908 Devices - Q1 2024

Transcript

Operator (participant)

I will now hand the floor over to Kelly Gura, Investor Relations, to begin the call.

Kelly Gura (Principal of Investor Relations)

Thank you. This morning, 908 Devices released financial results for the first quarter ended March 31st, 2024. If you've not received this news release, or if you'd like to be added to the company's distribution list, please send an email to [email protected]. Joining me today from 908 is Kevin Knopp, Chief Executive Officer and Co-Founder, and Joe Griffith, Chief Financial Officer. Today's call includes a slide presentation which is viewable to those joining via webcast. The slides will also be available after the call ends at [email protected] under the menu header Events and Presentations. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated.

Additional information regarding these risks and uncertainties appears in the section entitled Forward-Looking Statements in the press release 908 Devices issued today. For a more complete list and description, please see the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31st, 2023, and in its other filings with the Securities and Exchange Commission. Except as required by law, 908 Devices disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast April 30th, 2024. With that, I would like to turn the call over to Kevin.

Kevin Knopp (CEO and Co-Founder)

Thanks, Kelly. Good morning, and thank you for joining our first quarter 2024 earnings call. We had a solid start to the year with top-line revenue of $10 million for the first quarter, representing 8% product and service growth year-over-year. We continue to see robust demand for our handheld devices in Q1 and anticipate this trend to persist throughout the year as applications for chemical detection and identification at the point of need gain further traction in the U.S. and internationally. Over the past several years, our team has built a robust product portfolio that serves the forensics and bioprocessing markets through both our own innovation as well as through a strategic acquisition. On our last earnings call, we outlined three clear objectives for 2024. First, to expand our market reach. Second, to leverage our expanded product portfolio.

And third, to execute under a framework for sustained growth with a path to profitability. This morning, we are excited to announce the acquisition of RedWave Technology. This acquisition is additive to each of our existing initiatives for the year, and we believe will be a very strong strategic fit over the near and long term. As you will see momentarily, there is very strong strategic rationale and synergies between the two companies, which makes this a very compelling acquisition. Importantly, our teams have very similar cultures and ethos, which makes me extremely confident of the fit as we welcome the RedWave team into our organization. 908 Devices has a mission of creating positive impact in people's lives with our efforts to help our customers rid our communities of fentanyl and counterfeit pharmaceuticals and advance life-changing personal medicines.

Similar to our mission, RedWave thrives on helping increase the safety of first responders and other front-line workers that must answer the call each day. It is a founder-led, highly technical organization that we believe matches well culturally with our innovative team at 908 Devices. Further, our Chief Product Officer, our VP of Government Sales, and I, along with many others in our management, commercial, and technical teams, have immense experience with optical spectroscopy from product development to large-scale commercial penetration. This is a well-understood technology space, set of products, and applications for our team, which we believe will significantly lower the execution risk of the acquisition and enable us to focus on the positive financial impacts we expect to materialize.

Prior to reviewing our first quarter results, I wanted to walk you through a set of slides that outlines why we are so excited about this acquisition and the positive synergies we expect to see for our business. We believe there are many compelling points that highlight the strong rationale for this acquisition, which I will summarize into five key areas. First, RedWave, as a standalone company, has an attractive financial profile. It is a profitable, high-growth, privately owned business with unaudited 2023 full-year revenues of approximately $13.7 million, attractive gross margins of approximately 52%, and a positive operating margin of approximately 15%. Last year, they grew revenue 20%+ year-over-year and operated as a cash flow positive business. Second, RedWave expands our toolkit of handheld chemical analysis devices to serve broader forensics workflows, spanning unknown solids, liquids, gases, and aerosols from initial detection through their identification.

With this acquisition, our handheld portfolio goes from one to four market-leading handheld products. With the comprehensive capabilities of this expanded handheld portfolio, we expect to accelerate penetration of the addressable forensics market, which we estimate to be more than $1.3 billion. Third, the RedWave products immediately add to the bags of our 908 direct sales and applications team, enhancing our efficiency and scale while supporting RedWave's growth trajectory with our robust commercial platform and global reach. Fourth, in addition to the synergies for our forensics customers, RedWave's products also bolster our bioprocessing business. Their technology is based on an infrared optical spectroscopy platform called FTIR that is additive to our newly released Raman product, MAVRIC, that operates on a related scientific principle. Process analytical technology customers in pharma often leverage FTIR, Raman, and other related infrared spectroscopy technologies for QC, upstream, and downstream applications.

RedWave has a small presence already here today, and we see future opportunity to leverage the RedWave technology to further enhance our existing bioprocessing portfolio. And finally, fifth, this combination significantly enhances our financial profile. RedWave is profitable and cash flow generating. Immediately, RedWave is accretive to our gross margins. We have also identified more than $5 million in forecasted annual cost synergies that we expect to be realized in 2026. The contribution of RedWave revenue, the leverage of 908 sales infrastructure, and the identified cost synergies are expected to accelerate our path to reach $100 million in annual revenues and accelerate our crossover to cash flow break-even with a steeper profitability ramp thereafter. And importantly, we continue to expect that we will be able to reach break-even with our cash on hand.

The upfront transaction value is $53.5 million, which is comprised of $45 million in cash and 1.5 million shares, representing $8.5 million using our closing stock price as of April 26. In addition, there is the potential for milestone consideration totaling up to 4 million additional shares, representing $22.7 million using our closing stock price as of April 26 for accelerated growth over the next 24 months. An annualized approximate 22% growth is required to meet the minimum threshold for these payments. As RedWave's growth then becomes on par with 908 Devices' historic handheld revenue growth levels, additional consideration is earned over the 24 months, achieving the full earnout at an approximate 38% annualized growth rate. We believe this structure creates long-term value for our shareholders and rewards RedWave for accelerated growth with stock issuance upon performance. RedWave is a leader of innovation in optical spectroscopy.

