Bionano Genomics(BNGO) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, revenue recognition, balance sheet accounts, debt, equity, and the acquisition of Lineagen Condensed Consolidated Balance Sheets The company's balance sheet shows a significant increase in cash and total assets as of March 31, 2021, primarily driven by substantial equity offerings, with total assets growing from $60.5 million at December 31, 2020, to $384.9 million at March 31, 2021 | Metric | March 31, 2021 | December 31, 2020 | Change | | :-------------------------------- | :------------- | :---------------- | :----- | | Cash and cash equivalents | $362,057,000 | $38,449,000 | +$323,608,000 | | Total current assets | $370,251,000 | $46,790,000 | +$323,461,000 | | Total assets | $384,861,000 | $60,451,000 | +$324,410,000 | | Total liabilities | $22,143,000 | $25,369,000 | -$3,226,000 | | Total stockholders' equity | $362,718,000 | $35,082,000 | +$327,636,000 | | Accumulated deficit | $(153,631,000) | $(143,684,000) | -$(9,947,000) | Condensed Consolidated Statements of Operations For the three months ended March 31, 2021, the company reported a net loss of $9.9 million, an improvement from $10.5 million in the prior year, driven by significant revenue growth across product and service segments and a gain from PPP loan forgiveness | Metric | March 31, 2021 | March 31, 2020 | Change | % Change | | :-------------------------------------- | :------------- | :------------- | :------------- | :------- | | Product revenue | $2,049,000 | $983,000 | +$1,066,000 | 108.4% | | Service and other revenue | $1,119,000 | $153,000 | +$966,000 | 631.4% | | Total revenue | $3,168,000 | $1,136,000 | +$2,032,000 | 178.9% | | Total cost of revenue | $2,125,000 | $856,000 | +$1,269,000 | 148.2% | | Research and development expenses | $2,678,000 | $2,674,000 | +$4,000 | 0.1% | | Selling, general and administrative expenses | $9,528,000 | $7,368,000 | +$2,160,000 | 29.3% | | Loss from operations | $(11,163,000) | $(9,762,000) | -$(1,401,000) | 14.4% | | Gain on forgiveness of PPP loan | $1,775,000 | — | +$1,775,000 | — | | Net loss | $(9,947,000) | $(10,510,000) | +$563,000 | (5.4)% | | Net loss per share, basic and diluted | $(0.04) | $(0.30) | +$0.26 | (86.7)% | | Weighted-average common shares outstanding | 263,939,000 | 35,569,000 | +228,370,000 | 642.0% | Condensed Consolidated Statements of Stockholders' Equity (Deficit) Stockholders' equity significantly increased from $35.1 million at January 1, 2021, to $362.7 million at March 31, 2021, primarily due to the issuance of common stock from public offerings and warrant exercises, despite a net loss | Metric | January 1, 2021 | March 31, 2021 | Change | | :-------------------------------- | :-------------- | :------------- | :------------- | | Common Stock (Amount) | $19,000 | $28,000 | +$9,000 | | Additional Paid-in Capital | $178,747,000 | $516,321,000 | +$337,574,000 | | Accumulated Deficit | $(143,684,000) | $(153,631,000) | -$(9,947,000) | | Total Stockholders' Equity (Deficit) | $35,082,000 | $362,718,000 | +$327,636,000 | - Key Equity Activities (Three Months Ended March 31, 2021): * Stock option exercises: $333,000[18] * Stock-based compensation expense: $371,000[18] * Issue common stock, net of issuance costs: $327,486,000[18] * Issue stock for warrant exercises: $9,393,000[18] Condensed Consolidated Statements of Cash Flows The company experienced a net increase in cash and cash equivalents of $323.6 million for the three months ended March 31, 2021, primarily driven by significant cash provided by financing activities, offsetting cash used in operating activities | Activity | March 31, 2021 | March 31, 2020 | Change | | :-------------------------------------- | :------------- | :------------- | :------------- | | Net cash used in operating activities | $(13,904,000) | $(8,032,000) | -$(5,872,000) | | Net cash used in investing activities | $(24,000) | — | -$(24,000) | | Net cash provided by (used in) financing activities | $337,536,000 | $(1,135,000) | +$338,671,000 | | Net increase in cash and cash equivalents | $323,608,000 | $(9,167,000) | +$332,775,000 | | Cash and cash equivalents at end of period | $362,057,000 | $8,144,000 | +$353,913,000 | - Key Financing Activities (Three Months Ended March 31, 2021): * Proceeds from sale of common stock: $328,635,000[22] * Proceeds from warrant and option exercises: $9,726,000[22] Notes to Condensed Consolidated Financial Statements The notes provide detailed context and breakdowns for the financial statements, covering business operations, liquidity, accounting policies, revenue recognition, balance sheet specifics, debt obligations, equity activities, and the acquisition of Lineagen Note 1. Organization and Basis of Presentation Bionano Genomics is a life sciences instrumentation company focused on genome analysis with its Saphyr system and provides diagnostic testing through its subsidiary Lineagen. The company has significantly improved its liquidity position with $362.1 million in cash and cash equivalents as of March 31, 2021, and expects to fund operations for at least the next twelve months, despite anticipating continued net losses. The COVID-19 pandemic continues to pose risks to operations and financial results - Business Description: Bionano Genomics provides tools and services based on its Saphyr system for genetic research and patient testing, and diagnostic testing