CYTEK BIOSCIENCES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year endedDecember 31, 2020 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our final prospectus filed with theSecurities and Exchange Commission (the "SEC") onJuly 23, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the Securities Act), for our initial public offering (IPO). Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "we," "us" and "our" refer toCytek Biosciences, Inc.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and in our other filings with theSEC . The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
Overview
We are a leading cell analysis solutions company advancing the next generation
of cell analysis tools by leveraging novel technical approaches. Our goal is to
become the premier cell analysis company through continued innovation that
facilitates scientific advances in biomedical research and clinical
applications. We believe our core instruments, the Aurora and Northern Lights
systems, are the first full spectrum flow cytometers able to deliver
high-resolution, high-content and high-sensitivity cell analysis by utilizing
the full spectrum of fluorescence signatures from multiple lasers to distinguish
fluorescent tags on single cells ("Full Spectrum Profiling" or "FSP"). Our novel
approach harnesses the power of information within the entire spectrum of a
fluorescent signal to achieve a higher level of multiplexing with exquisite
sensitivity. Our patented FSP technology optimizes sensitivity and accuracy
through its novel optical and electronic designs that utilize an innovative
method of light detection and distribution. Our FSP platform includes
instruments, reagents, software and services to provide a comprehensive and
integrated suite of solutions for our customers. Since our first U.S. commercial
launch in mid-2017, we have sold and deployed over 970 instruments-primarily
comprised of our Aurora and Northern Lights systems-to over 620 customers around
the world, including the largest pharmaceutical companies, over 125 biopharma
companies, leading academic research centers, and clinical research
organizations ("CROs"). In June 2021 , we began shipping the Aurora cell sorter
("Aurora CS"), which uses our FSP technology to further broaden our potential
applications across cell analysis.
We manufacture our instruments in our facilities in Fremont, California and in
Wuxi, China . We have designed our operating model to be capital efficient and to
scale efficiently as our product volumes grow.
Our total revenue increased by 37% to $34.4 million and by 43% to $89.1 million
in the three and nine months ended September 30, 2021 , respectively, as compared
to $25.1 million and $62.2 million in the three and nine months ended September
30, 2020 , respectively, primarily due to sales of our Aurora and Northern Lights
systems.
To date, we have adopted a direct sales model in North America , Europe and
China , and sell our products through third-party distributors in Asia
(ex-China ), certain regions of Europe , South America , the Middle East , and
Africa . Revenue from direct sales represented 90% and 86% of total revenue for
the three and nine months ended September 30, 2021 , respectively, and revenue
from distributors represented 10% and 14% of total revenue for the three and
nine months ended September 30, 2021 , respectively.
We focus a substantial portion of our resources on developing new products and
solutions to meet our customers' needs. Our research and development efforts
focus on developing new and complementary instruments, reagents and reagent
kits, and continued operating software development. We incurred research and
development expenses of $6.1 million and $17.4 million for the three and nine
months ended September 30, 2021 , respectively, and $3.4 million and $9.3 million
for the three and nine months ended September 30, 2020 , respectively. We intend
to continue to make significant investments in research and development in the
future.
We expect to continue to invest in our commercial infrastructure through hiring
additional employees with strong scientific and technical backgrounds to support
growth in sales of our Aurora and Northern Lights instruments and our Aurora CS
cell sorter, as well as our planned expansion of reagents offerings and panel
design capabilities. We also plan to continue to invest in sales, marketing and
business development across the globe to drive commercialization of our
products. We incurred sales and marketing expenses of $6.6 million and $16.4
million for the three and nine months ended September 30, 2021 , respectively,
and $3.8 million and $10.4 million for the three and nine months ended September
30, 2020 , respectively.
Since our inception in 2014, we have financed our operations primarily through sales of our securities and revenue from the sale of our products and services.
We have incurred net losses in each year except for the year endedDecember 31, 2020 and for the three and nine months endedSeptember 30, 2021 when we are in a net income position. Our net income was$1.4 million and$4.2 million for the three and nine months endedSeptember 30, 2021 , respectively, and our net income was$6.5 million and$13.8 million for the three and nine months endedSeptember 30, 2020 , respectively. The change for the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 resulted primarily from expenses driven by an increase in headcount and salaries, expenses related to our IPO, and efforts in research and development and marketing initiatives. 20 --------------------------------------------------------------------------------
We expect our expenses will increase substantially in connection with our on-going activities, as we:
? attract, hire and retain qualified personnel; ? invest in processes, commercial infrastructure and supporting functions to scale our business and introduce new products and services; ? support our research and development efforts; ? continue to expand geographically; ? protect and defend our intellectual property; and ? make strategic investments in complementary businesses, services, products or technologies.
