Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together in conjunction with our financial statements and the related notes included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the risks described in Part I, Item 1A Risk Factors and elsewhere in this Annual Report.
Overview
We are a life sciences instrumentation company in the genome analysis space that provides tools and services based on its Saphyr system to scientists and clinicians conducting genetic research and patient testing, and provides diagnostic testing for those with autism spectrum disorder (“ASD”) and other neurodevelopmental disabilities through our wholly owned subsidiary Lineagen. We develop and market the Saphyr system, a platform for ultra-sensitive and ultra-specific structural variation detection that enables researchers and clinicians to accelerate the search for new diagnostics and therapeutic targets and to streamline the study of changes in chromosomes, which is known as cytogenetics. Our Saphyr system comprises an instrument, chip consumables, reagents and a suite of data analysis tools, and genome analysis services to provide access to data generated by the Saphyr system for researchers who want to evaluate Saphyr data quickly and with a low up-front investment. Lineagen has been providing genetic testing services to families and their healthcare providers for over nine years and has performed over 65,000 tests for those with neurodevelopmental concern.
We have incurred losses in each year since our inception. We have incurred losses in each year since our inception. Our net losses were $41.1 million and $29.8 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $143.7 million.
We expect to continue to incur significant expenses and operating losses as we:
• expand our sales and marketing efforts to further commercialize our products;
• continue research and development efforts to improve our existing products;
• hire additional personnel;
• enter into collaboration arrangements, if any;
• add operational, financial and management information systems; and
• incur increased costs as a result of operating as a public company.
COVID-19
We are subject to additional risks and uncertainties as a result of the continued spread of COVID-19 and uncertain market conditions, which could continue to have a material impact on our business and financial results. The Company closely monitors and complies with various applicable guidelines and legal requirements in the jurisdictions in which it operates, which may continue to result in reduced business operations in response to new or existing stay-at-home orders, travel restrictions and other social distancing measures. Our manufacturing partners, suppliers, and customers, have implemented similar operational reductions. This overall reduction in activity has contributed to a decrease in sales which has negatively impacted the Company’s 2020 financial results. The future effects of COVID-19 are unknown and the Company’s financial results may continue to be negatively affected in the future.
There may be long-term negative effects of the COVID-19 pandemic, even after it has subsided. Specifically, product demand may be reduced due to an economic recession, a decrease in corporate capital expenditures, prolonged unemployment, reduction in consumer confidence, or any similar negative economic condition. These negative effects could have a material impact on our operations, business, earnings, and liquidity.
Initial Public Offering
In August 2018, we completed our initial public offering of our common stock, or the IPO, in which we sold an aggregate of 3,864,000 units (each unit consisting of one share of our common stock and one warrant to purchase one share of our common stock) at a public offering price of $6.125 per unit for net proceeds of $19.4 million, after deducting underwriters' discounts and commissions of $2.2 million and other offering expenses of $2.1 million.
Follow-On Public Offerings
In October 2019, we completed an underwritten public offering of 10,014,000 shares of our common stock and, to certain investors, pre-funded warrants to purchase 10,924,000 shares of our common stock, and accompanying common warrants to purchase
63
up to an aggregate of 20,938,000 shares of our common stock. Each share of common stock and pre-funded warrant to purchase one share of common stock was sold together with a common warrant to purchase one share of common stock. The public offering price of each share of common stock and accompanying common warrant was $0.86 and $0.859, respectively. The pre-funded warrants are immediately exercisable at a price of $0.001 per share of common stock. The common warrants are immediately exercisable at a price of $0.86 per share of common stock and will expire five years from the date of issuance. The shares of common stock and pre-funded warrants, and the accompanying common warrants, were issued separately and were immediately separable upon issuance. We received gross proceeds, before deducting underwriting discounts and commissions and other offering expenses, of $18.0 million.
In April 2020, we completed an underwritten public offering of 16,896,000 shares of our common stock and, to certain investors, pre-funded warrants to purchase 37,650,000 shares of our common stock, and accompanying common warrants to purchase up to an aggregate of 54,546,000 shares of our common stock. Each share of common stock and pre-funded warrant to purchase one share of common stock was sold together with a common warrant to purchase one share of common stock. The public offering price of each share of common stock and accompanying common warrant was $0.33 and $0.329 for each pre-funded warrant. The pre-funded warrants are immediately exercisable at a price of $0.001 per share of common stock. The common warrants are immediately exercisable at a price of $0.33 per share of common stock and will expire five years from the date of issuance. The shares of common stock and pre-funded warrants, and the accompanying common warrants, were issued separately and were immediately separable upon issuance. We received gross proceeds, before deducting underwriting discounts and commissions and other offering expenses, of $18.0 million.
