Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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You should read the following discussion and analysis of our financial condition and results of operations together in conjunction with our financial statements and the related notes included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and expected financial results, includes forward-looking statements that involve risks and uncertainties. You should review the risks described in Part I, Item 1A Risk Factors and elsewhere in this Annual Report.
Overview
We are a 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 $232.5 million and $132.6 million for the years ended December 31, 2023, and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $581.2 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;
• 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, the Israel-Hamas war, any effects of global pandemics 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 EU, 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
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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.
We closely monitor and comply with various applicable guidelines and legal requirements in the jurisdictions in which we operate. In the past, we have experienced supply chain challenges, attributable to such adverse geopolitical and macroeconomic developments including increased costs to secure certain component parts in our products and to produce our products at our contract manufacturers. During the twelve months ended December 31, 2023, we did not experience material increases in our supply chain costs, but we may experience such increases in future fiscal periods. We expect our 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, high 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.
Recent Developments
On March 5, 2024, we announced a cost savings plan that aims to reduce annual savings of operating expenses of approximately $35.0 to $40.0 million starting in the second half of 2024. As part of the plan, we expect to reduce our overall headcount by approximately 110 to 125 employees, which represents approximately 34% to 39% of our full-time employees as of the date of this Annual Report. In addition, Bionano Laboratories will phase out over time the offering of certain testing services related to neurodevelopmental disorders, including autism spectrum disorders and other disorders of childhood development. These cost-saving measures are incremental to the cost saving initiatives previously announced in May 2023 and October 2023. At this time, we are unable to make a good faith determination of the cost estimates, or ranges of cost estimates, associated with implementation of the plan, including the reduction in force.
Financial Overview
Revenue
We generate product revenue from sales of our OGM and Ionic ® Purification systems and consumables, which includes our instruments, and our VIA software. At the end of July 2023 we began installations of VIA software as a replacement to NxClinical software. Like NxClinical, VIA has a simple integrated workflow for visualization, interpretation and reporting of NGS and microarray data. VIA additionally incorporates OGM data to that workflow creating a standard software tool for use across molecular pathology and cytogenomics applications. 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 at no cost under our reagent rental program, 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 VIA 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 an OGM 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,
2023
2022
Product revenue $ 26,727,000 $ 20,425,000
Service and other revenue 9,389,000 7,377,000
Total $ 36,116,000 $ 27,802,000
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,
2023
2022
$ % $ %
Americas $ 18,020,000 50 % $ 13,862,000 50 %
EMEA 12,963,000 36 % 8,960,000 32 %
Asia Pacific 5,133,000 14 % 4,980,000 18 %
Total $ 36,116,000 100 % $ 27,802,000 100 %
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.
Results of Operations
The following table sets forth our results of operations for the years ended December 31, 2023 and 2022:
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Years Ended December 31, Period-to-Period Change
2023
2022
$
%
Revenues:
Product revenue $ 26,727,000 $ 20,425,000 $ 6,302,000 31%
Service and other revenue 9,389,000 7,377,000 2,012,000 27%
Total revenue
36,116,000 27,802,000 8,314,000 30%
Cost of revenue:
Cost of product revenue 20,415,000 15,966,000 4,449,000 28%
Cost of service and other revenue 6,135,000 5,891,000 244,000 4%
Total cost of revenue
26,550,000 21,857,000 4,693,000 21%
Research and development 54,032,000 49,047,000 4,985,000 10%
Selling, general and administrative 93,499,000 88,596,000 4,903,000 6%
Goodwill Impairment
77,280,000 — 77,280,000 100 %
Total operating expenses
224,811,000 137,643,000 87,168,000 63%
Loss from operations (215,245,000) (131,698,000) (83,547,000) 63%
Other income (expenses):
Interest income 3,311,000 1,507,000 1,804,000 120%
Interest expense (5,119,000) (298,000) (4,821,000) 1,618%
Other income (expenses)
3,449,000 (223,000) 3,672,000 (1,647)%
Loss on High Trail Agreement
(18,827,000) — (18,827,000) 100%
Total other income (expenses)
(17,186,000) 986,000 (18,172,000) (1,843)%
Loss before income taxes (232,431,000) (130,712,000) (101,719,000) 78%
Benefit (provision) for income taxes (62,000) (1,884,000) 1,822,000 (97)%
Net loss $ (232,493,000) $ (132,596,000) $ (99,897,000) 75%
Revenue
Years Ended December 31, Period-to-Period Change
2023
2022
$
%
Instruments $ 9,999,000 $ 8,567,000 $ 1,432,000 17%
Consumables 11,157,000 6,731,000 4,426,000 66%
Software 5,571,000 5,127,000 444,000 9%
Total product revenue 26,727,000 20,425,000 6,302,000 31%
Services and other 9,389,000 7,377,000 2,012,000 27%
Total revenue $ 36,116,000 $ 27,802,000 $ 8,314,000 30%
Revenue increased by $8.3 million, or 30% to $36.1 million for the year ended December 31, 2023, as compared to $27.8 million for the same period in 2022, driven primarily from an increase in instrument, consumable, and service and other revenue as discussed below.
