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
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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 provider of genome analysis solutions that can enable researchers and clinicians to reveal answers to challenging questions in biology and medicine. Our mission is to transform the way the world sees the genome through optical genome mapping, or OGM, solutions, diagnostic services and software. We offer OGM solutions for applications across basic, translational and clinical research. Through our Lineagen business, we provide diagnostic testing for patients with clinical presentations consistent with autism spectrum disorder and other neurodevelopmental disabilities. Through our BioDiscovery business, we offer an industry-leading, platform-agnostic software solution, which integrates next-generation sequencing and microarray data designed to provide analysis, visualization, interpretation and reporting of copy number variants, single-nucleotide variants and absence of heterozygosity across the genome in one consolidated view.
We have incurred losses in each year since our inception. Our net losses were $72.4 million and $41.1 million for the years ended December 31, 2021, and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $216.1 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. We closely monitor and comply with various applicable guidelines and legal requirements in the jurisdictions in which we operate, 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. If restrictions related to COVID-19 persist, we could see additional supply chain disruptions that impact our ability to produce our products and may cause us to make strategic determinations regarding, among other things, the cost and quality of the components and supplies we acquire. At various times throughout the pandemic, we have been unable to visit certain customer sites to support installation of service our OGM systems. Our manufacturing partners, suppliers, and customers, have implemented similar operational reductions. This overall reduction in activity has contributed to a decrease in sales which negatively impacted the Company’s 2021 financial results. The future effects of COVID-19 are unknown and our financial results may continue to be negatively affected in the future.
During the twelve months ended December 31, 2021, we experienced supply chain challenges, which we largely attribute to the COVID-19 pandemic. While the COVID-19 pandemic did not prevent us from operating our business during the twelve months ended December 31, 2021, we experienced substantially increased cost to secure certain component parts in our products and to produce our products at our contract manufacturers.
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. Further, the travel restrictions on our business have limited our ability to support our global and domestic operations, including providing installation and training and customer service, which has and may continue to slow the pace of our commercial strategy, sales and marketing efforts. These negative effects could have a material impact on our operations, business, earnings, and liquidity.
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, we provide instruments to certain customers under our reagent rental program, under which we provide 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 generate service revenue from the sale of diagnostic testing services for those with autism spectrum disorder and other neurodevelopmental disabilities
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through our wholly owned subsidiary Lineagen. We also generate service and product revenue through BioDiscovery’s NxClinical software which provides customers with solutions for analysis, interpretation and reporting of genomics data. Other revenue consists of warranty and other service-based revenue.
The following table presents our revenue for the periods indicated:
Years Ended December 31,
2021
2020
Product revenue $ 11,695,000 $ 6,230,000
Service and other revenue 1
6,286,000 2,273,000
Total $ 17,981,000 $ 8,503,000
1 Includes $1.1 million of revenue generated by BioDiscovery from the date of acquisition through December 31, 2021.
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.
Years Ended December 31,
2021
2020
$ % $ %
North America $ 9,329,000 52 % $ 4,489,000 53 %
EMEIA 5,604,000 31 % 3,163,000 37 %
Asia Pacific 3,048,000 17 % 851,000 10 %
Total $ 17,981,000 100 % $ 8,503,000 100 %
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.