The company was founded in 2016 by a well-known and respected team in the detection space and is headquartered in a modern and cost-efficient 38,000 sq ft facility in Danbury, Connecticut. They've developed a compact and mobile technology variant of infrared spectroscopy called FTIR. FTIR is renowned for its specific substance identification abilities across a broad range of bulk materials. Using this technology, RedWave products can identify more than 22,000 chemicals in bulk, including visible amounts of drugs, white powders, and other unknown solids and liquids. This is a very complementary capability as our mass spec technology is highly regarded for its tremendous sensitivity, providing unparalleled detection identification capabilities at trace and invisible levels for a focus list of chemical species.

Given the complementary capabilities of our devices, RedWave products target the same types of customers as our handheld products, including first responders, law enforcement, and other front-line workers, including customs and postal inspection agents globally. There's a long runway of opportunity ahead for growth. RedWave products are well positioned to replace more than the 15,000 legacy FTIR products that are lacking modern conveniences such as remote connectivity and app integration. In addition to the significant opportunity to replace legacy FTIR products, there's an opportunity to address an expanded use case for unknown gas identification. RedWave offers products that can identify 5,500 toxic and VOC gases to help track down the source of a leak in industrial and hazardous materials situations. They have built three innovative handheld products that pair well with our MX908 and fortify our MX Aero offerings and our roadmap in the air monitoring space.

Our sales team is excited to add these complementary RedWave products to our handheld product offerings immediately. As I mentioned moments ago, our products are highly complementary for analyte detection and identification. Forensics customers use both mass spec and FTIR to rapidly assess and monitor their environment for dangerous trace chemicals and possible bulk chemical hazards. In the most general sense, our MX mass spec handheld focuses on the invisible and unseen, targeting fentanyl, its many analogs, and hundreds of such highly toxic analyte. RedWave's FTIR-based products expand our detection capability to more than 22,000 and are ideally suited for visible bulk sample identification. Together, the two technologies offer a fast and comprehensive field forensics toolkit supporting our customers' broader workflows. By bringing RedWave's market-leading handheld technology to 908 Devices, we can leverage our existing scale and platform to serve both new and existing customers more efficiently.

Strong relations and support through the sales cycle are key to our customers. By bringing their team onto our existing commercial platform, we can better serve customers across the sales cycle, from technology and application to offering world-class support and service. And we can now offer a combined situational awareness view through our 24/7 Reachback service with multiple data modalities available. Additionally, with scale of RedWave's cloud-based fleet management offering, we have the potential to offer new value-add data services for additional recurring revenue. The existing RedWave devices already in the field significantly expand our base. Collectively, we now have over 3,600 units fielded and more than 18,000 trained users. Over the last few years, we've focused on creating a portfolio of desktop devices to serve biopharma, and we released two products just last year as we believe our desktops will be a significant contributor going forward.

With this acquisition, we are adding three products to create a like portfolio of handhelds for forensics to gain efficiency and scale in that space as well. For both our desktops and handhelds, we see great benefits by having complete and complementary suites of products to offer our customers. We believe the strategic rationale here is incredibly clear. First, we believe this acquisition will meaningfully accelerate our revenue growth in an end market that has been performing well. Second, the overlapping customers and call points enable significant sales and marketing synergies. Third, it is projected to improve scale and efficiency in a large addressable forensics market, opening access with a broader portfolio of capabilities for our customers. Fourth, it expands our tech toolbox and has now created a leading point-of-need analysis platform, mass spec, Raman, and FTIR, three lab-grade technologies supporting a robust roadmap long-term in forensics and bioprocessing.

Finally, it is forecasted to be accretive to both the top line and gross margins. We are acquiring a profitable cash-generating business, which accelerates our path to break-even. As I touched on earlier, RedWave offers a compelling financial profile with meaningful revenue and margins, growth rates, and earnings above our own corporate averages. RedWave and 908 Devices have an overlapping customer base and call points, supporting improved scale and leverage of sales and marketing efforts. RedWave has just begun to make sales into U.S. federal government accounts, and we believe that our success with large enterprise accounts will help to further penetrate this opportunity. Internationally, RedWave and 908 Devices share many of the same channel partners. We estimate an 80% overlap, again creating efficiencies of scale.

As mentioned, beyond mass spec, pharma PAT customers often leverage FTIR, Raman, and related infrared spectroscopy technologies for applications in QC, upstream, and downstream. 908 Devices' desktop portfolio includes our new Raman-based MAVRIC device for upstream bioprocessing, and RedWave now adds a line of Raman and FTIR accessories for PAT and industrial QC, with the potential for optionality to extend FTIR devices into downstream pharma. These accessories represented approximately $2 million of their full-year 2023 sales. We are positioning ourselves for accelerated growth through our selective acquisition strategy and new product launches. RedWave is our second acquisition as an organization following the successful acquisition and technology integration of Trace Analytics GmbH in 2022.

Since our IPO in late 2020, we've developed and launched a suite of innovative desktop devices, too, just last year to position us for growth as the headwinds for life science instrumentation and bioprocessing subside and advanced therapeutic modalities take hold. Over time, we have grown total top line revenue at a three year CAGR of 23%, supported in large part by our flagship handheld device for the detection of fentanyl and related trace applications. In 2023, handhelds represented 76% of our revenues and grew 28% year-over-year. We absolutely want to continue to win in that space while we nurture and grow our desktops for bioprocessing. We believe the acquisition of RedWave does just that by solidifying our handheld market position and driving accelerated growth in a market we have seen with durable success.

