# STANDARD BIOTOOLS INC. (LAB) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from STANDARD BIOTOOLS INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1162194/000095017024023845/lab-20231231.htm
Accession: 0000950170-24-023845
Filing date: 2024-03-01
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/LAB/
All MD&A years: /company/LAB/mda/
Previous year: /company/LAB/mda/fy2022/ (FY 2022)
Next year: /company/LAB/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the results of operations and financial condition of Standard BioTools. This MD&A is provided as a supplement to, and should be read together with, our consolidated financial statements and the notes to those statements included elsewhere in this Annual Report. This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future cash flow, revenue, sources of revenue and results of operations, cost of product revenue and product margin, operating and other income and expenses, unit sales and the selling prices of our products, business strategies and strategic priorities, changes in commercial and strategic focus, restructuring plan, reduction-in-force and real estate footprint reduction plans, microfluidics research and development and marketing investment reduction plans, other cost reduction initiatives, portfolio rationalization initiatives, operating discipline improvement plans, implementation of Standard BioTools Business Systems, expected costs and cost savings associated with such plans and initiatives, future product offerings, financing plans, capital allocation plans, expansion of our business, merger and acquisition opportunities, competitive position, industry environment, potential growth opportunities and drivers, market growth expectations, the effects of competition and public health crises on our business, the global supply chain, and our customers, suppliers and other business partners, and our expectations with respect to the Merger with SomaLogic , the anticipated financial impact and potential benefits to us related to the Merger, and integration of the businesses and other matters related to the Merger;. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part I, Item 1A, “Risk Factors” in this Annual Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual Report.

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Unless otherwise stated, our forward-looking statements do not reflect the potential impact of the Merger or any other future acquisitions, mergers, dispositions, joint ventures or investments we may make. You should read this Annual Report completely and with the understanding that our actual future results may be materially different from what we expect.

Overview

Standard BioTools Inc. is driven by a bold purpose – unleashing tools to accelerate breakthroughs in human health. We have an established portfolio of essential, standardized next-generation high resolution technologies that assist biomedical researchers develop medicines faster and better. Our tools are designed to provide reliable and repeatable insights in health and disease using our proprietary mass cytometry and microfluidics technologies, which are useful in proteomics and genomics that help transform scientific discoveries into better patient outcomes. We work with leading academic, government, pharmaceutical, biotechnology, plant and animal research, and clinical laboratories worldwide, focusing on the most pressing needs in translational and clinical research, including oncology, immunology, and immunotherapy.

We distribute our systems through our direct sales force and support organizations located in North America, Europe, and Asia-Pacific, and through distributors or sales agents in several European, Latin American, Middle Eastern, and Asia-Pacific countries. Our manufacturing operations are located in Singapore and Canada.

On January 5, 2024, we completed the Merger with SomaLogic, creating a leading provider of differentiated multi-omics tools for research.

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Recent Developments

Reductions in Headcount and Sub-Leases

We took additional actions in the year ended December 31, 2023 under our strategic initiative to improve operating discipline, including reductions to our headcount in Europe and additional reductions to our real estate footprint in the U.S. On February 28, 2023, we signed an agreement to sublease an additional 25% of our corporate headquarters for a period of 77 months. As a result, 50% of the space at our headquarters was subleased as of December 31, 2023. We expect to recognize $9.1 million of sublease income over the term of this new agreement, and payments commenced on December 1, 2023.

Merger

On January 5, 2024, we completed the Merger pursuant to the Merger Agreement by and among us, SomaLogic and Merger Sub, pursuant to which Merger Sub merged with and into SomaLogic, with SomaLogic surviving as a wholly owned subsidiary of Standard BioTools. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time, each share of SomaLogic common stock converted into the right to receive 1.11 shares of our common stock.

In addition, as of the Effective Time, we assumed each SomaLogic stock incentive plan, outstanding option to purchase shares of SomaLogic Stock and outstanding restricted stock units convertible into shares of SomaLogic common stock, whether vested or unvested. In addition, as of the Effective Time, each SomaLogic warrant was treated in accordance with its terms.

Financial Operations Overview

Revenue

We generate revenue primarily from sales of our products and services. Other revenue consists of revenue from product development and license agreements.