On January 12, 2021, we completed an underwritten public offering of 33,368,851 shares of our common stock, including 4,352,458 shares of our common stock sold pursuant to the underwriters' exercise in full of their option to purchase additional shares. The price to the public in the offering was $3.05 per share and the underwriters purchased the shares from us pursuant to the underwriting agreement at a price of $2.867 per share. The gross proceeds to us were approximately $101.8 million before deducting underwriting discounts and commissions and other offering expenses.
On January 25, 2021, we completed an underwritten public offering of 38,333,352 shares of our common stock, including 5,000,002 shares of our common stock sold pursuant to the underwriters' exercise in full of their option to purchase additional shares. The price to the public in the offering was $6.00 per share and the underwriters purchased the shares from us pursuant to the underwriting agreement at a price of $5.64 per share. The gross proceeds to us were approximately $230.0 million before deducting underwriting discounts and commissions and other offering expenses.
Shelf Registration Statement and At-the-Market Facility
In August 2020, the Company filed a shelf registration statement on Form S-3 with the SEC covering the offering, issuance and sale of up to $125.0 million of the Company’s securities, including up to $40.0 million of common stock pursuant to an at-the-market facility (“ATM”) with Ladenburg Thalmann & Co. Inc. acting as sales agent. During October through December 2020, the Company sold 27,025,384 shares of common stock under the ATM at an average share price of $0.82, and received gross proceeds of approximately $22.1 million before deducting offering costs of $573,263. In January 2021, the Company sold an additional 6,298,152 shares of common stock under the ATM at an average share price of $2.68, and received gross proceeds of approximately $16.9 million before deducting offering costs of $422,034.
Financial Overview
Revenue
We generate product revenue from sales of our instruments and consumables. We currently sell our products for research use only applications and our customers are primarily laboratories associated with academic and governmental research institutions, as well as pharmaceutical, biotechnology and contract research companies. In addition, the Company provides instruments to certain customers under its reagent rental program, under which the Company provides an instrument to customers at no cost and the customers agree to purchase minimum quantities of consumables. Consumable revenue consists of sales of complete assays which are developed internally by us, plus sales of kits which contain all the elements necessary to run tests. We also generate service revenue from the sale of diagnostic testing services for those with autism spectrum disorder and other neurodevelopmental disabilities through our wholly owned subsidiary Lineagen. Other revenue consists of warranty and other service-based revenue.
The following table presents our revenue for the periods indicated:
64
Year Ended December 31,
2020
2019
Product revenue $ 6,229,611 $ 9,474,444
Service and other revenue 1
2,273,373 655,064
Total $ 8,502,984 $ 10,129,508
1 Includes $1.5 million of revenue generated by Lineagen from the date of acquisition through December 31, 2020.
The following table reflects total revenue by geography and as a percentage of total revenue, based on the billing address of our customers. North America consists of the United States and Canada. EMEIA consists of Europe, Middle East, India and Africa. Asia Pacific includes China, Japan, South Korea, Singapore and Australia.
Year Ended December 31,
2020
2019
$ % $ %
North America $ 4,489,359 53 % $ 5,030,267 50 %
EMEIA 3,162,694 37 % 3,627,602 36 %
Asia Pacific 850,931 10 % 1,471,639 14 %
Total $ 8,502,984 100 % $ 10,129,508 100 %
Cost of Revenue
Cost of revenue for our instruments and consumables includes raw material parts costs and associated freight, shipping and handling costs, contract manufacturing costs, salaries and other personnel costs, equipment depreciation, overhead and other direct costs related to those sales recognized as product revenue in the period. Cost of service and other revenue consists of third-party laboratory costs to process the diagnostic samples, salaries of our clinical technicians who interpret and deliver the results to patients, warranty services, and other costs of servicing equipment at customer sites.
