $ 10,983 $ 7,819 $ 3,164 40.5 %
Growth Direct system placements
We consider a Growth Direct system to be "placed" upon transfer of control of
the system to the customer, at which point the revenue for that system is
recognized. We regularly review the number of Growth Direct systems placed and
cumulative Growth Direct system placements in each period as a leading indicator
of our business performance. Our revenue has historically been driven by, and in
the future will continue to be impacted by, the rate of Growth Direct system
placements as a reflection of our success selling and delivering our products.
We expect our Growth Direct system placements to continue to grow over time as
we increase penetration in our existing markets and expand into new markets.
The number of Growth Direct system placements and rate of growth varies from
period-to-period due to factors including, but not limited to, Growth Direct
system order volume and timing, and access to customer sites (including
coronavirus related restrictions and the timing of customer site construction
activities). As a result, we expect to experience continued variability in our
period-to-period number of Growth Direct system placements due to the
aforementioned factors.
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Validated systems
We regularly review the number of Growth Direct systems validated and cumulative Growth Direct systems validated in each period as indicators of our business performance. Management focuses on validated Growth Direct systems as a leading indicator of likely future recurring revenue as well as a reflection of our success supporting our customers' validating placed systems. We expect our validated Growth Direct systems to continue to grow over time as we increase our base of cumulative systems placed and then validate those systems. After a Growth Direct system is placed with a customer and installed, we work with the customer to validate the system, which typically takes anywhere from three to nine months. Once a validation has been completed, we generally expect our customers to transition from their legacy manual method to our automated method and begin regular utilization of consumables over a period of up to three months after we complete our validation. However, the timeline for such transition may be longer depending on the needs of individual customers. The number of validated Growth Direct systems and rate of growth varies from period-to-period due to factors including, but not limited to, Growth Direct system order volume and timing, whether customers have previously validated Growth Direct systems within their site or network, access to customer sites (including as a result of coronavirus related restrictions), customer site readiness and the time to install and validate each individual system. As a result, we expect to experience continued fluctuations in our period-to-period number of Growth Direct systems validated due to the aforementioned factors.
Product and service revenue
We regularly assess trends relating to our combined product and service revenue as an indicator of our business performance. Product and service revenue represents all of our commercial revenue for the business. It excludes non-commercial revenue, which typically supports other business functions such as research and development and is, by its nature, subject to significant variability.
Recurring revenue
We regularly assess trends relating to recurring revenue, which is the revenue from consumables and service contracts, based on our product offerings, our customer base and our understanding of how our customers use our products. Recurring revenue was 64.1% and 33.7% of our total revenue for the years endedDecember 31, 2022 and 2021, respectively. Our recurring revenue as a percentage of the total product and service revenue will generally vary based upon the number of Growth Direct systems placed and the cumulative number of systems validated in the period, as well as other variables such as the volume of tests being conducted, and the test application(s) being used on those Growth Direct systems. As our base of validated systems continues to grow, we expect our recurring revenue streams to grow at a faster rate than our non-recurring revenue streams and that this will ultimately result in our recurring revenue constituting the majority of our revenue over the longer term.
Components of results of operations
Revenue
We generate revenue from sales of our Growth Direct system (including our LIMS
connection software), consumables, validation services, service contracts and
field service as well as our contractual arrangement with BARDA, which we
completed in the fourth quarter of 2021. We primarily sell our products and
services through direct sales representatives. The arrangements are
noncancellable and nonrefundable after ownership passes to the customer.
Percentage Percentage
Year Ended of total Year Ended of total
December 31, 2022 revenue December 31, 2021 revenue
(in thousands) (in thousands)
Product revenue $ 11,056 64.5 % $ 15,512 66.8 %
Service revenue 6,077 35.5 % 6,125 26.4 %
Non-commercial revenue - - % 1,595 6.9 %
Total revenue $ 17,133 100.0 % $ 23,232 100.0 %
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Based on the significant value that our Growth Direct platform provides to our customers, we have historically experienced strong organic commercial revenue growth, including in 2021, when commercial revenue of$21.6 million and increased 53.6% compared to$14.1 million in 2020. While commercial revenue subsequently declined 20.8% to$17.1 million in 2022 due mainly to lower system placements as a result of impacts from the coronavirus pandemic and commercial execution challenges, combined product and service recurring revenues still increased by 40.5% to$11.0 million compared to$7.8 million in 2021. We expect to return to commercial revenue growth and to continue growing our recurring revenues in 2023. Product revenue We derive product revenue primarily from the sale of our Growth Direct systems and related consumables as well as our LIMS connection software, which the majority of our customers purchase. As ofDecember 31, 2022 , we had placed 125 Growth Direct systems to over thirty-five customers globally, including over half of the top twenty pharmaceutical companies as measured by revenue and the manufacturers of 25% of globally approved cell and gene therapies.