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 to sustain our growth and improve our results of operations. Our ability to successfully address these challenges is subject to various risk and uncertainties, including those described under the heading "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q.
Global customer adoption
Our financial performance has largely been driven by our ability to increase the adoption of our FSP platform, a key factor on which our future success depends. We plan to drive global customer adoption through business development efforts, direct sales and marketing and third-party distributions. We are investing in our direct sales organization and commercial support functions and developing third-party distributor relationships to support global expansion and drive revenue growth. As part of this effort, we increased our direct sales force by 57% and 46% in the three and nine months endedSeptember 30, 2021 , respectively, compared to the three and nine months endedSeptember 30, 2020 . We intend to continue increasing our workforce in line with our growth.
Recurring revenues
We believe our expanding installed base of instruments to new and existing customers will provide us with greater leverage to drive pull-through for reagent and service revenue, which are recurring by nature. Furthermore, as we develop and identify new applications and products, we expect to further increase pull-through across our installed base. We expect recurring revenue on an absolute basis to increase and become an increasingly important contributor to our revenue as our installed base expands.
Revenue mix and gross margin
Our revenue is primarily derived from sales of our instruments and services with our core instruments recognizing higher gross margins than our services. Although we expect sales of our core instruments to continue to represent the largest percentage of our revenue in the future, we expect reagent sales to increase as a percentage of our total revenue and our gross margins to experience a corresponding improvement as we grow our installed base and increase our focus on commercializing reagents. We also expect a higher gross margin on our core instruments as we increase manufacturing efficiency, instrument reliability and training for personnel using our instruments, which we expect to lead to a reduction in warranty claims. Our sales in certain regions, particularly outside ofthe United States , are realized through third-party distribution partners that typically receive discounted prices, thus resulting in lower gross margins than those recognized by our direct sales organization. Furthermore, our gross margins and instrument selling prices may fluctuate in the future as we continue to grow our volume of third-party distribution partners in geographies outside ofthe United States , introduce new products and reduce our production costs as a result of variability in the timing of new product introductions. In the near term, we expect the continued optimization of our manufacturing processes related to our instruments and the expansion of product manufacturing distribution facilities to have the greatest impact on our gross margin. In addition to the impact of competing products entering the market, the future gross margin profiles of our instruments, services and reagents will depend on the outcome of any royalties we are required to pay and the royalty rates and products to which such royalties apply.
Expansion into new markets
We focus our research and development efforts on the greatest value-additive FSP products to meet the growing and unmet needs of the research and clinical markets. We work closely with researchers and clinicians to optimize and implement new panels and applications to meet their specific needs. We also gain valuable insight on potential new products, new applications and enhancements to existing products, as well as biomarker combinations that would be beneficial in different fields, through collaborations with our customers, academic laboratories, KOLs and industry partners. We plan to continue to invest in new product development and enhancements to support our expansion into new markets. Our Northern Lights system obtained clinical certification inChina in 2019 and received CE Marking under the European Union In Vitro Diagnostic Medical Devices Directive inSeptember 2020 . With these achievements, our Northern Lights system is available for clinical diagnostic use in hospitals, laboratories, and clinics inChina and theEuropean Union . 21 --------------------------------------------------------------------------------
Key business metrics
We regularly review the following key business metrics to evaluate our business,
measure our performance, identify trends affecting our business, formulate
financial projections and make strategic decisions. We believe that the
following metrics are representative of our current business; however, we
anticipate these will change or may be substituted for additional or different
metrics as our business grows.
Three months ended Nine months ended
September 30, September 30,
2021 2020 Dollar Change 2021 2020 Dollar
Change
( In thousands)
Sales channel mix
Direct sales channel $ 30,841 $ 21,200 $ 9,641 $ 76,406 $ 53,237 $ 23,169
Distributor channel 3,535 3,896 (361 ) 12,650 8,983 3,667
Total revenue, net $ 34,376 $ 25,096 $ 9,280 $ 89,056 $ 62,220 $ 26,836
Customer mix
Academia and government
Biotechnology,
pharmaceutical, distributor and CRO 15,783 14,507 1,276 46,593 30,719 15,874 Total revenue, net$ 34,376 $ 25,096 $ 9,280$ 89,056 $ 62,220 $ 26,836
Distributors typically sell to end customers identified in other customer categories.