for autism spectrum disorder (ASD) and other neurodevelopmental disabilities through Lineagen, Inc[25] - Saphyr System Components: Instrument, chip consumables, reagents, data analysis tools, and genome analysis services[25] - Liquidity Position (March 31, 2021): * Cash and cash equivalents: $362.1 million[27] * Working capital: $363.1 million[27] * PPP Loan forgiveness: $1.8 million in March 2021[27] * Revolving line of credit: $5.0 million available, no borrowings outstanding[27] - Future Funding Strategy: Expects to fund losses and capital needs through equity offerings, debt financings, or collaborations[28] - COVID-19 Impact: Continued spread of COVID-19 and market conditions pose risks, negatively impacting Q1 2021 financial results due to travel restrictions and reduced activity, with unknown future effects[29] - Significant Accounting Policies: No changes to significant accounting policies during the three months ended March 31, 2021[32] - Emerging Growth Company Status: Elected extended transition period for new accounting standards[33] - Potential Change in Filer Status: If market value of common stock held by non-affiliates exceeds $700.0 million by June 30, 2021, the company will become a large accelerated filer and cease to be an emerging growth company effective December 31, 2021[33] - ASU 2016-2 (Leases): Anticipates implementing using the alternative method beginning Q1 2023[34] - ASU No. 2016-13 (Credit Losses): Effective Q1 2023, currently evaluating impact[34] - Recently Adopted Accounting Pronouncements: Early adopted ASU No. 2020-06 on January 1, 2021, with no material impact on consolidated financial statements[35] Note 2. Net Loss Per Share Basic and diluted net loss per share were $(0.04) for the three months ended March 31, 2021, compared to $(0.30) for the same period in 2020, with potentially dilutive securities excluded due to the net loss | Period | Net Loss Per Share | | :--------------------- | :----------------- | | March 31, 2021 | $(0.04) | | March 31, 2020 | $(0.30) | - Anti-dilutive Securities: Warrants and stock options were excluded from diluted EPS calculation[38] | Type | March 31, 2021 | March 31, 2020 | | :------------- | :------------- | :------------- | | Stock options | 5,126,000 | 2,760,000 | | Warrants | 4,411,000 | 24,128,000 | | Total | 9,537,000 | 26,888,000 | Note 3. Revenue Recognition Total revenue increased by 178.9% to $3.168 million for the three months ended March 31, 2021, compared to $1.136 million in the prior year, driven by significant increases in both product revenue (108.4%) and service and other revenue (631.4%), with EMEIA showing the highest regional growth | Revenue Type | March 31, 2021 | March 31, 2020 | | :---------------------- | :------------- | :------------- | | Instruments | $882,000 | $534,000 | | Consumables | $1,167,000 | $449,000 | | Total product revenue | $2,049,000 | $983,000 | | Service and other | $1,119,000 | $153,000 | | Total revenue | $3,168,000 | $1,136,000 | | Region | March 31, 2021 ($) | March 31, 2021 (%) | March 31, 2020 ($) | March 31, 2020 (%) | | :-------------- | :----------------- | :----------------- | :----------------- | :----------------- | | North America | $1,498,000 | 47% | $726,000 | 64% | | EMEIA | $1,587,000 | 50% | $390,000 | 34% | | Asia Pacific | $83,000 | 3% | $20,000 | 2% | | Total | $3,168,000 | 100% | $1,136,000 | 100% | - Lineagen Revenue Contribution: Service revenue includes $851,000 generated from Lineagen during Q1 2021[97][99] - Remaining Performance Obligations: Estimated future revenue of $409,000 as of March 31, 2021, primarily from extended warranty and support, with 64.8% expected in remainder of 2021[42] Note 4. Balance Sheet Account Details Net accounts receivable decreased to $2.0 million as of March 31, 2021, from $2.8 million at December 31, 2020, with a recovery of bad debt expense recorded in Q1 2021, while total inventory also decreased to $3.0 million, mainly due to a reduction in finished goods | Metric | March 31, 2021 | December 31, 2020 | | :----------------------------- | :------------- | :---------------- | | Accounts receivable, trade | $4,083,000 | $4,894,000 | | Less allowance for doubtful accounts | $(2,091,000) | $(2,119,000) | | Net accounts receivable | $1,992,000 | $2,775,000 | - Bad debt expense recovery: $(28,000) recorded in Q1 2021[45] - Concentrations: No customer balances exceeded 10% of total accounts receivable as of March 31, 2021 (vs. Illumina 17.3% and Quest Diagnostics 10.1% at Dec 31, 2020)[46] | Component | March 31, 2021 | December 31, 2020 | | :---------------- | :------------- | :---------------- | | Raw materials | $2,736,000 | $2,283,000 | | Finished goods | $300,000 | $1,033,000 | | Total inventory | $3,036,000 | $3,316,000 | Note 5. Debt The company's $1.8 million Paycheck Protection Program (PPP) Loan was fully forgiven in March 2021, resulting in a gain, and the total carrying value of debt decreased to $14.9 million as of March 31, 2021, with the company in compliance with all covenants under its Innovatus LSA - PPP Loan Forgiveness: Approximately $1.8 million PPP Loan, including all accrued interest, was fully forgiven in March 2021, resulting in a $1.8 million gain[50][51] - Innovatus LSA: Includes term loans and a $5.0 million revolving line of credit (no borrowings outstanding as of March 31, 2021), with an effective interest rate for term loans of 16.7%[52][54] - Compliance: Company was in compliance with all covenants under the Innovatus LSA as of March 31, 2021[55] | Metric | March 31, 2021 | December 31, 2020 | | :----------------------------- | :------------- | :---------------- | | Term Loans | $16,099,000 | $15,981,000 | | PPP Loan | — | $1,775,000 | | Total principal | $16,099,000 | $17,756,000 | | Less unamortized debt issuance costs | $(1,233,000) | $(1,430,000) | | Total carrying value of debt | $14,866,000 | $16,326,000 | Note 6. Stockholders' Equity and Stock-Based Compensation The company significantly increased its capital through two public offerings in January 2021, raising approximately $331.8 million in gross proceeds, and utilized an at-the-market facility, while stock warrant exercises reduced outstanding warrants and stock-based compensation expense increased to $371,000 in Q1 2021 - Follow-on Public Offerings (January 2021): Raised approximately $101.8 million and $230.0 million in gross proceeds from two separate underwritten public offerings[58][59] - At-the-Market Facility: Sold 6,298,152 shares for ~$16.9 million gross proceeds in January 2021 under Ladenburg ATM, which was terminated, and a new $350.0 million ATM facility with Cowen was entered into in March 2021[60][61] | Metric | Shares of Stock under Warrants | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | | :----------------------------- | :----------------------------- | :------------------------------ | :------------------------------------------ | :------------------------ | | Outstanding at January 1, 2021 | 15,174,000 | $2.34 | 3.76 | $26,841,000 | | Exercised | (10,739,000) | $0.89 | | $57,912,000 | | Outstanding at March 31, 2021 | 4,411,000 | $5.89 | 2.50 | $2,911,000 | | Metric | Shares of Stock under Stock Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | | :----------------------------------- | :---------------------------------- | :------------------------------ | :------------------------------------------ | :------------------------ | | Outstanding at January 1, 2021 | 5,290,000 | $1.91 | 8.7 | $10,178,000 | | Granted | 138,000 | $10.83 | | | | Exercised | (102,000) | $3.28 | | $1,153,000 | | Outstanding at March 31, 2021 | 5,126,000 | $2.16 | 8.66 | $31,554,000 | | Expense Category | March 31, 2021 | March 31, 2020 | | :----------------------------- | :------------- | :------------- | | Research and development | $81,000 | $67,000 | | General and administrative | $290,000 | $261,000 | | Total | $371,000 | $328,000 | - Restricted Stock Units (RSUs): Granted 580,000 RSUs to CEO (time-based and performance-based) and 240,000 RSUs to COO (time-based) on May 12, 2021[68][69][70][71] Note 7. Litigation The company regularly assesses potential liabilities from claims and legal actions but currently does not have any material loss exposure as it is not a defendant in any claims or legal actions - No material loss exposure from litigation as of March 31, 2021[72] Note 8. Income Taxes The company's effective tax rate primarily differs from the federal statutory rate due to a full valuation allowance on its U.S. net operating losses - Primary difference in effective tax rate: Full valuation allowance on U.S. net operating losses[73] Note 9. Acquisition of Lineagen Bionano Genomics acquired Lineagen, Inc. on August 21, 2020, to accelerate sales growth for its Saphyr system through Lineagen's expertise in diagnostic testing, with an estimated purchase price of $7.1 million, allocated to assets including $7.2 million in goodwill - Acquisition Date: August 21, 2020[74] - Strategic Rationale: Lineagen's expertise in laboratory-developed tests provides a platform for accelerating Saphyr system sales growth[74] - Consideration: 6,167,510 shares of common stock (subject to adjustment), $1.9 million cash to creditors, assumption of $2.9 million liabilities, and repayment of Lineagen PPP Loan ($1.1 million)[76][77][79] | Asset/Liability | Amount | | :-------------------------------- | :------------- | | Cash and cash equivalents | $596,000 | | Accounts receivable | $337,000 | | Other assets | $209,000 | | Property and equipment, net | $111,000 | | Intangible assets | $1,580,000 | | Goodwill | $7,173,000 | | Accounts payable and other accrued liabilities | $(2,862,000) | | Net assets acquired | $7,144,000 | - Goodwill: $7.173 million, non-tax deductible, relates to expected synergies[78][81] - Intangible Assets Acquired: Customer relationships ($950,000) and trade name ($630,000)[81] | Metric | Amount | | :----------------------------- | :------------- | | Revenue | $2,676,000 | | Net loss | $(11,637,000) | | Basic and diluted net loss per share | $(0.28) | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance, liquidity, and capital resources for the three months ended March 31, 2021, highlighting revenue growth, ongoing losses, the impact of the COVID-19 pandemic, and recent financing activities Overview Bionano Genomics is a life sciences instrumentation company providing genome analysis tools (Saphyr system) and diagnostic testing (Lineagen), which incurred a net loss of $9.9 million in Q1 2021 and expects continued losses due to investments in commercialization, R&D, personnel, and public company costs - Business Focus: Genome analysis (Saphyr system) and diagnostic testing for neurodevelopmental disabilities (Lineagen)[87] - Net Loss (Q1 2021): $9.9 million[88] - Accumulated Deficit (March 31, 2021): $153.6 