Our product revenue consists of sales of instruments and consumables. Consumables revenue is largely driven by the size of our active installed base of instruments and the level of usage per instrument. Service revenue is linked to the sales and active installed base of our instruments as our service revenue primarily consists of post-warranty service contracts, preventive maintenance plans, instrument parts, installation and training for our instruments. We expect the average selling prices of our products and services to fluctuate over time based on market conditions, product mix and currency fluctuations.

Cost of Revenue

Cost of product revenue includes manufacturing costs incurred in the production process, including component materials, labor and overhead, installation, packaging and delivery costs. In addition, cost of product revenue includes amortization of developed technology and intangibles, royalty costs for licensed technologies included in our products, warranty costs, provisions for slow-moving excess and obsolete inventory and stock-based compensation expense. Our cost of product revenue and related product margin may fluctuate depending on the capacity utilization of our manufacturing facilities in response to market conditions and the demand for our products.

Cost of service revenue includes direct labor hours, overhead and instrument parts. Our cost of service revenue and related service margin may fluctuate depending on the variability in material and labor costs of servicing.

Research and Development (R&D)

R&D expense consists primarily of compensation-related costs, product development and material expenses and other allocated facilities and information technology expenses. Our R&D efforts have focused primarily on enhancing our technologies and supporting development and commercialization of new and existing products and services. R&D expense also includes costs incurred in conjunction with research grants and product development arrangements.

Selling, General, and Administrative

SG&A expense consists primarily of personnel costs for our sales and marketing, business development, finance, legal, human resources, information technology and general management teams, as well as professional services, including legal and accounting services.

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Restructuring and Related Charges

Restructuring and related charges primarily consist of severance costs and facilities costs for floors we have subleased or have the intent to sublease (net of sublease income) under our facility lease in South San Francisco. These costs, including a reduction in force, are incurred to improve operational efficiency, achieve cost savings and align our workforce to the future needs of the business. In addition to the reduction in force, we are reducing leased office space, optimizing our manufacturing footprint and streamlining support functions.

Transaction-related expenses

Transaction-related expenses consist of costs incurred during the year ended December 31, 2023 in connection with the Merger Agreement, including legal, advisory, accounting and other transaction-related costs. We expect to continue incurring these costs through the first quarter of 2024. The costs incurred during the year ended December 31, 2022 relate to the private placement whereby the Company issued and sold an aggregate of $225.0 million of convertible preferred stock in connection with the conversion of the bridge loans, which closed on April 4, 2022.

Results of Operations

The following table presents our consolidated statements of operations and as a percentage of total revenue for the years ended December 31, 2023 and 2022 ($ in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["Revenue","","$","106,340","","","","100","%","","$","97,948","","","","100","%"],["Cost of revenue:"],["Cost of product revenue","","","44,942","","","","42","%","","","52,555","","","","54","%"],["Cost of service and other revenue","","","10,948","","","","11","%","","","8,342","","","","9","%"],["Total cost of revenue","","","55,890","","","","53","%","","","60,897","","","","63","%"],["Gross profit","","","50,450","","","","47","%","","","37,051","","","","37","%"],["Operating expenses:"],["Research and development","","","25,948","","","","24","%","","","37,382","","","","38","%"],["Selling, general and administrative","","","87,541","","","","82","%","","","102,285","","","","104","%"],["Restructuring and related charges","","","7,076","","","","7","%","","","9,732","","","","10","%"],["Transaction-related expenses","","","6,485","","","","6","%","","","3,857","","","","4","%"],["Total operating expenses","","","127,050","","","","119","%","","","153,256","","","","156","%"],["Loss from operations","","","(76,600",")","","","(72",")%","","","(116,205",")","","","(119",")%"],["Interest expense","","","(4,567",")","","","(4",")%","","","(4,331",")","","","(4",")%"],["Loss on forward sale of Series B Preferred Stock","","","\u2014","","","","\u2014","%","","","(60,081",")","","","(61",")%"],["Loss on Bridge Loans","","","\u2014","","","","\u2014","%","","","(13,719",")","","","(14",")%"],["Other income (expense), net","","","6,963","","","","6","%","","","1,408","","","","1","%"],["Loss before income taxes","","","(74,204",")","","","(70",")%","","","(192,928",")","","","(197",")%"],["Income tax benefit (expense)","","","(452",")","","","\u2014","%","","","2,830","","","","3","%"],["Net loss","","$","(74,656",")","","","(70",")%","","$","(190,098",")","","","(194",")%"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue by product type and as a percentage of total revenue were as follows ($ in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Year-over-"],["","","2023","","","2022","","","Year Change"],["Product revenue:"],["Instruments","","$","37,459","","","","36","%","","$","25,664","","","","26","%","","","46","%"],["Consumables","","","41,739","","","","39","%","","","46,790","","","","48","%","","","(11",")%"],["Total product revenue","","","79,198","","","","75","%","","","72,454","","","","74","%","","","9","%"],["Service revenue","","","25,980","","","","24","%","","","23,712","","","","24","%","","","10","%"],["Other revenue","","","1,162","","","","1","%","","","1,782","","","","2","%","","","(35",")%"],["Total revenue","","$","106,340","","","","100","%","","$","97,948","","","","100","%","","","9","%"]]
[[/GREPCENT_TABLE]]