The table below sets forth our cumulative instruments shipped as of the dates
presented:
December 31, March 31, June 30, September 30,
2020 2021 2021 2021
Instruments shipped 657 751 855 970
COVID-19 update
The global COVID-19 pandemic continues to evolve rapidly and we intend to
continue to monitor it closely. In response to the COVID-19 pandemic and various
resulting government directives, we took proactive measures to protect the
health and safety of our employees, contractors, customers and visiting vendors
and suppliers. We continue to monitor the implications of the COVID-19 pandemic
on our business, as well as our customers' and suppliers' business. Some of the
measures we have taken are as follows:
?
As an "essential business" under the criteria set forth in executive orders
issued by the State of California , we have continued operations during the
COVID-19 pandemic within the applicable safety guidelines. In early March 2020 ,
we promptly instituted protocols to have most of our personnel work remotely.
Certain employees engaged in research and development and manufacturing
operations have continued to work on-site at our facility in Fremont,
California . Our employees in Wuxi and Shanghai, China returned to normal
activities in March 2020 to undertake research and development and manufacturing
operations due to the lifting of local restrictions in the country. In the
United States , we have implemented social distancing and other protective
measures in an effort to protect the health and safety of our personnel working
on-site. We have also restricted business travel and have limited access to our
facilities to vendors, suppliers and partners who are critical to our business
operations. While these arrangements have not to date materially affected our
ability to maintain our business operations, including the operation of
financial reporting systems, internal control over financial reporting and
disclosure controls and procedures, given the considerable uncertainty around
the duration and extent of the pandemic, the related financial and operational
impact cannot be reasonably estimated.
?
Our production, shipping and customer service functions remain operational to
maintain a continuous supply of products and services 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, and we have not yet
experienced any material supply issues. Our customer service teams around the
world are operating remotely and remain available to assist our customers and
partners as needed.
?
Initially, as a result of travel restrictions and shelter-in-place orders, we
experienced some delay in our ability to ship and install our FSP systems, as
well as train customers in certain geographies. In March 2020 , we began
developing, and continue to develop, remote learning capabilities to help our
customers and partners operate and reduce the number of required
customer/partner on-site visits for our field application scientists and field
support engineers to comply with travel restrictions and country-specific
quarantine requirements.
?
We are actively reviewing and managing costs to navigate the current
environment. To date, the COVID-19 pandemic has not had a material adverse
effect on our business or results of operations.
Potential impacts of the COVID-19 pandemic, some of which we have already
experienced, include those described throughout the "Risk Factors" section,
including "A pandemic, epidemic or outbreak of an infectious disease in the
United States or worldwide could adversely affect our business. The COVID-19
pandemic has had and could continue to have an adverse impact on our business,
operations, and the markets and communities in which we, our partners, and
customers operate."
Components of our results of operations
Total revenue, net
We currently generate our total revenue, net from product revenue and service revenue.
Product. Our product revenue primarily consists of sales of our instruments,
including the Aurora and Northern Lights systems and the Aurora CS, instrument
accessories, such as loaders and, to a lesser extent, consumables, such as
reagents. We offer multiple versions of our Aurora and Northern Lights systems
with different
22
-------------------------------------------------------------------------------- price points based on the number of lasers integrated in the systems. We also derive revenue from sales of our conventional flow cytometry system, which is available for sale inChina . We recognize product revenue when control of the instrument is transferred to the customer.
Service. Our service revenue primarily consists of post-warranty service contracts, installations and repairs which are recognized over time. Post-warranty service contracts are recognized ratably over the term of the contract and installations and repair services are recognized as they are delivered to the customer.
We expect our revenue to increase in absolute dollars as we expand our sales organization and sales territories, broaden our customer base, and expand awareness of our products with new and existing customers. Our revenue was$34.4 million and$25.1 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$89.1 million and$62.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively.
Total cost of sales, gross profit and gross margin
Our total cost of sales is comprised of product cost of sales and service cost of sales.
Product. Cost of sales associated with our products primarily consist of manufacturing-related costs incurred in the production process, inventory write-downs, warranty costs, third party royalty costs, personnel and related costs, costs of component materials, overhead, packaging and delivery and depreciation expense.