million[88] - Expected Future Expenses: Expansion of sales/marketing, R&D, hiring, collaboration, operational systems, and public company costs[89] Recent Highlights In Q1 2021, the company shipped 11 Saphyr systems, increasing the installed base to 107, and saw a 275% increase in nanochannel array flow cell sales compared to Q1 2020 - Saphyr systems shipped (Q1 2021): 11 (vs. 5 in Q1 2020)[90] - Installed base of Saphyr systems (end of Q1 2021): 107[90] - Nanochannel array flow cells sold (Q1 2021): 2,603 (275% increase YoY)[90] - Samples analyzed in Saphyr service lab: 227[91] COVID-19 Overview The COVID-19 pandemic continues to disrupt business operations, including reduced on-site activities, work-from-home policies, and travel restrictions, negatively impacting productivity and financial results, with future effects remaining uncertain - Disruptions: Reduced on-site operations, work-from-home, modified business practices (travel, events)[92] - Impact: Adversely affected operations, productivity, and Q1 2021 financial results[92][29] - Uncertainty: Future effects are unknown, and financial results may continue to be negatively affected[93][29] Financial Overview The financial overview details the company's revenue growth across product and service segments, the cost of revenue, and operating expenses, providing context for the overall financial performance Revenue Total revenue increased by 178.9% to $3.168 million in Q1 2021, driven by a 108.4% increase in product revenue and a 631.4% increase in service and other revenue, with Lineagen contributing $851,000 to service revenue | Revenue Type | March 31, 2021 | March 31, 2020 | % Change | | :---------------------- | :------------- | :------------- | :------- | | Product revenue | $2,049,000 | $983,000 | 108.4% | | Service and other revenue | $1,119,000 | $153,000 | 631.4% | | Total revenue | $3,168,000 | $1,136,000 | 178.9% | - Lineagen revenue contribution: $851,000 to service revenue in Q1 2021[97][99] - Geographic growth: North America +106%, EMEIA +307%, Asia Pacific +315%[106][108] Cost of Revenue Total cost of revenue increased by 148.2% to $2.1 million in Q1 2021, primarily due to a shift in product mix towards higher-margin consumables and services - Total cost of revenue (Q1 2021): $2.125 million (vs. $0.856 million in Q1 2020), a 148.2% increase[105][109] - Increase attributed to shift towards higher margin consumables and services[109] Research and Development Expenses Research and development expenses remained relatively flat at $2.678 million in Q1 2021 compared to $2.674 million in Q1 2020, reflecting continued investment in product development - R&D expenses (Q1 2021): $2.678 million (vs. $2.674 million in Q1 2020), a 0.1% increase[105] - Continued investment in R&D is essential for long-term competitive position[103] Selling, General and Administrative Expenses Selling, general and administrative expenses increased by 29.3% to $9.5 million in Q1 2021, mainly due to higher headcount-related costs from the Lineagen acquisition, partially offset by a decrease in bad debt expense - SG&A expenses (Q1 2021): $9.528 million (vs. $7.368 million in Q1 2020), a 29.3% increase[105][110] - Primary driver: Additional headcount-related costs from Lineagen acquisition (August 2020)[110] - Offset by: $1.0 million decrease in bad debt expense[110] Results of Operations The company's net loss decreased by 5.4% to $9.9 million in Q1 2021, primarily due to a substantial increase in total revenue (178.9%) and a $1.8 million gain from PPP loan forgiveness, partially offset by higher operating expenses | Metric | March 31, 2021 | March 31, 2020 | Change | % Change | | :-------------------------------------- | :------------- | :------------- | :------------- | :------- | | Total revenue | $3,168,000 | $1,136,000 | +$2,032,000 | 178.9% | | Total cost of revenue | $2,125,000 | $856,000 | +$1,269,000 | 148.2% | | Total operating expenses | $12,206,000 | $10,042,000 | +$2,164,000 | 21.5% | | Loss from operations | $(11,163,000) | $(9,762,000) | -$(1,401,000) | 14.4% | | Gain on forgiveness of PPP loan | $1,775,000 | — | +$1,775,000 | — | | Net loss | $(9,947,000) | $(10,510,000) | +$563,000 | (5.4)% | - Interest expense decreased by $0.2 million (29.3%) due to changes in term-loan debt[105][111] Liquidity and Capital Resources The company's liquidity significantly improved in Q1 2021, driven by substantial financing activities, including public offerings and ATM sales, which provided $337.5 million in cash, and despite ongoing operating losses, management believes current cash is sufficient for at least the next twelve months Sources of Liquidity The company has historically relied on equity sales and debt financing to fund operations, incurring net losses and negative cash flows, and as of March 31, 2021, it had $362.1 million in cash and cash equivalents and expects future liquidity from equity offerings, credit facilities, and commercial operations - Historical funding: Sales of equity securities and debt financing[113] - Net losses (Q1 2021): $9.9 million[113] - Cash and cash equivalents (March 31, 2021): $362.1 million[113] - Accumulated deficit (March 31, 2021): $153.6 million[113] - Future liquidity sources: Equity offerings, credit facilities, and commercial operations revenue[113] Cash Flows The company's cash flows saw a significant net increase of $323.6 million in Q1 2021, primarily driven