What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-03 · 130 added, 225 removed, 101 unchanged (78% of the section changed)

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The information in this Quarterly Report on Form 10-Q contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections.

These forward-looking statements include, but are not limited to any statements concerning the potential effects of the COVID-19 pandemic on our business, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management.

These forward-looking statements include, but are not limited to any statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management.

The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

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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.

Our mission is to transform the way the world sees the genome through optical genome mapping (“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 Lineagen, Inc.

(doing business as Bionano Laboratories, “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, LLC, or BioDiscovery, business, we also 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 expect to see OGM adoption in cytogenomics, discovery research and cell bioprocessing quality control.

Within cytogenetics and molecular pathology, we estimate the number of cytogenetic labs on a worldwide basis to be approximately 6,000 and the number of samples being analyzed on a worldwide basis to be approximately 4.2 million per year.

We estimate there are approximately 15,000 sequencers installed worldwide, each representing an opportunity to add OGM.

Based on these estimates, we believe the economic potential for OGM in these markets is currently in the range of $2.8-4.2 billion annually.

We have also identified several potential future market opportunities including newborn screening, population genomics, and neurological and cardiological risk assessment.

Together with cell bioprocessing quality control, we estimate these markets represent an additional $4.0 billion of opportunity for OGM.

We have incurred losses in each year since our inception.

Our net loss was $31.8 million and $93.9 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2022, we had an accumulated deficit of $310.0 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;

• incur increased costs as a result of operating as a public company.

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.

Recent Highlights

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In executing on our commercialization strategy, we expanded the utilization of our Saphyr ® system and:

• Grew our installed base to 217 as of September 30, 2022, an increase of approximately 54% from a total installed base of 141 as of September 30, 2021.

• Grew our installed base to 259 as of March 31, 2023, an increase of approximately 47% from a total installed base of 176 as of March 31, 2022.

Installed base represents the global number of Saphyr instruments installed at end-customer locations and therefore having the technology to process OGM.

• Sold 3,975 flowcells in the three-month period ended September 30, 2022, which is comparable to the 3,969 flowcells sold during the same quarter of 2021.

Flowcells sold in the nine-month period ended September 30, 2022 totaled 10,594, compared to 9,314 sold in the nine-month period ended September 30, 2021.

• Sold 5,226 flowcells in the three-month period ended March 31, 2023, an increase of approximately 62% from 3,225 flowcells sold in the same quarter of 2022.

The Saphyr cartridge is the consumable that packages nanochannel arrays for DNA linearization.

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Flowcells sold refers to the units of genome mapping consumables used for analyzing one genome, purchased by customers to process optical genome mapping.

• We analyzed 369 samples in our Saphyr service lab during the quarter ended September 30, 2022, compared to 309 samples analyzed in the same quarter in 2021.

• In the cytogenomics and molecular pathology markets, several sites in the United States have introduced OGM based laboratory developed tests (LDTs,), have obtained proprietary laboratory analyses (PLA) codes and have established pricing for those codes.

In addition, the 2022 Gapfill Final Recommendations were released by the Center for Medicare and Medicaid Services (CMS) for use in constitutional genetic testing.

These include reimbursements of $1,263.53 for two OGM PLA codes and reimbursement of $6,739.33 for another OGM PLA code.

These mark the first time in the United States that a payor has assigned reimbursement amounts for OGM in a Clinical Diagnostic Laboratory Fee Schedule.

There are also multiple sites in Europe that have validated OGM LDTs and are receiving reimbursement through the local healthcare systems.

COVID-19 and Other Geopolitical Events

We are subject to additional risks and uncertainties as a result of adverse geopolitical and macroeconomic events, such as the the continued impact of COVID-19, the ongoing conflict between Ukraine and Russia and related sanctions, and uncertain market conditions, including higher inflation and supply chain disruptions, 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.

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 the Company’s financial results in the first, second and third quarters of 2021 and 2022.

Given the continued evolution of the COVID-19 pandemic and the related complexities and uncertainties associated with the additional variants, the future effects of COVID-19 are unknown and our financial results may continue to be negatively affected in the future.

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.

Following the recent 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

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.

During the three and nine months ended September 30, 2022, we experienced supply chain challenges, which we largely attribute to the COVID-19 pandemic and the general disruptions resulting from the ongoing conflict between Ukraine and Russia and related sanctions.