Research and Development Expenses
Research and development expenses consist of salaries and other personnel costs, stock-based compensation, research supplies, third-party development costs for new products, materials for prototypes, equipment depreciation, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and development since our inception, and plan to continue to make investments in the future. Our research and development efforts have focused primarily on the tasks required to support development and commercialization of new and existing products. We believe that our continued investment in research and development is essential to our long-term competitive position.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and other personnel costs, intangibles amortization, and stock-based compensation for our sales and marketing, finance, legal, human resources and general management, as well as professional services, such as legal and accounting services.
65
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table sets forth our results of operations for the years ended December 31, 2020 and 2019:
Year Ended December 31, Period-to-Period Change
2020
2019
$ %
Product revenue $ 6,229,611 9,474,444 $ (3,244,833) (34)%
Service and other revenue 2,273,373 655,064 1,618,309 247%
Total revenue 8,502,984 10,129,508 (1,626,524) (16)%
Cost of product revenue 4,810,408 6,495,693 (1,685,285) (26)%
Cost of service and other revenue 919,729 272,454 647,275 238%
Total cost of revenue 5,730,137 6,768,147 (1,038,010) (15)%
Research and development 10,256,109 9,080,891 1,175,218 13%
Selling, general and administrative 31,068,060 20,155,376 10,912,684 54%
Total operating expenses 41,324,169 29,236,267 12,087,902 41%
Loss from operations (38,551,322) (25,874,906) (12,676,416) 49%
Interest expense (2,518,893) (2,286,196) (232,697) 10%
Loss on debt extinguishment — (1,333,496) 1,333,496 (100)%
Other expense (6,943) (299,424) 292,481 (98)%
Loss before income taxes (41,077,158) (29,794,022) (11,283,136) 38%
Provision for income taxes (29,193) (21,048) (8,145) 39%
Net loss $ (41,106,351) $ (29,815,070) $ (11,291,281) 38%
Revenue
Year Ended December 31, Period-to-Period Change
2020
2019
$ %
Instrument revenue $ 3,084,869 $ 6,762,463 $ (3,677,594) (54)%
Consumable revenue 3,144,742 2,711,981 432,761 16%
Product revenue 6,229,611 9,474,444 (3,244,833) (34)%
Services and other revenue 2,273,373 655,064 1,618,309 247%
Total revenue $ 8,502,984 $ 10,129,508 $ (1,626,524) (16)%
Revenue decreased by $1.6 million, or 16% to $8.5 million for the year ended December 31, 2020, as compared to $10.1 million for the same period in 2019. The decrease was largely driven by customers limiting their lab operations in response to COVID-19 restrictions to address the pandemic. The decrease impacted all regions. Below is a summary of changes for the year ended December 31, 2020 as compared to the same period in 2019:
• North America revenue decreased by $0.5 million, or 11%;
• EMEIA revenue decreased by $0.5 million, or 13%; and
• Asia Pacific revenue decreased by $0.6 million, or 42%.
Revenue for the year ended December 31, 2020 includes service revenue of $2.3 million of which $1.5 million is from our recently acquired subsidiary, Lineagen, from the date of the acquisition of August 21, 2020 to December 31, 2020.
Cost of Revenue
Cost of revenue decreased by $1.0 million, or 15%, to $5.7 million for the year ended December 31, 2020, as compared to $6.8 million for the same period in 2019. The decrease was driven by the decrease in revenue as well as a change in the mix of revenue between instrument sales and our reagent rental program. This was partially offset by an increase in consumable units sold of 59% and cost of service revenue of $0.5 million from our recently acquired subsidiary, Lineagen, from the date of the acquisition of August 21, 2020 to December 31, 2020.
66
Research and Development Expenses
Research and development expenses increased by $1.2 million, or 13%, to $10.3 million for the year ended December 31, 2020 as compared to $9.1 million for the same period in 2019. This is due to headcount additions to our development teams, but slightly offset by the salary reductions implemented in April 2020. In addition, our materials and supply expense increased during the year ended December 31, 2020 due to continued efforts to innovate our product.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.9 million, or 54%, to $31.1 million for the year ended December 31, 2020 as compared to $20.2 million for the same period in 2019. This is due to organic headcount additions to our global sales and back-office teams to support world-wide product distribution, as well as headcount additions attributed to the acquisition of Lineagen. Also, we incurred increased legal and accounting fees to support business operations both domestically and internationally. A total of $1.5 million in transaction-related expenses were recorded for the Lineagen acquisition. Lastly, we recognized bad debt expense of $1.8 million during the year ended December 31, 2020.