Service. Cost of sales associated with our services primarily consists of personnel and related costs, expenses related to product replacements, product updates and qualification validation of our products and depreciation expense.
We expect our total cost of sales to increase in absolute dollars in future periods, corresponding to our anticipated growth in revenue and employee headcount to support our manufacturing, operations, field service team and support organizations.
Gross profit is calculated as revenue less total 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 changes among our instruments and service agreements, 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.
Operating expenses
Our operating expenses are primarily comprised of research and development, sales and marketing, and general and administrative expenses, depreciation and amortization, and related overhead.
Research and development. Our research and development expenses primarily consist of salaries, benefits, stock-based compensation costs for employees in our research and development department, independent contractor costs, laboratory supplies, equipment maintenance and materials expenses.
We plan to continue to invest in our research and development efforts, including hiring additional employees to enhance existing products and develop new products. We expect research and development expense will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue due to our continuing investment in product development. Sales and marketing. Our sales and marketing expenses consist primarily of salaries, benefits, and stock-based compensation costs for employees in our sales and marketing department, sales commissions, marketing material costs, travel expenses and costs related to trade shows, trainings and various workshops. We expect our sales and marketing expense 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 percentage of sales in the short-term as we continue to grow our commercial organization to support anticipated growth of the business. 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, legal, general corporate costs and allocated overhead expenses. We expect our operating expenses to increase as a public company. In particular, we expect our accounting, legal, personnel-related expenses and directors' and officers' insurance costs reported within general and administrative expense to increase as we establish more comprehensive compliance and governance functions, maintain IT costs, review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and prepare and distribute periodic reports as required by the rules and regulations of theU.S. Securities and Exchange Commission . As a result, our historical results of operations may not be indicative of our results of operations in future periods.
We expect these expenses to vary from period to period as a percentage of revenue.
Other income (expense), net
Interest expense. Interest expense consists primarily of accretion of the present value of the litigation settlement liability. See Note 15 included in the notes to our unaudited interim consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding the settlement. Interest income. Our interest income consists primarily of interest earned on our cash and cash equivalents which are invested in cash deposits and in money market funds.
Other income (expense), net. Our other income (expense), net consists primarily of foreign exchange gains and losses.
23
--------------------------------------------------------------------------------Income taxes
Our provision for (benefit from) income taxes consists primarily of provision for federal taxes, local taxes and state minimum taxes inthe United States as well as foreign taxes. As we plan to 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. Results of operations
Comparison of the three and nine months ended
The results of operations presented below should be reviewed in conjunction with the unaudited interim consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
The following table sets forth our interim consolidated results of operations and comprehensive income data for the periods presented:
Three months ended September 30, Nine months ended September 30,
(In thousands, except share and
per share data) 2021 2020 2021 2020
Revenue, net:
Product $ 32,191 $ 23,153 $ 83,567 $ 56,688
Service 2,185 1,943 5,489 5,532
Total revenue, net 34,376 25,096 89,056 62,220
Cost of sales:
Product 10,024 7,556 25,264 23,644
Service 3,075 1,924 8,284 6,315
Total cost of sales 13,099 9,480 33,548 29,959
Gross profit 21,277 15,616 55,508 32,261
Operating expenses:
Research and development 6,078 3,376 17,366 9,308
Sales and marketing 6,553 3,838 16,406 10,428
General and administrative 5,749 1,691 13,896 6,742
Total operating expenses 18,380 8,905 47,668 26,478
Income (loss) from operations 2,897 6,711 7,840 5,783
Other income (expense):
Interest expense (441 ) (2 ) (1,249 ) (3 )
Interest income 12 3 31 105
Other income (expense), net (393 ) 185 (1,128 ) 543
Income (loss) before income taxes 2,075 6,897 5,494 6,428
Provision for (benefit from)
income taxes 655 357 1,302 (7,384 )
Net income $ 1,420 $ 6,540 $ 4,192 $ 13,812
Foreign currency translation
adjustment, net of tax 34 145 505 49
Net comprehensive income $ 1,454 $ 6,685 $ 4,697 $ 13,861
Total revenue, net
Three months ended Nine months ended September
September 30, Change 30, Change
(In thousands,
except percentages) 2021 2020 Amount % 2021 2020 Amount %
Revenue, net
Product $ 32,191 $ 23,153 $ 9,038 39 % $ 83,567 $ 56,688 $ 26,879 47 %
Service 2,185 1,943 242 12 % 5,489 5,532 (43 ) -1 %
Total revenue, net $ 34,376 $ 25,096 $ 9,280 37 % $ 89,056 $ 62,220 $ 26,836 43 %
Total revenue, net increased by $9.3 million , or 37%, for the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020 .