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Results of Operations
The following table sets forth our results of operations for the years ended December 31, 2021 and 2020:
Years Ended December 31, Period-to-Period Change Period-to-Period Percentage Change
2021
2020 2021 to 2020 2021 to 2020
Product revenue $ 11,695,000 $ 6,230,000 $ 5,465,000 88%
Service and other revenue 6,286,000 2,273,000 4,013,000 177%
Total revenue 17,981,000 8,503,000 9,478,000 111%
Cost of product revenue 10,524,000 4,810,000 5,714,000 119%
Cost of service and other revenue 3,583,000 920,000 2,663,000 289%
Total cost of revenue 14,107,000 5,730,000 8,377,000 146%
Research and development 22,485,000 10,256,000 12,229,000 119%
Selling, general and administrative 58,490,000 31,068,000 27,422,000 88%
Total operating expenses 80,975,000 41,324,000 39,651,000 96%
Loss from operations (77,101,000) (38,551,000) (38,550,000) 100%
Interest income 236,000 — 236,000 100%
Interest expense (927,000) (2,519,000) 1,592,000 (63)%
Gain on forgiveness of Paycheck Protection Program loan 1,775,000 — 1,775,000 100%
Loss on debt extinguishment (2,076,000) — (2,076,000) (100)%
Other expense (59,000) (7,000) (52,000) 743%
Loss before income taxes (78,152,000) (41,077,000) (37,075,000) 90%
Provision for income taxes 5,717,000 (29,000) 5,746,000 (19,814)%
Net loss $ (72,435,000) $ (41,106,000) $ (31,329,000) 76%
Revenue
Years Ended December 31, Period-to-Period Change Period-to-Period Percentage Change
2021
2020
2021 to 2020 2021 to 2020
Instrument revenue $ 5,887,000 $ 3,085,000 $ 2,802,000 91%
Consumable revenue 5,808,000 3,145,000 2,663,000 85%
Product revenue 11,695,000 6,230,000 5,465,000 88%
Services and other revenue 6,286,000 2,273,000 4,013,000 177%
Total revenue $ 17,981,000 $ 8,503,000 $ 9,478,000 111%
Revenue increased by $9.5 million, or 111% to $18.0 million for the year ended December 31, 2021, as compared to $8.5 million for the same period in 2020. The increase in product sales was driven by increased demand for our Saphyr OGM solutions, including increased instrument sales and greater demand for our reagent rental program and consumables. We believe increased demand for our OGM systems was primarily driven by increased market awareness and additional published data demonstrating the utility of OGM. During the year ended December 31, 2021, the total install base of our OGM systems increased by approximately 69%, 97 as of December 31, 2020 to 164 as of December 31, 2021. Additionally, for the year ended December 31, 2021, total flowcells sold reached 12,518, an increase of approximately 100% from the 6,311 flowcells sold during the year ended December 31, 2020. The increase in service and other revenue was primarily driven by sales generated by our Lineagen and BioDiscovery subsidiaries.
Cost of Revenue
Cost of revenue increased by $8.4 million, or 146%, to $14.1 million for the year ended December 31, 2021, as compared to $5.7 million for the same period in 2020. Cost of product revenue increased primarily due to increased product sales, but was also negatively impacted by unfavorable flowcell yields in the production cycle. The yield issues led us to record a $1.2 million inventory write-off in the fourth quarter of 2021, charged to cost of product revenue. If we are unable to solve for the yield issue, it could lead to lower gross margins in future periods. Cost of service and other revenue increased primarily due to costs from Lineagen sales contributing for a full year in 2021 versus a little more than one quarter in 2020.
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Research and Development Expenses
Research and development, or R&D expenses, increased by $12.2 million, or 119%, to $22.5 million for the year ended December 31, 2021 as compared to $10.3 million for the same period in 2020. This is due to headcount additions to our development teams, resulting in a $7.2 million increase in R&D compensation expense. This increase was further driven by a $5.0 million increase in product development costs, including internal materials and supply consumption costs, foundry expenses, clinical trial research, and consulting costs.
We expect research and development expenses to increase in 2022 relative to 2021 as we have added headcount in order to support our efforts to develop more scalable and efficient manufacturing workflows, expand the utility of Saphyr, and develop the next versions of OGM products – including integration of OGM data into our NxClinical software. We expect that stock based compensation will drive a significant portion of the increase in expense in 2022 as a result of the stock issued as consideration in the BioDiscovery acquisition, which primarily rolls up into research and development expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $27.4 million, or 88%, to $58.5 million for the year ended December 31, 2021 as compared to $31.1 million for the same period in 2020. This increase is primarily due to a $17.0 million increase in compensation costs driven by increased headcount, and a $2.6 million increase in other headcount-related expenses. Other headcount-related expenses included the cost of recruiting, temporary employment, and facilities expenses incurred in order to support increased product demand. Headcount increased 103% from 2020 to 2021 to our global sales and back-office teams to support world-wide product distribution. In addition, we increased headcount as a result of the acquisition of BioDiscovery. Professional services – including accounting, legal, investor relations, market research, and annual meeting expenses – increased by $4.6 million. In 2021, legal costs include a total of $1.5 million in transaction-related expenses that were recorded for the BioDiscovery acquisition. The increase in accounting fees was primarily due to SOX compliance efforts and accounting for the BioDiscovery transaction while the increase in annual meeting expense is tied to the increase in the number of Bionano shareholders.