Interest Expense
Interest expense increased by $0.2 million, or 10%, to $2.5 million for the year ended December 31, 2020, as compared to $2.3 million for the same period in 2019, driven by changes in our long-term debt. In March 2019, the Company retired its $10.0 million Credit and Security Agreement with MidCap Financial (the “CSA”) and replaced it with a $20.0 million facility under our Loan and Security Agreement with Innovatus Life Sciences Lending Fund I, LP.
Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from operations. We incurred net losses of $41.1 million, and $29.8 million, and used $38.3 million and $29.5 million of cash from our operating activities for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $143.7 million and cash and cash equivalents of $38.4 million.
Sources of Liquidity
Since our IPO, we have generated cash flows from sales of common stock and other equity instruments. We anticipate that future sources of liquidity will principally come from sales of common stock and other equity instruments, borrowings from credit facilities and revenue from our commercial operations. See Note 9 to our consolidated financial statements for a discussion of our recent equity activity and Note 8 to our consolidated financial statements for a discussion of terms and provisions of our debt included in this Annual Report on Form 10-K for more information.
Cash Flows
We derive cash flows from operations primarily from the sale of our products and services. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have developed our technology, expanded our business and built our infrastructure and this may continue in the future. The following table sets forth the cash flow from operating, investing and financing activities for the periods presented:
Year Ended December 31,
2020
2019
Net cash provided by (used in):
Operating activities $ (38,314,378) (29,529,720)
Investing activities (2,449,952) (61,056)
Financing activities 61,901,667 30,379,420
Operating Activities
Net cash used in operating activities was $38.3 million during the year ended December 31, 2020 as compared to $29.5 million during the year ended December 31, 2019. The increase in cash used in operating activities of $8.8 million is attributed to increased headcount across the business, increased professional fees to support ongoing business operations and increase our international presence, increased spending on materials and supplies, as well as $1.5 million in acquisition-related costs.
67
Investing Activities
Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our expanding infrastructure. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. During the year ended December 31, 2020, cash used in investing activities related to the acquisition of Lineagen, our new wholly owned subsidiary. We did not use a significant amount of cash in investing activities during the year ended December 31, 2019.
Financing Activities
Net cash provided by financing activities was $61.9 million during the year ended December 31, 2020 as compared to $30.4 million during the year ended December 31, 2019, an increase of $31.5 million. During the year ended December 31, 2020, we raised approximately $16.4 million in net proceeds from a follow-on offering, and $28.6 million from warrant exercises, and $21.6 million in ATM sales. In addition, we received approximately $1.8 million pursuant to the PPP Loan, as defined in Note 8 to our consolidated financial statements included in this Annual Report. Offsets included payments of $2.3 million on our revolving line of credit and $5.0 million in term-loan principal prepayments in accordance with the Second Amendment. During the year ended December 31, 2019, we had net proceeds of $11.0 million from the Innovatus LSA and Innovatus Purchase Agreement, $2.5 million from the Aspire Purchase Agreement, and net proceeds from our follow-on public offering of $16.0 million.
Capital Resources
As of December 31, 2020, we had approximately $38.4 million in cash and cash equivalents, and working capital of $37.8 million. In addition, we have a revolving line of credit with Innovatus Life Sciences Lending Fund I, LP (the “Innovatus LSA”), under which no borrowings were outstanding as of December 31, 2020. As of December 31, 2020, the amount available under the revolving line of credit was $5.0 million. This facility is scheduled to expire in March 2024. See Note 8 to our consolidated financial statements for a discussion of terms and provisions of our debt included in this Annual Report on Form 10-K for more information.
During October through December 2020, pursuant an effective registration statement on Form S-3, we sold 27,025,384 shares of our common stock under an at-the-market facility, or the Ladenburg ATM, at an average share price of $0.82, and received gross proceeds of approximately $22.1 million before deducting offering costs of $573,263. In January 2021, we sold an additional 6,298,152 shares of our common stock under the Ladenburg ATM at an average share price of $2.68, and received gross proceeds of approximately $16.9 million before deducting offering costs of $422,034.
