You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors." Please also see the section titled "Special Note Regarding Forward Looking Statements."
Overview
Berkeley Lights is a leading Digital Cell Biology company focused on enabling and accelerating the rapid development and commercialization of biotherapeutics and other cell-based products. The Berkeley Lights Platform captures deep phenotypic, functional and genotypic information for thousands of single cells in parallel and can also deliver the live biology customers desire in the form of the best cells. This is a new way to capture and interpret the qualitative language of biology and translate it into single-cell specific digital information, referred to as Digital Cell Biology. We currently focus on enabling the large and rapidly growing markets of antibody therapeutics, cell therapy, gene therapy, agricultural biology and synthetic biology with our platform. The Berkeley Lights Platform can be used to characterize the performance of cells relevant to the desired cell-based product early in the discovery process and then connect this phenotypic data to the genetic code for each cell. In contrast, current genomic technologies find sequences first and fail to deliver the functional information early in the process. Performing functional validation early means letting poorly performing cells fail early while rapidly advancing the best candidates forward, before incurring significant research and development expense. Our platform repeats this process of fail and advance many times throughout the process, delivering the best cells for what we believe will deliver the best product. Our platform is a fully integrated, end-to-end solution, comprised of advanced automation systems, proprietary consumables, including our OptoSelect chips and reagent kits, and advanced application and workflow software. Customers load onto our system their live cell samples, as well as media and reagents, then the cells are imported onto our OptoSelect chips where integrated workflows are performed to assess specific cell functions and attributes. Our platform captures and delivers rich single-cell data to find the best cells. Our platform leverages our proprietary OptoElectro Positioning ("OEP") technology, which enables deterministic positioning of living single cells and other micro-objects using light. OEP is a core technology of our platform and allows for a high level of control over live single cells or other micro-objects throughout the functional characterization process. Our commercial workflows, each of which are distinct offerings, are made up of four modules we call Import, Culture, Assay and Export. These modules can be adapted, interchanged and deployed with a variety of single-cell assays to address specific applications and a variety of cell types. We believe this versatility facilitates rapid development of new workflow offerings and virtually unlimited workflow commercialization opportunities. We have developed and will continue to develop and commercialize proprietary workflows across large markets by leveraging existing workflows and assays. Over time, our goal is to enable customers to standardize many of their processes on our platform utilizing our workflows. We believe we are the only company commercializing a platform that can do this in a scalable way. We commercially launched our platform in December of 2016, which included the Beacon system and the alpha version of ourOpto Cell Line Development 1.0 workflow, targeted to the antibody therapeutics market. From the initial launch of our platform throughDecember 31, 2021 , we have commercially launched ten workflows. In June of 2019, we launched our desktop Lightning system targeted for assay development and lower throughput workflows, and in early 2020 we launched ourCulture Station instrument. As ofDecember 31, 2021 , our customer base was comprised of 80 customers and included several of the largest biopharmaceutical companies in the world, as well as biotechnology companies, leading contract research organizations, synthetic biology companies and academic institutions. While we have seen significant growth in our customer and installed base, we believe we are still in the very early stages of platform adoption, with the majority of our historical revenue derived from early adopters of our technology for research and development purposes. 65
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We focus a substantial portion of our resources on platform, workflow and assay development, as well as on business development and sales and marketing. Our research and development efforts are geared towards developing new workflows and assay capabilities, as well as new advanced systems and OptoSelect chips and reagent kits, to meet both our customers' needs and to address new markets. We generally outsource all of our production manufacturing. Design work, prototyping and pilot manufacturing are performed in-house before outsourcing to third party contract manufacturers. Our outsourced production strategy is intended to drive cost leverage and scale, and avoid the high capital outlays and fixed costs related to constructing and operating a manufacturing facility. The contract manufacturers of our systems, reagent kits and OptoSelect chip components are located inthe United States ,Asia andEurope . Certain of our suppliers of components and materials are single source suppliers. We perform final manufacture and assembly steps of our OptoSelect chips in-house. We have financed our operations primarily from the issuance and sale of equity securities, borrowings under our long-term debt agreement, as well as cash flows from operations. OnJuly 21, 2020 , we closed our initial public offering (the "IPO"), in which we sold 9,315,000 shares of common stock (which included 1,215,000 shares that were sold pursuant to the full exercise of the IPO underwriters' option to purchase additional shares) at a price to the public of$22.00 per share. We received aggregate net proceeds of$187.9 million after deducting offering costs, underwriting discounts and commissions of$17.0 million . Since our inception in 2011, we have incurred net losses in each year. Our net losses were$71.7 million and$41.6 million for the years endedDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 , we had an accumulated deficit of$263.6 million and cash and cash equivalents totaling$178.1 million . We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
•attract, hire and retain qualified personnel;
•invest in processes and infrastructure to scale our platform;
•support research and development to introduce new products;
•market and sell new and existing products and services;
•protect and defend our intellectual property; and
•acquire businesses or technologies to support the growth of our business.