With the contributions from eight months of RedWave revenue for 2024, we now expect full-year reported revenues to be between $63 million-$65 million, an increase of 25%-29% compared to 2023. Joe will address the details of this guidance in a moment. We project favorable financial impact from this acquisition, including higher growth, improved margins, and a faster path to profitability. In 2024, we expect to add $11 million in revenue, representing eight months of ownership on top of the revenue guidance we provided for the core 908 business earlier this year. Over time, we expect RedWave to contribute strong gross margins above 908 Devices' corporate average. We are absorbing a cash flow positive business, and going forward, we have identified more than $5 million in forecasted annual cost synergies to be realized in 2026.

The acquisition is fully funded with the cash from our balance sheet, and an additional consideration will be paid in stock contingent on RedWave meeting a minimum annual growth target of approximately 22% over 24 months. We continue to believe that our cash on hand is sufficient to reach cash flow break-even. At 908 Devices, we have always operated our business with the goal to build a solid financial foundation for durable, long-term, profitable growth. This acquisition is squarely in line with that vision and further fortifies the foundation we are building. We now have multiple lab-grade analytical platforms at hand to power point-of-need chemical analysis today and well into the future. We have a consolidated portfolio of handheld and desktop devices to address greater than $6 billion of forensics research, QA/QC, and bioprocessing TAM.

We believe we have accelerated our path to reach more than $100 million in annualized revenues with improved U.S. and international scale. Further, we continue to project the ability to reach cash flow break-even with our current cash on hand. I'm so proud of what our team has been able to accomplish over the last several years, and with the addition of RedWave Technology, I am even more excited for what's next. With that, I'll now turn the call over to Joe for more details on our first quarter and on our updated guidance.

Joe Griffith (CFO)

Thanks, Kevin. Revenue for the first quarter 2024 was $10 million, up 5% from $9.5 million in the prior year period, primarily driven by an increase in handheld device revenue. Handheld revenue was $7.4 million for the first quarter 2024, up 20% from $6.2 million for the first quarter 2023. This increase was driven primarily by component shipments in support of the initial production phase of the U.S. Department of Defense Next-Gen Chemical Detector Program, also known as AVCAD, and an increase in service revenue. We shipped 53 MX908 handheld devices in the first quarter. Our pipeline remains strong for our handheld devices in the U.S. and internationally. The fentanyl crisis and the emergence of new and evolving analogs has been a key driver of handheld adoption in the U.S., and we are now seeing this crisis expand and drive urgency internationally.

This was confirmed by U.S. Secretary of State Antony Blinken, who warned of exactly this in March during a United Nations conference. Now turning to our desktops serving the life science instrumentation and bioprocessing markets. Revenue from our desktop products for the first quarter 2024 was $2.6 million, down 17% from $3.1 million in the prior year period, primarily related to a decrease in device sales, with eight desktop devices placed in the first quarter comprised of Rebel, ZipChip, and MAVEN. Despite customers continuing to remain cautious in their first-half capital expenditures, we are seeing positive engagement. One of our core objectives has been to launch and leverage an expanded product portfolio to maximize opportunities and strengthen customer engagements.

Our product portfolio now includes four desktop devices in the PAT space, two launched just last year, and we are seeing quoting activity reflect a combination of products now, one product driving another. For instance, in the first quarter, we received an order from a top 20 biopharma customer for multiple desktop devices, Rebel and MAVEN, demonstrating the value of our expanded portfolio and validating the complementary nature of our PAT desktop devices. Over the first quarter, our sales engagements reflected this trend, with an approximate two to one weighting toward our newest products, which is also consistent with trends seen in the second half of 2023. Although it is still early days, we continue to see traction and positive engagement with MAVRIC. In early April, we hosted a successful webinar with over 250 registrants, highlighting how process control impacts critical quality attributes, or CQAs.

We reviewed how MAVRIC was readily deployed in cell culture monitoring and control without any bioprocess-specific model building. We showcased a strategy of continuous dynamic feeding to enhance process performance and improve product quality. Further, we have engaged in a number of qualified evaluations where biopharma customers install a MAVRIC and test across multiple bioreactors. MAVRIC's ability to connect to multiple bioreactors is a key capability, and we are encouraged to see customers supporting and prioritizing evaluations for this novel technology. We ended the first quarter 2024 with a cumulative handheld and desktop installed base of 2,914 devices, up 18% from 2,468 at the end of the first quarter 2023. Recurring revenue, which consists of consumables, accessories, and service revenue, represented 45% of total revenues this quarter and was $4.5 million, a $0.4 million increase over the prior year period driven by service and Rebel consumables.

Recurring revenue in the first quarter consisted of $2.8 million related to handhelds and $1.7 million related to desktops. Rebel utilization remained at approximately half a kit per month for our active users, which has been a consistent run rate for nine quarters. Looking ahead, we continue to expect recurring revenue for our product portfolio to be around a third of product and service revenue for the full year 2024. Gross profit was $5 million for the first quarter of 2024 compared to $4.4 million for the prior year period. Gross margin was 50% for the first quarter 2024 compared to 46% for the prior year period. The increase in gross margin was largely due to favorable timing of production, driving higher absorption and lower material costs during the first quarter of 2024.

