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 OGM solutions, diagnostic services and software. We offer OGM solutions for applications across basic, translational and clinical research, and for other applications including bioprocessing. Through our Bionano Laboratories business, we also 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. Through our Purigen business, we offer nucleic acid extraction and purification solutions using proprietary ITP technology.
We expect to see OGM adoption in cytogenomics, discovery research and cell bioprocessing quality control (QC). Within cytogenetics and molecular pathology, we estimate the number of cytogenetic labs on a worldwide basis (excluding India and developing countries) to be approximately 10,000. We estimate that these labs analyze approximately 10.0 million samples per year. Additionally, we estimate the number of pharmaceutical and biotech companies that are engaged in research and development of various cell therapies that rely on methods, including cytogenetics, for QC of the cell modification and manufacturing process to be approximately 1,400. Based on these estimates, we believe the economic potential for OGM in these markets is approximately $10.0 billion annually, $3.0 billion of which we attribute to cell bioprocessing QC. We believe there are additional potential future market opportunities for OGM including newborn screening, population genomics, and neurological and cardiological risk assessment which are not included in our estimates above.
We have incurred losses in each year since our inception. Our net losses were $132.6 million and $72.4 million for the years ended December 31, 2022, and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $348.7 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.
Accordingly, based on recurring losses from operations incurred since inception, the expectation of continued operating losses, and the need to raise additional capital to finance our future operations, we determined that there is substantial doubt about our ability to continue as a going concern within 12 months of this Annual Report.
Macroeconomic and Geopolitical Developments
We are subject to additional risks and uncertainties as a result of adverse geopolitical and macroeconomic developments, such as the ongoing conflict between Ukraine and Russia and related sanctions, any lingering effects of COVID-19 and uncertain market conditions, including inflation and supply chain disruptions, which could continue to have a material impact on our business and financial results.
Following the invasion of Ukraine by Russia, the U.S. and global financial markets experienced volatility, which has led to disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity globally. In response to the invasion, the United States, United Kingdom and European Union, along with others, imposed significant new sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future. The full economic and social impact of the sanctions imposed on Russia and possible future punitive measures that may be implemented, as well as the counter measures imposed by Russia, in addition to the ongoing military conflict between Ukraine and Russia, which could conceivably expand into the surrounding region, remains uncertain; however, both the conflict and related sanctions have resulted, and could continue to result, in disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity on acceptable terms, in both Europe and globally, and has introduced significant uncertainty into global markets. As a result, our business and results of operations may be adversely affected by the ongoing conflict between Ukraine and Russia and related sanctions, particularly to the extent it escalates to involve additional countries, further economic sanctions or wider military conflict.
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We closely monitor and comply with various applicable guidelines and legal requirements in the jurisdictions in which we operate. As a result of COVID-19 and actions taken to reduce its spread, 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. We may also see negative effects on enrollment in our ongoing or future clinical studies. At various times throughout the pandemic, we have been unable to visit certain customer sites to support installation or 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 our financial results in fiscal years 2021 and 2022. The future effects of the COVID-19 pandemic, if any, are unknown and our financial results may continue to be negatively affected as a result. The COVID-19 pandemic may also have long-term effects on the nature of the office environment and remote working, which may present strategy, operational, talent recruiting and retention and workplace culture challenges that may adversely affect our business.
During the twelve months ended December 31, 2022, 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, 2022 and 2021, we experienced increased costs to secure certain component parts in our products and to produce our products at our contract manufacturers. We expect these increased costs to remain high as the COVID-19 pandemic, the Ukraine-Russia conflict and their respective effects persist. As global economic conditions recover, business activity may not recover as quickly as anticipated, and it is not possible at this time to estimate the long-term impact that these and related events could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. For instance, product demand may be reduced due to an economic recession, a decrease in corporate capital expenditures, prolonged unemployment, rising inflation rates, labor shortages, reduction in consumer confidence, adverse geopolitical and macroeconomic developments, 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 systems and consumables, which includes our instruments, and our NxClinical™ software. We currently sell our systems for research use only applications and our customers are primarily laboratories associated with academic and governmental research institutions, academic and commercial clinical laboratories, 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 reagents and chips necessary to process a sample. Sales of our NxClinical™ software, which provides customers with solutions for analysis, interpretation and reporting of genomics data, are made on a subscription basis. We generate service revenue from the sale of diagnostic testing services for those with autism spectrum disorder and other neurodevelopmental disabilities through Bionano Laboratories, as well as services performed related to customer sample evaluations using the Saphyr system. Other revenue consists of warranty and other service-based revenue, including support, repair and maintenance services.