Growth Direct systems
Growth Direct system revenue is a non-recurring product revenue stream that we recognize as revenue upon transfer of control of the system to the customer. The Growth Direct system is fully functional for use by the customer upon delivery as we do not require our customers to use our installation and validation services, however it is unusual for our customers to not purchase those services. As such, transfer of control occurs at shipment or delivery depending on contractual terms. We expect our Growth Direct system revenue to continue to grow over time as we increase system placements in our existing customers and markets and expand into new customers and markets.
Consumables
Our consumable revenue is a recurring product revenue stream composed of two proprietary consumables to capture test samples for analysis on the Growth Direct system, an Environmental Monitoring, or EM, consumable, and a Water/Bioburden consumable, or W/BB, consumable. Both proprietary consumables support the growth-based compendial method for MQC testing mandated by global regulators and provide results that are comparable to traditional consumables. Our consumables are designed with features that enable automation on the Growth Direct system, with bar coding for tracking and data integrity, and physical characteristics for robotic handling, to support vision detection, and to prevent counterfeiting.
We expect consumable revenue to increase in future periods as our base of cumulative validated Growth Direct systems grows and those systems utilize our consumables on a recurring, ongoing basis.
Our LIMS connection software is a non-recurring product revenue stream. Although optional, the majority of our customers elect to purchase this software, which allows Growth Direct systems to export result reports and securely link to a customer's two-way LIMS connection software to completely eliminate manual data entry and drive productivity.
Service revenue
We derive service revenue from validation services, field service including installations, and service contracts sold to our customers. Revenue from validation services and field service are non-recurring service revenue streams, while revenue from service contracts is a recurring service revenue stream.
We offer our customers validation services (including related documentation)
that enable them to replace their existing manual testing method and utilize
their Growth Direct systems in compliance with relevant MQC regulations.
Validation services are recognized as revenue over time as these services are
provided to the customer.
We offer our customers service contracts that can be purchased after the
expiration of the one-year assurance warranty that all of our customers receive
with the purchase of a Growth Direct system. Under these contracts, they are
entitled to receive phone support, emergency on-site maintenance support and two
preventative maintenance visits per year. These service contracts generally have
fixed fees and a term of one year. We recognize revenue from the sale of service
contracts over time as these services are provided over the respective contract
term.
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We also offer our customers field service which primarily consists of services provided by our field service engineers to install Growth Direct systems at customer sites. We recognize revenue from field service over time as these services are provided to the customer.
We expect service revenue to increase in future periods as the number of placed and validated Growth Direct systems grows and we are able to generate increasing non-recurring revenue from validation services and field service for newly placed systems and increasing recurring revenue from service contracts for validated systems.
Non-commercial revenue
We have generated non-commercial revenue from long-term contracts with governmental agencies and third parties. To date, our non-commercial revenue has been derived from contracts with BARDA and was fully earned by the fourth quarter of 2021. We are now in the process of closing out our BARDA contract, which includes a true-up of actual reimbursable costs to those previously billed at provisional rates for each year of performance. Once the amount of each annual true-up is determined and approved by BARDA and they identify available funds to reimburse us for that amount, we expect to enter into a contract modification and invoice BARDA for the true-up amount, at which point we will recognize corresponding incremental non-commercial revenue in that amount. We anticipate recognizing the annual true-ups as non-commercial revenue as outlined above, which we currently expect to take place over a period of up to several years. Costs and operating expenses Costs of revenue Cost of product revenue primarily consists of costs for raw material parts and associated freight, shipping and handling costs, salaries and other personnel costs including stock-based compensation expense, contract manufacturer costs, scrap, warranty cost, inventory reserves, royalties, depreciation and amortization expense, allocated information technology and facility-related costs, overhead and other costs related to those sales recognized as product revenue in the period. Cost of service revenue primarily consists of salaries and other personnel costs including stock-based compensation expense, travel costs, materials consumed when performing installations, validations and other services, allocated information technology and facility-related costs, costs associated with training, and other expenses related to service revenue recognized in the period. Cost of non-commercial revenue primarily consists of salaries and other personnel costs including stock-based compensation expense, consulting expense, materials, travel and other costs related to the revenue recognized as non-commercial revenue during the period. Our contract with BARDA is subject to the Federal Acquisition Regulation, or FAR and is priced based on estimated or actual costs of producing goods or providing services. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods or services provided underU.S. government contracts.