Access options to Digital Cell Biology enabled by the Berkeley Lights Platform
Our business model is focused on driving the adoption of theBerkeley Lights Platform and maximizing its use across our customers' value chains. This is achieved by enabling more functional testing of single cells throughout our customers' value chains and by finding opportunities for customers to perform single-cell functional testing earlier in their product development process to advance better product candidates. We engage with potential customers to identify a significant challenge they are facing and then evaluate which of our workflows and underlying assays can address their problem. Customers can gain access to our platform via direct purchase, subscription, or a strategic partnerships and services agreement. In many cases we can address customers' needs with existing or variants of existing workflows. Alternatively, we may form strategic partnerships to develop substantially new workflows with our customers to address their needs.
Key factors affecting our results of operations and future performance
We believe that our financial performance has been, and in the foreseeable future will continue to be, primarily driven by multiple factors as described below, each of which presents growth opportunities for our business. These factors also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risks and uncertainties, including those described under the heading "Risk Factors." 66
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New customer adoption of the Berkeley Lights Platform
Our financial performance has largely been driven by, and a key factor to our future success will be, our ability to increase the adoption of our platform. We drive global customer adoption through business development efforts, a direct sales and marketing organization inthe United States , parts ofEurope ,China , and third party distributors and dealers inAsia . We are investing in our direct sales organization and establishing distributors in certain global geographies.
Adoption of the platform access options we offer
We offer different access options to our platform in order to meet customer budget and business model needs. We believe this helps to drive customer adoption of our platform. Customers can access our platform with a direct platform purchase or through a subscription. We also form strategic partnerships and services agreements to jointly develop workflows. In these strategic partnerships and services agreements the customer can access the platform through work done by our scientists on advanced automation systems that are part of the Berkeley Lights BioFoundry. Substantially all of our customers to date have chosen to access our platform with a direct platform purchase, subscription or by forming a strategic partnership with us. We launched the subscription access option inFebruary 2020 , and our TechAccess subscription option inJune 2021 . We believe that, over time, a growing portion of our new customers will choose subscription. The degree to which customers adopt one access option over the other could create variations in the amount of and timing in which we recognize revenue and derive cash flow from operations. In addition, as adoption of the subscription access option increases, it will make it difficult to compare our future results with our historical results as a consequence of differing accounting treatment.
Utilization and value of our workflows
Workflows represent a source of recurring revenue from customers using our platform through increased consumables consumption and licenses. We are driving utilization of our workflows by engaging with customers leveraging our customer success organization to help them advance through the platform adoption cycle from early stage validation of the platform into an integrated solution. As our platform advances towards becoming fully integrated within customer processes, customers utilize more workflows. We also develop new workflows for use at multiple points within the discovery, development and production phases of our customers' value chains. We increase the value of our workflows by building additional assays that can be used with a given workflow and by further integrating the workflows into our customers' existing processes. We are also expanding the upstream and downstream reach of our workflows. This increases the workflow value to our customers and enables us to share in that value creation, which we believe will increase workflow adoption.
Adoption of our platform across existing customers' organizations
There is an opportunity to increase broader adoption and utilization of our platform throughout our customers' organizations by their purchasing of more systems to support multiple locations, to meet redundancy requirements, or driven by a need to increase capacity. Increased usage amongst existing customers can also occur as customers advance through the platform adoption cycle from early stage validation phase into an integrated solution.
Development and monetization of proprietary biological assets
Our ability to participate in the end-markets of cell-based products is a function of how many proprietary biological assets are generated during new workflow development in our BioFoundry. Within our Berkeley Lights BioFoundry, we develop, practice and validate workflows. In certain cases, we may use our own biology as part of this validation process. This enables us to commercialize new workflows and may also generate proprietary valuable biological assets we could sell outright or license to customers, such as functionally validated antibodies or new organisms applicable to synthetic biology. We also use ourInnovation Lab in cooperation with third parties to develop workflows to generate proprietary biological assets for new and adjacent markets. These early third party research collaborations may take various forms, including service or capacity subscription arrangements. 67
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Adoption of the Berkeley Lights Platform into new markets
Our market entry strategy involves identifying markets that have significant constraints, which can be addressed by our platform. This can be specific to certain diseases or pathogens and/or involve new therapeutic modalities and/or cell types. We drive our expansion into new markets by developing workflows for those markets, either by adapting existing workflows or by partnering with leaders in those markets to develop workflows that address their significant unmet needs, and have general value for other customers in that market. These partnerships can result in joint development of specific workflows and assays involving upfront and milestone arrangements, as well as capacity subscription arrangements. Depending on the agreement, we could also negotiate end product revenue participation through royalties. Furthermore, these partnerships enable us to generate insights about a particular market, which facilitates development of workflows that we may commercialize to the market broadly.