On January 12, 2021, we completed an underwritten public offering of 33,368,851 shares of our common stock, including 4,352,458 shares of our common stock sold pursuant to the underwriters' exercise in full of their option to purchase additional shares. The price to the public in the offering was $3.05 per share and the underwriters purchased the shares from us pursuant to the underwriting agreement at a price of $2.867 per share. The gross proceeds to us were approximately $101.8 million before deducting underwriting discounts and commissions and other offering expenses.
On January 25, 2021, we completed an underwritten public offering of 38,333,352 shares of our common stock, including 5,000,002 shares of our common stock sold pursuant to the underwriters' exercise in full of their option to purchase additional shares. The price to the public in the offering was $6.00 per share and the underwriters purchased the shares from us pursuant to the underwriting agreement at a price of $5.64 per share. The gross proceeds to us were approximately $230.0 million before deducting underwriting discounts and commissions and other offering expenses.
Management believes the available cash balance will be sufficient to fund operations, obligations as they become due, and capital investments for at least the next twelve months.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, and similarly did not and do not have any holdings in variable interest entities.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on for information concerning recent accounting pronouncements.
68
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We generate revenue from the sale of our OGM products, primarily our Saphyr system and related consumables, and related services, which are primarily support, repair and maintenance services on the instruments. These products are sold primarily through a direct sales force, and within international markets, there is more reliance on distributors. In addition, we provide the Saphyr system to certain customers under our reagent rental program, under which we provides Saphyr systems to customers at no cost and the customers agree to purchase minimum quantities of consumables. We also generate revenue by performing diagnostic testing services, sourced from our recently acquired subsidiary, Lineagen. Revenue is recorded net of sales tax. We provide assurance-type warranties on our instruments with a term of one year, which are not material performance obligations, and also offer separately-priced extended warranties for periods after the initial year.
We consider revenue to be earned when all of the following criteria are met: we have a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the amount we expect to receive, including an estimate of uncertain amounts subject to a constraint to ensure revenue is not recognized in an amount that would result in a significant reversal upon resolution of the uncertainty, is determinable; and we have transferred control of the promised items to the customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the contract. The transaction price for the contract is measured as the amount of consideration we expect to receive in exchange for the goods and services expected to be transferred. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control of the distinct good or service is transferred.
Transfer of control for our products is generally at shipment or delivery, depending on contractual terms, but occurs when title and risk of loss transfers to the customer which represents the point in time when the customer obtains the use of and substantially all of the remaining benefit of the product. As such our performance obligation related to product sales is satisfied at a point in time.
Revenue from support and maintenance contracts and extended warranties are recognized over time based on the contract term, which represents a faithful depiction of the transfer of goods and services given the stand-ready nature of the performance obligations. Service revenue related to repairs and customer sample evaluations are recognized as the services are performed based on the specific nature of the service.
For transfers of instruments and consumables to customers under our rental reagent program, we allocate the total contract consideration between the instrument and the consumables based on estimates of stand-alone selling prices, and we recognize the instrument revenue evenly over the rental period, and the consumables revenue when the consumables are delivered.
Revenue from the completion of diagnostic testing services is recorded at the billed value less estimated contractual adjustments. We perform our obligation under a contract with a customer by processing diagnostic tests and communicating the test results, which we have determined is the point at which control is transferred to the customer for revenue recognition purposes.
We recognize a receivable when it has an unconditional right to payment, which is generally at the time of shipment of consumables and instruments, including any extended warranties, and at the time when services are rendered. Payment terms are typically 30 days for sales to customers in the United States but may be longer in international markets. We treat shipping and handling costs performed after a customer obtains control of the good as a fulfillment cost and record these costs within selling, general and administrative expenses, less any amounts reimbursed by the customer, when the corresponding revenue is recognized.
Some of our contracts have multiple performance obligations. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. If the product or service does not have a history of sales or if sales volume is not sufficient, including
69
instruments under reagent rental agreements, we have estimated the standalone selling price to be the incremental sales price generally charged for consumables to customers under the reagent rental agreements in relation to amounts charged to other customers.
Variable Consideration
We exercise judgment in estimating variable consideration, if any, which would be recorded as a reduction to revenue. To the extent the transaction price includes variable consideration, we apply judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. We evaluate constraints based on our historical and projected experience with similar customer contracts.
Our contracts typically do not provide for product returns or refunds. In general, estimates of variable consideration and constraints are not material to our financial statements.