Research and development
Research and development expenses consist primarily of costs incurred for our research activities, product development, hardware and software engineering and consultant services and other costs associated with our technology Growth Direct platform and products, which include:
•employee-related expenses, including costs for salaries, bonuses and other personnel costs including stock-based compensation expense, for employees engaged in research and development functions;
•the cost of developing, maintaining and improving new and existing product designs;
•the cost of hardware and software engineering;
•research materials and supplies;
•external costs of outside consultants engaged to conduct research and development associated with our technology and products; and
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•allocated information technology and facility-related costs, which include direct and allocated expenses for rent, maintenance of facilities and insurance as well as related depreciation and amortization. Our research and development costs are expensed as incurred. We believe that our continued investment in research and development is essential to our long-term competitive position, and we expect these expenses to increase in future periods.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, commissions, benefits and other personnel costs including stock-based compensation expense as well as costs relating to travel, consulting, public relations and allocated information technology and facility-related costs for our employees engaged in sales and marketing activities. We expect sales and marketing expenses to increase in future periods as the number of sales and marketing personnel grows and we continue to expand our geographic reach and capabilities, broaden our customer base and introduce new products.
General and administrative
General and administrative expenses consist primarily of salaries, bonuses and other personnel costs including stock-based compensation expense for our finance, legal, human resources and general management employees and most of our executive leadership team, as well as professional fees for legal, patent, accounting, audit, corporate governance, investor relations, recruiting, consulting and other services. General and administrative expenses also include direct and allocated information technology and facility-related costs. General and administrative expenses are expected to increase in future periods as the number of administrative personnel grows to support increasing business size and complexity. Since our IPO inJuly 2021 , we have also incurred incremental accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor relations expenses associated with operating as a public company. Additionally, during the year endedDecember 31, 2022 , we incurred incremental legal, investment banking and other expenses associated with an unsolicited, non-binding proposal we received from a shareholder to acquire all of our outstanding common stock and our strategic alternatives review process. This process was concluded during the fourth quarter of 2022.
Other income (expense)
Interest income (expense), net
Interest income (expense), net is comprised of interest income from investments as well as costs associated with outstanding borrowings under our loan and security agreements, amortization of deferred financing costs and debt discounts associated with such arrangements.
Change in fair value of preferred stock warrant liability
In connection with theMay 2020 term loan facility that we entered into with a lender, or the 2020 Term Loan, we issued 1,195,652 warrants to purchase shares of Series C1 Preferred Stock at an exercise price of$1.15 per share. These warrants were immediately exercisable and expire 10 years after the issuance date. We also have other outstanding warrants to purchase preferred stock issued in connection with previous financing arrangements. We classified all of our warrants to purchase preferred stock as a liability on our consolidated balance sheets until our IPO because the warrants are freestanding financial instruments that may require us to transfer assets upon exercise. The liability associated with each of these warrants was initially recorded at fair value upon the issuance date and was subsequently remeasured to fair value at each reporting date. The resulting change in the fair value of the preferred stock warrant liability was recorded as a component of other income (expense) in our consolidated statements of operations. We continued to recognize changes in the fair value of this preferred stock warrant liability at each reporting period until the IPO, when the preferred stock warrants were converted into common stock warrants that are equity classified. In connection with the IPO, the preferred stock warrants were automatically converted to Class A common stock warrants. We determined the event resulted in equity classification of the Class A common stock warrants and derecognized the fair value of the preferred stock warrant liability as of the IPO date and reclassified to equity. 68
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Loss on extinguishment of debt
Loss on extinguishment of debt recognized during the year ended
Other income (expense), net
Other income (expense), net primarily consists of other miscellaneous income and expense unrelated to our core operations.