Leverage derived from our BioFoundry research and development infrastructure
We use our Berkeley Lights BioFoundry, which we believe represents the largest single location platform capacity globally for functionally characterizing cells, to drive new workflow development and functionally characterize cells. In our BioFoundry, we practice and develop workflows and functional assays that are applicable throughout the value chain of our target markets. Our workflows are made up of modules that can be adapted, interchanged and deployed with a variety of assays. We believe this versatility facilitates rapid development of new workflow offerings and virtually unlimited workflow commercialization opportunities. There can also be significant leverage among workflows and underlying assays used to functionally characterize single cells in these markets, allowing us to leverage the components developed for one market to improve and accelerate workflow development for another market. This allows us to capture workflow synergies which facilitate adoption of our platform across markets. We have and will continue to invest significantly in expanding our assay and workflow libraries. We have grown our workflow library since the introduction of our first workflow in December of 2016, and as ofDecember 31, 2021 , we offered ten commercial workflows incorporating multiple assays and a variety of cell classes.
Further investment towards adoption of Digital Cell Biology
Driving the adoption of our platform and workflows across existing and new markets will require significant investment. We plan to further invest in research and development to support the expansion of our workflow and assay libraries as well as the addition of platform capabilities including new reagent kits and OptoSelect chips, and new advanced automation systems to address new markets and new workflows. We will continue to hire employees with the necessary scientific and technical backgrounds to enhance our existing products and help us introduce new products to market. We expect to incur additional research and development expenses and higher stock-based compensation expenses as a result. We further plan to invest in sales, marketing and business development activities to drive the commercialization of new products, migration to new markets and further growth within our existing markets. We have invested, and will continue to invest, significantly in our manufacturing capabilities and commercial infrastructure, including customer support and service. We expect to incur additional general and administrative expenses and to have higher stock-based compensation expenses as we support our growth and our continuing transition into a publicly traded company. As cost of revenue, operating expenses and capital expenditures fluctuate over time, we may experience short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments in the belief that they will contribute to long-term growth and sustainability.
COVID-19 update
The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, including temporary closures of businesses and quarantine and shelter in place orders. During the year endedDecember 31, 2021 , our production, shipping and customer service functions have remained operational to maintain a continuous supply of products both to our customers and for our internal research and development activities. We are communicating regularly with our suppliers so that our supply chain remains intact. We continue to closely monitoring global supply issues around materials, parts and components, including plastics and integrated circuit chips, and we have not experienced any material supply issues to date. 68
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The ultimate impact of COVID-19 on our operations and financial performance in future periods remains uncertain and will depend on many factors outside our control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. Refer to Part I, Item 1A. of this Form 10-K under the heading "Risk Factors" for more information.
Components of results of operations
We have elected to omit discussion of the earliest of the three years covered by the audited financial statements presented. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of of Operations", located in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 12, 2021 , for reference to the discussion of the year endedDecember 31, 2019 , the earliest of the three fiscal years presented. Revenue Our revenue consists of both product and service revenue, which is generated through the following revenue streams: (i) direct platform sales (advanced automation systems, fully-paid workflow license agreements and platform support), (ii) recurring revenue (annual workflow license agreements, workflow subscription agreements, consumables, service and extended or enhanced warranty contracts) and revenues under our Tech Access subscription model, and (iii) revenue from partnerships related to our strategic partnerships and services agreements, and to a lesser extent feasibility studies. Sales of advanced automation systems, recurring revenue from consumables, workflow subscription agreements, and workflow licenses are defined as product revenue, and revenue from strategic partnership and services agreements and extended or enhanced warranty contracts, feasibility studies and platform support are defined as service revenue in our consolidated results of operations. We launched our Tech Access subscription model inJune 2021 . 69
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The following tables provide an overview of our revenue streams and how we report revenue in our consolidated statements of operations and comprehensive loss (in thousands):
Income Statement Product or Service sold Revenue Stream
Classification
Product revenue Sale of advanced automation system (Beacon and Direct platform sales Lightning system, Culture Station) Software Direct platform sales Fixed term sales-type lease arrangements with qualified customers Direct platform sales Annual renewable workflow licenses, quarterly Recurring revenue workflow subscriptions, annual or multi-year subscriptions arrangements (e.g. TechAccess) Consumables and reagent kits (e.g. OptoSelect chips) Recurring revenue Service revenue Strategic partnerships, joint development and Strategic partnerships collaboration agreements where we provide services and services for development of new workflows, cells or organism types Application support, installation and training Direct platform sales Fixed fee extended warranty and service programs Recurring revenue
We renamed our joint development and partnership offering to strategic partnerships and services in the fourth quarter of 2021.