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The following table presents our revenue for the periods indicated:
Years Ended December 31,
2022
2021
Product revenue $ 20,425,000 $ 12,686,000
Service and other revenue 7,377,000 5,295,000
Total $ 27,802,000 $ 17,981,000
The following table reflects total revenue by geography and as a percentage of total revenue, based on the billing address of our customers. Americas consists of North America and South America. EMEA consists of Europe, Middle East and Africa. Asia Pacific includes China, Japan, South Korea, Singapore, Australia and India.
Years Ended December 31,
2022
2021
$ % $ %
Americas $ 13,862,000 50 % $ 9,329,000 52 %
EMEA 8,960,000 32 % 5,604,000 31 %
Asia Pacific 4,980,000 18 % 3,048,000 17 %
Total $ 27,802,000 100 % $ 17,981,000 100 %
Cost of Revenue
Cost of product revenue for our systems 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, amortization expense related to acquired intangibles, 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, 2022 and 2021:
Years Ended December 31, Period-to-Period Change Period-to-Period Percentage Change
2022
2021
2022 to 2021 2022 to 2021
Product revenue $ 20,425,000 $ 12,686,000 $ 7,739,000 61%
Service and other revenue 7,377,000 5,295,000 2,082,000 39%
Total revenue 27,802,000 17,981,000 9,821,000 55%
Cost of product revenue 15,966,000 10,524,000 5,442,000 52%
Cost of service and other revenue 5,891,000 3,583,000 2,308,000 64%
Total cost of revenue 21,857,000 14,107,000 7,750,000 55%
Research and development 49,047,000 22,485,000 26,562,000 118%
Selling, general and administrative 88,596,000 58,490,000 30,106,000 51%
Total operating expenses 137,643,000 80,975,000 56,668,000 70%
Loss from operations (131,698,000) (77,101,000) (54,597,000) 71%
Interest income 1,507,000 236,000 1,271,000 539%
Interest expense (298,000) (927,000) 629,000 (68)%
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 (223,000) (59,000) (164,000) 278%
Loss before income taxes (130,712,000) (78,152,000) (52,560,000) 67%
Benefit (provision) for income taxes (1,884,000) 5,717,000 (7,601,000) (133)%
Net loss $ (132,596,000) $ (72,435,000) $ (60,161,000) 83%
Revenue
Years Ended December 31, Period-to-Period Change Period-to-Period Percentage Change
2022
2021
2022 to 2021 2022 to 2021
Instruments $ 8,567,000 $ 5,887,000 $ 2,680,000 46%
Consumables 6,731,000 5,808,000 923,000 16%
Software 5,127,000 991,000 4,136,000 417%
Total product revenue 20,425,000 12,686,000 7,739,000 61%
Services and other 7,377,000 5,295,000 2,082,000 39%
Total revenue $ 27,802,000 $ 17,981,000 $ 9,821,000 55%
We have revised the classification of its revenue between the categories in the table above for the December 31, 2021 income statement to separately present software revenue. In our December 31, 2021 income statement, “software” was included in “services and other.”
Revenue increased by $9.8 million, or 55% to $27.8 million for the year ended December 31, 2022, as compared to $18.0 million for the same period in 2021, driven primarily from an increase in instrument and software sales as discussed below.
Instrument revenue increased $2.7 million, or 46%, to $8.6 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021, due to an increase in instruments sold. For the year ended December 31, 2022, our installed base grew to 240 Saphyr systems compared to the 164 systems for the year ended December 31, 2021. We expect the number of Saphyr placements to continue to grow during 2023, driven by increased market awareness and additional published data demonstrating the utility of OGM solutions.
Consumables revenue increased $0.9 million, or 16%, to $6.7 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase in consumable revenue was attributable to higher Saphyr consumables sales given the growth of the instrument installed base. For the year ended December 31, 2022, total flowcells sold reached 15,375, an increase of approximately 23% from the 12,518 flowcells sold during the year ended December 31, 2021.