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Total revenue grew 9% to $106.3 million for the year ended December 31, 2023, compared to 2022. The growth was primarily attributable to increased instrument placements, primarily in our proteomics end user markets, offset by declines in our genomics end user markets as the result of our decision to reorganize, simplify and reposition our business over the past year. Revenue reported for the year ended December 31, 2022 includes a $1.6 million instrument revenue reduction for a one-time reserve recorded for our discontinued LCM product line in the genomics segment.

Instrument revenue grew 46% to $37.5 million for the year ended December 31, 2023, compared to 2022. Combined consumables and services revenue has experienced a flat to moderate decrease in 2023; however, the increase in instrument revenue is expected to drive increased consumables and services pull-through based on an expanded installed base, particularly in our proteomics end user markets.

Revenue by segment and as a percentage of total revenue were as follows ($ in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Year-over-"],["","","2023","","","2022","","","Year Change"],["Proteomics revenue","","$","63,883","","","","60","%","","$","52,502","","","","54","%","","","22","%"],["Genomics revenue","","","42,457","","","","40","%","","","45,446","","","","46","%","","","(7",")%"],["Total revenue","","$","106,340","","","","100","%","","$","97,948","","","","100","%","","","9","%"]]
[[/GREPCENT_TABLE]]

Total proteomics revenue grew 22% for the year ended December 31, 2023, compared to 2022, primarily due to the timing of customer orders. Our growth in proteomics was driven by expanded adoption of our flow symmetry solution, the CYTOF XT and early traction from the April 2023 release of Hyperion XTi, our next-generation imaging solution.

Total genomics revenue decreased 7% for the year ended December 31, 2023, compared to 2022, with instrument growth offsetting declines in consumables, service, and development revenues during the year. Consumables revenue in genomics was down over 2022, driven by the impact of initial consumables purchases by our OEM partner in 2022. The anticipated decline in the genomics segment was a primary driver of our decision to reorganize, simplify and reposition this business over the past year. We have implemented our strategy to focus on growing the OEM business and manage this segment to sustainable positive contribution margin in the near-term.

Cost of Revenue

Product and service cost, gross profit, and gross margin were as follows ($ in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Year-over-"],["","","2023","","","2022","","","Year Change"],["Cost of product revenue","","$","44,942","","","$","52,555","","","","(14",")%"],["Cost of service and other revenue","","","10,948","","","","8,342","","","","31","%"],["Total cost of revenue","","$","55,890","","","$","60,897","","","","(8",")%"],["Gross profit","","$","50,450","","","$","37,051","","","","36","%"],["Gross margin","","","47.4","%","","","37.8","%","","","9.6","%"]]
[[/GREPCENT_TABLE]]

Gross profit increased by $13.4 million, or 36%, for the year ended December 31, 2023, compared to 2022. The increases in gross profit were primarily attributable to certain one-time reductions to gross profit recognized during 2022, including a $7.9 million provision for excess and obsolete inventory, a $1.6 million revenue reserve related to the discontinuation of our laser capture microdissection products during the second quarter of 2022, and cost reductions driven by the relocation of operations to lower cost regions completed at the end of 2022.