Income tax (benefit) expense
We generated significant taxable losses during the years endedDecember 31, 2022 and 2021, and, therefore, have not recorded anyU.S. federal or state income tax expense during those periods. However, we did record an immaterial amount of foreign income tax expense during each of those periods. Additionally, as a result of a favorable outcome related to the tax examination for our German subsidiary,Rapid Micro Biosystems Europe GmbH , we recorded an income tax benefit of$0.6 million during the year endedDecember 31, 2022 . We have not recorded anyU.S. federal or state income tax benefits for the NOLs we have incurred in each year or for the research and development tax credits we generated inthe United States . As ofDecember 31, 2022 , we hadU.S. federal and state NOL carryforwards of$189.3 million and$87.1 million , respectively, which may be available to offset future taxable income and begin to expire in 2038 and 2032, respectively. Additionally, we had a federal NOL carryforward of$176.6 million generated since 2018 that will not expire. As ofDecember 31, 2022 , we also hadU.S. federal and state research and development tax credit carryforwards of$1.5 million and$2.9 million , respectively, which may be available to offset future tax liabilities and begin to expire in 2038 and 2024, respectively. Utilization of theU.S. federal and state NOL carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation due to ownership changes that have occurred previously or that could occur in the future. We completed a Section 382 study throughJuly 31, 2020 to assess whether a change of control has occurred or whether there have been multiple changes of control. The study determined that ownership changes materially limited the NOL carryforwards and research and development tax credits available to offset future tax liabilities and the limitations have been reflected in the amounts of NOL carryforwards, research and development tax credits, and deferred tax assets disclosed above. We have not completed a Section 382 study for postJuly 31, 2020 transactions which could create an additional limitation although materially all of the current federal NOL carryforwards can be carried forward indefinitely.For additional information, see the risk factor entitled "Our ability to use our net operating losses and research and development tax credits to offset future taxable income or income tax liabilities are subject to certain limitations" and Note 14-Income taxes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date because of uncertainty about future taxable income to permit use of the assets. 69
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Results of operations
Comparison of the years ended
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021: Year Ended December 31, December 31, Change 2022 2021 Amount % (dollars in thousands) Revenue: Product revenue$ 11,056 $ 15,512 $ (4,456) (28.7) % Service revenue 6,077 6,125 (48) (0.8) % Non-commercial revenue - 1,595 (1,595) (100.0) % Total revenue 17,133 23,232 (6,099) (26.3) % Costs and operating expenses: Cost of product revenue 18,477 23,434 (4,957) (21.2) % Cost of service revenue 7,196 5,922 1,274 21.5 % Cost of non-commercial revenue - 1,617 (1,617) (100.0) % Research and development 12,866 9,781 3,085 31.5 % Sales and marketing 14,994 11,815 3,179 26.9 % General and administrative 26,819 17,895 8,924 49.9 % Total costs and operating expenses 80,352 70,464 9,888 14.0 % Loss from operations (63,219) (47,232) (15,987) 33.8 % Other income (expense): Interest income (expense), net 1,778 (2,608) 4,386 (168.2) % Change in fair value of preferred stock warrant liability - (19,643) 19,643 (100.0) % Loss on extinguishment of debt - (3,100) 3,100 (100.0) % Other income (expense), net 59 (850) 909 (106.9) % Total other income (expense), net 1,837 (26,201) 28,038 (107.0) % Loss before income taxes (61,382) (73,433) 12,051 (16.4) % Income tax (benefit) expense (576) 91 (667) (733.0) % Net loss$ (60,806) $ (73,524) $ 12,718 (17.3) % Revenue Product revenue decreased by$4.5 million , or 28.7%, with the decrease attributable to volume of$3.9 million as a result of fewer Growth Direct system placements partially offset by higher consumable shipment volumes due to an increase in cumulative validated Growth Direct systems. The mix of consumable products sold negatively impacted revenue by$0.6 million . Service revenue remained relatively consistent, decreasing 0.8%. The slight decrease in service revenue was primarily due to a$1.2 million decrease in validation and installation revenue due to fewer Growth Direct systems placed during 2022. Recurring service contract revenue increased$1.2 million as a result of the increase in cumulative Growth Direct systems validated and placed under service contracts. Non-commercial revenue decreased by$1.6 million , or 100.0%. All funding under our most recent contract with BARDA was fully earned by the fourth quarter of 2021. During the years endedDecember 31, 2022 and 2021, restrictions on travel and access to customer sites related to coronavirus, and its variants, negatively impacted our ability to sell, ship, install and validate systems, as well as train 70
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customers in certain geographies. Although travel restrictions have gradually eased in many geographies by the second half of 2022, the impact of previous travel restrictions negatively impacted our product and service revenue in the period. While we expect these disruptions may continue to impact our operating results, the related financial impact and duration of these disruptions cannot be reasonably estimated at this time.