Year ended December 31, 2021 Product Service Total Direct platform sales$ 44,366 $ 1,996 $ 46,362 Recurring revenue 12,209 6,947 19,156 Strategic partnerships and services - 19,870 19,870 Total revenue$ 56,575 $ 28,813 $ 85,388 Year ended December 31, 2020 Product Service Total Direct platform sales$ 42,435 $ 2,221 $ 44,656 Recurring revenue 9,151 4,737 13,888 Strategic partnerships and services - 5,759 5,759 Total revenue$ 51,586 $ 12,717 $ 64,303 70
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The following table provides information by revenue stream for the periods presented:
Year ended December
31,
(in thousands, except percentages) 2021 Change 2020 Change 2019 Direct platform sales$ 46,362 4%$ 44,656 14 %$ 39,116 Recurring revenue 19,156 38% 13,888 73 % 8,021 Strategic partnerships and services 19,870 245% 5,759 (40) % 9,556 Total revenue$ 85,388 33%$ 64,303 13 %$ 56,693
Costs of sales, gross profit and gross margin
Product cost of sales. Cost of sales associated with our products primarily consists of manufacturing related costs incurred in the production process, including personnel and related costs, costs of component materials, labor and overhead, packaging and delivery costs and allocated costs, including facilities and information technology. These costs also include the costs associated with the standard assurance-type product warranty provided on our platforms, which are recorded at the time of sale. Service cost of sales. Cost of sales associated with our services primarily consists of personnel and related costs, expenses related to the development of customized platforms and workflows, feasibility studies on our platforms and service and warranty costs to support our customers. We maintain continuous efforts to increase reliability and uptime of our advanced automation systems. Gross profit and gross margin. Gross profit is calculated as revenue less cost of sales. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including: market conditions that may impact our pricing; sales mix among platform access options, including the regional mix of sales; sales mix changes among consumables, advanced automation systems and services; product mix changes between established products and new products; excess and obsolete inventories; our cost structure for manufacturing operations relative to volume; and product warranty obligations. We expect cost of sales to increase in absolute dollars in future periods as our revenue grows, and as we plan to hire additional employees to support our manufacturing, operations, service and support organizations.
Gross profit was
Operating expenses
Research and development. Research and development costs primarily consist of salaries, benefits, incentive compensation, stock-based compensation, laboratory supplies, materials expenses and allocated facilities and IT costs for employees and contractors engaged in research and product development. We expense all research and development costs in the period in which they are incurred. We plan to continue to invest in our research and development efforts, including hiring additional employees, to enhance existing products and develop new products. As a result, we expect that our research and development expenses will continue to increase in absolute dollars in future periods. We expect these expenses to vary from period to period as a percentage of revenue. General and administrative. Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation costs for employees in our executive, accounting and finance, legal and human resource functions, as well as professional services fees, such as consulting, audit, tax and legal fees, general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in absolute dollars, primarily due to increased headcount to support anticipated growth in the business and due to incremental costs associated with operating as a public company. We expect these expenses to vary from period to period as a percentage of revenue.
Sales and marketing. Our sales and marketing expenses consist primarily of salaries, benefits, sales commissions and stock-based compensation costs for employees within our commercial sales functions, as well as marketing,
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travel expenses and allocated facilities and IT costs. We expect our sales and marketing expenses to increase in absolute dollars as we expand our commercial sales, marketing and business development teams, increase our presence globally and increase marketing activities to drive awareness and adoption of our platform. While these expenses may vary from period to period as a percentage of revenue, we expect these expenses to increase as a percent of sales in the short-term as we continue to grow our commercial organization to support anticipated growth in the business.
We expect our aggregate stock-based compensation to continue to increase in absolute dollar terms.
Other income (expense)
Interest expense. Interest expense consists primarily of interest related to borrowings under our debt obligations.
Interest income. Interest income primarily consists of interest earned on our cash and cash equivalents which are invested in cash deposits and in money market funds.
Other income (expense), net. Other income (expense), net consists primarily of foreign currency exchange gains and losses. Foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than theU.S. dollar, primarily related to our operations in theUnited Kingdom andChina . We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates. Provision for income taxes Our provision for income taxes consists primarily of foreign taxes and state taxes inthe United States . As we expand the scale and scope of our international business activities, any changes inthe United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. 72
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Results of operations
The following tables set forth our results of operations for the periods presented:
Year ended December 31, (in thousands, except share and per share data) 2021 2020 2019 Consolidated statements of operations and comprehensive loss data: Revenue: Product revenue$ 56,575 $ 51,586 $ 43,460 Service revenue 28,813 12,717 13,233 Total revenue 85,388 64,303 56,693 Cost of sales: Product cost of sales 14,857 13,021 11,245 Service cost of sales 13,980 6,727 1,972 Total cost of sales (1) 28,837 19,748 13,217 Gross profit 56,551 44,555 43,476 Operating expenses: Research and development (1) 58,553 47,240 38,414 General and administrative (1) 43,400 23,202 12,362 Sales and marketing (1) 25,387 14,507 9,237 Total operating expenses 127,340 84,949 60,013 Loss from operations (70,789) (40,394) (16,537) Other income (expense): Interest expense (1,171) (1,436) (1,425) Interest income 175 338 909 Other income (expense), net 6 82 (1,180) Loss before income taxes (71,779) (41,410) (18,233) Provision for (benefit from) income taxes (55) 174 69 Net loss and net comprehensive loss $
(71,724)
$
(1.08)
66,707,129
31,192,752 2,883,950
(1)Includes stock-based compensation as follows:
Year ended December 31, (in thousands) 2021 2020 2019 Cost of sales$ 254 $ 290 $ - Research and development 5,672 5,201 1,672 General and administrative 8,224 3,377 1,763 Sales and marketing 7,072 2,049 325
Total stock-based compensation
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Ta b l e of Contents Revenue Year ended December 31, (in thousands, except percentages) 2021 Change 2020 Change 2019 Product revenue$ 56,575 10%$ 51,586 19 %$ 43,460 Service revenue 28,813 127% 12,717 (4) % 13,233 Total revenue$ 85,388 33%$ 64,303 13 %$ 56,693 Product revenue increased by$5.0 million , or 10%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . Revenue from platform and system sales increased by$1.9 million , including sales-type lease arrangements and license arrangements related to our workflows and revenue from the sale of consumables increased by$2.1 million driven by additional demand due to the increase in our installed base. In addition, revenue from subscription arrangements increased by$0.9 million for the year endedDecember 31, 2021 compared to the same period in 2020. During the year endedDecember 31, 2021 we placed 36 platforms compared to 27 platforms during the year endedDecember 31, 2020 . Service revenue increased by$16.1 million , or 127% for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The increase was driven by increased revenue associated with strategic partnership and services revenue of$14.1 million , as well as an increase from sales in services, including warranty and application support arrangements of$2.0 million .