We expect selling, general, and administrative expenses to increase in 2022 due to our continuing investment in growing and supporting our customer base. We expect stock based compensation to drive a significant portion of the increase in expense in 2022 due to stock option awards issued to senior-level Q4 2021 hires as well as awards annual refresher grants issued to executives and non-executives in February 2022.
Interest Expense
Interest expense decreased by $1.6 million, or 63%, to $0.9 million for the year ended December 31, 2021, as compared to $2.5 million for the same period in 2020. In May 2021, we paid off the outstanding principal balance of the Company’s March 2019 Loan and Security Agreement (“Innovatus LSA”). The Innovatus LSA was outstanding for all of 2020 .
Interest Income
Interest income was $0.2 million, for the year ended December 31, 2021, as compared to $0.0 million for the same period in 2020 resulting from positive returns on investments. Our total available-for-sale securities balance was $226.0 million as of December 31, 2021.
Gain on forgiveness of Paycheck Protection Program loan
A gain on forgiveness of our Paycheck Protection Program loan, or PPP Loan, of $1.8 million was recognized during the year ended December 31, 2021 in connection with the forgiveness of the PPP Loan, including all accrued interest in full.
Loss on debt extinguishment
A loss on debt extinguishment of $2.1 million was recognized during the year ended December 31, 2021 in connection with our payment in full of the Innovatus LSA, including all accrued interest, an end of term fee, a prepayment fee, and write-off of unamortized debt issuance costs
Income tax benefit (expense)
Income tax benefit increased by $5.7 million, or 19,814%, to a $5.7 million benefit for the year ended December 31, 2021, as compared to a $29,000 expense for the same period in 2020, driven by the acquisition of BioDiscovery. As a result of the acquisition, we recorded a $5.8 million deferred tax liability related to customer lists, patents/trademarks, developed technology, and fixed assets as part of the business combination which reduced the Company’s valuation allowance by $5.8 million, resulting in an income tax benefit for the period.
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Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from operations. We incurred net losses of $72.4 million and $41.1 million, and used $71.9 million and $38.3 million of cash from our operating activities for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $216.1 million, cash and cash equivalents of $24.6 million and $226.0 million in available-for-sale securities.
Sources of Liquidity
In the years ended December 31, 2021 and 2020, we have generated cash flows from sales of common stock and other equity instruments. Additionally, during the year ended December 31, 2020, we relied on debt as a source of liquidity. 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. Revenue from our commercial operations has increased due to our acquisition of revenue-positive BioDiscovery. See Note 10 to our consolidated financial statements for a discussion of our recent equity activity and Note 9 to our consolidated financial statements for a discussion of terms and provisions of our debt included in this Annual Report.
Future Capital Requirements
We expect that our near and longer-term liquidity requirements will consist of working capital and general corporate expenses associated with the growth of our business, including, without limitation, expenses associated with scaling up our operations and continuing to increase our manufacturing capacity, sales and marketing expense, increasing market awareness of our products and services to target customers, instrument placements with customers via the reagent rental sales strategy, additional research and development expenses associated with expanding our offerings, expenses associated with continuing to build out our corporate infrastructure and expenses associated with being a public company. Our short-term capital expenditure needs relate primarily to the ongoing build out of our manufacturing and research facilities, service lab and service-related capabilities, research and development expenses related to current and future product offerings, and enhancements to information technology. We expect such expenditures to continue throughout 2022.