Costs of revenue
Cost of product revenue decreased by$5.0 million , or 21.2%. The decrease was driven by$2.1 million in costs related to fewer placements of Growth Direct systems, partially offset by the increase in consumables sold. Direct labor cost decreased$1.3 million due to a combination of reduced headcount spend in systems as well as increased absorption due to higher production volumes and related absorption in consumables. In addition, material and production costs favorably impacted cost of product revenue by$1.0 million due to manufacturing efficiencies and other improvements partially offset by material cost increases as well as$0.3 million in other costs. Also, overhead related costs decreased$0.7 million primarily due to a reduction in headcount partially offset by an increase in freight costs, while warranty-related costs increased by$0.4 million . Cost of service revenue increased by$1.3 million , or 21.5%. This increase was primarily due to higher employee-related costs of$0.7 million due to increases in headcount in the latter part of 2021 and 2022. We also incurred additional travel costs of$0.3 million and increased material cost of$0.5 million due to the higher number of Growth Direct systems under service contracts. These increases were offset by a decrease in other costs of$0.2 million . Cost of non-commercial revenue decreased by$1.6 million , or 100.0%. All funding under our most recent BARDA contract was fully earned by the fourth quarter of 2021. Research and development Year Ended December 31, Change 2022 2021 Amount % (dollars in thousands) Research and development$ 12,866 $ 9,781 $ 3,085 31.5 % Percentage of total revenue 75.1 % 42.1 % Research and development expenses increased by$3.1 million , or 31.5%. This increase was primarily due to an increase of$2.2 million in employee-related costs due primarily to higher headcount to support increased new product development activities. The increase was also due to a$0.6 million increase in allocated facility and information technology costs and a net increase of$0.3 million in other general research and development expenses. Sales and marketing Year Ended December 31, Change 2022 2021 Amount % (dollars in thousands) Sales and marketing$ 14,994 $ 11,815 $ 3,179 26.9 % Percentage of total revenue 87.5 % 50.9 % Sales and marketing expenses increased by$3.2 million , or 26.9%. This increase was due to an increase in employee-related costs (including commissions earned) of$4.3 million primarily as a result of the expansion of our direct sales and marketing organizations to drive sales growth, an increase in allocated facility and information technology costs of$0.6 million , and an increase of$0.2 million in other general sales and marketing costs. These increases were partially offset by lower consulting fees, which decreased by$1.9 million due to lower spending on strategy and market analysis projects as well as a reduction in marketing consulting due to the expansion of our in-house marketing team. 71
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General and administrative
Year Ended
December 31, Change
2022 2021 Amount %
(dollars in thousands)
General and administrative $ 26,819 $ 17,895 $ 8,924 49.9 %
Percentage of total revenue 156.5 % 77.0 %
General and administrative expenses increased by $8.9 million , or 49.9%. This
increase was driven by a $3.5 million increase in employee-related costs due to
higher headcount, a $1.5 million increase in legal, audit, tax and business
insurance costs associated with operating as a public company for the full year
in 2022, an increase in facilities, depreciation, and information technology
costs of $1.3 million , and a net increase of $0.4 million other costs. In
addition to the above expenses, one-time costs related to an unsolicited,
non-binding proposal we received from a shareholder to acquire all of our
outstanding common stock and our strategic alternatives review process
contributed the remaining $2.2 million to the increase.
Other income (expense)
Interest income (expense), net
Interest income (expense) for the years endedDecember 31, 2022 and 2021 was income of$1.8 million compared to expense of$2.6 million , respectively. The increase of$4.4 million , or 168.2%, was the result of lower interest expense due to the repayment of our$25.0 million 2020 Term Loan inSeptember 2021 and higher interest income due to higher interest rates on our investments.