Costs of sales, gross profit and gross margin
Year ended December 31, (in thousands, except percentages) 2021 Change 2020 Change 2019 Product cost of sales$ 14,857 14%$ 13,021 16 %$ 11,245 Service cost of sales 13,980 108% 6,727 241 % 1,972 Total cost of sales$ 28,837 46%$ 19,748 49 %$ 13,217 Gross profit$ 56,551 27 %$ 44,555 2 %$ 43,476 Gross margin 66 % 69 % 77 %
Product cost of sales increased by
Service cost of sales increased by$7.3 million , or 108% for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily due to costs incurred for strategic partnership and services agreements that began during 2021 as well as increased costs for extended warranty services and application support due to the increase in our installed base. Gross profit increased by$12.0 million , or 27%, for the year endedDecember 31, 2021 compared to the same period in 2020. The increase in gross profit was primarily driven by higher revenues. Gross margin was 66% for the year endedDecember 31, 2021 and was 69% for the year endedDecember 31, 2020 . Gross margin for the year endedDecember 31, 2021 was negatively impacted by the buy-down of two workflow programs in prior periods that are being developed in collaboration with Ginkgo Bioworks to use the workflows in relation to certain strategic partnership and services agreements. While this buy-down does not impact our costs incurred, it reduces revenue, as we are no longer entitled to bill Ginkgo for certain development costs and therefore also reduces gross margin related to these specific programs upon execution on a go-forward basis. 74
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Ta b l e of Contents Operating expenses Research and development Year ended December 31, (in thousands, except percentages) 2021 Change 2020 Change 2019 Research and development$ 58,553 24% $ 47,240 23 %$ 38,414 Research and development expense increased by$11.3 million , or 24%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The increase was due to an increase in personnel-related expenses, including a$0.5 million increase in stock-based compensation expense resulting primarily from increased headcount, and also due to an increase in other costs, including testing and qualification materials and other costs related to various projects to develop and improve systems, workflows and assays. Stock-based compensation for the year endedDecember 31, 2020 included a$2.4 million charge related to the modification of certain stock option related to the retirement of one of our non-executive employees. General and administrative Year ended December 31, (in thousands, except percentages) 2021 Change 2020 Change 2019 General and administrative$ 43,400 87% $ 23,202 88 %$ 12,362 General and administrative expense increased by$20.2 million , or 87%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The increase was primarily due to an increase in outside legal fees, including patent litigation support, as well as an increase in personnel-related expenses, including a$4.8 million increase in stock-based compensation expense primarily due to the growth of our operations, and increased costs to improve our information processes and systems and implement the financial reporting, compliance and other infrastructure required for a public company.
Sales and marketing
Year ended December 31, (in thousands, except percentages) 2021 Change 2020 Change 2019 Sales and marketing$ 25,387 75% $ 14,507 57 %$ 9,237 Sales and marketing expense increased by$10.9 million , or 75%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The increase was primarily due to an increase in personnel-related expenses, including a$5.0 million increase in stock-based compensation and also due to an increase in marketing, advertising and other costs.
Interest expense
Year ended December 31, (in thousands, except percentages) 2021 Change 2020 Change 2019 Interest expense$ (1,171) (18)% $ (1,436) 1 %$ (1,425) 75
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Interest expense decreased by$0.3 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , as a result of refinancing our loan fromEast West Bank , which now carries a lower interest rate.
Interest income
Year ended December 31, (in thousands, except percentages) 2021 Change 2020 Change 2019 Interest income$ 175 (48)% $ 338 (63) %$ 909 Interest income decreased$0.2 million for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The decrease was primarily due to lower interest received on our cash and short-term deposits due to a decline in interest rates and lower average cash balances during fiscal 2021.