Total revenue, net increased by $26.8 million , or 43%, for the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020 . The
increase in revenue was primarily driven by an increase in product revenue due
to higher unit sales of our Aurora, Aurora Cell Sorter, and Northern Lights
systems and an increase in the average blended selling price due to product mix.
Product revenue increased by $9.0 million , or 39%, to $32.2 million , for the
three months ended September 30, 2021 as compared to the three months ended
September 30, 2020 . Product revenue increased by $26.9 million , or 47%, to $83.6
million , for the nine months ended September 30, 2021 as compared to the nine
months ended September 30, 2020 . The increase was primarily driven by an
increase in our instrument sales due to higher unit sales of our Aurora, Aurora
Cell Sorter, and Northern Lights systems and an increase in the average blended
selling price due to product mix.
Service revenue increased by $242,000 , or 12%, to $2.2 million , for the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020 . Service revenue decreased by $43,000 , or 1%, to $5.5 million , for the
nine months ended September 30, 2021 as compared to the nine months ended
September 30, 2020 . The increase in service revenue for the three months ended
September 30, 2021 was related primarily to instruments coming off warranty and
24
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transitioning to service contracts. The decrease in service revenue for the nine
months ended September 30, 2021 was driven by reduced service contract revenue
associated with non-Cytek instruments. While we have historically performed
maintenance services and support functions for non-Cytek instruments, we ceased
sales of service contracts for non-Cytek instruments as of January 1, 2021 while
continuing to honor pre-existing multi-year service contracts. We perform
on-demand professional services to support non-Cytek instruments provided that
resources are available. As a result of our decision to no longer service
non-Cytek instruments, revenue associated with service contracts for non-Cytek
instruments decreased in the nine months ended September 30, 2021 . Our strategy
was to shift resources in anticipation of the increasing demand for our Aurora
and Northern Lights instruments, and to allow us to fully support our
instruments when they come out of warranty.
Total cost of sales, gross profit and gross margin
Three months ended Nine months ended
September 30, Change September 30, Change
(In thousands,
except percentages) 2021 2020 Amount % 2021 2020 Amount %
Cost of sales:
Product $ 10,024 $ 7,556 $ 2,468 33 % $ 25,264 $ 23,644 $ 1,620 7 %
Service 3,075 1,924 1,151 60 % 8,284 6,315 1,969 31 %
Total cost of sales $ 13,099 $ 9,480 $ 3,619 38 % $ 33,548 $ 29,959 $ 3,589 12 %
Gross profit $ 21,277 $ 15,616 $ 5,661 36 % $ 55,508 $ 32,261 $ 23,247 72 %
Gross margin 62 % 62 % 62 % 52 %
Total cost of sales increased by $3.6 million , or 38%, for the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020 and increased by $3.6 million , or 12%, for the nine months ended September
30, 2021 as compared to the nine months ended September 30, 2020 . This is
primarily due to more instruments shipped and increased service headcount,
offset by lower inventory write-downs as a result of operational efficiencies.
Gross profit margin was 62% as a percent of total revenue for the three months
ended September 30, 2021 and 2020, and improved 1,000 basis point to 62% from
52% as a percent of total revenue for the nine months ended September 30, 2021
and 2020, respectively. The increase is primarily due to an increase of core
instruments delivered to customers, an increase in the average blended selling
price, lower inventory write-downs, and an improved product mix for the three
and nine months ended September 30, 2021 .