Instrument revenue increased $1.4 million, or 17%, to $10.0 million for the year ended December 31, 2023, as compared to $8.6 million for the year ended December 31, 2022, due to an increase in OGM and Ionic instruments sold. For the year ended December 31, 2023, our installed base grew to 326 OGM systems compared to the 240 OGM systems for the year ended December 31, 2022. We expect the number of our OGM system placements to continue to grow during 2024, driven by increased market awareness, the full commercial release of our Stratys system in the first quarter of 2024, additional published data demonstrating the utility of OGM solutions, along with continued efficiencies gained in the OGM workflow through research and development, and the acquisitions of BioDiscovery and Purigen.
Consumables revenue increased $4.4 million, or 66%, to $11.2 million for the year ended December 31, 2023, as compared to $6.7 million for the year ended December 31, 2022. The increase in consumable revenue was attributable to higher OGM
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consumable sales given the growth of the instrument installed base and an increase in the consumable purchase quantities under our reagent rental program. For the year ended December 31, 2023, total flowcells sold reached 26,444, an increase of approximately 72% from the 15,375 flowcells sold during the year ended December 31, 2022.
Software revenue increased $0.4 million, or 9%, to $5.6 million for the year ended December 31, 2023, as compared to $5.1 million for the year ended December 31, 2022. The increase is attributed to an increase in sales of our VIA software.
Service and other revenue increased $2.0 million, or 27%, to $9.4 million for the year ended December 31, 2023 as compared to $7.4 million for the year ended December 31, 2022. The increase was primarily due to a $1.9 million increase in diagnostic and service project revenue contributed from Bionano Laboratories. As of March 1, 2024, we have determined that Bionano Laboratories will phase out over time the products related to testing services for individuals demonstrating clinical presentations consistent with NDDs, including ASDs and other disorders of childhood development.
Cost of Revenue, Gross Profit, and Gross Margin
Years Ended December 31, Period-to-Period Change
2023
2022
$
%
Gross profit (loss):
Product $ 6,312,000 $ 4,459,000 $ 1,853,000 42%
Service and other 3,254,000 1,486,000 1,768,000 119%
Total gross profit $ 9,566,000 $ 5,945,000 $ 3,621,000 61%
Gross margin:
Product 24 % 22 %
Service and other 35 % 20 %
Total gross margin 26 % 21 %
Cost of product revenue increased by $4.4 million, or 28%, to $20.4 million for the year ended December 31, 2023, compared to $16.0 million for the year ended December 31, 2022. The increase in cost of product revenue was primarily due to higher sales of instruments and consumables.
Cost of service and other revenue increased $0.2 million, or 4%, to $6.1 million for the year ended December 31, 2023, compared to $5.9 million for the year ended December 31, 2022. The increase in cost of service and other revenue was 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 $1.9 million, or 42%, to $6.3 million for the year ended December 31, 2023, compared to $4.5 million for the year ended December 31, 2022. The increase in gross profit was primarily due to higher sales of instruments and consumables.
Service and other gross profit increased by $1.8 million, or 119%, to $3.3 million for the year ended December 31, 2023, compared to $1.5 million for the year ended December 31, 2022. The increase in gross profit was primarily due to increased sales of our Bionano Laboratories service offerings.