While neither the COVID-19 pandemic nor the Ukraine-Russia conflict prevented us from operating our business during the three and nine months ended September 30, 2022, we experienced increased cost 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 from the COVID-19 pandemic, the Ukraine-Russia conflict and the related sanctions, 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 events, 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.

Macroeconomic and Geopolitical Developments

We are subject to additional risks and uncertainties as a result of adverse geopolitical and macroeconomic developments, such as recent and potential future bank failures, 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.

We closely monitor and comply with various applicable guidelines and legal requirements in the jurisdictions in which we operate.

The future effects of the COVID-19 pandemic, if any, are unknown and our financial results may be negatively affected as a result.

We may also experience 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 three months ended March 31, 2023, 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 three months ended March 31, 2023 and 2022, 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 for the foreseeable future.

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.

These negative effects could have a material impact on our operations, business, earnings, and liquidity.

Financial Overview

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, academic and commercial clinical laboratories, as well as pharmaceutical, biotechnology and contract research companies.

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.

We also generate service 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, including support, repair and maintenance services.

The following table presents our revenue for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Product revenue $ 5,447,000 $ 4,206,000

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Total $ 7,415,000 $ 5,696,000

1 Includes $1.8 million and $4.0 million of revenue generated from BioDiscovery during the three and nine months ended September 30, 2022, respectively.

The following table reflects total revenue by geography and as a percentage of total revenue, based on the billing address of our customers.

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Asia Pacific includes China, Japan, South Korea, Singapore, India and Australia.

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

$ % $ % $ % $ %

Three Months Ended March 31,

Americas $ 3,444,000 47 % $ 3,328,000 58 %

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Cost of Revenue

Cost of product revenue for our instruments and consumables includes costs from the manufacturer, raw material parts costs and associated freight, shipping and handling costs, contract manufacturer costs, salaries and other personnel costs, overhead and other direct costs related to those sales recognized as product revenue in the period.

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, and allocated overhead costs that include facility and other overhead costs.

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.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and other personnel costs, stock-based compensation for our sales and marketing, amortization expense related to acquired intangible assets, finance, legal, human resources and general management, as well as professional services, such as legal and accounting services.

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.

Results of Operations

Comparison of the Three Months Ended September 30, 2022 and 2021

The following table sets forth our results of operations for the three months ended September 30, 2022 and 2021:

Three Months Ended September 30, Period-to-Period Change

Product revenue $ 3,606,000 $ 3,300,000 $ 306,000 9 %

Service and other revenue 3,615,000 1,355,000 2,260,000 167 %

Total revenue 7,221,000 4,655,000 2,566,000 55 %

Cost of revenue:

Cost of product revenue 3,708,000 2,340,000 1,368,000 58 %

Cost of other revenue 1,704,000 1,161,000 543,000 47 %

Total cost of revenue 5,412,000 3,501,000 1,911,000 55 %

Operating expenses:

Research and development 12,742,000 6,505,000 6,237,000 96 %

Selling, general and administrative 21,216,000 15,327,000 5,889,000 38 %

Total operating expenses 33,958,000 21,832,000 12,126,000 56 %

Loss from operations (32,149,000) (20,678,000) (11,471,000) 55 %

Other income (expenses):

Interest income 436,000 29,000 407,000 1,403 %

Interest expense (73,000) (2,000) (71,000) 3,550 %

Other income (expenses) 5,000 (67,000) 72,000 (107) %

Total other income (expenses) 368,000 (40,000) 408,000 (1,020) %

Loss before income taxes (31,781,000) (20,718,000) (11,063,000) 53 %

Provision for income taxes (28,000) (35,000) 7,000 (20) %

Net loss $ (31,809,000) $ (20,753,000) $ (11,056,000) 53 %

Total revenue increased by $2.6 million, or 55%, to $7.2 million for the three months ended September 30, 2022 compared to $4.7 million for the same period in 2021.

The increase in product sales was driven by increased demand for our Saphyr OGM solutions, including an increase in instrument installed base (54%) when compared to the same period last year.

The increased demand for our reagent rental program continues to drive a significant portion of the increase in consumable sales.

We believe increased demand for our OGM systems was primarily driven by increased market awareness and additional published data demonstrating the utility of OGM.

While not immune to the negative effects caused by geopolitical and macroeconomic events, such as COVID-19, we expect revenue to increase as market awareness and published data of OGM utility increases.