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:
Years Ended December 31,
2021
2020
Net cash provided by (used in):
Operating activities $ (71,927,000) $ (38,314,000)
Investing activities (278,062,000) (2,450,000)
Financing activities 336,111,000 61,902,000
Operating Activities
2021 Compared to 2020
Net cash used in operating activities was $71.9 million during the year ended December 31, 2021 as compared to $38.3 million during the year ended December 31, 2020. The increase in cash used in operating activities of $33.6 million is attributed to increased headcount of 103% 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 transaction costs, including financial advisor fees, legal expenses and accounting fees during the year ended December 31, 2021. We anticipate our use of cash in operating activities to increase in the next 12 to 24 months due to anticipated increases in headcount and ongoing support of our growing operations, including, R&D operations. As discussed below, we anticipate our available cash balance will be sufficient to fund those increases in cash used in operating activities through at least the next 12 months, but we may consider funding those increases or increases beyond the next 12 months with the methods discussed in the section below entitled “Capital Resources.”
Investing Activities
2021 Compared to 2020
Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our expanding infrastructure, as well as the acquisitions of Lineagen and BioDiscovery to grow our business. We
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expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. Net cash used in investing activities was $278.1 million during the year ended December 31, 2021, compared to $2.5 million during the year ended December 31, 2020. This increase in cash used in investment activities of $275.6 million is attributed to the acquisition of BioDiscovery, our new wholly owned subsidiary, as well as purchases of available-for-sale investment securities.
Financing Activities
2021 Compared to 2020
Net cash provided by financing activities was $336.1 million during the year ended December 31, 2021 as compared to $61.9 million during the year ended December 31, 2020, an increase of $274.2 million. During the year ended December 31, 2021, we raised approximately $311.1 million in net proceeds from executing two follow-on offerings, $10.0 million from warrant and stock option exercises, and $29.9 million in sales under our at-the-market facilities with Landenburg Thalmann & Co. Inc., or Landenburg, and Cowen and Company, LLC, or Cowen. These proceeds were offset by our repayment in full of all outstanding amounts under our Innovatus LSA of $15.0 million, including all accrued interest, the end of term fee, and a prepayment fee.
Capital Resources
As of December 31, 2021, we had approximately $24.6 million in cash and cash equivalents, $226.0 million of available-for-sale securities, and $250.6 million of working capital.
During the fourth quarter of 2020, we sold 27.0 million shares of our common stock under our prior at-the-market facility at an average share price of $0.82, and received gross proceeds of approximately $22.1 million before deducting offering costs of $0.6 million. In January 2021, we sold an additional 6.3 million shares of our common stock under the such prior at-the-market facility at an average share price of $2.68, and received gross proceeds of approximately $16.9 million before deducting offering costs of $0.4 million. This at-the-market facility was terminated effective March 22, 2021 and replaced by an ATM with Cowen and Company, LLC, or the Cowen ATM.
On January 12, 2021, we completed an underwritten public offering of 33.4 million shares of our common stock, including 4.4 million 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 19, 2021, we filed an automatically effective shelf registration statement on Form S-3 (File No. 333-252216) with the U.S. Securities and Exchange Commission, or SEC, as a “well-known seasoned issuer.” The registration statement allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings. However, there can be no assurance that we will complete any future offerings of securities. Any future offerings under this registration statement will be dependent upon, among other factors, market conditions, available pricing, our financial condition, investor perception of our prospects, our capital needs and our ability to maintain status as a well-known seasoned issuer.
On January 25, 2021, we completed an underwritten public offering pursuant to our shelf registration statement of 38.3 million shares of our common stock, including 5.0 million 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.
On March 23, 2021, we entered into a Sales Agreement with Cowen and Company, LLC, or the Cowen ATM, or Cowen, pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $350.0 million, through or to Cowen, acting as sales agent or principal. In the third quarter of 2021, the Company sold 2.3 million shares of common stock under the Cowen ATM at an average share price of $6.15 per share, and received gross proceeds of approximately $13.9 million before deducting offering costs of $0.6 million .