Research and Development Expenses
Research and development expenses increased by $5.0 million, or 10%, to $54.0 million for the year ended December 31, 2023 as compared to $49.0 million for the same period in 2022. The increase was primarily due to a $6.8 million increase in headcount-related expenses. On a full year basis, we averaged 28 more employees allocated to research and development departments in 2023 than we did in 2022. This was mostly attributed to the fourth quarter 2022 acquisition of Purigen and partially offset by the cost-savings initiatives announced in early 2023. In addition, we recognized a $2.0 million increase in materials and supplies costs, a $1.4 million increase in information technology (“IT”) and software related costs, a $1.3 million increase in facilities costs, and a $1.2 million increase in depreciation expense. These increases were incurred in support of our efforts to develop more scalable and efficient manufacturing workflows, clinical trial research, expand the utility of OGM, and develop the next versions of OGM products – including integration of OGM data into our VIA software and full commercial launch of the Stratys system. The increases were primarily offset by a decrease in stock-based compensation of $8.3 million due to the vesting of stock issued as consideration in the BioDiscovery acquisition, which primarily rolled up into research and development expense and vested in full in 2022, as further described in Note 10 (Stockholders’ Equity and Stock-Based
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Compensation). We anticipate that our research and development expenses will decrease in 2024 as a result of our cost savings initiatives announced in May 2023 and October 2023.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.9 million, or 6%, to $93.5 million for the year ended December 31, 2023 as compared to $88.6 million for the same period in 2022. The increase was primarily due to a $4.6 million increase in headcount-related expenses. On a full year basis, we averaged 16 more employees allocated to selling, general and administrative departments in 2023 than we did in 2022. This was mostly attributed to the fourth quarter 2022 acquisition of Purigen and partially offset by the cost-savings initiatives announced in early 2023. In addition, we recognized a $2.2 million increase in marketing expenses, a $1.5 million increase in consulting and professional fees, and a $1.4 million increase in amortization of acquisition-related intangibles — including an additional 11 months of amortization expense from the Purigen acquisition. The increases are being offset by decreases of $1.9 million in materials and supplies, $1.5 million in facilities costs, and $0.9 million in legal expenses. We anticipate that our SG&A expenses will decrease in 2024 in part due to the cost savings initiatives announced in May 2023 and October 2023.
Goodwill impairment
Goodwill impairment increased for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022. The carrying value of the net assets of the Company’s reporting unit exceeded its enterprise wide fair value and the Company recognized a goodwill impairment charge of $77.3 million on the consolidated statements of operations and comprehensive loss for the year ended December 31, 2023.
Interest Expense
Interest expense increased by $4.8 million, or 1,618%, to $5.1 million for the year ended December 31, 2023, as compared to $0.3 million for the same period in 2022. The increase was primarily driven by the debt issuance costs incurred in connection with the convertible notes. See Note 9 (High Trail Agreement) to our consolidated financial statements for further discussion.
Interest Income
Interest income increased by $1.8 million, or 120%, to $3.3 million for the year ended December 31, 2023, as compared to $1.5 million for the same period in 2022 resulting from positive returns on investments. Our total short-term investments balance was $48.8 million as of December 31, 2023.
Loss on High Trail Agreement
A loss on the High Trail Agreement of $18.8 million was recognized during the year ended December 31, 2023 for the difference between the combined fair value of the Notes and option to purchase additional Notes and the proceeds from the transaction, which is recorded as Loss on High Trail Agreement on the consolidated statement of operations.
Income tax benefit (expense)
Income tax expense decreased by $1.8 million, or 97%, to a $0.1 million expense for the year ended December 31, 2023, as compared to a $1.9 million expense for the same period in 2022, 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, decrease goodwill, and increase 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 $232.5 million and $132.6 million, and used $125.2 million and $124.8 million of cash from our operating activities for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $581.2 million, cash and cash equivalents of $17.9 million, $48.8 million in short-term investments and $35.5 million in restricted cash and cash equivalents and restricted short-term investments.
Sources of Liquidity and Capital Resources
In the years ended December 31, 2023 and 2022, we have generated cash flows from sales of common stock, other equity instruments and the issuance of convertible notes payable. We anticipate that future sources of liquidity will principally come from sales of common stock and other equity instruments, borrowings from credit facilities and revenue from our commercial operations. See Notes 9 (High Trail Agreement) and 10 (Stockholder’s Equity and Stock-Based Compensation) to our consolidated financial statements for a discussion of our recent debt and equity activity.
As of December 31, 2023, we received net proceeds of approximately $75.2 million, after deducting placement agent fees and offering expenses from the issuance and sale of our securities pursuant to the Purchase Agreement in October 2023. Based on
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our current business plans, we believe such net proceeds together with our existing cash and cash equivalents and short-term investments, will be sufficient to fund our operating expenses and capital expenditure requirements into at least the third quarter of 2024. This estimate assumes the inclusion of the amount equal to the sum of (i) the outstanding principal amount of the Registered Notes plus (ii) approximately $0.7 million that we are required to hold as restricted cash in an account control agreement under the terms of the Registered Notes. Our existing cash and cash equivalents and short-term investments, will not be sufficient for us to achieve cash-flow break even and we expect to need to seek additional capital based on strategic consideration alternatives in the future.
