CYTEK(CTKB) - 2023 Q4 - Annual Report

PART I Business Cytek Biosciences specializes in Full Spectrum Profiling (FSP™) technology for cell analysis, expanding its product portfolio with the 2023 acquisition of Luminex's FCI business - The company's core business revolves around its patented Full Spectrum Profiling (FSP™) technology, enabling highly complex cell analysis with over 40 biomarkers in a single sample[48][49] - In February 2023, Cytek completed the acquisition of the flow cytometry and imaging (FCI) business from Luminex Corporation, adding Amnis® and Guava® branded instruments to its product line, expanding offerings into conventional and image-based flow cytometry[53][85] - Cytek's growth strategy focuses on accelerating adoption of its solutions, continuous innovation (e.g., Aurora CS cell sorter), investing in integrated workflow solutions, and driving development in clinical research applications like minimal residual disease (MRD) testing[57] - The company operates manufacturing facilities in Fremont, CA, San Diego, CA, Seattle, WA, and Wuxi, China, providing dual-source capabilities for core products to mitigate production disruption risks[125][127] - As of December 31, 2023, the company had 676 employees, with 254 in sales and marketing and 164 in research and development, supporting its global commercial and innovation efforts[137][54] Risk Factors The company faces risks from limited operating history, product dependence, single-source suppliers, intense competition, and material weaknesses in internal controls - The company has identified material weaknesses in its internal control over financial reporting due to a lack of sufficient qualified resources and deficiencies in control activities, which could prevent timely detection of financial misstatements[335][231] - A substantial portion of revenue comes from a limited number of products (Cytek Aurora, Northern Lights, Aurora CS), which have long sales cycles, making quarterly revenue prone to fluctuation[262] - The company relies on single-source or sole-source suppliers for critical components like lasers and semiconductors, posing a risk of supply chain interruption that could adversely affect operations[263] - The cell analysis market is highly competitive, with established competitors like Becton, Dickinson and Company, Danaher, and Thermo Fisher Scientific having substantially greater financial and operational resources[281][128] - A significant portion of revenue (43% in 2023) comes from academic and government institutions, making the business dependent on research and development spending, which can be affected by government funding and budgetary constraints[274][270] Cybersecurity Cybersecurity risks are managed through information security processes, overseen by the COO and IT, with Board oversight and periodic reporting on threats and mitigation - The company's cybersecurity risk management is overseen by the Board of Directors, with implementation managed by the Chief Operating Officer (COO) and the IT department[534][536] - Processes to manage cybersecurity threats include a security incident response plan, disaster recovery plans, encryption, access controls, and penetration testing, utilizing third-party service providers for assistance[533] Properties Cytek's headquarters is a leased 99,000 sq ft facility in Fremont, CA, complemented by an owned 56,000 sq ft manufacturing site in Wuxi, China, and other leased international spaces - The company's principal executive offices are located in a leased 99,000 sq ft facility in Fremont, CA, and it owns a 56,000 sq ft facility in Wuxi, China, which houses manufacturing and office operations[537] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "CTKB" since its 2021 IPO, with no cash dividends paid or intended, and a 2023 share repurchase program of $44.0 million completed - On May 17, 2023, the Board approved a share repurchase program of up to $50 million, repurchasing 6,613,780 shares for approximately $44.0 million at an average price of $6.66 per share by its expiration on December 31, 2023[546][555] - The company has never declared or paid cash dividends and intends to retain all available funds for future business growth and operations[543] Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue increased 18% to $193.0 million in 2023, driven by the FCI Acquisition, while gross margin decreased to 57%, and increased operating expenses led to a $12.1 million net loss Comparison of Results of Operations (FY 2023 vs. FY 2022) | Financial Metric | 2023 (in thousands) | 2022 (in thousands) | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue, net | $193,015 | $164,036 | $28,979 | 18% | | Product Revenue | $156,717 | $148,600 | $8,117 | 5% | | Service Revenue | $36,298 | $15,436 | $20,862 | 135% | | Gross Profit | $109,426 | $100,974 | $8,452 | 8% | | Gross Margin | 57% | 62% | - | - | | Total Operating