Change in fair value of preferred stock warrant liability
The change in fair value of preferred stock warrant liability was zero for the year endedDecember 31, 2022 , compared to a loss of$19.6 million for the year endedDecember 31, 2021 . The loss in the prior year was due to an increase in the fair value of the underlying preferred stock immediately prior to conversion of common stock as a result of our IPO.
Loss on extinguishment of debt
Loss on extinguishment of debt was zero for the year endedDecember 31, 2022 , compared to a$3.1 million loss for the year endedDecember 31, 2021 . The loss in the prior year was due to the repayment of our 2020 Term Loan inSeptember 2021 . We determined the loss on extinguishment of debt to be the difference between the reacquisition price of the debt and net carrying value of the extinguished debt.
Other income (expense), net
Other income (expense) was less than$0.1 million of income for the year endedDecember 31, 2022 compared to$0.8 million of expense for the year endedDecember 31, 2021 . The expense in the prior year was related to an exit fee we were obligated to pay a former lender in the event of a qualifying exit event prior toDecember 31, 2026 , or the Exit Fee. As defined in the agreement, a "qualifying exit event" included a public offering of its common stock. The IPO was deemed to be a "qualifying event" and we expensed and paid the Exit Fee inJuly 2021 .
Income tax (benefit) expense
Income tax (benefit) expense was a benefit of$0.6 million and expense of$0.1 million for the years endedDecember 31, 2022 and 2021, respectively. Both the benefit and the expense recorded related to our German subsidiary,Rapid Micro Biosystems Europe GmbH . During the year endedDecember 31, 2022 , we adjusted an uncertain tax liability we had recorded for that subsidiary as a result of the favorable outcome of an examination for the tax years 2016 through 2018, resulting in the favorable income tax benefit in the period. 72
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Liquidity and capital resources
Since our inception, we have incurred significant operating losses. To date, we have funded our operations primarily through proceeds from sales of redeemable convertible preferred stock, borrowings under loan agreements, revenue from sales of our products, services and contracts and proceeds from our IPO. OnAugust 11, 2022 , our board of directors approved the Restructuring Plan to right-size our cost structure based on our lowered 2022 outlook. We will continue to invest in key growth initiatives including enhanced commercial capabilities and key product development programs that are expected to drive future revenue growth. We recorded a restructuring charge of$1.1 million in the third quarter of 2022 primarily related to severance, employee benefits, outplacement and related costs under the Restructuring Plan. We made payments of$0.6 million during the year-endedDecember 31, 2022 related to the Restructuring Plan and have$0.5 million recorded within accrued expenses as ofDecember 31, 2022 . We believe that our cash, cash equivalents and short and long-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least twelve months following the date the consolidated financial statements contained in this Annual Report on Form 10-K for the year endedDecember 31, 2022 were issued. Further, we do not have any banking relationship, cash or investment accounts withSilicon Valley Bank .
As of
December 31, 2022
Cash and cash equivalents $ 27,064
Short-term investments 81,584
Long-term investments 29,790
Restricted cash 284
Total $ 138,722
Contractual obligations and commitments
InOctober 2013 , we entered into an operating lease for office and manufacturing space inLowell, Massachusetts , which expires inJuly 2026 . The terms of the lease include options for a one-time, five-year extension of the lease and early termination of the lease inJuly 2024 as well as a$0.7 million tenant improvement allowance which has been drawn down in full. InMarch 2022 , we amended the lease for our office and manufacturing space inLowell, Massachusetts . The amendment increased the amount of facility space subject to the lease and extended the expiration of the lease fromJuly 2026 toJuly 2029 . The terms of the amendment include options for a one-time, five-year extension of the lease and early termination of the lease inJuly 2026 (subject to an early termination fee), as well as a$0.3 million tenant improvement allowance. Monthly rent payments are fixed and future minimum lease payments under the lease (as amended) are$4.1 million as ofDecember 31, 2022 , including$0.6 million in short-term obligations. InDecember 2020 , we entered into a non-cancelable agreement with a service provider for software as a service and cloud hosting services. As ofDecember 31, 2022 , we had committed to minimum payments under these arrangements totaling$0.8 million throughJanuary 31, 2026 , including short-term obligations of$0.2 million . We had$0.1 million and zero accrued for the software subscription as ofDecember 31, 2022 andDecember 31, 2021 , respectively. InJune 2021 , we entered into a sublease agreement for office and back-up manufacturing space inLexington, Massachusetts , which expires inJune 2029 . The sublease agreement includes an option to terminate the sublease inJuly 2026 , subject to an early termination fee. Monthly rent payments are fixed and future minimum lease payments over the term of the sublease are$5.6 million , including$0.7 million in short-term obligations. We also have the right to use furniture and equipment specified in the sublease agreement for an additional$0.6 million in future payments over the term of the sublease with the option to purchase the furniture and equipment at the end of the sublease term. Short-term obligations related to the furniture and equipment were less than$0.1 million as ofDecember 31, 2022 . Concurrent with entering into the sublease agreement, we executed an option agreement with the property owner which provides us the option to enter into a new direct lease for theLexington facility for an additional five years following expiration of the sublease. 73
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For additional information on our contractual obligation and commitments please see Note 16 - Commitments and Contingencies to our consolidated financial statements.