Software revenue increased $4.1 million, or 417%, to $5.1 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase is attributed to BioDiscovery’s NxClinical™ software contributing for a full year in 2022, and software revenue is expected to even out as a result. BioDiscovery was acquired in October 2021.
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Service and other revenue increased $2.1 million, or 39%, to $7.4 million for the year ended December 31, 2022, primarily due to a $1.2 million increase in revenue contributed from diagnostic and service project revenue contributed from Bionano Laboratories.
Cost of Revenue, Gross Profit, and Gross Margin
Years Ended December 31, Period-to-Period Change Period-to-Period Percentage Change
2022
2021
2022 to 2021 2022 to 2021
Gross profit (loss):
Product $ 4,459,000 $ 2,162,000 $ 2,297,000 106%
Service and other 1,486,000 1,712,000 (226,000) (13)%
Total gross profit $ 5,945,000 $ 3,874,000 $ 2,071,000 53%
Gross margin:
Product 22 % 17 %
Service and other 20 % 32 %
Total gross margin 21 % 22 %
Cost of product revenue increased by $5.4 million, or 52%, to $16.0 million for the year ended December 31, 2022, compared to $10.5 million for the year ended December 31, 2021. The increase in cost of product revenue was primarily due to higher sales of instruments and consumables.
Cost of service and other revenue increased $2.3 million, or 64%, to $5.9 million for the year ended December 31, 2022, compared to $3.6 million for the year ended December 31, 2021. The increase in cost of service and other revenue is primarily due to increased service costs on our growing installed base as well as increased costs to support the service offerings from Bionano Laboratories.
Product gross profit increased $2.3 million, or 106%, to $4.5 million for the year ended December 31, 2022, compared to $2.2 million for the year ended December 31, 2021. The increase is primarily due to a change in product mix, where NxClinical™ software revenue represented 25% of product sales in 2022 compared to 8% in 2021, offset by an increase in product costs resulting from unfavorable flowcell yields in the production cycle and other inventory write offs.
Service and other gross profit decreased by $0.2 million, or 13%, to $1.5 million for the year ended December 31, 2022, compared to $1.7 million for the year ended December 31, 2021. The decrease in service and other gross profit is primarily due to increased service costs on our growing installed base as well increased costs to support the service offerings from Bionano Laboratories.
Research and Development Expenses
Research and development (R&D) expenses increased by $26.6 million, or 118%, to $49.0 million for the year ended December 31, 2022 as compared to $22.5 million for the same period in 2021. The increase is primarily due to a $19.4 million increase in compensation expenses, of which $9.9 million relates to stock-based compensation expense. The increase in compensation expense is primarily driven by increased headcount. We anticipate future additions to our development teams as well as continued increases to our product development costs and, thus, future increases to R&D expenses. This increase was further driven by a $5.6 million increase in product development costs, including internal materials and supply consumption costs, foundry expenses, clinical trial research, and consulting costs.
We expect R&D expenses to increase in 2023 relative to 2022 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $30.1 million, or 51%, to $88.6 million for the year ended December 31, 2022 as compared to $58.5 million for the same period in 2021. The increase is primarily due to a $16.7 million increase in compensation expenses, of which $2.8 million relates to stock-based compensation, a $4.4 million increase in amortization of intangibles related to the acquisitions of BioDiscovery and Purigen, a $3.2 million increase in marketing expenses, and a $1.8 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.
The increase in compensation expense is driven primarily by increased headcount. This is due to growth in our global sales, service, and back-office teams to facilitate the expanding customer base, as well as headcount additions attributed to the acquisition of Purigen. We anticipate headcount additions to our global sales, service and back-office teams in the coming 12
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months. While we expect headcount to continue to grow, we anticipate that headcount will grow at a slower pace than the trailing twelve months.
We expect selling, general, and administrative expenses to increase in 2023 due to our continuing investment in growing and supporting our customer base.
Interest Expense
Interest expense decreased by $0.6 million, or 68%, to $0.3 million for the year ended December 31, 2022, as compared to $0.9 million for the same period in 2021. In May 2021, we paid off the outstanding principal balance of our March 2019 Loan and Security Agreement (Innovatus LSA).