Expenses | $137,271 | $102,778 | $34,493 | 34% | | Research & Development | $44,151 | $34,858 | $9,293 | 27% | | Sales & Marketing | $49,148 | $33,230 | $15,918 | 48% | | General & Administrative | $43,972 | $34,690 | $9,282 | 27% | | (Loss) Income from Operations | ($27,845) | ($1,804) | ($26,041) | - | | Net (Loss) Income | ($12,148) | $2,484 | ($14,632) | - | - The FCI Acquisition, completed in February 2023, contributed $28.7 million to revenue for the year, with organic revenue (excluding this contribution) at $164.3 million, a 0.2% increase year-over-year[559] - Gross margin declined from 62% in 2022 to 57% in 2023, primarily due to higher material costs and a less favorable instrument product mix following the FCI Acquisition[257][258] - The increase in operating expenses was driven by higher headcount and personnel-related costs from the FCI Acquisition, along with increased investment in R&D and sales and marketing initiatives[233][234] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency fluctuations, mainly renminbi and euro, and minimal interest rate risk due to short-term cash holdings, with no hedging arrangements in place - The company's main market risk is from foreign currency fluctuations, as revenue and expenses are denominated in currencies like the renminbi and euro, and the company does not currently use hedging instruments[21][23] - Interest rate risk is considered low because the company's $167.6 million in cash and cash equivalents are held in short-term, variable-rate instruments like money market funds and bank deposits[22] Financial Statements and Supplementary Data Deloitte & Touche LLP issued an unqualified opinion on financial statements but an adverse opinion on internal controls due to material weaknesses, with critical audit matters including inventory and acquired intangible asset valuation - The independent auditor, Deloitte & Touche LLP, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2023, due to identified material weaknesses[26][439] - Critical Audit Matters identified by the auditor include the valuation of excess and obsolete inventories and the valuation of acquired customer relationship intangible assets from the Luminex FCI business acquisition[29][65] Consolidated Balance Sheet Summary (as of Dec 31) | Account | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $167,299 | $296,601 | | Total current assets | $392,060 | $454,020 | | Total assets | $494,457 | $519,476 | | Total current liabilities | $56,226 | $49,040 | | Total liabilities | $101,393 | $93,930 | | Total stockholders' equity | $393,064 | $425,546 | Consolidated Statement of Operations Summary (Year Ended Dec 31) | Account | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | :--- | | Total revenue, net | $193,015 | $164,036 | $127,950 | | Gross profit | $109,426 | $100,974 | $79,144 | | Income (loss) from operations | ($27,845) | ($1,804) | $9,157 | | Net (loss) income | ($12,148) | $2,484 | $3,027 | | Net (loss) income per share, diluted | ($0.09) | $0.02 | — | Consolidated Statement of Cash Flows Summary (Year Ended Dec 31) | Account | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,281 | ($12,231) | | Net cash used in investing activities | ($93,894) | ($55,909) | | Net cash (used in) provided by financing activities | ($41,812) | $5,513 | | Net decrease in cash, cash equivalents and restricted cash | ($131,870) | ($65,118) | Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2023, due to material weaknesses in internal control over financial reporting, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023, due to material weaknesses in internal control over financial reporting[431] - The identified material weaknesses stem from an insufficient number of qualified accounting and IT personnel and ineffective design of control activities, including general IT controls over access security and procedures for journal entries and account reconciliations[432][442][444] - A remediation plan is in place to address these weaknesses, focusing on hiring qualified personnel, improving control design with external help, and strengthening training and management review processes[435] PART III Directors, Executive Officers, Corporate Governance, and Other Matters Information for Items 10 through 14, covering governance, compensation, and related party matters, is incorporated by reference from the upcoming 2024 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's upcoming 2024 Proxy Statement[494][495] PART IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements filed under Item 8 and all exhibits, including corporate governance documents, material contracts, and SOX certifications - This section contains the list of financial statements and exhibits filed with the annual report, including key agreements such as the Asset Purchase Agreement with Luminex and the Settlement Agreement with Becton, Dickinson and Company[497][501]