Gross profit by segment was as follows ($ in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","Year-over-"],["","","2023","","","2022","Year Change"],["Proteomics gross profit","","$","26,239","","","$","20,041","","","","31","%"],["Genomics gross profit","","","24,211","","","","17,010","","","","42","%"],["Total gross profit","","$","50,450","","","$","37,051","","","","36","%"]]
[[/GREPCENT_TABLE]]

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During 2023, the proteomics business returned to growth with a gross profit improvement of 31% for the year ended December 31, 2023, compared to 2022. The increase was primarily attributable to increased proteomics revenue of $11.4 million as well as improved manufacturing efficiencies driven by higher unit sales of instruments. Genomics gross profit improved by 42% for the year ended December 31, 2023, compared to 2022. The year over year increase was primarily attributable to one certain one-time reductions to gross profit recognized during 2022, including $7.2 million of inventory write-offs involving discontinued products and other slow-moving inventory. We expect profitable growth in the genomics business in future years. These impacts resulted in an overall increase of 36% to gross profit for the year ended December 31, 2023.

Operating Expenses

Operating expenses were as follows ($ in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Year-over-"],["","","2023","","","2022","","","Year Change"],["Research and development","","$","25,948","","","$","37,382","","","","(31",")%"],["Selling, general and administrative","","","87,541","","","","102,285","","","","(14",")%"],["Restructuring and related charges","","","7,076","","","","9,732","","","","(27",")%"],["Transaction-related expenses","","","6,485","","","","3,857","","","","68","%"],["Total operating expenses","","$","127,050","","","$","153,256","","","","(17",")%"]]
[[/GREPCENT_TABLE]]

Research and Development

R&D expense decreased by $11.4 million, or 31%, for the year ended December 31, 2023, compared to 2022. The decreases were primarily due to a $3.5 million impairment charge related to our acquisition of InstruNor AS (InstruNor) recognized during the year December 31, 2022, as well as lower compensation and consulting costs and reduced spending on laboratory supplies. These reductions were related to our strategic initiatives to reduce headcount and improve operating efficiencies by engaging in lower-cost and more focused R&D projects and activities.

Selling, General and Administrative

SG&A expense decreased by $14.7 million, or 14%, for the year ended December 31, 2023 compared to 2022. The decreases were primarily attributable to decreased salaries and benefits expense and stock-based compensation expense as a result of the restructuring plan that downsized our global workforce.

Restructuring and Related Charges

Restructuring and related charges consisted of the following (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Year-over-"],["","","2023","","","2022","","","Year Change"],["Severance and other termination benefits","","$","2,379","","","$","5,849","","","","(59",")%"],["Facilities and other","","","4,697","","","","3,883","","","","21","%"],["Total restructuring and related charges","","$","7,076","","","$","9,732","","","","(27",")%"]]
[[/GREPCENT_TABLE]]

Restructuring and related charges decreased by $2.7 million for the year ended December 31, 2023 compared to 2022, due to decreased severance costs and decreased facilities expenses (net of sublease income) as a result of the subleases that commenced in October 2022 and December 2023 as part of our restructuring plan. During the year ended December 31, 2023, we recognized $2.7 million in sublease income which offset operating lease expense within restructuring and related charges on our consolidated statements of operations. As of December 31, 2023, we expect to recognize an additional $11.9 million in sublease income over the remaining lease terms to further offset operating lease expense.

Transaction-related expenses

Transaction-related expenses increased by $2.6 million for the year ended December 31, 2023 compared to 2022. The increase was due to legal, advisory, and accounting costs incurred in connection with the Merger Agreement offset by $3.9 million in costs related to our Private Placement which closed in April 2022. The Company expects to incur additional amounts in future periods for the Merger Agreement.

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Other Non-Operating Income (Expense)

The increase in other income (expense), net of $5.6 million for the year ended December 31, 2023 compared to 2022, was primarily due to the interest earned on money market funds and short-term investments. We previously had no such investments until the second half of 2022.

The improvement in non-operating income (expense) in the year ended December 31, 2023, compared to 2022, primarily reflects losses related to the Private Placement. The Series B Convertible Preferred Stock Purchase Agreements entered into with various investors were accounted for as forward sales contracts and recorded at fair value. The loan agreements (collectively, the Bridge Loans) that we entered into on January 23, 2022 with various investors for a $25.0 million term loan were also recorded at fair value. In the year ended December 31, 2022 the $60.1 million loss on the forward sales of Series B Preferred Stock and the loss on the Bridge Loans of $13.7 million reflected the increase in the price of our common stock from January 23, 2022 (the date of the Purchase Agreements and the Bridge Loan agreements) to the Private Placement Closing Date.