The increase in service and other revenue was primarily driven by $1.8 million in revenues generated by our BioDiscovery subsidiary, which was acquired in October 2021, as well as by increased volume through the Bionano Laboratories sample analysis business.

Cost of Revenue

Cost of revenue increased by $1.9 million, or 55%, to $5.4 million for the three months ended September 30, 2022 compared to $3.5 million for the same period in 2021.

During the three months ended September 30, 2022, gross margin was 25%, compared to 25% during the same period in 2021.

Gross margin for the three months ended September 30, 2022 improved compared to gross margin for the first and second quarters of 2022, which were 15% and 22%, respectively.

The improvement in gross margin was primarily due to improvements in chip yield during the second and third quarters of 2022, as well as an increase in high-margin software revenues from BioDiscovery.

Cost of product revenue increased primarily due to increased instrument and flowcell sales volume, but was also negatively impacted by unfavorable flowcell yields in the production cycle, which is in part attributable to COVID-19.

Our gross margins for the three months ended September 30, 2022 were affected by the unfavorable flowcell yields in the production cycle which led to increased scrap and quality control costs.

If we are unable to solve the unfavorable flowcell yield issue, it could lead to lower gross margins in future periods.

Cost of service and other revenue increased primarily due to increased maintenance and service costs on our increased installed base, as well as increased

service expenses related to our laboratory services.

We expect cost of product and service and other revenue to continue to increase as we continue to increase our installed base and the number of customers purchasing laboratory services

Research and Development Expenses

Research and development, or R&D, expenses increased by $6.2 million, or 96%, to $12.7 million for the three months ended September 30, 2022 compared to $6.5 million for the same period in 2021.

The increase is primarily due to a $5.4 million increase in compensation expenses, of which $2.9 million relates to stock-based compensation expense, and an increase of $0.5 million in product development costs.

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.

We expect R&D expenses to increase in the remainder of 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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $5.9 million, or 38%, to $21.2 million for the three months ended September 30, 2022 compared to $15.3 million for the same period in 2021.

The increase is primarily due to a $4.1 million increase in compensation expenses, of which $0.4 million relates to stock-based compensation, a $1.4 million increase in amortization of intangibles related to the acquisition of BioDiscovery, a $0.2 million increase in marketing expenses, and a $0.4 million increase in other headcount-related expenses.

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 BioDiscovery.

We anticipate headcount additions to our global sales, service and back-office teams in the coming 12 months.

While we expect headcount to continue to grow, we anticipate that headcount will grow at a slower pace than the trailing twelve months.

Other headcount-related expenses included the cost of recruiting, temporary employment, and facilities expenses incurred in order to support increased product demand.

We expect selling, general, and administrative expenses to increase in the remainder of 2022 due to our continuing investment in growing and supporting our customer base.

We expect stock based compensation to continue to drive a significant portion of the increase in expense in the remainder of 2022 due to stock option awards issued to senior-level fourth quarter 2021 hires as well as annual refresher grants issued to executives and non-executives in February 2022.

Interest Income

Interest income was $0.4 million for the three months ended September 30, 2022, as compared to $0.03 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 $152.0 million as of September 30, 2022.

Comparison of the Nine Months Ended September 30, 2022 and 2021

The following table sets forth our results of operations for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30, Period-to-Period Change

We have incurred losses in each year since our inception.

Our net loss was $37.1 million for the three months ended March 31, 2023.

As of March 31, 2023, we had an accumulated deficit of $385.8 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;

• 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 Quarterly Report on Form 10-Q.

Comparison of the Three Months Ended March 31, 2023 and 2022

The following table sets forth our results of operations for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, Period-to-Period Change

Product revenue $ 5,447,000 $ 4,206,000 $ 1,241,000 30 %

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Cost of product revenue 3,858,000 3,576,000 282,000 8 %

Cost of other revenue 4,190,000 2,321,000 1,869,000 81 %

Cost of service and other revenue 1,487,000 1,259,000 228,000 18 %

Total cost of revenue 5,345,000 4,835,000 510,000 11 %

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Interest expense (76,000) (77,000) 1,000 (1) %

Loss on debt extinguishment — (2,076,000) 2,076,000 (100) %

Gain on forgiveness of Paycheck Protection Program Loan — 1,775,000 (1,775,000) (100) %

Other income (expenses) 117,000 (33,000) 150,000 (455) %

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Net loss $ (37,124,000) $ (29,952,000) $ (7,172,000) 24 %

Total revenue increased by $7.9 million, or 68%, to $19.6 million for the nine months ended September 30, 2022 compared to $11.7 million for the same period in 2021.