Interest Income
Interest income increased by $1.3 million, or 539%, to $1.5 million for the year ended December 31, 2022, as compared to $0.2 million for the same period in 2021 resulting from positive returns on investments. We did not hold available for sale securities until August 2021. Our total available-for-sale securities balance was $108.1 million as of December 31, 2022.
Gain on forgiveness of Paycheck Protection Program loan
A gain on forgiveness of our Paycheck Protection Program loan (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 expense increased by $7.6 million, or 133%, to a $1.9 million expense for the year ended December 31, 2022, as compared to a $5.7 million benefit for the same period in 2021, driven by the acquisition of BioDiscovery. We adjusted the business combination accounting for the tax impact of the BioDiscovery acquisition within the one year measurement period for the acquisition. The effect of the adjustment was to decrease the net deferred tax liability and decrease goodwill recorded in connection with the acquisition by $1.8 million, which increased the valuation allowance associated with our deferred taxes by $1.8 million, which we recorded to deferred tax expense for the year ended December 31, 2022.
Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from operations. We incurred net losses of $132.6 million and $72.4 million, and used $124.8 million and $71.9 million of cash from our operating activities for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $348.7 million, cash and cash equivalents of $5.1 million and $108.1 million in available-for-sale securities.
Sources of Liquidity
In the years ended December 31, 2022 and 2021, 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. 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. See the section below entitled “ Capital Resources ” for a discussion of our no longer qualifying as a well-known seasoned issuer and its impacts on our ability to generate liquidity.
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 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 2023.
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Based on our $5.1 million in cash and cash equivalents and $108.1 million in available for sale securities as of December 31, 2022, we anticipate our available cash balance will not be sufficient for the next twelve months from the issuance of this report. Accordingly, based on recurring losses from operations incurred since inception, the expectation of continued operating losses, and the need to raise additional capital to finance our future operations, we determined that there is substantial doubt about our ability to continue as a going concern within 12 months after the date that the financial statements included in this Annual Report are issued. As a result, in order to continue to operate our business beyond that time, we will need to raise additional funds. However, there can be no assurance that we will be able to generate funds on terms acceptable to us, on a timely basis, or at all. In addition, we have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we currently anticipate.
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,
2022
2021
Net cash provided by (used in):
Operating activities $ (124,816,000) $ (71,927,000)
Investing activities 82,767,000 (278,062,000)
Financing activities 23,007,000 336,111,000
Operating Activities
2022 Compared to 2021
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. 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 and servicing our expanding commercial footprint. As discussed below, we anticipate our available cash balance will not be sufficient for the next twelve months from the issuance of this report. We plan to raise additional capital to fulfill our operating and capital requirements for at least 12 months through public or private equity or debt financings, however, we may not be able to secure such financing in a timely manner or an favorable terms, if it all.
Net cash used in operating activities was $124.8 million during the year ended December 31, 2022 as compared to $71.9 million during the year ended December 31, 2021. The increase in cash used in operating activities of $52.9 million is attributed to increased headcount of 35% across the business, increased professional fees to support ongoing business operations and increase our international presence and increased spending on materials and supplies during the year ended December 31, 2022.
Investing Activities
2022 Compared to 2021
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, BioDiscovery and Purigen to grow our business. We expect to continue to incur additional costs for capital expenditures related to these efforts in future periods. Net cash provided by investing activities was $82.8 million during the year ended December 31, 2022, compared to $278.1 million used in investing activities during the year ended December 31, 2021. This increase in cash provided by investment activities of $360.8 million is attributed to sales of available-for-sale investments and is offset by the acquisition of Purigen, our new wholly owned subsidiary.
Financing Activities
2022 Compared to 2021
Net cash provided by financing activities was $23.0 million during the year ended December 31, 2022 as compared to $336.1 million during the year ended December 31, 2021, a decrease of $313.1 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. (Landenburg) and Cowen (Cowen). These proceeds were offset by our repayment in full of all outstanding amounts under our
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Innovatus LSA of $15.0 million, including all accrued interest, the end of term fee, and a prepayment fee. During the year ended December 31, 2022, we raised approximately $23.1 million in gross proceeds from sales under the Cowen ATM.