Income Tax Benefit (Expense)

We recorded income tax expense of $0.5 million for the year ended December 31, 2023 and an income tax benefit of $2.8 million for the year ended December 31, 2022. The increase in our tax provision reflects the effect of our foreign operations, which reported pre-tax income in the year ended December 31, 2023 and pre-tax loss in the year ended December 31, 2022.

Our effective tax rates for both periods differ from the 21% U.S. Federal statutory tax rate primarily due to valuation allowances recorded against deferred tax assets on domestic losses and the tax rate differences between the U.S. and foreign countries.

Liquidity and Capital Resources

We have experienced operating losses since inception and have an accumulated deficit of $1.0 billion as of December 31, 2023. To date, we have funded our operating losses primarily through equity offerings, term loans, convertible notes and redeemable preferred stock. Our ability to fund future operations and meet debt covenant requirements will depend upon our level of future revenue and operating cash flow and our ability to access additional funding through either equity offerings, issuances of debt instruments or both.

Our liquidity and capital requirements depend upon many factors, including market acceptance of our products and services; effectiveness of our business improvement initiatives and restructuring programs; costs of supporting sales growth, product quality, R&D and capital expenditures, including our ERP upgrade; and costs and timing of acquiring other businesses, assets or technologies.

We continually evaluate our liquidity requirements considering our operating needs, growth initiatives and capital resources. We expect that our existing liquidity and sources of capital will be sufficient to support our operations for at least the next 12 months from the filing date of this Annual Report.

Sources of Liquidity

Our principal sources of liquidity are cash, cash equivalents and short-term investments. Our collective balances of cash, cash equivalents and short-term investments were $114.9 million at December 31, 2023 and $165.8 million at December 31, 2022. Our working capital was $48.9 million at December 31, 2023.

Giving effect to our Merger with SomaLogic on January 5, 2024, our balance of cash, cash equivalents, short-term investments and restricted cash on a pro forma basis was $565.5 million at December 31, 2023.

Capital Resources and Commitments

We enter into arrangements that serve as sources of capital and the associated contractual agreements may result in firm or contingent obligations of us. In addition to our common stockholders’ equity, our sources of capital primarily include debt, mezzanine equity and operating leases. Our Series B Preferred Stock, which is classified as mezzanine equity, contains rights that may result in their conversion to our common stock or their redemption in cash. Our term loan and operating lease arrangements require cash repayment and our convertible debt that matures on December 1, 2024 contains rights that may result in their conversion to our common stock prior to maturity. We also enter into contractual and legally binding commitments to purchase goods.

A summary of our significant future capital requirements include:

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Purchase Obligations and Commitments

Purchase obligations consist of contractual and legally binding commitments to purchase goods and services. Our purchase obligations with suppliers specify all significant terms, including fixed, minimum or variable price provisions, and the approximate timing of the transaction The majority of our contracts are cancellable with little or no notice or penalty. However, once a vendor has incurred costs to fulfill a contract with us, and which costs cannot be otherwise deployed, we are liable for those costs upon cancellation. As of December 31, 2023, these purchase commitments totaled $9.7 million. Capital expenditure commitments as of December 31, 2023 were immaterial. In addition, we have certain non-cancellable commitments with service providers that are not material in the aggregate.

In connection with the Merger, on January 5, 2024, we assumed a purchase commitment of $6.9 million to a contract manufacturer. Under the contract manufacturing agreement, we are required to spend $2.3 million per year for three years.

We have additional obligations beyond the purchase of goods and services, including the following:

•
Series B. Contingent obligations to our Series B Redeemable Preferred Stockholders. Refer to Note 9 to the consolidated financial statements for additional information.

•
Convertible Notes. The 2019 Notes mature on December 1, 2024. If the price of our common stock has equaled or exceeded 130% of the conversion price then in effect for a specified number of days as defined in the indenture, (currently $2.90 per share, subject to adjustment), we may, at our option, elect to convert the 2019 Notes in whole but not in part into our shares. If our common stock does not meet this price, we will settle the 2019 Notes in cash. The aggregate net carrying value of the 2014 and 2019 Notes was $55.1 million at December 31, 2023, of which $54.5 million is due and payable in 2024. In addition, holders may require the Company to repurchase all or a portion of their 2014 Notes on each of February 6, 2024 and February 6, 2029, at a repurchase price in cash equal to 100% of the principal amount of the 2014 Notes plus accrued and unpaid interest. On February 6, 2024, one holder of the 2014 Notes exercised their repurchase right, and we repurchased an immaterial amount of principal and accrued interest. Refer to Note 6 of the consolidated financial statements for additional information.