Remaining Performance Obligations
As of December 31, 2020, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied was $513,379. These remaining performance obligations primarily relate to extended warranty and support and maintenance obligations. We expect to recognize approximately 81% of this amount as revenue in 2021, 16% in 2022 and 3% in 2023. Warranty revenue is included in service and other revenue.
Contract Assets and Liabilities
We disclose accounts receivable separately in the consolidated balance sheets at their net realizable value. Contract assets primarily relate to our conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were immaterial.
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. We record a contract liability, or deferred revenue, when we have an obligation to provide service, and to a much lesser extent product, to the customer and payment is received or due in advance of performance. Deferred revenue primarily relates to support and maintenance contracts and extended warranty obligations. Contract liabilities are classified as other current liabilities and other long-term liabilities on the consolidated balance sheets. We recognized revenue of $357,492 and $270,171 during the years ended December 31, 2020 and 2019, respectively, which was included in the contract liability balance at the end of the previous year.
Distributor Transactions
In certain markets, we sell products and provide services to customers through distributors that specialize in life sciences products. In cases where the product is delivered to a distributor, revenue recognition generally occurs when title transfers to the distributor. The terms of sales transactions through distributors are generally consistent with the terms of direct sales to customers and do not contain return rights. Distributor sales transactions typically differ from direct customer sales as they do not require our services to install the instrument at the end customer or perform the services for the customer that are beyond our standard warranty in the first year following the sale. These transactions are accounted for in accordance with our revenue recognition policy described herein.
Stock-Based Compensation Expense
We recognize compensation expense for employees based on an estimated grant date fair value using the Black-Scholes option-pricing method. We have elected to account for forfeitures as they occur.
The inputs for the Black-Scholes valuation model require management’s significant assumptions. The common share price was determined by using the quoted price on the grant date. The risk-free interest rates were based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected life was based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos. 107 and 110. The expected volatility was estimated based on historical volatility information of peer companies that are publicly available.
Goodwill Impairment
We review goodwill annually at the reporting unit level at the same time every year or when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. We have established December 31 as the annual impairment test date. We first make a qualitative assessment as to whether goodwill is impaired and if it is more likely than not that goodwill is impaired, we perform a quantitative impairment analysis to determine if goodwill is impaired. We may also determine to skip the qualitative assessment in any year and move directly to the quantitative test. For the quantitative test, we determine the fair value of the reporting unit, then compare the fair value of the reporting unit to its carrying value. Goodwill impairment is recorded for any excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The determination of fair value requires a number of significant assumptions and judgments, including assumptions about future economic conditions, revenue growth, operating margins, and discount rates.
70
We have determined that the Company is a single reporting unit for purposes of goodwill impairment testing. As of December 31, 2020, we performed a qualitative assessment of goodwill impairment which included an evaluation of changes in industry, market and macroeconomic conditions as well as consideration of our financial performance and any significant trends. Our qualitative assessment indicated that it was not more likely that not that goodwill is impaired. No impairments of goodwill were reported during the years ended December 31, 2020 and 2019.
Business Combinations
We apply the provisions of ASC 805, Business Combinations, in accounting for acquisitions. It requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are required to be recorded to our consolidated statements of operations.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and any contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company and are inherently uncertain.
JOBS Act
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act. Under the JOBS Act, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of new or revised accounting standards that have different transition dates for public and private companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period. As a result of this election, our timeline to comply with these standards will in many cases be delayed as compared to other public companies that are not eligible to take advantage of this election or have not made this election. Therefore, our financial statements may not be comparable to those of companies that comply with the public company effective dates for these standards.
For so long as we are an emerging growth company we expect that:
• we will present only two years of audited consolidated financial statements, plus unaudited consolidated condensed financial statements for any interim period, and related management’s discussion and analysis of financial condition and results of operations in our initial registration statement;
• we will avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
• we will avail ourselves of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards; and
• we will provide less extensive disclosure about our executive compensation arrangements.
We will remain an emerging growth company for up to five years, although we will cease to be an “emerging growth company” upon the earliest of: (1) December 31, 2023, which is the end of the fiscal year following the fifth anniversary of the closing of our IPO, (2) the last day of the first fiscal year in which our annual revenues are $1.07 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities, or (4) the date on which we are deemed to be a “large accelerated filer” as defined in the Exchange Act.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide information typically disclosed under this item.
71