by $337.5 million from financing activities, which offset $13.9 million used in operating activities | Activity | March 31, 2021 | March 31, 2020 | | :-------------------------------------- | :------------- | :------------- | | Net cash used in operating activities | $(13,904,000) | $(8,032,000) | | Net cash used in investing activities | $(24,000) | — | | Net cash provided by (used in) financing activities | $337,536,000 | $(1,135,000) | Operating Activities Net cash used in operating activities increased by $5.9 million to $13.9 million in Q1 2021, primarily due to increased headcount-related costs from the Lineagen acquisition - Net cash used in operating activities (Q1 2021): $13.9 million (vs. $8.0 million in Q1 2020)[117] - Increase attributed to: Increased headcount-related costs from Lineagen acquisition[117] Investing Activities Cash used in investing activities was negligible in Q1 2021, consistent with historical patterns of capital expenditures for infrastructure - Net cash used in investing activities (Q1 2021): $(24,000)[114][118] - Primary activities: Capital expenditures for equipment[118] Financing Activities Net cash provided by financing activities surged to $337.5 million in Q1 2021, a $338.7 million increase from the prior year, driven by proceeds from two follow-on public offerings and at-the-market facility sales, as well as warrant and option exercises - Net cash provided by financing activities (Q1 2021): $337.5 million (vs. $(1.1) million used in Q1 2020)[114][119] - Key drivers: $328.6 million from follow-on offerings and ATM sales, $9.7 million from warrant and option exercises[119] Paycheck Protection Program The company's $1.8 million PPP Loan was fully forgiven in March 2021 after an application in February 2021, following its use for eligible costs under the CARES Act - PPP Loan received: Approximately $1.8 million in April 2020[120] - Forgiveness: Applied in February 2021, fully forgiven in March 2021[121] - Use of proceeds: For Eligible Costs (payroll, etc.) through October 2, 2020[122] Capital Resources As of March 31, 2021, the company had $362.1 million in cash and cash equivalents and $363.1 million in working capital, having secured significant capital through public offerings and an ATM facility in late 2020 and early 2021, and established a new $350.0 million ATM facility in March 2021, with management believing current cash is sufficient for at least the next twelve months - Cash and cash equivalents (March 31, 2021): $362.1 million[124] - Working capital (March 31, 2021): $363.1 million[124] - Outstanding debt (March 31, 2021): $14.9 million[124] - Capital Raised (Oct 2020 - Jan 2021): * Ladenburg ATM: ~$22.1 million (Oct-Dec 2020), ~$16.9 million (Jan 2021)[125][126] * Underwritten public offering (Jan 12, 2021): ~$101.8 million[129] * Underwritten public offering (Jan 25, 2021): ~$230.0 million[129] - New Cowen ATM facility (March 23, 2021): Up to $350.0 million[130] - Liquidity outlook: Sufficient cash for at least the next twelve months[131] Off-Balance Sheet Arrangements The company did not have any off-balance sheet arrangements or holdings in variable interest entities during the periods presented - No off-balance sheet arrangements[132] - No holdings in variable interest entities[132] Critical Accounting Policies and Estimates There were no material changes in the company's critical accounting policies and estimates during the three months ended March 31, 2021 - No material changes in critical accounting policies and estimates in Q1 2021[134] Recent Accounting Pronouncements Information concerning recent accounting pronouncements is provided in Note 1 to the condensed consolidated financial statements - Refer to Note 1 for recent accounting pronouncements[135] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - Not required to provide market risk disclosures as a smaller reporting company[136] ITEM 4. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and procedures were not effective as of March 31, 2021, due to a material weakness in internal control over financial reporting, specifically insufficient resources and inadequate segregation of duties, with remediation efforts ongoing but not fully achieved by the end of Q1 2021 Evaluation of Disclosure Controls and Procedures As of March 31, 2021, management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective at a reasonable assurance level due to a material weakness in internal control over financial reporting - Disclosure controls and procedures: Not effective at a reasonable assurance level as of March 31, 2021[139] - Reason: Material weakness in internal control over financial reporting[139] Material Weaknesses in Internal Control over Financial Reporting As of December 31, 2020, and March 31, 2021, the company identified a material weakness in its internal control environment due to insufficient resources to support financial reporting growth and complexity, leading to inadequate segregation of duties, though no material misstatements were identified - Material weakness identified: Insufficient resources for financial reporting growth and complexity[140] - Impact: Inadequate segregation of duties, pervasive impact on financial statement account balances and disclosures[141] - No material misstatements identified in financial statements[141] Remediation of Material Weaknesses The company is actively implementing a remediation