Over the longer term, we expect volume-based improvements to our gross margins as we achieve better leverage over fixed costs. Additionally, with the integration of RedWave, we expect modest benefit in the back half of 2024 and further impact in 2025. Total operating expenses for the first quarter of 2024 were $17.7 million compared to $17.4 million in the prior year period. This increase was driven by a $0.4 million increase in non-cash stock-based compensation and $0.3 million in legal fees related to our acquisition, offset in part by a reduction in third-party commissions and salary and related costs. Net loss for the first quarter of 2024 was $10.9 million compared to $12.5 million in the prior year period, a 13% improvement. We ended the first quarter of 2024 with $134.2 million in cash, cash equivalents, and marketable securities with no debt outstanding.

Subsequent to quarter end, we used an additional $45 million for our acquisition of RedWave. We anticipate exiting 2024 with multiple years of cash to support our path to cash flow break-even. Looking ahead in 2024, we now expect revenue to be in the range of $63 million-$65 million, representing reported growth of 25%-29% over full year 2023. Our updated revenue guidance includes an expected $11 million of revenue from RedWave, representing eight months of ownership layered on top of our prior guidance of $52 million-$54 million for the core 908 business. Our updated revenue guidance includes the following assumptions. First, we expect $11 million in 2024 reported revenue from RedWave, which reflects eight months of ownership. On an annualized basis, this represents approximately 20% growth for 2024 RedWave revenues in line with the company's 2023 growth profile.

We see potential for RedWave's growth to accelerate once the company's products and services gain traction within 908's commercial engine, likely by the end of 2024. Our second quarter results will include two months of revenue contribution from RedWave, and given similar customer and funding dynamics, we anticipate RedWave's seasonality to mirror that of our handhelds, being back half weighted. Second, we are reiterating our $52 million-$54 million revenue guidance for the core 908 business. While we continue to see some indicators of positivity for the life science instrumentation and bioprocessing markets, the pressures we experienced in 2023 have, as expected, persisted and likely will continue through at least the first half. The industry is reporting some promising signs related to bioprocessing inventory destocking in Q1.

However, 908's bioprocessing recovery will be driven by rebounding CapEx spending for instrumentation and preclinical biopharma, which has remained relatively muted to this point. But we do continue to expect a step up in total desktop device placements during 2024, with sales of newer products building through the year as our sales engagements convert to orders. And lastly, we expect the strength of our handheld devices, which serve the forensics market, to continue to bolster our overall growth. However, the delay in approval of the U.S. federal government budget may result in some of our enterprise opportunities shifting into the second half of the year. With the timing of the U.S. federal government budget and the acquisition of RedWave, we expect a slight shift from our previous assumptions for 2024 revenue split.

We now expect revenue to be slightly more back half weighted compared to our prior assumption of a 40%-60% first half to second half split. Touching on gross margins, we continue to expect 2024 to be in the low 50s range due to the impact of pricing, higher material costs, and overall product, service, and channel mix. We anticipate that RedWave will have a small positive benefit to second half gross margins, with rising contributions expected in 2025. At this point, I would like to turn the call back to Kevin.

Kevin Knopp (CEO and Co-Founder)

Thanks, Joe. Again, as previously communicated on our fourth quarter call, we are laser-focused on three key areas for 2024, including market expansion, leveraging our expanded product portfolios, and executing to a framework for sustained growth with a past profitability. Our acquisition announcement today directly and meaningfully addresses each of these three key areas. Further, we are pleased with our on-plan Q1 results and the new trajectory we have set for 2024 and beyond. I'd like to thank our team for their hard work towards our Q1 achievements. Lastly, I'm excited to welcome our new colleagues from RedWave Technology to the 908 Devices team, and I look forward to our bright future together. With that, we'll now open it up to questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two. Our first question is from Matt Larew at William Blair. Please go ahead.

Matt Larew (Equity Research Analyst)

Hi, good morning. I wanted to start on RedWave and two things. One would be, if I think back to the last acquisition, Trace, obviously, we just saw the product in MAVRIC that features the aseptic sampling technology from Trace. So clearly incorporating the technology in product development. And you referenced, obviously, the impressive portfolio that RedWave has of their own products and how the sales channels overlap. But I'm just curious, as you looked at the deal, what you're thinking about from potential collaboration on the R&D or product development side over time.

Kevin Knopp (CEO and Co-Founder)

Yeah, hi, Matt. Yeah, thanks for the question. You're right. I mean, we did the acquisition of Trace Analytics GmbH in 2022, and really a successful one that we're really happy we did. It is fully integrated now. As you know, it's become our base of operations in Europe and allowing us to take orders direct across Europe. And then, as you mentioned, the technology, we took the sampling technology and released the product MAVEN, and then now that's on the market, and it's the basis of the online capabilities for next generations of Rebel when we get to that point. So lots of good there on the R&D side and then plugging it in and having a base of operations in Europe.

From the RedWave perspective, we're super excited that now we have a portfolio of products in the bioprocessing life science instrumentation space for said products, and we really built a nice foundation for that growth as we move along. But if you look at our handhelds, we've had one product and a series of accessories. So with RedWave, that adds three additional products that have that high overlap with our customers and sales channel, which we can get immediately into the bags of our team. From an R&D collaboration perspective, we briefly touched on it in the prepared remarks, but we're also excited that RedWave has approximately $2 million of their sales last year in the pharma PAT space, selling accessories and selling Raman probes, FTIR probes, and the like into industrial QA/QC and pharma PAT applications.

I would imagine, as we continue to go and the market justifies, that we'll be able to work more together on integrating and looking to offer additional FTIR-based products into our desktop portfolio.