Other income (expense), net
Year ended December
31,
(in thousands, except percentages) 2021 Change 2020 Change 2019 Other income (expense), net$ 6 (93)%$ 82 (107) %$ (1,180) Other income for the years endedDecember 31, 2021 and 2020 was mainly comprised of foreign exchange gains and losses and other miscellaneous income and expense items.
Liquidity and capital resources
As ofDecember 31, 2021 , we had approximately$178.1 million in cash and cash equivalents which were primarily held inU.S. short-term bank deposit accounts and money market funds. Restricted cash of$0.3 million serves as collateral for our corporate credit card program. We have generated negative cash flows from operations since inception throughDecember 31, 2021 . We expect to incur additional operating losses in the foreseeable future as we continue to invest in the research and development of our product offerings, commercialize and launch platforms, and expand into new markets. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, the timing and extent of additional capital expenditures to invest in existing and new facilities as well as our manufacturing operations, the expansion of sales and marketing and the introduction of new products. Our future capital needs may also depend upon the impacts of the COVID-19 pandemic. We have and may in the future enter into arrangements to acquire or invest in businesses, services and technologies, and any such acquisitions or investments could significantly increase our capital needs. We currently anticipate making aggregate capital expenditures between approximately$12 million and$15 million during the next 12 months, which is expected to primarily include equipment to be used for manufacturing and research and development, as well as spend associated with the expansion of our facilities. Based on our current business plan, we believe our existing cash and cash equivalents and anticipated cash flows from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months from the date of this Annual Report on Form 10-K.
Sources of liquidity
Since our inception, we have financed our operations primarily from the issuance and sale of our equity securities, borrowings under long-term debt agreements, and to a lesser extent, cash generated by product and service sales. InJuly 2020 , we completed our IPO, resulting in the receipt of aggregate proceeds of$187.9 million , net of offering costs, underwriter discounts and commissions of$17.0 million . 76
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East West Bank Loan and Security Agreement
OnMay 23, 2018 , we entered into a Loan and Security Agreement withEast West Bank ("EWB") providing it the ability to borrow up to$20.0 million . The loan facility was fully drawn as ofMay 23, 2018 . OnJune 30, 2021 , we entered into an Amended and Restated Loan and Security Agreement (the "Agreement") with EWB. Pursuant to the Agreement, EWB provided a$20.0 million term loan ("the Term Loan") which was used to refinance the term loan outstanding under the Loan and Security Agreement datedMay 23, 2018 . The Term Loan matures in 48 months and bears interest at a fixed rate of 4.17%. The Term Loan has an initial interest-only period of 24 months, which can be extended to up to 36 months based on the achievement of certain liquidity measures, and can be pre-paid without penalty at any time. The Agreement grants EWB a security interest in and liens on all of our assets, excluding intellectual property, which is subject to a double negative pledge. In addition, certain other terms of the original agreements as previously in effect were amended by the Agreement, including certain financial covenants. The Amended and Restated Loan and Security Agreement was accounted for as a debt modification and we capitalized incremental debt issuance costs. Furthermore, the Agreement also provided the Company with a new$10.0 million revolving credit line (the "Revolving Line"), which bears interest on the outstanding daily balance thereof of 0.70% above the Prime Rate (as defined in the Agreement). No amount was outstanding under the Revolving Line as ofDecember 31, 2021 .
We were in compliance with all covenants under the EWB Loan Agreement as of
Cash flows
The following table summarizes our cash flows for the periods presented:
Year ended December 31, (in thousands) 2021 2020 2019 Net cash (used in) provided by: Operating activities$ (53,128) $ (35,852) $ (10,533) Investing activities (15,825) (3,289) (9,073) Financing activities 13,641 191,516 1,022 Net increase (decrease) in cash, cash equivalents, and restricted cash$ (55,312) $ 152,375 $ (18,584) Operating activities Net cash used in operating activities for the year endedDecember 31, 2021 was primarily due to a net loss of$71.7 million , a net cash outflow from changes in operating assets and liabilities of$11.4 million , partially offset by non-cash adjustments, mainly consisting of depreciation expense and stock-based compensation. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory to support revenue growth, an increase in accounts receivable due both to an increase in revenue and the timing of invoicing, partially offset by an increase in deferred revenue, accrued expenses and other current liabilities and accounts payable due to the timing of advanced billings and revenue recognition as well as the timing of vendor invoicing and related payments. Net cash used in operating activities for the year endedDecember 31, 2020 was primarily due to a net loss of$41.6 million , a net cash outflow from changes in operating assets and liabilities of$12.2 million , partially offset by non-cash adjustments, mainly consisting of depreciation expense and stock-based compensation. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory to support revenue growth, an increase in accounts receivable due both to an increase in revenue and the timing of invoicing.