plan, including engaging external consultants and hiring additional qualified personnel, to address the identified material weaknesses, though full remediation was not achieved as of March 31, 2021 - Remediation efforts: Engaged external consultants, hiring additional qualified individuals[142][143] - Status: Material weaknesses not fully remediated as of March 31, 2021[144] Changes in Internal Control over Financial Reporting Other than the ongoing remediation efforts, there were no material changes in the company's internal control over financial reporting during Q1 2021 - No material changes in internal control over financial reporting in Q1 2021, aside from remediation efforts[145] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company reported no legal proceedings - No legal proceedings[147] ITEM 1A. RISK FACTORS This section outlines various risks that could impact the company's business, financial condition, and stock price, including financial instability, operational challenges, regulatory compliance, intellectual property protection, and factors affecting securities ownership RISK FACTOR SUMMARY This section provides a summary of principal factors that make an investment in the company's securities speculative or risky, including recurring net losses, fluctuating operating results, limited operating history, adverse effects from public health crises (like COVID-19), uncertain future capital needs, market acceptance challenges, reliance on "research use only" products, dependence on R&D spending, new product development risks, regulatory clearance requirements, intellectual property protection issues, debt facility restrictions, and stock price volatility - Recurring net losses and uncertainty of profitability[148] - Fluctuating operating results and cash flows[148] - Limited operating history as an early commercial-stage company[148] - Adverse effects of public health crises, including COVID-19[148] - Uncertain future capital needs and risk of insufficient funding[148] - Risk of failure to achieve and sustain sufficient market acceptance for products[148] - Limitations of "research use only" products and potential regulatory requirements for clinical use[148] - Dependence on R&D spending by academic/governmental institutions and biopharmaceutical companies[148] - Risks associated with managing new product development and launch[148] - Challenges in protecting intellectual property[148] - Restrictions from debt facility covenants[148] - Volatility of securities price[148] RISK FACTORS This section details the specific risks the company faces, categorized into financial, operational, regulatory, intellectual property, and ownership-related risks, providing a comprehensive view of potential challenges and uncertainties Risks related to our financial condition and need for additional capital The company has a history of net losses and negative cash flows, with an accumulated deficit of $153.6 million as of March 31, 2021, and expects continued losses due to significant investments and public company costs, necessitating future funding through equity, debt, or collaborations, while the COVID-19 pandemic further complicates financial stability and covenant compliance - Net losses: $9.9 million (Q1 2021), $10.5 million (Q1 2020)[152] - Cash used in operations: $13.9 million (Q1 2021), $8.0 million (Q1 2020)[152] - Accumulated deficit: $153.6 million (March 31, 2021)[152] - Future funding needs: Expansion of sales/marketing, R&D, regulatory approvals, facility expansion, personnel, collaborations[155] - COVID-19 impact: May compromise loan agreement compliance, leading to default or need for additional financing[155] Risks related to our business operations The company faces risks including the need for market acceptance of its Saphyr system, challenges in integrating acquisitions like Lineagen, and potential dilution from equity issuances, while also relying on a limited number of suppliers and contract manufacturers, and being vulnerable to facility damage, product defects, and international operational risks - Market acceptance: Success depends on demonstrating Saphyr technology as a cost-effective alternative to existing systems[162] - Acquisition risks: Integration challenges, unanticipated expenses, diversion of management time, dilution from equity issuances (e.g., Lineagen acquisition)[165][166] - Equity issuances: Future sales of equity or convertible debt may cause dilution[167] - Lineagen sales strategy: Need to establish market and build acceptance through physician education and clinical trial results[167] - Dependence on R&D spending: Sales of Saphyr system and services depend on budgets of academic, governmental, and biopharmaceutical customers[170] - Sales cycle: Lengthy and variable, making revenue forecasting difficult[171] - Product development: Long-term results depend on improving existing products and introducing new ones successfully[172] - Customer penetration: Future success depends on penetrating existing customer base and attracting new customers[175] - "Research Use Only" (RUO) limitation: Many materials are RUO; expanding to diagnostic use requires regulatory clearance and non-RUO suppliers[176] - Limited manufacturing: Reliance on single contract manufacturers for instruments and chip consumables poses supply risks[178] - Manufacturing problems: Delays or shortfalls could limit revenue growth[179] - Facility