Matt Larew (Equity Research Analyst)

Okay, that's great to hear. And you referenced, obviously, or Joe did, I suppose, in his comments, CapEx recovery being key, obviously, to your own bioprocessing recovery. Just curious what you're hearing from customers about budgets for capital equipment, any indicators of shifts in sales cycle or availability of capital. And you referenced, obviously, some placements at a top 20 biopharma. Any patterns or trends that you would call out in terms of customer groups and how they're perhaps viewing their capital purchasing ability this year?

Kevin Knopp (CEO and Co-Founder)

Yeah, sure. I'm happy to give a few comments there. So yes, absolutely. It's really not the destocking dynamic of consumables that impacts 908's. As you know, it's more around the CapEx spending for small-scale instrumentation like 908 does here in the life science instrumentation market and bioprocessing. As you know, we're very much in the PD labs, process development labs, so that's in the upstream preclinical world. So we've been seeing a particular pause there to adopt novel technologies in that space. I would say two things. I mean, one, from the conversations with customers regarding budget, I think there's still uncertainty on the timing of the release of CapEx within organizations. I've been in direct conversations with several customers. Hard to draw conclusions by group, as you asked for, just because our numbers are fairly modest here.

But I have definitely seen larger organizations as well as smaller organizations showing that uncertainty. Last comment on that, in fact, one of the customers talking to of late is very much ready to pull the trigger but is waiting for their biotech funding to come, so an additional series raised for that organization. So it's directly coupled. So we are pleased that the world has been showing some positive signs in the biotech funding arena, as you know, over the first quarter. So we're pleased for that. And we'll take some time for that to ripple down, I'm sure, but I think that is a positive thing. And the other thing that we mentioned in our prepared remarks, we are getting a lot of engagement. While that engagement isn't translating directly to desktop orders, it's fast as we would, of course, all like. Lots of engagement.

Joe called a few things out in his prepared remarks regarding great engagement on a MAVRIC webinar, great engagement with customers doing evaluations, in some cases, funded evaluations, so. We'll cover there for you.

Matt Larew (Equity Research Analyst)

That's great. I'll jump back in the queue. Congrats on what looks like a really nice fit in terms of the RedWave deal. Thanks.

Thanks, Matthew.

Operator (participant)

The next question comes from Jacob Johnson from Stephens. Please go ahead.

Jacob Johnson (Equity Research Analyst)

Hey, thanks. Good morning and congrats on the deal. I guess I've got a couple on RedWave. Maybe just first on the RedWave technology versus the MX908 and use applications. Can you just talk about how complementary your products are with theirs? And then is there any risk of kind of cannibalization between these two product portfolios?

Kevin Knopp (CEO and Co-Founder)

Yeah, yeah, happy to. Thanks, Jacob, for the congratulations there. We're really excited for the RedWave side. I mean, first, from a technology perspective, they are very complementary, and it very much expands the toolkit. We mentioned that about 80% of our international distributors represent both, and we would only do that if they were not in a competitive situation and that they were, in fact, complementary. So it's a little bit of a proof point there. But in the simplest way, you can think of the MX technology as a new product class that's taking mass spec, so it has immense sensitivity. So it can measure things at very, very low trace levels, so invisible amounts, a residue, a minute particulates, aerosols in the air.

Now, if you think of the RedWave technology, it can measure bulk quantities, but it can measure many, many more chemicals, 22,000+ chemicals it can measure. So the two are often used by our customers in concert, depending on the situation and where they go. So we really don't see that they're a competitive nature to those products from their positioning. And then, as you know, obviously, we're excited for RedWave as well due to its financial profile. We have pretty high benchmarks that we've been trying to stay true to, and this acquisition really kind of showcases those in terms of being very synergistic from a cost perspective that we touched on, as well as in the complete financial profile that's a bit creative in many, many different ways.

Joe Griffith (CFO)

And maybe a little bit helpful too is just a little bit more color on the RedWave products.

As Kevin mentioned, there are three today, the ThreatID, ProtectIR, and XplorIR. And those U.S. list prices of those products range from $45,000-$75,000 so at the high end, close to the MX list price today. And the majority of the RedWave placements in the U.S. and in Australia have come through distribution channels to date. Usually, it comes with discounting, lower ASPs, kind of discount levels from 5%, maybe up to 30% on the international sales. And the ThreatID, where the majority of the placements have been today, the first launch product by RedWave, is where the majority of the placements are and are at the higher end of that ASP range. But you get a little bit more color on the products themselves.

Jacob Johnson (Equity Research Analyst)

Thanks for that, Kevin and Joe. I guess maybe just kind of following up there, you guys laid out some pretty robust growth outlook potentially for RedWave, at least to get the contingent consideration. It seems to me there's kind of two or three big opportunities there, one and two being kind of the bioprocessing industrial applications, and then the other one kind of leveraging the large enterprise accounts. As we think about that, the growth outlook going forward for this business, could you just kind of talk about the relative size of those opportunities in terms of growth drivers between kind of bioprocessing industrial versus the large enterprise accounts?

Kevin Knopp (CEO and Co-Founder)

Yeah, absolutely. I'll start, and then maybe Joe can add some additional remarks. But yes, you're absolutely right. We think there's a lot of growth potential with this business, and you can see the resolve that the RedWave team has in this combination based on that structure and earnout consideration that's contingent upon beating growth targets. So first and foremost, those growth targets are going to be driven and met through and pursued through plugging into our commercial engine, which we think is pretty robust on our handheld side. So we're working even on day one to make sure that it plugs into that channel. And we mentioned very briefly in the slides that they haven't really done too much yet in the larger federal accounts, those larger enterprise accounts.