Capital Resources
As of December 31, 2022, we had approximately $5.1 million in cash and cash equivalents, $108.1 million of available-for-sale securities, and $121.4 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 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 at-the-market facility with Cowen (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 $2.87 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 automatic 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 and our capital needs. Further, as of the date of this Annual Report, the worldwide market value of our voting and non-voting common equity held by our non-affiliates did not equal $700.0 million or more, calculated as of a date within 60 days prior to filing, and, consequently, we are no longer a well-known seasoned issuer. We may continue to use our automatic shelf registration statement but only for a limited time and only if we follow the applicable provisions of the Securities Act of 1933, as amended (the Securities Act), the rules promulgated thereunder and the guidance of the SEC relating to a former well-known seasoned issuer utilizing an automatic shelf registration statement. We anticipate filing a new shelf registration statement after filing this Annual Report; however, we anticipate being unable to raise additional capital as efficiently as when we could rely on our automatic shelf registration statement, and raising capital may take more time and be more costly as a result.
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.
We have in place the Cowen ATM, as amended, pursuant to which we may offer and sell from time to time up to $200.0 million of shares from the date of the amendment going forward through or to Cowen, acting as sales agent or principal. In the third quarter of 2021, we 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 . In the third quarter of 2022, we sold approximately 6.6 million shares of common stock under the Cowen ATM at an average share price of $3.46 per share, and received gross proceeds of approximately $23.1 million before deducting offering costs of $0.6 million. In January, February and March 2023, we sold approximately 9.5 million shares of common stock under the Cowen ATM and received gross proceeds of approximately $15.2 million before deducting offering costs of $0.4 million.
We performed an analysis of our ability to continue as a going concern. We believe, based on our current business plan, that our existing cash and cash equivalents will not be sufficient for the next twelve months from the issuance of this report. We plan to continue to fund our losses from operations through cash and cash equivalents on hand, as well as through public or private equity or debt financings. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. Even if we raise additional capital, we may also be required to modify, delay or abandon some of our plans which could have a material adverse effect on our business, operating results and financial condition and our ability to achieve our intended business objectives. Any of these actions could materially harm our business, results of operations and future prospects. We have based these estimates on assumptions that may prove to be wrong,
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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.
Contingent Consideration
As part of the merger agreement related to the acquisition of BioDiscovery, we agreed to pay a milestone payment of $10.0 million in cash contingent on the achievement of a commercial milestone within eighteen months of the acquisition date. We determined the fair value of the milestone consideration using a scenario-based technique, as the trigger for payment is event driven. The outcome of the milestone consideration is binary, meaning the milestone is either achieved or not achieved, and the only other variable factor is the timing of when the milestone is achieved. We determined it is highly likely that the milestone will be achieved and therefore used a 95% probability factor which is applied to the $10.0 million milestone consideration.
As part of the merger agreement related to the acquisition of Purigen, we agreed to pay two independent milestone payments up to an aggregate of $32.0 million.
The fair value of the Purigen milestones are reassessed on a quarterly basis using a probability weighted model and a Monte Carlo Simulation. We determined the fair value of this milestone consideration using a scenario-based technique, as the trigger for payment is event driven. We determined the likelihood of each independent milestone and used probability factors ranging from 20% to 80% which were applied to the individual payments. A Monte Carlo Simulation was performed to determine the likelihood that the milestone will be achieved and was applied to the milestone consideration payment.
Based on these valuation assumptions, the fair value of the contingent consideration liabilities was determined to be $22.4 million as of December 31, 2022, $9.4 million of which is current as of December 31, 2022.
Contractual Obligations
The following table summarizes our future cash outflows for contractual obligations as of December 31, 2022.
Payments Due by Period
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 years
Operating lease obligations, including interest $ 9,042,000 $ 2,586,000 $ 5,472,000 $ 984,000 $ —
Finance lease obligations, including interest, related party 7,287,000 322,000 668,000 703,000 5,594,000
Purchase obligations 1,350,000 1,350,000 — — —
Total contractual obligations $ 17,679,000 $ 4,258,000 $ 6,140,000 $ 1,687,000 $ 5,594,000
Operating lease obligations relate to our office, laboratory and manufacturing space for our corporate headquarters in San Diego, California, Bionano Laboratories operations in Salt Lake City, Utah, and Purigen office and laboratory space in Pleasanton, California. 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.
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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 we are a single reporting unit for purposes of goodwill impairment testing. As of December 31, 2022, 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, 2022 and 2021.
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.
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