Cash flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Year Ended December 31,
2022 2021
Net cash used in operating activities $ (58,547) $ (54,964)
Net cash used in investing activities (93,469) (13,289)
Net cash provided by financing activities 693 216,745
Net (decrease) increase in cash and cash equivalents and restricted cash
$ (151,323) $ 148,492
Operating activities
During the year endedDecember 31, 2022 , operating activities used$58.5 million of cash, primarily resulting from our net loss of$60.8 million and net cash used by changes in our operating assets and liabilities of$5.3 million , partially offset by non-cash charges of$7.6 million . Net cash used by changes in our operating assets and liabilities for the year endedDecember 31, 2022 consisted primarily of an increase of$5.8 million mostly attributed to higher inventory to build safety stock and support a projected increase in demand, a decrease in accrued expenses and other current liabilities of$2.8 million primarily due to the timing of vendor expenses and the amount and timing of bonus payments, and a$0.4 million increase in accounts receivable primarily due to an increase in billings correlating with an increase in systems placed and recurring annual service contracts. These net operating cash uses were partially offset by an increase in accounts payable of$1.5 million due to timing of vendor invoices and payments, an increase in deferred revenue of$1.4 million primarily due to advanced billings for service contracts and pending validation services, a decrease in prepaid expenses and other current liabilities of$0.6 million primarily due to timing of payments and a decrease of other long-term assets of$0.2 million . During the year endedDecember 31, 2021 , operating activities used$55.0 million of cash, primarily resulting from our net loss of$73.5 million and net cash used by changes in our operating assets and liabilities of$8.0 million , partially offset by non-cash charges of$26.6 million . Net cash used by changes in our operating assets and liabilities for the year endedDecember 31, 2021 consisted primarily of an increase of$6.8 million in raw material inventory to build safety stock and support a projected increase in demand, an increase of$1.1 million in prepaid expenses and other current assets primarily due to insurance costs premium increases associated with operating as a public company, an increase of$0.9 million in other long-term assets primarily related to costs capitalized as a result of the implementation of a new Enterprise Resource Planning software during 2021, and a decrease in deferred revenue of$1.1 million due to timing of advanced billings for validation services and performance of the related services partially offset by an increase in advance billings related to a higher number of systems under service contracts. These net operating cash uses were partially offset by an increase of$1.8 million in accrued expenses, accounts payable and other current liabilities primarily due to timing of invoicing and cash disbursements, as well as an increase of$0.1 million in deferred rent. Investing activities During the year endedDecember 31, 2022 , net cash used in investing activities was$93.5 million , consisting of$179.2 million in purchases of investments and$6.7 million of capital expenditures, partially offset by investment maturities of$92.5 million . During the year endedDecember 31, 2021 , net cash used in investing activities was$13.3 million , consisting of capital expenditures of$3.2 million and$10.1 million in net purchases of investments.