We feel we have a pretty skilled team there, so we believe we can make good progress getting into those enterprise accounts. They take a little bit of time, but they can be quite large as we go. And we think the earnout structure being cumulative over 24 months is helpful in that regard. The areas of bioprocessing, the areas of the PAT accessories that they sell, particularly into pharma industrial QA/QC, I think that's something that we'll be looking to leverage over time but see the biggest benefit coming from putting into our handheld commercial engine.

Joe Griffith (CFO)

And maybe provide additional pieces. We did highlight in our prepared remarks that RedWave's 20%+ year-on-year growth in 2023, and for 2024, our revenue expectation is at $11 million. Contemplates RedWave growing at that similar level on an annualized basis.

There is certainly potential for RedWave revenues to accelerate towards the end of 2024 once the products gain traction and it's within our commercial engine. But we want to be measured in our approach. We're excited by the growth potential that RedWave brings, but we're setting achievable expectations, we believe, that we can plan to revisit once these products have a few quarters of integration within our commercial engine. In terms of their pacing and seasonality, we're selling, it's probably seen as similar to our current customers, selling to the same customers, and we're working through similar budget processes as the MX. So I do expect similar pacing, more revenue in the second half as we go.

Jacob Johnson (Equity Research Analyst)

Got it. Thanks for taking the questions, guys.

Kevin Knopp (CEO and Co-Founder)

Jacob?

Operator (participant)

The next question comes from Steven Mah from TD Cowen. Please go ahead.

Steven Mah (Senior Equity Research Analyst)

Great. Good morning. Can you hear me?

Kevin Knopp (CEO and Co-Founder)

Yes. Hi, Steven. How are you doing?

Steven Mah (Senior Equity Research Analyst)

Oh, good. Thanks for taking the questions. So maybe to build on what Jacob asked, there does seem to be some overlap with the handheld MX908 in terms of some use cases, such as fentanyls. Can you give us a little bit more color on, and I know you guys said that customers use both FTIR and mass spec, but give us a little bit more color in the marketplace landscape. What percentage of users use both FTIR and mass spec?

Kevin Knopp (CEO and Co-Founder)

Yeah, sure. Happy to. I would say it's a pretty large percentage of customers that have access and use both. And they do. Often it's a toolkit, right? So people will pick what's the right tool for the right job at the right time. In the cases of something like fentanyl, mass spec is just absolutely well-positioned there because of its extreme sensitivity and the minute quantities, the invisible quantities that are really required to detect for something like a fentanyl. Now, if you think about how it complements in applications like that, if you think of a counterfeit pill, the excipients, the binders, the mix, what you would provide around that fentanyl can be a unique identifier of that counterfeit construction. And so those bulk components being measurable on FTIR is very much complementary, even in that one use case here, really around fentanyl and counterfeit drugs.

There are many, many applications that people employ FTIR for, from really unknown materials of all sort, from benign to something toxic that they're looking to identify. We spoke that there's about 15,000, as we estimate, legacy FTIR instruments that are out there in the field. If you think about a five to 10-year useful life of these, that would imply that there's maybe 1,500-3,000 per year as an opportunity to replace or upgrade. We really see the theme that you can look at a lot of opportunities since they only have placed 700 thus far. We believe, just like we've communicated in the past for our MX, that as you offer more modern conveniences, size reductions, speed improvements, other modern connectivity options, that it drives upgrade cycles.

We see that the RedWave team is able to take advantage of that, and we're looking forward to, again, plugging it into our commercial engine to see if we can support that and get its growth trajectory to be meaningful here. That's the same as we've talked about, that as our MX goes to its next generation, we would expect it to spawn upgrade cycles as well. I really do believe the two are absolutely complementary, even in the application and use cases like that fentanyl counter-drug situation I tried to pick.

Steven Mah (Senior Equity Research Analyst)

Yeah. Okay. Yeah, no, that's really helpful. Thanks for that. And I might have misheard, but did you guys say RedWave just uses distributors, or do they have an internal sales force?

Joe Griffith (CFO)

They have both. They have some internal sales folks, about four, that plug into our 70 folks that we have across our combined organization coming into the year. They leverage, based upon their size and efficiency, a lot of channel managers, channel opportunities here in the U.S., also internationally, which is similar to us. Internationally, for our handhelds, we use distribution channels, so very much known within the market. But yes, they do have a sales force for us, and we're excited to partner with them and get the combined scale to drive the growth of the RedWave and MX product.

Steven Mah (Senior Equity Research Analyst)

Okay, got it. So do they have direct sales, or is it mostly all distributors? Or I guess asked a different way, how much of the $13.7 million in revenues last year were from distributors?

Joe Griffith (CFO)

Yeah, from the direct sales perspective, they do have some direct sales, but it's a low %, right? I don't want to put exact % on it. It's higher than single digits, but it's low double-digit type level, really just from where they are. 39 people today have focused on leveraging smartly with distributors out of the box. We think we have an opportunity to go direct, which is part of our synergies as we think about the opportunity to expand our ASP going forward.

Steven Mah (Senior Equity Research Analyst)

Yeah. Okay. Yeah, that's my next question. The potential revenue synergies, yeah, it seems like it's very complementary. When do you think you'll start seeing revenue synergies? I appreciate you said cost synergies would hit fully by 2026, but when do you think revenue synergies will hit? And I appreciate it takes time to cross-train the sales forces across the different products.

Joe Griffith (CFO)

Yeah. It does take time. We're looking to hit the ground running today. But maybe to give you a little bit of additional details on both the costs and maybe thoughts on topline, you probably heard that we're forecasting $5 million+ in potential cost synergies in 2026, and we expect roughly $2 million of those synergies to be realized for 2025, kind of in the shorter term. And those $2 million include savings anticipated from prioritization of personnel across organizations, mainly selling, marketing, R&D leverage. Together, we need to hire less. It also contemplates an improvement in channel discounts that we were just talking about related to international distributor alignment and some opportunity for margin improvement in our direct sales.