Three months ended Nine months ended
September 30, Change September 30, Change
(In thousands,
except percentages) 2021 2020 Amount % 2021 2020 Amount %
Product:
Revenue$ 32,191 $ 23,153 $ 9,038 39 % $
83,567
Cost of sales 10,024 7,556 2,468 33 % 25,264 23,644 1,620 7 % Product gross profit$ 22,167 $ 15,597 $ 6,570 42 %$ 58,303 $ 33,044 $ 25,258 76 % Gross margin 69 % 67 % 70 % 58 % Service: Revenue$ 2,185 $ 1,943 $ 242 12 %$ 5,489 $ 5,532 $ (43 ) -1 %
Cost of sales 3,075 1,924 1,151 60 %
8,284 6,315 1,969 31 % Service gross profit$ (890 ) $ 19 $ (909 ) -4784 %$ (2,795 ) $ (783 ) $ (2,012 ) 257 % Gross margin -41 % 1 % -51 % -14 % While we have seen a significant increase in total gross profit margin, the gross profit margin of our service revenue has decreased from 1% and (14)% in the three and nine months endedSeptember 30, 2020 , respectively, to (41)% and (51)% in the three and nine months endedSeptember 30, 2021 , respectively. This was due to an increase in personnel-related expenses due to an increase in headcount. The decrease was also driven by reduced service contract revenue consistent with our expectations after not renewing contracts on non-Cytek instruments. Operating expenses Research and development Three months ended September 30, Change Nine months ended September 30, Change (In thousands, except percentages) 2021 2020 Amount % 2021 2020 Amount % Research and development$ 6,078 $ 3,376 $ 2,702 80 %$ 17,366 $ 9,308$ 8,058 87 % Research and development expenses were$6.1 million for the three months endedSeptember 30, 2021 as compared to$3.4 million for the three months endedSeptember 30, 2020 . The increase of$2.7 million in research and development expenses was primarily due to an increase in headcount and personnel-related expenses including stock-based compensation of$671,000 . Research and development expenses were$17.4 million for the nine months endedSeptember 30, 2021 as compared to$9.3 million for the nine months endedSeptember 30, 2020 . The increase of$8.1 million in research and development expenses was primarily due to an increase in headcount and personnel-related expenses of$4.8 million , which includes stock-based compensation of$936,000 , and a$2.2 million increase in engineering expenses related to cell sorter and reagent developments. 25
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We expect our research and development expense to increase in absolute dollars as we continue to develop new products and enhance existing instruments and technologies.
Sales and marketing
Three months ended Nine months ended September
September 30, Change 30, Change
(In thousands,
except
percentages) 2021 2020 Amount % 2021 2020 Amount %
Sales and
marketing $ 6,553 $ 3,838 $ 2,715 71 % $ 16,406 $ 10,428 $ 5,978 57 %
Sales and marketing expenses were $6.6 million for the three months ended
September 30, 2021 as compared to $3.8 million for the three months ended
September 30, 2020 . The increase of $2.7 million was primarily due to an
increase in headcount, commissions, and personnel-related expenses of $2.0
million , which includes stock-based compensation of $440,000 . The increase in
personnel-related costs was primarily due to increased commissions, headcount,
and stock-based compensation. There was also an increase in advertising and
marketing activities of $268,000 .
Sales and marketing expenses were $16.4 million for the nine months ended
September 30, 2021 as compared to $10.4 million for the nine months ended
September 30, 2020 . The increase of $6.0 million was primarily due to an
increase in headcount, commissions, and other personnel-related expenses of $5.0
million , which includes stock-based compensation of $675,000 . There was also an
increase in advertising and marketing activities of $448,000 and outside
services of $402,000 .
We expect our sales and marketing expenses to increase in absolute dollars as we
hire additional sales and marketing personnel, expand our sales support
infrastructure and invest in our brand and product awareness to further
penetrate
General and administrative
Three months ended
September 30, Change Nine months ended September 30, Change
(In thousands,
except
percentages) 2021 2020 Amount % 2021 2020 Amount %
General and
administrative $ 5,749 $ 1,691 $ 4,058 240 % $ 13,896 $ 6,742 $ 7,154 106 %
General and administrative expenses were $5.7 million for the three months ended
September 30, 2021 as compared to $1.7 million for the three months ended
September 30, 2020 . The increase of $4.0 million in general and administrative
expenses was primarily due to an increase in general corporate personnel-related
costs, professional fees relating to our IPO, and infrastructure services to
support the growth of our overall operations. The increase in personnel-related
costs was primarily due to increased headcount and stock-based compensation of
$698,000 .
General and administrative expenses were $13.9 million for the nine months ended
September 30, 2021 as compared to $6.7 million for the nine months ended
September 30, 2020 . The increase of $7.2 million in general and administrative
expenses was primarily due to an increase in general corporate personnel-related
costs of $2.7 million , which includes stock-based compensation of $943,000 ,
professional fees relating to our IPO of $3.1 million , and increased
infrastructure costs of 2.6 million to support the growth of our overall
operations. This increase is partially offset by $1.4 million litigation legal
expenses decrease.