The increase in product sales was driven by increased demand for our Saphyr OGM solutions, including an increase in instrument installed base (54%) and flowcell units sold (14%), when compared to the same period last year.

We have revised the classification of our revenue between the categories in the table above for the March 31, 2022 statement of operations to present software revenue within “product revenue”.

In our March 31, 2022 statement of operations, “software” was included in “service and other revenue.”

Product revenue increased by $1.2 million, or 30%, to $5.4 million for the three months ended March 31, 2023 compared to $4.2 million for the same period in 2022.

The increase in product revenue was driven by increased demand for our Saphyr OGM solutions, including an increase in instrument installed base (47%) when compared to the same period last year.

The increased demand for our reagent rental program continues to drive a significant portion of the increase in consumable sales.

We believe increased demand for our OGM systems was primarily driven by increased market awareness and additional published data demonstrating the utility of OGM.

The increase in service and other revenue was primarily driven by $4.0 million in revenues generated by our BioDiscovery subsidiary, which was acquired in October 2021, as well by increased volume through the Bionano Laboratories sample analysis business.

Cost of Revenue

Cost of revenue increased by $7.4 million, or 92%, to $15.4 million for the nine months ended September 30, 2022 compared to $8.0 million for the same period in 2021.

Our gross margins for the nine months ended September 30, 2022 were affected by the unfavorable flowcell yields in the production cycle which led to increased scrap and quality control costs during the first half of 2022.

If we are unable to solve the unfavorable flowcell yield issue, it could lead to lower gross margins in future periods.

Cost of service and other revenue increased primarily due to increased maintenance and service costs on our increased installed base, as well as increased service expenses related to our laboratory services.

We expect cost of product and service and other revenue to continue to increase as we continue to increase our installed base and the number of customers purchasing laboratory services.

We expect revenue to increase as market awareness and published data of OGM utility increases, along with continued efficiencies gained in the OGM workflow through research and development, and the acquisitions of BioDiscovery and Purigen.

Service and other revenue increased by $0.5 million, or 32%, to $2.0 million for the three months ended March 31, 2023 compared to $1.5 million for the same period in 2022.

The increase in service and other revenue was primarily driven by increased volume through the Bionano Laboratories sample analysis business.

Cost of Revenue, Gross Profit, and Gross Margin

Three Months Ended March 31, Period-to-Period Change Period-to-Period Percentage Change

Gross profit (loss):

Product $ 1,589,000 $ 630,000 $ 959,000 152%

Service and other 481,000 231,000 250,000 108%

Total gross profit $ 2,070,000 $ 861,000 $ 1,209,000 140%

Gross margin:

Product 29 % 15 %

Service and other 24 % 16 %

Total gross margin 28 % 15 %

Cost of product revenue increased by $0.3 million, or 8%, to $3.9 million for the three months ended March 31, 2023, compared to $3.6 million for the three months ended March 31, 2022.

The increase in cost of product revenue was due to higher sales of instruments and consumables.

We anticipate similar increases in future periods as sales of our instruments and consumables grow.

Cost of service and other revenue increased $0.2 million, or 18%, to $1.5 million for the three months ended March 31, 2023, compared to $1.3 million for the three months ended March 31, 2022.

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.

We anticipate similar increases in future periods as our installed base and the number of Bionano Laboratories services grow.

Product gross profit increased $1.0 million, or 152%, to $1.6 million for the three months ended March 31, 2023, compared to $0.6 million for the three months ended March 31, 2022.

The increase in gross profit was primarily due to higher sales of instruments and consumables, improvements in chip yield, and reduced scrap and quality control costs.

Service and other gross profit increased by $0.3 million, or 108%, to $0.5 million for the three months ended March 31, 2023, compared to $0.2 million for the three months ended March 31, 2022.

The increase in service and other gross profit is primarily due to increased sales of services – primarily those offered by Bionano Laboratories – offset by increased costs incurred to maintain our growing installed base.