•
Term Loan. The principal amount of the term loan advances was repayable beginning on August 1, 2023, in twenty-four equal monthly installments. Principal amounts due under the Term Loan, including end-of-term fees, totaled $8.4 million at December 31, 2023, of which $5.0 million is due and payable in 2024. However, if the principal amount of the Company’s convertible debt exceeds $0.6 million as of June 1, 2024 or if the maturity date of the 2019 Notes has not been extended beyond January 1, 2026 by June 1, 2024, then the Term Loan will be due in full on June 1, 2024. Refer to Note 6 of the consolidated financial statements for additional information.

•
Leases. Future payments for operating lease obligations (net of sublease income) at December 31, 2023 totaled $36.8 million, of which $5.2 million is expected to be paid in 2024. Refer to Note 7 of the consolidated financial statements for additional information.

•
Additional information on our obligations under license and patent agreements, and indemnification agreements entered into in the ordinary course of business is provided in Note 7 to the consolidated financial statements .

The expected timing of payments of our obligations is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the timing of receipt of goods or services, or changes to agreed-upon amounts for some obligations. In addition, some of our future purchasing needs are not current contractual obligations and are therefore not included in the commitment amounts above as they are not handled through binding contracts or are not fulfilled by vendors on a purchase order basis within short time horizons.

Cash Flow Activity

Our cash flow summary was as follows ($ in thousands):

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["Cash flow summary:"],["Net cash used in operating activities","","$","(43,287",")","","$","(89,370",")"],["Net cash provided by (used in) investing activities","","","20,237","","","","(88,127",")"],["Net cash provided by (used in) financing activities","","","(6,809",")","","","230,758"],["Effect of foreign exchange rate fluctuations on cash and cash equivalents","","","34","","","","(404",")"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","$","(29,825",")","","$","52,857"]]
[[/GREPCENT_TABLE]]

We derive cash flows from operations primarily by collecting amounts due from sales of our products and services, and fees earned under our product development and license agreements. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses and working capital to support the business. We have historically experienced negative cash flows from operating activities as we have expanded our business and built our infrastructure, domestically and internationally.

In the year ended December 31, 2023, we used $23.1 million of net proceeds from the sales and maturities of short-term investments to help fund $43.3 million of net cash used in operating activities, $5.4 million of common stock repurchases and $2.1 million of term loan repayments.

In the year ended December 31, 2022, we used $230.7 million of net debt and Series B Preferred Stock proceeds in part to fund $89.4 million used in operating activities, the purchase of short-term investments of $137.3 million and a $52.9 million increase in cash, cash equivalents and restricted cash.

Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 decreased by $46.1 million compared to the same period in 2022. The decrease reflects a lower net loss and adjustments for non-cash items, which collectively used $45.1 million in the year ended December 31, 2023 compared to $73.9 million used in the same period of 2022, and changes in net operating assets and liabilities which provided $1.8 million and used $15.5 million in the years ended December 31, 2023 and 2022, respectively.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2023 was $20.2 million compared to $88.1 million used in the year ended December 31, 2022. The year ended December 31, 2023 primarily reflects $23.1 million of proceeds from sales and maturities of short-term investments, net of purchases. Net proceeds from the Private Placement issuance and the Bridge Loans were used to purchase short-term investments of $137.3 million during the year ended December 31, 2022.

Financing Activities

Financing activities used cash of $6.8 million for the year ended December 31, 2023 and provided cash of $230.8 million in the same period of 2022. These changes in cash from financing activities primarily reflect $5.4 million of common stock share repurchases and $2.1 million of term loan repayments in the year ended December 31, 2023, and $25.0 million of borrowings under the Bridge Loans and the repayment of $6.8 million borrowed under our Revolving Credit Facility as well as $225.0 million proceeds received from the issuance of Series B Preferred Sock less payments of $12.5 million in equity issuance costs in the year ended December 31, 2022.