Financing activities
During the year ended
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During the year endedDecember 31, 2021 , net cash provided by financing activities was$216.7 million , consisting of net proceeds of$164.1 million from the initial public offering of Class A common stock, net of issuance costs,$79.7 million of net proceeds from the sale of the Series D1 and Series D2 Preferred Stock, net of issuance costs, and$0.9 million from the issuance of common stock upon exercise of stock options and purchase of restricted stock awards. Partially offsetting cash provided by financing activities in 2021 was the repayment of term loans of$26.2 million and payment of debt extinguishment fees of$1.9 million . Long-term debt InMay 2020 , we entered into the 2020 Term Loan which provided for borrowings of an initial$25.0 million tranche upon closing and options to borrow up to an aggregate of$35.0 million in two additional tranches of$20.0 million under the second tranche, or the Term B Loan, and$15.0 million under the third tranche, or the Term C Loan, subject to certain Growth Direct system sales milestones. At closing, we issued warrants to purchase 1,195,652 shares of Series C1 Preferred Stock to the lender with an exercise price of$1.15 per share. We paid a$0.8 million facility fee in connection with the 2020 Term Loan. InSeptember 2021 , we agreed to pay in full all of our outstanding obligations under the 2020 Term Loan in the amount of$28.7 million , comprised of the principal amount of the 2020 Term Loan, interest previously paid-in-kind, accrued cash interest, a prepayment premium, and other fees and expenses. As a result, with the exception of the warrants issued to the lender, all obligations under the 2020 Term Loan were satisfied, released, discharged and/or terminated in full. Seasonality Our revenues can vary from quarter to quarter as a result of factors such as our customers' budgetary cycles and extended summer vacation periods that can impact our ability to deliver products and provide onsite services to our customers during those periods. We expect this volatility to continue for the foreseeable future, which may cause fluctuations in our operating results and financial metrics. In addition, trends may vary in the future as our revenue mix shifts from non-recurring to recurring revenues.
Critical accounting policies and significant judgments and estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States . 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, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. Our estimates are based on our historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 - Summary of Significant Accounting Policies - to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following critical accounting policies are those most important to the judgments and estimates used in the preparation of our consolidated financial statements. Revenue recognition Product revenue We derive product revenue primarily from the sale of Growth Direct systems and related consumables. Product revenue is recognized when control of the promised systems and consumables is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or consumables (the transaction price). For Growth Direct systems and consumables sold by us, control transfers to the customer at a point in time. 75
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Service revenue
We derive service revenue primarily from the sale of validation services, service contracts and field service (including installation). Revenue is recognized when services are provided to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services (the transaction price). Service revenue is recognized over time using an input method based on time lapsed for service contracts and using an output method based on milestones achieved for validation services and field service.
Performance obligations
A performance obligation is a promise in a contract to transfer a distinct product or service to a customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. Our main performance obligations in customer arrangements are Growth Direct systems, LIMS connection software, proprietary consumables, validation services, field service and services due under service contracts.
Multiple performance obligations
Our contracts may include multiple performance obligations when customers purchase a combination of products and services such as Growth Direct system sold together with the LIMS connection software, proprietary consumables or services. For these arrangements, 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. The primary methods used to estimate standalone selling prices are based on the prices observed in standalone sales to customers or cost-plus margin depending on the nature of the obligation and available evidence of fair value. Allocation of the transaction price is determined at contract's inception. Non-commercial revenue We have generated non-commercial revenue from long-term contracts with BARDA, which is part of theU.S. government. The contract is a cost-reimbursable, cost-sharing contract, whereby BARDA reimburses us for a percentage of the total costs that have been incurred including indirect allowable rates. We include the unconstrained amount of consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. Stock-based compensation We measure stock-based option awards granted to employees, officers and directors based on their fair value on the date of grant using the Black-Scholes option-pricing model. Compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period of the respective award. We account for forfeitures as they occur. The straight-line method of expense recognition is applied to all awards with service-only conditions. The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model, which uses inputs such as the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield. We measure all restricted common stock and restricted stock units granted to employees based on the common stock value on the date of grant. The purchase price of the restricted common stock was the common stock value on the date of grant. Valuation of inventory We value inventory at the lower of cost or net realizable value. Cost is computed using the first-in, first-out method. We regularly review inventory quantities on-hand for excess and obsolescence and, when circumstances indicate, we record charges to write down inventories to their estimated net realizable value after evaluating future demand, expected product life cycles and current inventory levels. Such charges are classified as cost of product revenue in the statements of operations. Any write-down of inventory to net realizable value creates a new cost basis. 76
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Recently issued accounting pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Emerging growth company status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, and our financial statements may not be comparable to other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies. We will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of$1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of the IPO, (iii) the date on which we have issued more than$1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of theSecurities and Exchange Commission . Further, even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
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