risks: Single laboratory facilities for R&D, OGM services, and molecular diagnostics services are vulnerable to damage or inoperability[180] - Supplier reliance: Reliance on limited or sole suppliers for materials and components[181] - Product defects: Undetected errors or defects could harm reputation and lead to product liability claims[182] - International sales: Reliance on distributors outside the U.S. and exposure to foreign regulatory, economic, and political risks[183][184] - Anti-corruption laws: Subject to U.S. and foreign anti-corruption laws; non-compliance can lead to liability[185] - Export/import controls: Subject to regulations that could impair international competition[185] - Key personnel: Future success depends on ability to recruit, train, retain, motivate, and integrate key personnel[186] - Technical support: Need for highly trained technical support personnel to assist customers[187] - Security breaches: Vulnerability to cyberattacks and security incidents, potentially leading to data disruption, liability, and reputational damage[189][190] - Data privacy: Subject to stringent and changing laws (CCPA, CPRA, GDPR) related to privacy and data security, with non-compliance risks[193][194][195][196][199][200] - Competition: Highly competitive life sciences research and diagnostic markets with established and early-stage companies[201] - PPP Loan eligibility: Potential for future determination of impermissibility or reputational damage regarding PPP Loan application/forgiveness[204] - Global economic conditions: Unfavorable global economic conditions, including Brexit, could adversely affect business[205][207] - Exclusive forums: Charter documents designate exclusive forums for disputes, potentially limiting stockholder's ability to choose a favorable judicial forum[208][209] Risks related to government regulation and diagnostic product reimbursement The company faces significant regulatory hurdles if its RUO products are deemed medical devices or if it pursues clinical diagnostic use, requiring expensive and time-consuming FDA clearances, while its Lineagen diagnostic services are subject to complex billing, reimbursement, and fraud/abuse laws, with potential for unfavorable pricing and penalties for non-compliance - RUO products as medical devices: If FDA determines RUO products are medical devices or if marketed for clinical use, regulatory clearance/approval (510(k) or PMA) will be required, which is expensive, time-consuming, and uncertain[210] - Laboratory Developed Tests (LDTs): Lineagen's LDTs are currently under FDA enforcement discretion; changes in regulation could increase costs and reduce demand[210] - Third-party studies: Expects to rely on third parties for future diagnostic product studies, reducing control over activities[212] - Lineagen billing complexity: Billing for diagnostic testing services is complex, time-consuming, and expensive, involving various payors and compliance with federal/state regulations[213] - Unfavorable pricing/reimbursement: Lineagen revenue depends on broad coverage and adequate reimbursement from third-party payors; lack thereof could harm business[216] - Saphyr diagnostic procedures reimbursement: If diagnostic procedures enabled by Saphyr technology face unfavorable pricing or reimbursement, demand could be impacted[217][219] - Healthcare reform: ACA and other reforms (e.g., PAMA) may lead to more rigorous coverage criteria and downward pressure on prices[220] - Regulatory compliance: Subject to CLIA and state laboratory licenses; non-compliance can result in sanctions and harm business[222] - Healthcare fraud and abuse laws: Operations subject to federal and state anti-kickback, false claims, Stark Law, EKRA, HIPAA, and other laws; non-compliance could lead to substantial penalties[223][224][225][227] Risks Related to Intellectual Property The company relies on patents, trademarks, trade secrets, and contractual restrictions to protect its intellectual property, but faces risks including challenges to patent validity, infringement by competitors, and the high costs of litigation, while government-funded intellectual property is subject to "march-in" rights and other regulations, and reliance on licensed technology from Princeton University poses additional risks - Inadequate IP protection: Failure to protect intellectual property (patents, trademarks, trade secrets) may reduce competitive advantage and incur litigation costs[228] - Patent challenges: Pending or future patent applications may not result in granted patents, or issued patents may be challenged, invalidated, or narrowly interpreted[228] - Government-funded IP: Intellectual property from government-funded programs is subject to "march-in" rights, reporting requirements, and U.S. manufacturing preference, potentially limiting exclusive rights[230][231] - Reliance on licensed technology: Dependence on exclusive license from Princeton University; breach of obligations could lead to termination or modification of the license[232] - Infringement claims: Risk of being sued for infringing third-party intellectual property rights, leading to substantial costs, injunctions, or damages[234] - Patent litigation: Involvement in lawsuits to protect or enforce patents is expensive, time-consuming, and uncertain[235] - Patent invalidity/unenforceability: Issued patents could be found invalid or unenforceable if challenged, materially