Investing activities
Net cash used in investing activities was$15.8 million in the year endedDecember 31, 2021 compared to$3.3 million in the year endedDecember 31, 2020 . The increase was primarily driven by the increase and timing of capital expenditures. Capital expenditures for fiscal 2021 included the expansion of our research and development and BioFoundry laboratory operations to support current and planned programs. 77
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Financing activities
Net cash provided by financing activities was$13.6 million for the year endedDecember 31, 2021 compared to$191.5 million for the year endedDecember 31, 2020 . Net cash provided by financing activities during the year endedDecember 31, 2021 primarily related to cash receipts upon the issuance of common stock under our employee stock option and stock purchase plans. Net cash provided by financing activities during the year endedDecember 31, 2020 primarily related to net cash receipts of$187.9 million from our initial public offering.
Concentration of credit risk
Most of the Company's customers are located inthe United States . For the year endedDecember 31, 2021 , three customer accounted for 19%, 11% and 10% of revenue. For the year endedDecember 31, 2020 , one customer accounted for 12% of revenue. Three customers accounted for 15%, 11% and 11%, respectively, of accounts receivable atDecember 31, 2021 . Three customers comprised 42%, 21% and 15%, respectively, of accounts receivable atDecember 31, 2020 .
Contractual Obligations and Commitments
The following table summarizes our commitments to settle contractual obligations as ofDecember 31, 2021 : Payments due by period Less than More than (in thousands) Total 1 year 1 - 3 years 3 -5 years 5 years Debt obligations, including interest (1)$ 22,078 $ 845 $
17,023
34,163 4,202 8,631 9,107 12,223 Purchase Obligations (3) 43,640 22,227 21,413 - - Total$ 99,881 $ 27,274 $ 47,067 $ 13,317 $ 12,223 (1)As ofDecember 31, 2021 , the outstanding balance of our term loan under the EWB Loan Agreement was$20.0 million . Borrowings under the term loan mature onJune 30, 2025 and accrue interest at a fixed rate of 4.17% per annum.
(2)Represents commitments under our non-cancelable office leases.
(3)Purchase obligations relate primarily to our contract manufacturer which manufactures our instruments and makes advance purchases of components based on our sales forecasts and the placement of property by us, as well as the commitments made to certain providers of components of our consumable manufacturing. To the extent components are purchased by the contract manufacturer on our behalf and cannot be used by the contract manufacturer's other customers, we are obligated to purchase such components.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report are prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated 78
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financial condition and results of operations. For further information, see Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report. Revenue recognition
We derive revenue from primarily two sources, product and service revenues, which are discussed further below.
We recognize revenue using a five step process. This process involves identifying the contract with a customer, identifying the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract based on their stand-alone selling price, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once it has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Our agreements with customers often include multiple performance obligations, which can sometimes be included in separate contracts entered into within a reasonably short period of time. We consider an entire customer arrangement to determine if separate contracts should be considered combined for the purposes of revenue recognition. Management must apply judgment in determining whether the individual promises represent multiple performance obligations, or a single, combined performance obligation. In order to determine the stand-alone selling price, we conduct a periodic analysis to determine whether various goods or services have an observable stand-alone selling price as well as to identify significant changes to current stand-alone selling prices. If we do not have an observable stand-alone selling price for a particular good or service, then the stand-alone selling price for that particular good or service is estimated using an approach that maximizes the use of observable inputs. Our process for determining stand-alone selling price requires judgment and considers multiple factors that are reasonably available and maximizes the use of observable inputs that may vary over time depending upon the unique facts and circumstances related to each performance obligation. We believe that this method results in an estimate that represents the price we would charge for the product offerings if they were sold separately. For most of our performance obligations, we have established stand-alone selling price as a range rather than a single value, such range being plus or minus 15% of the weighted average of observable prices. If the contractually stated prices of all the performance obligations in a contract fall within their respective stand-alone selling price ranges, we will allocate the transaction price at the contractually stated amounts. In situations where the contractually stated price for one or more performance obligations in a contract fall(s) outside of their respective stand-alone selling price range, we will use the mid-point of the respective stand-alone selling price range for performance obligations in the contract priced outside of their respective stand-alone selling price range(s) and the contract values for performance obligations priced within their respective stand-alone selling price range(s), to allocate the transaction price on a relative stand- alone selling price basis. Taxes, such as sales, value-add and other taxes, collected from customers concurrent with revenue generating activities and remitted to governmental authorities are not included in revenue. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in cost of sales.
In certain markets, our products are sold to customers primarily through distributors. The terms of sales transactions to our distributors are substantially consistent with the terms of our direct sales to end customers.
The following describes the nature of our primary types of revenue and the revenue recognition policies and significant payment terms as they pertain to the types of transactions we enter into with our customers.