Research and Development Expenses

R&D expenses increased by $21.8 million, or 164%, to $35.0 million for the nine months ended September 30, 2022 compared to $13.3 million for the same period in 2021.

The increase is primarily due to a $17.0 million increase in compensation expenses, of which $9.2 million relates to stock-based compensation expense, and an increase of $4.2 million in product development costs.

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.

Research and development (“R&D”) expenses increased by $3.4 million, or 32%, to $13.9 million for the three months ended March 31, 2023 compared to $10.5 million for the same period in 2022.

The increase is primarily due to an increase of $2.2 million in product development costs, an increase of $0.8 million in professional services related to research activities, and $0.6 million in software and information technology costs.

Compensation costs tied to headcount, excluding stock-based compensation, increased by $1.5 million.

Stock-based compensation expense decreased by $2.0 million due to the vesting of stock issued as consideration in the BioDiscovery acquisition in 2022, which primarily rolled up into R&D expense and vested in full in 2022.

We anticipate that our previously planned R&D expenses will decrease for the remainder of 2023 as we implement our cash savings initiative announced May 9, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $24.6 million, or 64%, to $63.3 million for the nine months ended September 30, 2022 compared to $38.7 million for the same period in 2021.

The increase is primarily due to a $13.9 million increase in compensation expenses, of which $2.8 million relates to stock-based compensation, a $4.2 million increase in amortization of intangibles related to the acquisition of BioDiscovery, a $2.1 million increase in marketing expenses, and a $1.2 million increase in other headcount-related expenses.

Selling, general and administrative (“SG&A”) expenses increased by $5.7 million, or 28%, to $26.0 million for the three months ended March 31, 2023 compared to $20.3 million for the same period in 2022.

The increase is primarily due to a $2.9 million increase in compensation expenses, of which $0.6 million relates to stock-based compensation, a $0.5 million increase in amortization of intangibles related to the acquisition of Purigen, a $1.3 million increase in professional services, a $0.6 million increase in marketing expenses, and a $0.7 million increase in the estimated fair value of the contingent consideration liabilities primarily related to the acquisition of Purigen, which rolls into SG&A expense.

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 BioDiscovery.

We anticipate headcount additions to our global sales, service and back-office teams in the coming 12 months.

While we expect headcount to continue to grow, we anticipate that headcount will grow at a slower pace than the trailing twelve months.

Other headcount-related expenses included the cost of recruiting, temporary employment, and facilities expenses incurred in order to support increased product demand.

We expect selling, general, and administrative expenses to increase in the remainder of 2022 due to our continuing investment in growing and supporting our customer base.

Interest Expense

Interest expense decreased by $0.7 million, or 74%, to $0.2 million for the nine months ended September 30, 2022 compared to $0.9 million for the same period in 2021, driven by us paying off the outstanding principal balance of our outstanding term loan under the Innovatus LSA during the nine months ended September 30, 2021.

This was 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 that our previously planned SG&A expenses will decrease for the remainder of 2023 as we implement our cash savings initiative announced May 9, 2023.

Interest Income

Interest income was $0.7 million for the nine months ended September 30, 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 $152.0 million as of September 30, 2022.

Loss on debt extinguishment

A loss on debt extinguishment of $2.1 million was recognized during the nine months ended September 30, 2021 in connection with our payment in full of the term loan under the Innovatus LSA, including all accrued interest, an end of term fee, a prepayment fee, and write-off of unamortized debt issuance costs.

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 nine months ended September 30, 2021 in connection with the forgiveness of the PPP Loan in full, including all accrued interest.

Interest income was $0.7 million for the three months ended March 31, 2023, as compared to $0.1 million for the same period in 2022 resulting from positive returns on investments due to higher interest rates in 2023.

Our total available for sale securities balance was $91.7 million as of March 31, 2023.

Liquidity and Capital Resources

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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 increased demand for our product offerings and our acquisition of revenue-positive BioDiscovery.

Revenue from our commercial operations has increased due to increased demand for our product offerings and our acquisition of revenue-positive BioDiscovery and Purigen.

See Note 6 to our unaudited condensed consolidated financial statements for a discussion of our recent equity activity included elsewhere in this Quarterly Report on Form 10-Q for more information.

We incurred net losses of $93.9 million and $49.5 million for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, we had an accumulated deficit of $310.0 million, cash and cash equivalents of $28.2 million, and

available for sale investment securities of $152.0 million.