We expect to continue to incur additional general and administrative expenses as
a result of operating as a public company, including expenses related to
compliance with the rules and regulations of the SEC and the Nasdaq Stock
Market , additional insurance costs, investor relations activities and other
administrative and professional services. As a result, we expect general and
administrative expenses to increase in absolute dollars in future periods.
Interest expense
Three months ended September Nine months ended September
30, Change 30, Change
(In thousands,
except
percentages) 2021 2020 Amount % 2021 2020 Amount %
Interest
expense $ (441 ) $ (2 ) (439 ) n/m $ (1,249 ) $ (3 ) (1,246 ) n/m
Interest expense was $441,000 and $1.2 million for the three and nine months
ended September 30, 2021 . This was due to the accretion of the present value
discount related to the settlement agreement entered into with Becton , Dickinson
and Company ("BD"). See Note 15 included in the notes to our unaudited interim
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q for further details.
Interest income
Three months ended September 30, Change Nine months ended September 30, Change
(In thousands,
except
percentages) 2021 2020 Amount % 2021 2020 Amount %
Interest income $ 12 $ 3 9 300 % $ 31 $ 105 (74 ) -70 % Interest income was$12,000 for the three months endedSeptember 30, 2021 as compared to$3,000 for the three months endedSeptember 30, 2020 . Interest income was$31,000 for the nine months endedSeptember 30, 2021 as compared to$105,000 for the nine months endedSeptember 30, 2020 . The decrease of$74,000 in 26
-------------------------------------------------------------------------------- interest income for the nine months endedSeptember 30, 2021 was the result of lower interest earned on our cash and short-term deposits due to a decline in interest rates as compared to nine months endedSeptember 30, 2020 . Other income (expense), net Nine months ended September Three months ended September 30, Change 30, Change (In thousands, except percentages) 2021 2020 Amount % 2021 2020 Amount % Other income (expense), net$ (393 ) $ 185 (578 ) -312 %$ (1,128 ) $ 543 (1,671 ) -308 % Other expense, net was$393,000 for the three months endedSeptember 30, 2021 as compared to Other income of$185,000 for the three months endedSeptember 30, 2020 . The net change of$578,000 was primarily the result of the net impact of foreign exchange gains and losses during the three months endedSeptember 30, 2021 . Other expense, net was$1.1 million for the nine months endedSeptember 30, 2021 as compared to Other income of$543,000 for the nine months endedSeptember 30, 2020 . The net change of$1.7 million was the result of increased foreign currency losses on transactions and remeasurement during the nine months endedSeptember 30, 2021 . Income Taxes Three months ended September 30, Change Nine months ended September 30, Change (In thousands, except percentages) 2021 2020 Amount % 2021 2020 Amount % Provision for (benefit from) income tax $ 655 $ 357 298 83 % $ 1,302$ (7,384 ) 8,686 -118 % Provision for income tax was$655,000 for the three months endedSeptember 30, 2021 as compared to$357,000 for the three months endedSeptember 30, 2020 . Provision for income tax was$1.3 million for the nine months endedSeptember 30, 2021 as compared to an income tax benefit of$7.4 million for the nine months endedSeptember 30, 2020 . The net change of$298,000 and$8.7 million for the three and nine months endedSeptember 30, 2021 , respectively, was the result of aUnited States income tax valuation allowance release of$8.1 million in the second quarter of fiscal 2020 and an increase in state income tax from higher taxable sales in the three and nine months endedSeptember 30, 2020 .
Liquidity and capital resources
Overview
To date, our primary sources of capital have been through sales of our securities, revenue from the sale of our products and services. As ofSeptember 30, 2021 andDecember 31, 2020 , we had approximately$376.8 million and$165.2 million , respectively, in cash and cash equivalents, which were primarily held inU.S. short-term bank deposit accounts and money market funds.