impacting business[237] - Trade secret misuse: Claims that employees/consultants wrongfully used or disclosed trade secrets of former employers[238] - Inventorship/ownership challenges: Claims challenging inventorship or ownership of patents and other IP[238] - Global IP protection: Difficulty protecting IP rights throughout the world due to varying laws and enforcement[240] - Changes in patent laws: Changes like the America Invents Act (AIA) or Supreme Court rulings could diminish patent value[241][243] - Compliance with patent agencies: Failure to comply with procedural requirements can lead to loss of patent rights[244] - Trademark protection: Inadequate protection of trademarks and trade names could hinder brand recognition[244] - Open source software: Future use of open source software components could restrict ability to sell products if license terms are not complied with[245] - Third-party software: Reliance on third-party software may lead to errors or failures, harming reputation[246] - Limitations of IP rights: Intellectual property rights have limitations and may not adequately protect the business or provide a competitive advantage[247] Risks Related to Ownership of our Securities The company's stock price is highly volatile due to various factors, including commercial progress, regulatory changes, competition, and financial performance, with risks of delisting from Nasdaq, limited influence from other stockholders due to significant principal ownership, reduced attractiveness of securities as an emerging growth company, and erosion of investor confidence from material weaknesses in internal controls - Stock price volatility: Highly volatile due to commercial progress, regulatory changes, competition, financial performance, and market factors[248][250] - Nasdaq delisting risk: Failure to comply with listing requirements (e.g., minimum bid price) could lead to delisting, negatively impacting stock price and liquidity[250][252] - No dividends: No intention to pay cash dividends; investment gain depends on stock price appreciation[253] - Principal stockholder control: Executive officers, directors, and 5% stockholders own a significant percentage, exerting control over stockholder approval matters[253] - Emerging Growth Company (EGC) status: Reduced reporting requirements may make securities less attractive; potential loss of EGC status by December 31, 2021, if market value exceeds $700 million[254][255] - Material weaknesses in internal control: Identified material weaknesses could lead to inaccurate financial reporting, delayed filings, loss of investor confidence, and stock price decline[255][256] - Disclosure controls limitations: Disclosure controls may not prevent or detect all errors or fraud[258] - Public company costs: Significant increased costs and management time devoted to compliance initiatives as a public company[258] - Future stock sales: Sales of substantial amounts of common stock could adversely affect market price[260] - Anti-takeover provisions: Charter documents and Delaware law contain provisions that could delay or prevent a change of control[260] - Active trading market: Risk that an active trading market for common stock may not be sustained[261] General Risk Factors General risks include the impact of securities or industry analysts' research on stock price, potential negative effects of activist stockholders, and the possibility of securities class action litigation diverting management's attention and incurring significant liabilities - Analyst coverage: Lack of or inaccurate/unfavorable research by securities analysts could cause stock price and trading volume to decline[263] - Activist stockholders: Actions by activist stockholders could disrupt business, divert management attention, and impact stock trading value[264] - Securities class action litigation: Risk of litigation following stock price volatility, leading to substantial costs and management distraction[265] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This item is not applicable - Not applicable[267] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities - No defaults upon senior securities[267] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable - Not applicable[267] ITEM 5. OTHER INFORMATION On May 12, 2021, the compensation committee granted Restricted Stock Units (RSUs) to the CEO (580,000 RSUs) and COO (240,000 RSUs), with vesting schedules tied to time and, for a portion of the CEO's grant, revenue targets - RSU Grants (May 12, 2021): * CEO (R. Erik Holmlin): 580,000 RSUs[267] * 290,000 time-based (50% on 1st and 2nd anniversaries)[268] * 290,000 performance-based (revenue targets within four years)[269] * COO (Mark Oldakowski): 240,000 RSUs, time-based (50% on 1st and 2nd anniversaries)[270] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including organizational documents, warrant forms, registration rights agreements, and certifications - Lists various exhibits, including Amended and Restated Certificate of Incorporation, Bylaws, forms of Warrants, Registration Rights Agreements, Sales Agreement with Cowen, and certifications[272] SIGNATURES The report was duly signed on May 13, 2021, by R. Erik Holmlin, Ph.D., President and Chief Executive Officer, and Christopher Stewart, Chief Financial Officer - Signed by R. Erik Holmlin, Ph.D. (President and CEO) and Christopher Stewart (CFO) on May 13, 2021[279][280][281]