As of December 31, 2021, we had an accumulated deficit of $216.1 million, cash and cash equivalents of $24.6 million, and available for sale investment securities of $226.0 million.

We incurred net losses of $37.1 million and $29.9 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, we had an accumulated deficit of $385.8 million, cash and cash equivalents of $4.1 million, and available for sale investment securities of $91.7 million.

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 2022.

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 and proving the utility of our offerings, expenses associated with continuing to build out our corporate infrastructure, enhancements to information technology, and expenses associated with being a public company.

We expect such expenditures to continue throughout the remainder of 2023 and over the next few years.

Since our inception, we have generally incurred significant losses and negative cash flows.

Based on our $4.1 million in cash and cash equivalents and $91.7 million in available for sale securities as of March 31, 2023, 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, our expectation of continued operating losses, our current business plan, 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 unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are issued.

We plan to continue to fund our losses from operations through revenues, cash and cash equivalents on hand, sale of marketable securities and equity or debt financings.

As a result, in order to continue to operate our business beyond that time, we will need to raise additional funds.

Accordingly, we are actively evaluating debt and equity financing sources available to us as well as cost reduction strategies, but there can be no assurance that financing will be available on terms acceptable to us, on a timely basis, or at all, or that we are able to effectively reduce our operating expenses.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders.

Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends.

Any disruptions to, or volatility in, the credit and financial markets or any deterioration in overall economic conditions may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive.

If we are unable to raise additional funds through debt or equity financing or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research and development activities or future commercialization efforts.

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.

In addition, our estimate as to the sufficiency of our current cash, cash equivalents and available for sale securities, and our current operating plan are based on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we currently anticipate.

See Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.

The following table sets forth the cash flow from operating, investing and financing activities for the periods presented:

Net cash provided by (used in):

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities $ (32,413,000) $ (32,494,000)

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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.

Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to support 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.

As discussed below, we anticipate our available cash balance will be sufficient to fund those increases in cash used in operating activities for 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.”

Net cash used in operating activities was $90.3 million during the nine months ended September 30, 2022 as compared to $46.3 million during the same period in 2021.

The increase in cash used in operating activities of $44.0 million was primarily attributed to an incremental headcount growth compared to our headcount as of September 30, 2021, as well as additional spending to support ongoing business operations and increase our international presence, including increased marketing costs and professional fees.

As discussed above, 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 equity or debt financings, however, we may not be able to secure such financing in a timely manner or on favorable terms, if it all.

We anticipate that our cash used in operating activities will decrease over the next 12 to 24 months;

however, we may observe fluctuations in the cash used in operating activities on a quarterly basis to sustain the expansion of our commercial offerings.

Net cash used in operating activities was $32.4 million during the three months ended March 31, 2023 as compared to $32.5 million during the same period in 2022.

The decrease in cash used in operating activities of $0.1 million was primarily attributed to increased headcount-related expenses offset by timing of invoice payments in accounts payable.

Investing Activities

Historically, our primary investing activities have consisted of capital expenditures for the purchase of capital equipment to support our expanding infrastructure, the acquisitions of Bionano Laboratories and BioDiscovery to grow our business, and purchases of available for sale investment securities.

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.

During the nine months ended September 30, 2022, cash provided by investing activities was $71.2 million, as compared to $185.6 million used in investing activities during the same period in 2021.

The increase in cash provided by investing activities of $256.7 million was primarily attributed to the maturity of $135.4 million in available for sale securities during the nine months ended September 30, 2022, which was partially offset by a purchase of $63.2 million of available for sale securities during the same period.

During the nine months ended September 30, 2021, cash used in investing activities primarily related to the purchase of $205.3 million in available for sale securities, which was offset by the maturity of $20.0 million in available for sale securities.

During the three months ended March 31, 2023, cash provided by investing activities was $16.5 million, as compared to $32.0 million provided by investing activities during the same period in 2022.

The decrease in cash provided by investing activities of $15.4 million was primarily attributed to the maturity of $16.9 million in available for sale securities during the three months ended March 31, 2023, compared to the maturity of $47.2 million in available for sale securities during the same period in 2022, which was partially offset by a purchase of $15.0 million of available for sale securities during the same period.

Financing Activities

Net cash provided by financing activities was $22.9 million during the nine months ended September 30, 2022 as compared to the same period in 2021 where we had net cash provided by financing activities of $334.1 million, a decrease of $311.3 million.