The remaining $3 million will probably be realized starting in 2026 related to the utilization of the 38,000 sq ft Danbury facility that we're acquiring here today and the manufacturing scale-up of potential high-volume programs that we've talked about, like AVCAD, versus expanding space here in Boston for that. But a big part of the value in the transaction is what you're asking about, is the ability to plug RedWave products into our 908 sales channel and drive that sustainable, exciting growth. And we're working to get going on that, I'd say, immediately. We expect there is the ability to drive cross-selling across our forensics portfolio, and these trends will be easier to understand probably in a few quarters.

We see an opportunity to improve our return revenue profile as well after the commercialization of a possible cloud-based enterprise management software and the potential to increase RedWave participation in our life science instrumentation and bioprocessing PAT space. We expect near-term cost synergies that I mentioned really to show up in OpEx and the long-term synergies to be more balanced between OpEx and COGS. We'll work to get those topline synergies as soon as we can.

Kevin Knopp (CEO and Co-Founder)

Yeah. And maybe just layering into that for a second, Steven. I hope it's coming across on the call today, but we see so many synergies, even beyond what we touched on, and you can probably see the dimensions of that from how complementary this is. So we're going to be working on that now that it's under our ownership to quantify their timing and impact. We really don't want to underestimate it because there is so many here. We've quantified some on the call today, but there's a lot that have been qualified and more qualitative. But yeah, we don't want to underestimate the impact, and we'll certainly report as we progress.

Steven Mah (Senior Equity Research Analyst)

Okay, great. Thanks for all the questions.

Operator (participant)

Our next question comes from Dan Arias from Stifel. Please go ahead.

Dan Arias (Managing Director)

Hey, good morning, guys. Thank you. Kevin, maybe on desktops, I know you said last quarter that you wouldn't be breaking out system placements by instrument, but is there anything that you can say about the Rebel in order to put it in some context since that's the product that we have a bit of install history with? And then I think you said that the total for desktops was made up of Rebel, MAVEN, and ZipChip, if I'm not mistaken. So no MAVRIC, anything we can use when it just comes to the mix across the year for these different systems? Or is it at the end of the day just sort of up one quarter and down another for the various components of that mix?

Joe Griffith (CFO)

Good, Dan. This is Joe. A little bit of color on Rebel. It continues to tick along, right, where we've been kind of that low single-digit range. As you mentioned, we're not specifically breaking it out, 78 placements. But it is continuing to see some of those pressures. And as I did talk to the placements within the specific quarter, our desktops include Rebel, ZipChip, and MAVEN. Kevin, if you want to give a little bit more color on MAVRIC, excited by that opportunity.

Kevin Knopp (CEO and Co-Founder)

Yeah, absolutely. I mean, we called out a little bit in the prepared remarks that the sales engagement we're seeing here in Q1 is similar to what we saw in Q4 in terms that it is more weighted, more two to one weighted to our newer products in the pipeline as we're gaining momentum and excitement, again, just from a sales engagement funnel perspective. I think it's absolutely early days, but lots of engagement on MAVRIC. We mentioned briefly that in April, we had a webinar with 250-some registered incentives centered around MAVRIC and how it impacts critical quality attributes and how it doesn't take investments in modeling. So good engagement on that. And then further, we have a number of qualified evaluations ongoing right now, being planned and many ongoing.

And this is where a biopharma customer, in some cases, will be purchasing or consumables and like to support a demo across multiple bioreactors and kind of testing and qualifying that and the ability to connect across there. So lots of encouraging parts to evaluate it. But as we've talked about, certainly, the CapEx spending for novel technologies has been muted, but we're really excited that we've seen a lot of this engagement. And then obviously, we've got a diversified portfolio, and the handhelds have been performing to bolster our overall growth of 8% this quarter of products and service.

Dan Arias (Managing Director)

Okay. And Joe, your point was that total desktop system placements, whatever that mix is, should sequentially march higher across the year, correct?

Joe Griffith (CFO)

Yes, that's our expectation. And ultimately, by the end of the year, to see an increase in placements driven mainly by MAVRIC and MAVEN. It'll progress throughout the year.

Dan Arias (Managing Director)

Okay. Then if I could just ask yep, I got you. Thank you for that. Maybe just on the handheld side, you had mentioned last quarter that the budget delays were a factor when you were thinking about the beginning of the year and 1Q. I'm curious if once the federal budget was released, you saw some loosening when it comes to spending and deals. Did late March, early April show any pickup in activity in any way? And I guess relatedly, is there anything you could say that helped us with the modeling exercise when it comes to MX systems across the year? Thanks.

Joe Griffith (CFO)

Yeah, from a timing perspective, it was good to see it finally get over the line. I think it was March 22nd that the funding was released. Of course, that's in many ways just the start of the process with our customers. So lots of conversations with our sales team to tee up the funding mechanisms and the timing and understand the procurement cycle, which is likely pushing a lot of those Fed government opportunities more into the back half in Q3 versus Q2 opportunities where it really didn't start to free up until March. So I would say we're seeing a pickup in the conversations, but the timing is working against us a bit where it'd be more, I'd say, back half, Q3, Q4, even more so than we initially thought back in March.

Dan Arias (Managing Director)

Okay. Thank you.

Operator (participant)

Our next question is from Puneet Souda from Leerink Partners. Please go ahead.

Puneet Souda (Senior Analyst and Senior Managing Director)

Yeah, hi, guys. Thanks for the questions here. So Kevin, it's good to see the acquisition, but on the flip side of it, I'm getting a number of questions here on what brought about this acquisition at this point and sort of why now? And can you talk to us about the level of investments that you might have to do in order to drive the RedWave technology into some of the other applications and make—I know you pointed out to some of the cost synergies, but just I think the big question here is, given your cash balance and sort of the dilution you're taking on for this deal, how should we be thinking about the overall sort of cash burn this year and next?

Kevin Knopp (CEO and Co-Founder)

Yeah, sure. Absolutely. Great questions. I'll start, and then I'll pass to Joe. But yeah, we're super excited about the RedWave acquisition. As you know, we have done an acquisition in our past, and that helped grow us a nice portfolio of products in the bioprocessing. So we've got really and life science instrumentation. So we've got a really nice foundation there in a portfolio. But looking to drive scale and benefit from our investments in sales and marketing with our handheld devices, which have been durable in their success and their growth and serving the markets of point-of-need chemical analysis. And we absolutely want to keep winning there. So when we go out and search from an inorganic perspective and look, this asset was very unique to us. It's profitable. It's highly growing. Many, many synergies that directly plug into our sales channels.

So we think it's a creative in many different directions. So it's a strong fit for us. And again, it fits well into our drive to win across point-of-need chemical detection. And that can be in forensics. That can be in bioprocessing. And there's just a lot of opportunity that we see in that space.

Joe Griffith (CFO)

Maybe to touch on some of the cash concept and path to cash flow break-even, in 2023, we used approximately $25 million in operating cash flows to support the business. And in Q1, it's typically our largest quarter for cash flows. In Q1 2024, our cash used for operating purposes was about $10 million. But we'd expect to be in the $30 million range on a full-year basis here in 2024. We do expect to finish 2024 with multiple years of cash available to support operations. I mean, the key factor to our path to profitability is the cash burn, is the topline growth. And we're continuing to see a path to double-digit topline growth for the core 908 business once the bioprocessing recovery plays out. And the structure of our RedWave acquisition rewards strong 22%+ growth over the two-year consideration period.

We expect to improve, lowering our burn with scale in 2025 and beyond. To think about that as it translates over to a possible path to cash flow break-even, we believe that this acquisition does pull forward our cash flow break-even timeline, given that we're adding scale with RedWave revenues, bolstering our topline growth profile, and adding an accretive gross margin and cash flow positive business. We previously had indicated that we probably needed to be a low three-digit revenue number to cross into profitability. We're likely with somewhere less than $150 million in revenue, we can get there. With the addition of RedWave, we can reach this level faster than before. Definitely excited about that.

Puneet Souda (Senior Analyst and Senior Managing Director)

Got it. That's helpful, Joe. And my follow-up is on what are you seeing from the cell therapy accounts? Those have been some of the early adopters, but obviously impacted during the biotech impact over the last couple of months and, in fact, last year. Can you talk a little bit about sort of adoption you're seeing in those accounts? And wondering, Kevin, how should we think about the closed loops or automated systems? How do your products position into bioprocessing applications there? And just lastly, if I could squeeze in one more on, is there anything that we ought to think about in terms of Biosecure or impact from Biosecure? Thank you.

Kevin Knopp (CEO and Co-Founder)

Yeah, happy to touch on those. So first, on the cell therapy side, our focus has been that ladder, as you mentioned. We do have a dedicated BD professional under our commercial leader that's engaging the innovative hardware equipment companies in the cell therapy space. As you know, we announced a relationship with Terumo. And then in February, we released a relationship with Solaris. And those efforts, Solaris in particular, is really around creating a fully integrated device that automates the whole process and increases the number of dosage available and lowering the cost of goods while doing so. So that efficiency, in our mind, is very synergistic with our products and very much aligned to how we're positioning our MAVEN and MAVRIC products to actually help control processes, help control and determine when you harvest, help improve yields, and other quality attributes along the way.

We do have a focused effort to engage such organizations. We're very pleased to be working with Solaris. You can see in the news, they're getting good traction with BMS and others. They announced here recently. We're working to get designed into their processes. But we have a number of others that we're working with as well. We're really working between the innovative hardware providers and also the innovators on the therapeutic side. And then we're bringing the innovation on the analytics. We're trying to close those loops. It's, again, early days, more of an OEM-scale relationship we're looking to build. But I can say that we've had good engagement in the quarter with a number of groups in that area. Regarding Biosecure, real quickly, we work with many organizations in the government with our handhelds.

So those, of course, are going after the small molecule analysis, drug analysis in many phases, counterfeits, and the like. So we work on a variety of additional security applications and are well-versed on things like export control and the like. So I think as biosecurity opportunities develop, we do have a very good, dedicated, capable government sales channel. We are in some conversations with the U.S. government around some initiatives on the military as well as just for the economy around initiatives to onshore and have a strong, vibrant economy here in the United States for biopharmaceuticals. So we'll have to see how it develops. You know as well that we work with groups like National Resilience, where this has been a part of their government strategy as well. And they've been a strong partner and customer and collaborator with 908.

Maybe not an immediate direct impact we see there, but we certainly stand poised to help out where we can on that.

Puneet Souda (Senior Analyst and Senior Managing Director)

Okay. Thanks, guys.

Operator (participant)

We currently have no further questions on the call, so I will hand the floor back to management.

Kevin Knopp (CEO and Co-Founder)

All right. Well, thank you very much. Thank you very much for joining our call today. We appreciate all the questions. Have a good day.