Critical Accounting Estimates

The consolidated financial statements and related notes included in this Annual Report are prepared in accordance with U.S. GAAP. Preparing U.S. GAAP financial statements requires the use of estimates and assumptions to determine the value of the assets, liabilities, revenues and expenses reported on the consolidated balance sheets and statements of operations. We develop these estimates after considering historical transactions, the current economic environment and various other assumptions considered reasonable under the circumstances. Actual results may differ materially from these estimates and judgments. Accounts that rely heavily on estimated information to determine their values include revenue, trade receivables, inventories, right-of-use assets, goodwill, long-lived intangible assets, lease liabilities, and preferred equity. Refer to Note 2 to our consolidated financial statements for further information on our most significant accounting policies.

Revenue

We recognize revenue based on the amount of consideration we expect to receive in exchange for the goods and services we transfer to the customer. Our commercial arrangements typically include multiple, distinct products and services, and we allocate purchase

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consideration to the products and services based on each item’s relative standalone selling price. Standalone selling prices (SSP) are generally determined using observable data from recent transactions. In cases where sufficient data is not available, we estimate a product’s SSP using a cost plus margin approach or by applying a discount to the product’s list price.

We have entered and may continue to enter into development agreements with customers that require us to recognize revenue using an input method that determines the extent of our progress toward completion by comparing the actual costs incurred to the total expected cost. As part of the accounting for these arrangements, we develop estimates and assumptions that require judgment to determine the transaction price and progress towards completion. We review these estimates at the end of each reporting period using the best available information, revise the estimates as necessary, and recognize revenue commensurate with our progress toward completion.

Inventories

Inventories are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. We regularly review inventory for excess and obsolete products and components. Significant judgment is required in determining provisions for slow-moving, excess, and obsolete inventories which are recorded when required to reduce inventory values to their estimated net realizable values based on product life cycle, development plans, product expiration, and quality issues.

Goodwill and Long-Lived Assets

Assessing goodwill and long-lived assets for impairment requires significant judgment as it involves selecting an appropriate valuation method, identifying reporting units, assigning assets and liabilities to the reporting units, and estimating future cash flows, remaining service lives, revenue growth rates, terminal values and discount rates. Refer to Note 4 to the consolidated financial statements for additional information.

Series B Redeemable Preferred Stock

The Purchase Agreements (as defined in Note 9 to the consolidated financial statements) for the issuance of shares of Series B Preferred Stock were accounted for as forward sales contracts at fair value in accordance with ASC 480, Distinguishing Liabilities from Equities. The Series B Preferred Stock was treated as mezzanine equity and recorded at its fair value upon issuance, net of issuance costs due to its redemption features, such as change of control and liquidation preference, which are outside of the Company’s control. Subsequent remeasurement of the Series B Redeemable Preferred Stock amount presented within mezzanine equity to its redemption amount is not required since it is not probable that the instrument will become redeemable. Mezzanine equity which has characteristics of both liabilities and shareholders’ equity (deficit) is presented separately on the consolidated balance sheets between these two items because it has some characteristics of both. Refer to Note 9 to the consolidated financial statements for additional information.

Stock-Based Compensation

The Company recognizes compensation costs for all stock-based awards, including stock options, Restricted Share Units (RSUs), Performance Share Units (PSUs) and stock purchased under the Company's Employee Share Purchase Plan (ESPP), based on the grant date fair value of the award. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service periods for non-performance-based awards. For RSUs, fair value is measured based on the closing fair market value of the Company's common stock on the date of grant. For PSUs with a market condition, the Company uses a Monte Carlo simulation pricing model to incorporate the market condition effects at the grant date. The Monte Carlo pricing model requires inputs which are subjective and generally requires judgment. For PSUs with performance conditions, stock-based compensation expense is recognized over the requisite service period when the achievement of each individual performance goal becomes probable.

The fair value of options and stock purchases under ESPP on the grant date is estimated using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions, including expected term, volatility, risk-free interest rate and the fair value of the Company's common stock. These assumptions generally require judgment. Refer to Note 11 to the consolidated financial statements for additional information.

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Recent Accounting Changes and Accounting Pronouncements

Adoption of New Accounting Guidance

None.

Recent Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our consolidated financial statements included in this Annual Report.