As of December 31, 2023, we had $69.8 million of Notes at fair value, which is classified as current. At the holder’s option, as of December 31, 2023, we would have been required to redeem $62.1 million of Notes at the Repayment Price (as defined in Note 9 (High Trail Agreement) to our consolidated financial statements) in 2024. Because the Notes have a history of both redemptions ($20.7 million) and conversions ($10.0 million) since issuance in October 2023 through February 1, 2024, and twelve months of redemptions at the Repayment Price represents most of the outstanding balance of the Notes, we have classified the entire amount of Notes as current as of December 31, 2023. Additionally, we would have been required to pay a retirement fee to the holder based on amounts redeemed when the outstanding balance is paid in full, which as of December 31, 2023, was estimated at $4.4 million assuming full redemption and no further conversions. On January 1, 2024, and February 1, 2024, the holders redeemed an aggregate of $9.0 million of principal, at the Repayment Price of $10.4 million. In February 2024, in connection with the Letter Agreement and Amendment we redeemed an aggregate of $27.7 million of Notes for a total redemption payment of approximately $31.9 million, together with a retirement fee of approximately $3.2 million. Following the redemptions we have $24.3 million of principal of the Notes outstanding. See Note 9 (High Trail Agreement) to our consolidated financial statements.
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 increasing 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, research and development expenses associated with expanding our offerings, and expenses associated with being a public company. Our short-term capital expenditure needs relate primarily to 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 2024.
We had $17.9 million in cash and cash equivalents, $48.8 million short-term investments, and $35.5 million in restricted cash and cash equivalents and restricted short-term investments as of December 31, 2023. Based on recurring losses from operations incurred since inception and the expectation of continued operating losses, we anticipate our available cash balance will not be sufficient to operate our business for the next twelve months from the issuance of this report. Accordingly, 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. In order to continue to operate our business beyond that time, we will need to raise substantial additional capital.
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 and cash equivalents and available for sale securities, and our current operating plan as discussed above 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 (Organization and Operations) to our consolidated financial statements included elsewhere in this Annual Report for more information.
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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,
2023
2022
Net cash provided by (used in):
Operating activities $ (125,181,000) $ (124,816,000)
Investing activities 24,158,000 82,767,000
Financing activities 113,815,000 23,007,000
Operating Activities
2023 Compared to 2022
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. 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 an annual basis to sustain the expansion of our commercial offerings.
Net cash used in operating activities was $125.2 million during the year ended December 31, 2023 as compared to $124.8 million during the year ended December 31, 2022. The increase in cash used in operating activities of $0.4 million is primarily attributed to an increase in our net loss in the current year offset by a decrease in our working capital usage due to higher inventory purchases in the prior year.
Investing Activities
2023 Compared to 2022
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 $24.2 million during the year ended December 31, 2023, compared to $82.8 million provided by investing activities during the year ended December 31, 2022. This decrease in cash provided by investment activities of $58.6 million is attributed to an increase in purchases of available-for-sale securities of $111.3 million as of December 31, 2023, compared to purchases of available-for-sale securities of $84.2 million as of December 31, 2022, in addition to the acquisition of Purigen, net of cash acquired of $31.3 million that occurred during the year ended December 31, 2022 only. The decrease in cash is offset by the sales and maturity of available-for-sale securities of $137.0 million as of December 31, 2023, compared to the sales and maturity of available-for-sale securities of $200.9 million as of December 31, 2022.
Financing Activities
2023 Compared to 2022
Net cash provided by financing activities was $113.8 million during the year ended December 31, 2023 as compared to $23.0 million during the year ended December 31, 2022, an increase of $90.8 million. This increase in cash provided by financing activities is mainly attributed to the proceeds from the issuance of convertible notes payable and warrants of $80.0 million as further discussed in Note 9 (High Trail Agreement). During the year ended December 31, 2023, we raised approximately $57.8 million in gross proceeds from sales under the Cowen ATM as compared to $23.1 million during the year ended December 31, 2022.
Financial Information about Affiliates Whose Securities Collateralize a Registrant’s Securities and Consolidated Subsidiaries
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The Notes are secured by a first-priority lien, subject only to certain permitted liens, on substantially all of our and our subsidiaries’ (other than certain foreign subsidiaries) tangible and intangible assets, whether now owned or hereafter acquired (other than certain excluded property). For a list of subsidiaries whose securities collateralize the Notes, see Exhibit 22 to this Annual Report.
The Notes are our senior secured obligations, rank pari passu with the up to $25.0 million of additional notes that may be issued pursuant to the securities purchase agreement, senior in right of payment to all of our indebtedness that is expressly subordinated to the Notes in right of payment, effectively senior to all of our unsecured indebtedness to the extent of the collateral securing the Notes, effectively junior to all of our indebtedness secured by permitted liens, to the extent of the value of the assets subject to such permitted liens and to the extent such permitted liens have lien priority by contract or law and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries that are not party to the security documents. We do not believe there is any trading market for any of our subsidiaries whose securities are pledged as collateral for the Notes.