We believe that our cash, cash equivalents, and available for sale securities will be sufficient to fund our planned operations, obligations as they become due, and capital investments for at least the next twelve months. This estimate is based on our current business plan. This estimate does not reflect any additional expenditures resulting from potential acquisitions or strategic transactions. We have based these estimates on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. See Note 1 to our consolidated financial statements included elsewhere in this Annual Report for more information.
Contractual Obligations
The following table summarizes our future cash outflows for contractual obligations as of December 31, 2021.
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Payments Due by Period
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 years
Operating lease obligations, including interest $ 8,162,000 $ 1,881,000 $ 3,961,000 $ 2,320,000 $ —
Finance lease obligations, including interest, related party 7,599,000 314,000 652,000 684,000 5,949,000
Purchase obligations 6,480,000 3,240,000 1,350,000 — —
Total contractual obligations $ 22,241,000 $ 5,435,000 $ 5,963,000 $ 3,004,000 $ 5,949,000
Operating lease obligations relate to our office, laboratory and manufacturing space for our corporate headquarters in San Diego, California and Lineagen operations in Salt Lake City, Utah. Finance lease obligations relate to our BioDiscovery office in El Segundo, California. See Note 11, Commitments and Contingencies to our consolidated financial statements included in this Annual Report.
Purchase obligations primarily represent commitments for purchases of inventory from our supplier as disclosed in Note 11, Commitments and Contingencies to our consolidated financial statements included in this Annual Report.
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. These accounting principles require us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. We believe that the estimates, judgments and assumptions are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. Historically, revisions to our estimates have not resulted in a material change to our financial statements. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, the significant accounting estimates that we believe are important to aid in fully understanding and evaluating our reported financial results include the following:
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. Our expected dividend yield assumption is zero as we have never paid dividends and have no present intention to do so in the future.
Goodwill
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.
We have determined that the Company is a single reporting unit for purposes of goodwill impairment testing. As of December 31, 2021, 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, 2021 and 2020.
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Business Combinations
We apply the provisions of ASC 805, Business Combinations, in accounting for acquisitions. It requires us to recognize separately from goodwill the identifiable 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 identifiable 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.
We generally use the income approach to derive the fair value of the above identified intangible assets when accounting for business combinations. This approach calculates fair value by estimating future cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. We selected this method because we believe the income approach most appropriately measures the value of our income producing assets. This approach requires significant management judgment with respect to future volume, revenue and expense growth rates, changes in working capital use, appropriate discount rates, terminal values and other assumptions and estimates. The estimates and assumptions used are consistent with our business plans. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the asset. Actual results may differ from management’s estimates.
We record contingent consideration resulting from a business combination at its fair value on the acquisition date. On a quarterly basis, we revalue this obligation and record any increase or decrease in fair value as an adjustment to the consolidated statement of operations. Changes to the fair value of the contingent consideration obligation may result from changes to the discount rate, the passage of time, or changes in our estimate of the likelihood or timing of achieving the criteria for payment of the contingent consideration. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent reporting period. Accordingly, changes in the assumptions described above could have a material impact on the amount of income or expense we record for contingent consideration in any given period.
Recent Accounting Pronouncements
Refer to Note 2, ‘‘Summary of Significant Accounting Policies,’’ in the accompanying notes to our consolidated financial statements included in this Annual Report for a discussion of recent accounting pronouncements.
JOBS Act Accounting Election
Previously, we were an emerging growth company within the meaning of the JOBS Act. Section 107(b) of the JOBS Act provides that an emerging growth company can leverage the extended transition period, provided in Section 102(b) of the JOBS Act, for complying with new or revised accounting standards. However, because the market value of our common stock held by non-affiliates exceeded $700.0 million as of June 30, 2021, we are no longer an emerging growth company effective December 31, 2021. As a result, we now apply public company adoption dates for new or revised accounting standards. Further, we were required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley regarding our internal control over financial reporting as of December 31, 2021.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.