Product revenues
Product revenues are comprised of two major revenue streams, direct platform sales and consumables. Direct platform sales revenues are comprised of advanced automation systems, which include the Beacon and Lightning systems (including fully paid workflow licenses) as well asCulture Station instruments. Consumables revenues are comprised of OptoSelect chips required to run the system as well as reagent kits. Direct platform sales also include 79
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revenue from certain historical subscription arrangements in which customers are able to subscribe to a specific workflow and pay a quarterly fee over a fixed period of time which covers the annual workflow license, the advanced automation system, as well as warranty and service. While the majority of our revenue under our TechAccess subscription falls into the service category, consumables and certain other deliverables under TechAccess subscription are categorized as product revenue. Our standard arrangement with our customers is generally a purchase order or an executed contract. Revenue on product sales is recognized when control has transferred to the customer which typically occurs when the product has been shipped to the customer, risk of loss has transferred to the customer and we have a present right to payment for the system, chip or kit, as applicable. In certain limited circumstances when a product sale includes client acceptance provisions, we will first assess such terms to determine if the control of the good is being transferred to the customer in accordance with the agreed-upon specifications in the contract. To the extent that such acceptance provisions can be objectively determined to be aligned with the standard specifications of the arrangement, are defined and easily evaluated for completion, as well as do not afford the customer any additional rights or create additional performance obligations for us, such provisions would be determined perfunctory and would not preclude revenue recognition presuming all other criteria are met. If such acceptance provisions are considered to be substantive, revenue is recognized either when client acceptance has been obtained, client acceptance provisions have lapsed, or we have objective evidence that the criteria specified in the client acceptance provisions have been satisfied. Payment terms are generally thirty to ninety days from the date of invoicing.
On a limited basis, we also enter into fixed-term sales-type lease arrangements with certain qualified customers.
Service revenues
Service revenues primarily consist of strategic partnership and services agreements, service and warranty, training and installation services, platform support and feasibility studies on our advanced automation systems and workflows. Strategic partnership and services agreements are agreements whereby we provide services for, among other things, the development of customized workflows, screening capabilities, or for customized consumables or advanced automation systems to meet a specific customer's needs. These contracts can be executed on a time-and-materials basis and in certain cases include defined milestones associated with these development activities over extended periods of time, some in excess of twenty-four months. Our services are generally provided primarily on a fixed fee basis with defined billing schedules. We review strategic partnerships and services agreements for revenue recognition at contract inception and generally recognizes revenue from these contracts over time, using either an input measure of progress based on costs incurred to date relative to total expected costs or on a time and materials basis. We recognize revenue from the sale of extended warranty and enhanced service warranty arrangements over the respective period, while revenue on feasibility studies is recognized over time, using an input measure of progress based on costs incurred to date relative to total expected costs. Revenue on platform support is recognized as the services are performed. Service contracts are typically short-term in nature. Payment terms are generally thirty to ninety days from the date of invoicing. We only include variable consideration in the transaction price to the extent that it is not probable that a significant reversal of revenue will occur for that amount. The constraint estimate is reassessed at each reporting date until the uncertainty is resolved.
Contract assets and contract liabilities
Contract assets include amounts where revenue recognized exceeds the amount invoiced to the customer and the right to payment is not solely subject to the passage of time. Contract liabilities consist of fees invoiced or paid by our customers for which the associated services have not been performed and revenue has not been recognized based on our revenue recognition policy described above. Such amounts are reported as deferred revenue on our consolidated balance sheets. Deferred revenue that is expected to be recognized during the following twelve months is recorded as a current liability and the remaining portion is recorded as non-current. Contract assets and contract liabilities are reported in a net position on an individual contract basis at the end of each reporting period. Contract assets are classified as current or long-term on our consolidated balance sheet based on 80
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the timing of when we expect to complete the related performance obligations and invoice the customers. Contract liabilities are classified as current or long-term on our consolidated balance sheet based on the timing when the revenue recognition associated with the related customer payments and invoicing is expected to occur.
Costs to obtain or fulfill a contract
Origination costs relate primarily to sales commissions to individuals that are directly related to sales transactions. Fulfillment costs generally include the direct cost of services such as platform support and feasibility studies. Origination and fulfillment costs that are internal to us are generally expensed when incurred because most of those costs are incurred concurrently with the delivery of the related goods and services, which are predominantly recognized at a point in time or are less than one year in nature. The origination costs that are related to long-term development agreements are capitalized and amortized over the relevant service period.
Stock-based compensation
We maintain an incentive compensation plan under which incentive stock options, non-qualified stock options and restricted stock units ("RSU") are granted primarily to employees and non-employee consultants.
Stock-based compensation expense for stock-based awards is based on the grant date fair value of the award. We determine the fair value of RSUs based on the closing value of its stock price listed on the Nasdaq at the date of the grant. We estimate the fair value of stock option awards on the grant date using the Black-Scholes option-pricing model. The fair value of stock option awards is recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. Stock option awards that include a service condition and a performance condition are considered expected to vest when the performance condition is probable of being met. Compensation expense associated with performance awards that are determined to be probable of achievement is recognized over the requisite service period, provided the grantee remains an employee or consultant of the Company through each applicable vesting date. For performance awards not initially assessed as probable of achievement, we record a cumulative adjustment to compensation expense in the period we change our determination that a performance condition becomes probable of being achieved. We cease recognition of compensation expense in any periods where we determine the attainment of a performance condition is no longer probable. If the performance goals are determined to be improbable, no compensation expense is recognized and any previously recognized compensation expense is reversed.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" in our Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for a discussion of recent accounting pronouncements.
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