See Note 9 (High Trail Agreement) to our consolidated financial statements for further details about the terms, conditions and other factors that may affect payments to holders and the collateral arrangements of the Notes.
Rule 13-02 of Regulation S-X requires the presentation of summarized financial information of the combined affiliates whose securities are pledged as collateral for the Notes unless such information is not material. Because the combined assets, liabilities and results of operations of the Company and the affiliates whose securities are pledged as collateral for the Notes are not materially different than the corresponding amounts presented in our consolidated financial statements, summarized financial information of affiliates whose securities are pledged as collateral for the Notes is not required to be presented under Rule 13-02.
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. On October 2, 2023, the $10.0 million milestone consideration was paid in full.
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 which were applied to the individual payments over the five year milestone term. 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 $10.9 million as of December 31, 2023, $0.0 of which is current as of December 31, 2023.
Contractual Obligations
The following table summarizes our future cash outflows for contractual obligations as of December 31, 2023.
Payments Due by Period
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 years
Operating lease obligations, including interest $ 6,456,000 $ 2,684,000 $ 3,517,000 $ 255,000 $ —
Finance lease obligations, including interest, related party 6,963,000 330,000 685,000 721,000 5,227,000
Convertible notes payable*
70,150,000 62,100,000 8,050,000 — —
Total contractual obligations $ 83,569,000 $ 65,114,000 $ 12,252,000 $ 976,000 $ 5,227,000
*Also refer to Note 9 (High Trail Agreement) in our consolidated financial statements.
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
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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, (Summary of Significant Accounting Policies) to our consolidated financial statements in this Annual Report, the significant accounting estimates that we believe are important to aid in fully understanding and evaluating our reported financial results include the following:
Stock-Based Compensation Expense
We recognize compensation expense for employees based on an estimated grant date fair value using the Black-Scholes option-pricing method. We have elected to account for forfeitures as they occur.
The inputs for the Black-Scholes valuation model require management’s significant assumptions. The common share price was determined by using the quoted price on the grant date. The risk-free interest rates were based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected life was based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos. 107 and 110. The expected volatility was estimated based on historical volatility information of the Company and 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.
Valuation of Goodwill
Goodwill is tested annually for impairment, in the fourth quarter, and in interim periods if events or changes in circumstances indicate that the assets may be impaired. We first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. The qualitative factors include economic environment, business climate, market capitalization, operating performance, competition, and other factors. If, after completing such assessment, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to perform any further testing. If we conclude otherwise, or if we proceed directly to perform a quantitative assessment, then we calculate the estimated fair value of the reporting unit and compare the fair value with the carrying value of the reporting unit. If the carrying amount of the reporting unit exceeds the fair value, we record an impairment loss based on the difference.
If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions include, but are not limited to, future revenue growth, operating margins, capital expenditures, terminal growth rates and discount rates. We also consider our market capitalization as a part of our analysis .
As described further in Note 2, (Summary of Significant Accounting Policies) to our consolidated financial statements in this Annual Report, we performed qualitative goodwill impairment tests as of September 30, 2023 and concluded that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Therefore, we performed a quantitative impairment test and recognized a goodwill impairment charge, impairing goodwill of $77.3 million in full on the consolidated statements of operations and comprehensive loss for the quarter ended September 30, 2023. During the years ended December 31, 2023, the Company recognized no additional impairment losses on goodwill and during the year ended December 31, 2022, no impairment losses were recorded on goodwill.
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Business Combinations
We apply the provisions of Accounting Standards Codification (“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.
Convertible Notes Payable
As described further in Note 2, (Summary of Significant Accounting Policies) to our consolidated financial statements in this Annual Report, the Company elected to account for the convertible notes payable issued using the fair value option under ASC 825-10. Such instruments are recognized at estimated fair value on the date of issuance, with changes in fair value after issuance recorded in other (income) expense, net on the consolidated statements of operations as a gain or loss, unless the change is a result of a change in credit risk, in which case such change in estimated fair value is recorded within other comprehensive income.
Increases or decreases in the fair value of the convertible notes payable can result from updates to assumptions such as the expected timing or probability of a qualified financing event, expected volatility or changes in discount rates. Judgment is used in determining these assumptions as of the initial valuation date and at each subsequent reporting period. Updates to assumptions could have a significant impact on the Company’s results of operations 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.