During the nine months ended September 30, 2021, we raised approximately $342.7 million in gross proceeds from executing two follow-on offerings and sales under our at-the-market facilities with Ladenburg Thalmann & Co.

Inc., or Ladenburg, and

Cowen and Company, LLC, or Cowen.

During the nine months ended September 30, 2022, we raised approximately $23.1 million in gross proceeds from sales under the Cowen ATM.

Paycheck Protection Program

In April 2020, we received loan proceeds of approximately $1.8 million, or the PPP Loan, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, administered by the U.S.

Small Business Administration, or the SBA.

The PPP Loan accrued interest at a rate of 1.00% per annum, and is subject to the standard terms and conditions applicable to loans administered by the SBA under the CARES Act.

In February 2021, we applied for forgiveness of the PPP Loan and, in March 2021, the PPP Loan, including all accrued interest, was forgiven in full.

The PPP Loan is also described in Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Net cash provided by financing activities was $14.9 million during the three months ended March 31, 2023 as compared to the same period in 2022 where we had net cash provided by financing activities of $7,000, an increase of $14.9 million.

During the three months ended March 31, 2023, we raised approximately $15.2 million in gross proceeds from executing sales under our at-the-market facility with Cowen and Company, LLC (“Cowen”).

Capital Resources

As of September 30, 2022, we had approximately $28.2 million in cash and cash equivalents, available for sale securities of $152.0 million, and working capital of $184.7 million.

In August 2020, we 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 our securities, including up to $40.0 million of common stock pursuant to an At Market Issuance Sales Agreement, with Ladenburg acting as sales agent, or the Ladenburg ATM.

During October 2020 through January 2021, we sold 33.3 million shares of common stock under the Ladenburg ATM and received net proceeds of $38.0 million after deducting aggregate offering costs.

We terminated the Ladenburg ATM in March 2021.

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 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.

Further, as of June 30, 2022, as a consequence of our re-qualification as a “smaller reporting company,” we may lose “well-known seasoned issuer” status at the time we file our Annual Report on Form 10-K for the fiscal year ending December 31, 2022 if the worldwide market value of our voting and non-voting common equity held by our non-affiliates does not equal $700.0 million or more, calculated as of a date within 60 days prior to filing such report.

If that were to occur and we were no longer considered a well-known seasoned issuer, we anticipate needing to amend our automatically effective shelf registration statement on Form S-3 prior to our filing of such annual report (or earlier if required by the Securities Act or the rules and regulations of the SEC) in order to sell securities under that Form S-3 on an ongoing basis.

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 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, or the Cowen ATM.

In August and September 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.

In August 2022, the Company 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.

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 unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.

As of March 31, 2023, we had approximately $4.1 million in cash and cash equivalents, available for sale securities of $91.7 million, and working capital of $104.4 million.

We have in place a Sales Agreement with Cowen (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.

During the three months ended March 31, 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.

Contingent Consideration

As part of the merger agreement related to the acquisition of BioDiscovery, the Company 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.

The Company determined the fair value of the milestone consideration using a scenario-based technique, as the trigger for payment is event driven.

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 as set forth in the BioDiscovery agreement and plan of merger, as amended.

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.

The Company 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.

Based on these valuation assumptions, the fair value of the milestone consideration was determined to be $9.3 million as of September 30, 2022.

During the nine months ended September 30, 2022, the milestone consideration liability was reclassified from non-current liabilities to current liabilities.

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.

At March 31, 2023 and December 31, 2022, 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 $23.1 million as of March 31, 2023, $9.5 million of which is current as of March 31, 2023.

Contractual Obligations

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Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited 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.

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed 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 unaudited condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented.

We have discussed the development, selection and disclosure of the accounting estimates with our audit committee.

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Historically, revisions to our estimates have not resulted in a material change to our financial statements.

During the three and nine months ended September 30, 2022, there have been no changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

As of March 31, 2023, 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 than not that goodwill is impaired as of March 31, 2023.

However, our stock price has significantly declined after March 31, 2023.

A sustained decline in our stock price or other material changes in the significant assumptions that affect the determination of the fair value of the Company’s single reporting unit may result in a goodwill impairment charge in future periods, and such charge may be material.

During the three months ended March 31, 2023, there have been no changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis