CYTEK BIOSCIENCES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Part I, Item 1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Unless the context requires otherwise, references in this Annual Report on Form 10-K to "we," "us" and "our" refer toCytek Biosciences, Inc. The following is a discussion and year-to-year comparisons of our financial condition and results of operations for the years endedDecember 31, 2021 and 2020. For a discussion of the results of operations and financial condition for the years endedDecember 31, 2019 and year-to-year comparisons between 2020 and 2019, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the final prospectus for our IPO datedJuly 22, 2021 and filed with theSEC pursuant to Rule 424(b)(4) of the Securities Act onJuly 23, 2021 , which item is incorporated herein by reference.
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 1,000 instruments-primarily
comprised of our Aurora and Northern Lights systems-to over 840 customers around
the world, including the largest pharmaceutical companies, over 150 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 was
To date, we have adopted a direct sales model inNorth America ,Europe andChina , and sell our products through third-party distributors in certain countries inEurope ,Latin America , theMiddle East ,Africa , and theAsia-Pacific region . Revenue from direct sales represented 86% and 83% of total revenue for the year endedDecember 31, 2021 and 2020, respectively, and revenue from distributors represented 14% and 17% of total revenue for the year endedDecember 31, 2021 and 2020, 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$24.4 million and$13.7 million for the year endedDecember 31, 2021 and 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, Northern Lights and Aurora CS systems, 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$24.7 million and$15.0 million for the year endedDecember 31, 2021 and 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.
Our net income was$3.0 million and$19.4 million for the year endedDecember 31, 2021 and 2020, respectively. The change for the year endedDecember 31, 2021 compared to the year endedDecember 31, 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. Net 53 -------------------------------------------------------------------------------- income of$3.0 million as disclosed in this Annual Report on Form 10-K differs from net income of$4.4 million previously reported in our earnings press release issued onFebruary 23, 2022 due to a$1.4 million tax adjustment made prior to the filing of this Form 10-K and omitted from the net income amount included in our earnings press release.
We expect our expenses will increase substantially in connection with our on-going activities, as we:
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attract, hire and retain qualified personnel;
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invest in processes, commercial infrastructure and supporting functions to scale our business and introduce new products and services;
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support our research and development efforts;
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continue to expand geographically;
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protect and defend our intellectual property; and
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make strategic investments in complementary businesses, services, products or technologies.
OnNovember 2, 2021 , we completed the acquisition of the reagents business ofTonbo Biotechnologies Corporation as detailed in Note 8, Acquisition, to consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The acquired assets include a portfolio of life science research reagents related to cell preparation, flow cytometry, molecular immunology/polymerase chain reaction and cell culture covering application areas across immunology, apoptosis and immunoprofiling.
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 Annual Report on Form 10-K.
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 55% in the year endedDecember 31, 2021 compared to the year endedDecember 31, 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 instruments recognizing higher gross margins than our services. Although we expect sales of our 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 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
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--------------------------------------------------------------------------------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 .
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.
Year ended December 31,
2021 2020 Dollar Change
( In thousands)
Sales channel mix
Direct sales channel $ 110,520 $ 77,106 $ 33,414
Distributor channel 17,430 15,733 1,697
Total revenue, net $ 127,950 $ 92,839 $ 35,111
Customer mix
Academia and government $ 59,415 $ 45,674 $ 13,741 Biotechnology, pharmaceutical, distributor and
CRO 68,535 47,165 21,370 Total revenue, net$ 127,950 $ 92,839 $ 35,111
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:
March 31, June 30, September 30, December 31,
2021 2021 2021 2021
Instruments shipped 751 855 970 1,110
COVID-19
The global COVID-19 pandemic continues to evolve 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, including implementing social distancing and other protective
measures, restricting business travel and limiting access to our facilities to
vendors, suppliers and partners who are critical to our business operations. We
communicate regularly with our suppliers so that our supply chain remains
intact, and we have not experienced any material supply issues. We also
developed, 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. While the COVID-19 pandemic has not had a material
adverse effect on our business, results of operations or 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. We continue to monitor the implications
of the COVID-19 pandemic on our business, as well as our customers' and
suppliers' business. 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
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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, Northern Lights and Aurora CS systems, 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 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$128.0 million and$92.8 million for the year endedDecember 31, 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
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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 the SEC . 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 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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.
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. 57 --------------------------------------------------------------------------------
Results of operations
Comparison of the year ended
The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
The following table sets forth our consolidated results of operations and comprehensive income data for the periods presented:
Year ended December 31,
(In thousands, except share and per share data) 2021 2020 Revenue, net: Product$ 119,519 $ 85,283 Service 8,431 7,556 Total revenue, net 127,950 92,839 Cost of sales: Product 37,377 32,277 Service 11,429 8,852 Total cost of sales 48,806 41,129 Gross profit 79,144 51,710 Operating expenses: Research and development 24,442 13,693 Sales and marketing 24,710 14,988 General and administrative 20,835 9,370 Total operating expenses 69,987 38,051 Income from operations 9,157 13,659 Other income (expense): Interest expense (1,741 ) (333 ) Interest income 49 110 Other income (expense), net (1,527 ) 994 Income before income taxes 5,938 14,430 Provision for (benefit from) income taxes 2,911
(4,981 )
Net income$ 3,027 $
19,411
Foreign currency translation adjustment, net of tax 832 212 Net comprehensive income$ 3,859 $ 19,623 Total revenue, net Year ended December 31, Change (In thousands, except percentages) 2021 2020 Amount % Revenue, net Product$ 119,519 $ 85,283 $ 34,236 40 % Service 8,431 7,556 875 12 % Total revenue, net$ 127,950 $ 92,839 $ 35,111 38 % Total revenue, net increased by$35.1 million , or 38%, for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . The increase in revenue was primarily driven by an increase in product revenue due to higher unit sales of our Aurora and Northern Lights systems, sales of our Aurora CS system, which commercially launched inJune 2021 , and an increase in the average blended selling price due to product mix. Product revenue increased by$34.2 million , or 40%, to$119.5 million , for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . The increase was primarily driven by an increase in our instrument sales due to higher unit sales of our Aurora and Northern Lights systems, sales of our Aurora CS system, which commercially launched inJune 2021 , and an increase in the average blended selling price due to product mix. Service revenue increased by$0.9 million , or 12%, to$8.4 million , for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . The increase in service revenue was driven by more instruments coming off warranty, offset by reduced service contract revenue associated with non-Cytek instruments. While we have historically performed maintenance services and support functions for non-Cytek instruments, we ceased sales of service contracts for non-Cytek instruments as ofJanuary 1, 2021 while continuing to honor pre-existing multi-year service contracts. We perform on-demand professional services to support non-Cytek 58 -------------------------------------------------------------------------------- instruments provided that resources are available. As a result of our decision to no longer service non-Cytek instruments, revenue associated with service contracts for non-Cytek instruments decreased in the year endedDecember 31, 2021 . Our strategy was to shift resources in anticipation of the increasing demand for our Aurora and Northern Lights instruments, and to allow us to fully support our instruments when they come out of warranty.
Total cost of sales, gross profit and gross margin
Year ended December 31 , Change
(In thousands, except percentages) 2021 2020 Amount % Cost of sales: Product$ 37,377 $ 32,277 $ 5,100 16 % Service 11,429 8,852 2,577 29 % Total cost of sales$ 48,806 $ 41,129 $ 7,677 19 % Gross profit$ 79,144 $ 51,710 $ 27,434 53 % Gross margin 62 % 56 % Total cost of sales increased by$7.7 million , or 19%, for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . This is primarily due to more instruments shipped and increased service and manufacturing headcount and associated personnel cost, including$1.3 million stock-based compensation; offset by lower inventory write-downs as a result of operational efficiencies. Gross profit margin was 62% and 56% as a percent of total revenue for the year endedDecember 31, 2021 and 2020, respectively. The increase is primarily due to an increase of instruments delivered to customers, an increase in the average blended selling price due to product mix, and lower inventory write-downs for the year endedDecember 31, 2021 . Year ended December 31,
Change
(In thousands, except percentages) 2021 2020 Amount % Product: Revenue$ 119,519 $ 85,283 $ 34,236 40 % Cost of sales 37,377 32,277 5,100 16 % Product gross profit$ 82,142 $ 53,006 $ 29,136 55 % Gross margin 69 % 62 % Service: Revenue$ 8,431 $ 7,556 $ 875 12 % Cost of sales 11,429 8,852 2,577 29 % Service gross profit$ (2,998 ) $ (1,296 ) $ (1,702 ) 131 % Gross margin -36 % -17 % While we have seen an increase in total gross profit margin, the gross profit margin of our service revenue has decreased from (17)% in the year endedDecember 31, 2020 , to (36)% in the year endedDecember 31, 2021 . This was due to an increase in headcount and personnel-related expenses. The decrease was also driven by reduced service contract revenue on non-Cytek instruments consistent with our expectations after not renewing these contracts. Operating expenses Research and development Year ended December 31, Change (In thousands, except percentages) 2021 2020 Amount % Research and development$ 24,442 $ 13,693 $ 10,749 78 % Research and development expenses were$24.4 million for the year endedDecember 31, 2021 as compared to$13.7 million for the year endedDecember 31, 2020 . The increase of$10.7 million in research and development expenses was primarily due to an increase in headcount and personnel-related expenses, including stock-based compensation of$1.8 million .
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.
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Sales and marketing
Year ended December 31, Change
(In thousands, except percentages) 2021 2020 Amount %
Sales and marketing $ 24,710 $ 14,988 $ 9,722 65 %
Sales and marketing expenses were $24.7 million for the year ended December 31,
2021 as compared to $15.0 million for the year ended December 31, 2020 . The
increase of $9.7 million in sales and marketing expenses was primarily due to an
increase in headcount, commissions, and personnel-related expenses of $7.0
million , including stock-based compensation of $1.2 million . There was also an
increase in advertising and marketing activities of $0.8 million .
We expect our sales and marketing expenses to increase in absolute dollars as we
hire additional sales and marketing personnel, expand our sales support
infrastructure and invest in our brand and product awareness to further
penetrate
General and administrative
Year ended December 31 , Change
(In thousands, except percentages) 2021 2020 Amount % General and administrative$ 20,835 $ 9,370 $ 11,465 122 % General and administrative expenses were$20.8 million for the year endedDecember 31, 2021 as compared to$9.4 million for the year endedDecember 31, 2020 . The increase of$11.5 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$1.7 million . We expect to continue to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and theNasdaq Stock Market , additional insurance costs, investor relations activities and other administrative and professional services. As a result, we expect general and administrative expenses to increase in absolute dollars in future periods.
Interest expense
Year ended December 31 , Change
(In thousands, except percentages) 2021 2020 Amount % Interest expense$ (1,741 ) $ (333 ) (1,408 ) n/m Interest expense was$1.7 million for the year endedDecember 31, 2021 as compared to$333,000 for the year endedDecember 31, 2020 . The increase of$1.4 million was due to the accretion of the present value discount related to the settlement agreement withBecton , Dickinson and Company ("BD"). See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.
Interest income
Year ended December 31 , Change
(In thousands, except percentages) 2021 2020 Amount % Interest income$ 49 $ 110 (61 ) -55 % Interest income was$49,000 for the year endedDecember 31, 2021 as compared to$110,000 for the year endedDecember 31, 2020 . The decrease of$61,000 in interest income was the result of lower interest earned on our cash and short-term deposits due to a decline in interest rates as compared to year endedDecember 31, 2020 . Other income (expense), net Year ended December 31, Change (In thousands, except percentages) 2021 2020 Amount % Other income (expense), net$ (1,527 ) $ 994 (2,521 ) -254 % 60
-------------------------------------------------------------------------------- Other expense, net was$1.5 million for the year endedDecember 31, 2021 as compared to other income, net of$1.0 million for the year endedDecember 31, 2020 . The net change of$2.5 million was primarily the result of the net impact of foreign exchange gains and losses during the year endedDecember 31, 2021 . Income Taxes Year ended December 31, Change (In thousands, except percentages) 2021 2020 Amount %
Provision for (benefit from) income tax
7,892 -158 %
Provision for income tax was $2.9 million for the year ended December 31, 2021
as compared to an income tax benefit of $5.0 million for the year ended December
31, 2020 .
The net change of $7.9 million for the year ended December 31, 2021 was the
result of a United States income tax valuation allowance release of $8.1 million
in the second quarter of fiscal 2020 and an increase in income tax from higher
earnings in the year ended December 31, 2021 .
Liquidity and capital resources
Overview
To date, our primary sources of capital have been through sales of our securities and revenue from the sale of our products and services. As ofDecember 31, 2021 andDecember 31, 2020 , we had approximately$364.6 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 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 Annual Report on Form 10-K.
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$4.1 million under the PPP. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. OnMay 4, 2021 , we fully repaid the PPP loan. 61 --------------------------------------------------------------------------------
Cash flows
The following table summarizes our cash flows for the periods presented:
Year ended December 31 ,
(In thousands) 2021 2020
Net cash (used in) provided by:
Operating activities$ 4,630 $ 15,156 Investing activities (20,993 ) (1,547 ) Financing activities 213,559 122,607 Effect of exchange rate changes on cash, cash equivalents and restricted cash 1,303 (587 ) Net increase in cash, cash equivalents, and restricted cash$ 198,499 $ 135,629 Operating activities Net cash provided by operating activities for the year endedDecember 31, 2021 was$4.6 million , including net income of$3.0 million . We also incurred non-cash stock-based compensation expense, interest expenses for accretion of the legal settlement liabilities, and depreciation and amortization of$6.6 million ,$1.7 million , and$1.2 million , respectively. Usage of cash included an increase of trade accounts receivable of$12.4 million due to an increase in sales, an increase in inventories of$7.1 million , an increase in prepaid expenses and other assets of$6.3 million , and a decrease in the legal settlement liability of$3.7 million due to payment to BD of$6.0 million , which is offset by increased royalty accrual. This was partially offset by an increase in deferred revenue of$10.0 million and an increase in accrued expenses and other liabilities of$11.0 million . Net cash provided by operating activities for the year endedDecember 31, 2020 was$15.2 million , consisting primarily of net income of$19.4 million , an increase in accrued expenses and other liabilities of$8.2 million directly attributable to an increase in headcount and the corresponding personnel-related costs, and an increase in inventories of$5.7 million to accommodate increase in sales volume. Investing activities Net cash used in investing activities during the year endedDecember 31, 2021 was$21.0 million driven by our acquisition of Tonbo's reagents business for$17.0 million , an increase in purchases of property and equipment of$4.4 million partially offset by the payment for the additional investment in CytekJapan , net of cash acquired of$371,000 . See Note 17 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Net cash used in investing activities during the year endedDecember 31, 2020 was$1.5 million primarily driven by an increase in capital expenditures for laboratory equipment of$1.1 million and an increase in leasehold improvements of$344,000 . Financing activities
Net cash provided by financing activities during the year ended
Net cash provided by financing activities during the year endedDecember 31, 2020 was$122.6 million primarily driven by the issuance of our Series D redeemable convertible preferred stock inOctober 2020 for net proceeds of$119.7 million , net proceeds from the PPP loan of$2.8 million and$169,000 from the issuance of common stock upon option exercises.
Contractual Obligations and Commitments
During the year endedDecember 31, 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 datedJuly 22, 2021 and filed with theSEC onJuly 23, 2021 pursuant to Rule 424(b)(4) under the Securities Act in connection with 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.
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--------------------------------------------------------------------------------Critical accounting policies, significant judgments and use of estimates
We have prepared our consolidated financial statements in accordance withU.S. GAAP. Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and judgments on an ongoing basis. We based our estimates on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The economic uncertainty in the current environment caused by the COVID-19 pandemic could limit our ability to accurately make and evaluate our estimates and judgments. Actual results could therefore differ materially from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. While our significant accounting policies are described in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to understanding and evaluating our reported consolidated financial results. Revenue recognition Our product revenue primarily consists of sale of our Aurora, Aurora CS and Northern Lights systems, 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 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. Our service revenue consists of post-warranty service contracts, preventative maintenance plans, repairs, installation and quality check, customer training and other specialized product support services. We recognize service contract revenue ratably over the term of the contract and other service obligations as they are performed. Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account for revenue recognition under the contract with customers guidance. Performance obligations are considered distinct if they are both capable of being distinct, and distinct within the context of the contract. The Company identified the following performance obligations in the contracts: product sales of instrument systems, installation on instrument systems, delivery of instrument accessories such as loaders, consumables, reagents, extended service contracts and professional services revenue for post-warranty service contracts, preventative maintenance plans, repairs, installations, training, time and material services and other specialized support services. A good or service is distinct when the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and is distinct in the context of the contract, where the transfer of the good or service is separately identifiable from other promises in the contract. Payments from customers are in arrears. For arrangements where the anticipated period between timing of transfer of services and the timing of payment is one year or less, we have elected to not assess whether a significant financing component exists. For arrangements with terms greater than one year, payments are received up-front and are for reasons other than financing. Revenue is recognized only to the extent that it is probable that a significant reversal of the cumulative amount recognized will not occur in future periods. Certain of our sales contracts involve the delivery or performance of multiple products and services within contractually binding arrangements. Significant judgment is sometimes required to determine the appropriate accounting for such arrangements, including whether the deliverables specified in a contract with multiple promises should be treated as separate performance obligations for revenue recognition purposes and, if so, how the related sales price should be allocated among the performance obligations, when to recognize revenue for each performance obligation, and the period over which revenue should be recognized. For most of our performance obligations, we have established the stand-alone selling prices ("SSP") as a range rather than a single value, based on standalone sales of products. We allocate revenue to the performance obligations based on their relative standalone selling prices SSP. 63 -------------------------------------------------------------------------------- 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.
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 revenue
Our standard arrangement for sales to end users is generally a purchase order or an executed contract. Product revenue is recognized upon transfer of control of the product to the customer, which, for us, generally occurs at a point in time depending on the shipping terms. Payment terms are generally 30 to 90 days from the date of invoicing. Our distributor arrangements with our customers include a purchase order. The purchase order is governed by terms and conditions of the distributor agreements. Revenue is recognized upon transfer of control of the products to the distributor, which for us, occurs at a point in time depending on the shipping terms. Service revenue Our services are primarily a mix of service contracts, installation services, and time and material-based repair and support. We recognize revenue from the sale of service contracts over the respective period, while revenue on product support is recognized as the services are performed. Service contracts are typically between one and three years. Payment terms are generally 30 days from the date of invoicing. Installation revenue is recognized upon completion of the installation, which, for us, occurs at a point in time.
Contract assets and contract liabilities
Contract assets are recorded when the amount of revenue recognized exceeds the amount invoiced to the customer and the right to payment is not solely subject to the passage of time. As ofDecember 31, 2021 and 2020, we had immaterial amounts of contract assets included within prepaid expenses and other current assets on the consolidated balance sheets. 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 criteria described above. Such amounts are reported as deferred revenue for service and customer deposits for instruments on the consolidated balance sheets. Deferred revenue that is expected to be recognized during the following 12 months is recorded as a current liability and the remaining portion is recorded as noncurrent.
Assurance-type product warranties
We provide a one-year assurance-type warranty that is included with the sale of our instruments. At the time revenue is recognized for the products, we establish an accrual for estimated warranty expense based on historical data and trends of product reliability and costs of repairing and replacing defective products. We exercise judgment in estimating the expected product warranty costs, using data such as the historical repair costs. While we believe that historical experience provides a reliable basis for estimating such warranty cost, unforeseen quality issues or component failure rates could result in future costs in excess of such estimates, or alternatively, improved quality and reliability in our products could result in actual expenses that are below those currently estimated.
InJanuary 2017 , the FASB issued ASU 2017-04, Intangibles -Goodwill and Other: Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. We adopted this guidance during the year endedDecember 31, 2019 , and the adoption did not have a material impact on the consolidated financial statements. We recognize goodwill in accounting for business combinations based on the amount by which the total consideration transferred, exceeds the fair value of identifiable assets acquired and liabilities assumed. Identifiable intangible assets other than goodwill are primarily comprised of patents and trademarks which amortize on a straight-line basis over an assigned useful life based on 64 --------------------------------------------------------------------------------
management's estimate of the period the asset is expected to contribute to future cash flows.
We assess our goodwill and indefinite-lived intangible assets for impairment at
least annually in the fourth quarter, or more frequently if factors indicate
impairment may exist. Our qualitative goodwill impairment analysis consists of
assessing whether any events or circumstances listed in ASC 350-20-35-3A
("triggering events") existed or occurred in the year under review to the date
of the financial statements. The qualitative analysis assesses macroeconomic
conditions, market, and industry considerations, change in cost factors, overall
company financial performance, and any events affecting the reporting unit.
Based on the qualitative analysis results, we determined that it is more likely
than not that the fair values of the reporting unit exceed the carrying value
and that no triggering events were noted that would require a quantitative
impairment assessment in the fiscal year.
Stock-based compensation
We maintain an equity incentive compensation plan under which incentive stock options and nonqualified stock options to purchase common stock, and restricted stock units for common stock, are granted primarily to employees and non-employee consultants. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. The fair value of stock options is estimated using the Black- Scholes option pricing model. We record forfeitures as they occur. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock- based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and expected stock price volatility over the expected term. For all stock options granted, we calculated the expected term using the simplified method for standard stock option awards. After our IPO, the fair value of our common stock is determined by the closing price of our common stock on the date of grant as reported on the Nasdaq Global Select Market. The risk-free interest rate is based on the yield available onU.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. The following table summarizes the weighted-average assumptions used in estimating the fair value of stock options granted during each of the periods presented: Year ended December 31, 2021 2020 Expected term (in years) 6.05 5.96 Expected volatility 90 % 83 % Risk-free interest rate 1 % 1 % Dividend yield - - Expected volatility-Expected volatility is estimated by studying the volatility of selected industry peers deemed to be comparable to our business corresponding to the expected term of the awards.
Expected term-Expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method.
Risk-free interest rate-The risk-free interest rate is based on the
Dividend yield- The expected dividend yield is zero as we have never declared or paid cash dividends and have no current plans to do so in the foreseeable future.
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--------------------------------------------------------------------------------Common stock valuation
There was no public market for our common stock prior to our IPO. As such, the estimated fair value of our common stock was determined at each grant date by our board of directors, with input from management, based on the information known to us on the grant date and upon review of any recent events and their potential impact on the estimated per share fair value of our common stock. As part of these fair value determinations, our Board of Directors obtained and considered valuation reports prepared by third-party valuation firms in accordance with the guidance outlined in theAmerican Institute of Certified Public Accountants Technical Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In contemplation of an IPO, we began using a hybrid approach in determining the fair value of our common stock that includes a probability-weighted expected return method, or PWERM, and an option pricing method, or OPM. Under a PWERM, the fair market value of the common stock is estimated based upon an analysis of future values for the enterprise assuming various future outcomes. Within one of those potential outcomes, we utilized the OPM. The OPM treats the rights of the holders of redeemable convertible preferred stock and common stock as equivalent to that of call options on any value of the enterprise above certain break points of value based upon the liquidation preferences of the holders of redeemable convertible preferred stock, as well as their rights to participation and conversion. Based on the timing and nature of an assumed liquidity event in each scenario, a discount for lack of marketability either was or was not applied to each scenario, as appropriate. We then probability-weighted the value of each expected outcome to arrive at an estimate of fair value per share of common stock. In addition to considering the results of these third-party valuation reports, our board of directors used assumptions based on various objective and subjective factors, combined with management judgment, to determine the fair value of our common stock as of each grant date, including:
•
the prices at which we sold shares of redeemable convertible preferred stock and the superior rights and preferences of the redeemable convertible preferred stock relative to our common stock at the time of each grant;
•
external market conditions affecting the life sciences research and development industry and trends within the industry;
•
our stage of development and business strategy;
•
our financial condition and operating results, including our levels of available capital resources, and forecasted results;
• developments in our business; •
the progress of our research and development efforts;
•
equity market conditions affecting comparable public companies; and
•
general
Application of these approaches involves the use of estimates, judgment and assumptions that are subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
Litigation settlement liability
We are not currently involved in legal proceedings asDecember 31, 2021 . In case we will be involved in legal proceedings, we are required to assess the probability of loss and amount of such loss, if any, in preparing our consolidated financial statements. We evaluate the likelihood of a potential loss from legal proceedings to which we are a party. We record a liability for such claims when a loss is deemed probable, and the amount can be reasonably estimated. Significant judgment may be required in the determination of both probability and whether an exposure is reasonably estimable. Our judgments are subjective based on the status of the legal proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. As additional information becomes 66 -------------------------------------------------------------------------------- available, we reassess the potential liability related to pending claims and may revise our estimates. Due to the inherent uncertainties of the legal processes in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes, which could have material adverse effects on our business, financial conditions, and results of operations.
Recently adopted accounting pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our financial statements.
Emerging growth company 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 theSEC . 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. 67
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