Funding requirements
We anticipate continuing to expend significant amounts of cash for fixed assets in the foreseeable future as we continue to invest in research and development of our product offerings, commercialization of new products and services, and expansion into new markets. Our future capital requirements will depend on many factors including our revenue, research and development efforts, the new and continued impacts of the COVID-19 pandemic, 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. We have entered into, 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 additional capital expenditures during the next
12 months, which is expected to primarily include equipment to be used for
manufacturing and investment in research and development, as well as spend
associated with the expansion of our facilities in
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 for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. InJuly 2021 , we completed our IPO, which resulted in net proceeds to us of approximately$215.7 million . Sources of liquidity We have financed our operations primarily through sales of our securities. InJuly 2021 , we completed our IPO, which resulted in net proceeds to us of approximately$215.7 million . We have also benefited from operating cash flows from the sale of our products and services. OnMay 7, 2020 , we received loan proceeds in the amount of approximately$4.1 million under the PPP. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. OnMay 4, 2021 , we fully repaid the PPP loan. 27
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Cash flows
The following table summarizes our cash flows for the periods presented:
Nine months ended September 30,
(In thousands) 2021 2020Net cash (used in) provided by:
Operating activities $ (818 ) $ 3,515 Investing activities (2,697 ) (1,344 ) Financing activities 213,542 2,880 Effect of exchange rate changes on cash, cash equivalents and restricted cash 625 (13 ) Net (decrease) increase in cash, cash equivalents, and restricted cash $ 210,652 $ 5,038 Operating activities Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$0.8 million . Net income was$4.2 million ; we also incurred non-cash stock-based compensation expense, interest expenses for accretion of the legal settlement liabilities, and depreciation and amortization of$3.6 million ,$1.2 million , and$0.6 million , respectively. Usage of cash included an increase of trade accounts receivable of$11.6 million due to an increase in sales, an increase in prepaid expenses and other assets of$5.0 million and an increase in inventories of$4.8 million . This was partially offset by an increase in deferred revenue of$6.6 million , an increase in the legal settlement liability of$1.6 million , an increase in accrued expenses and other liabilities of$2.1 million , and an increase in trade accounts payable of$486,000 . Net cash provided by operating activities for the nine months endedSeptember 30, 2020 was$3.5 million consisting primarily of our net income of$13.8 million , an increase in accrued expenses and other liabilities of$1.8 million , an increase in the legal settlement liability of$1.7 million , and an increase of deferred revenue of$1.1 million . This was partially offset by an increase in prepaid expenses and other assets of$9.0 million , an increase in inventories of$5.4 million and an increase in trade accounts receivable of$0.8 million directly attributable to increased sales, and an increase in trade accounts payable of$1.7 million .
Investing activities
Net cash used in investing activities during the nine months endedSeptember 30, 2021 was$2.7 million driven by an increase in purchases of property and equipment of$3.1 million partially offset by the payment for the additional investment in Cytek Japan, net of cash acquired of$371,000 . See Note 16 included in the notes to our unaudited interim consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Net cash used in investing activities during the nine months endedSeptember 30, 2020 was$1.3 million primarily driven by an increase in purchases of property and equipment. Financing activities Net cash provided by financing activities during the nine months endedSeptember 30, 2021 was$213.5 million primarily driven by our IPO, which resulted in net proceeds to us of approximately$215.7 million . Net cash provided by financing activities during the nine months endedSeptember 30, 2020 was$2.9 million primarily driven by the cash received from the PPP loan.
Contractual Obligations and Commitments
During the nine months endedSeptember 30, 2021 , there were no material changes to our contractual obligations and commitments from those described under "Management's Discussion and Analysis of Financial Condition" which is contained in our final prospectus filed with theSEC onJuly 23, 2021 pursuant to Rule 424(b)(4) under the Securities Act, for our IPO.
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, significant judgments and use of estimates
This management's discussion and analysis of our financial condition and results of operations is based on our unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP. The preparation of our unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited interim consolidated financial statements and notes to the unaudited interim consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates are different assumptions and conditions. A summary of our critical accounting policies is presented in our audited financial statements and notes thereto as of and for the year endedDecember 31, 2020 included in our final prospectus filed with theSEC onJuly 23, 2021 pursuant to Rule 424(b)(4) under the Securities Act for our IPO. There were no material changes to our critical accounting policies during the nine months endedSeptember 30, 2021 .
Recently adopted accounting pronouncements
28
--------------------------------------------------------------------------------See Note 2 to our unaudited interim consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements applicable to our financial statements.
JOBS Act accounting election and smaller reporting company status
InApril 2012 , the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In addition, as an emerging growth company, we may take advantage of certain reduced disclosure and other requirements that are otherwise applicable generally to public companies. We may take advantage of these exemptions until such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than$1.07 billion ; (iii) the date on which we have issued more than$1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of theSecurities and Exchange Commission . We are also a "smaller reporting company," as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than$250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than$100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than$700.0 million measured on the last business day of our second fiscal quarter. If we are a smaller reporting company at the time, we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited consolidated financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 29
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