Palladyne AI Corp. (PDYN) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. In addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Part I Item 1A Risk Factors and elsewhere in this Annual Report. See also Part I Special Note Regarding Forward-Looking Statements in this Annual Report.
Overview
Our mission is to deliver software to our customers that enhances the utility and functionality of third-party stationary and mobile robotic systems by enabling these systems to quickly observe, learn, reason and act in structured and unstructured environments. Our AI/ML Software Platform is being designed with artificial intelligence (AI) and machine learning (ML) techniques to enable robotic systems to perceive their environment and quickly adapt to changing circumstances by generalizing (i.e., learning) from their past experience using dynamic real-time operations “on the edge” (i.e., on the robotic system) without extensive programming and with minimal robot training. We believe this “human-like” ability to learn and adapt will be a key differentiator in helping our customers maintain optimal productivity in dynamic or unstructured environments, where new situations and unexpected challenges are more likely to cause delays and costly downtime. Our value proposition is further enhanced relative to other competitive solutions because robotic systems using our AI/ML Software Platform are not required to be continuously connected to the cloud for our software to function, thereby reducing the performance issues associated with poor connectivity and latency typically associated with processing in the cloud. Our approach also reduces the expense typically associated with transmitting large amounts of data to and from the cloud.
As a pioneer in the robotic systems industry, we benefit from both experiences and lessons gained from our 30-plus years, as well as significant investment in our internal research and development efforts. Software has been an integral part of our development efforts over the years. Our vision for our AI/ML Software Platform began in 2017 as a foundational technology to enhance training for the autonomous operation of our own internally developed hardware solutions and progressed to our first CYTAR (Cybernetic Training for Autonomous Robots) government project in 2019. Significant design and development work began in 2020 when our Chief Technology Officer, Dr. Denis Garagic, joined our team. We have since continued to develop our AI/ML software both for the U.S. Department of Defense and in connection with our development of commercial robotic systems. As previously disclosed, in November 2023, we decided to suspend our hardware product development efforts to focus on commercializing our AI/ML Software Platform, although some de minimis hardware-related research and development efforts continue. By de-coupling our AI/ML Software Platform from our own hardware systems and applying it to a wide range of third-party robotics systems, from industrial robots and cobots to mobile systems potentially including drones, autonomous mobile robots (AMR), autonomous underwater vehicles (AUV) and remotely operated vehicles (ROV), we believe we can reach a much broader market more quickly and better utilize our remaining cash resources.
We are designing our AI/ML Software Platform to be hardware agnostic in order to be compatible with most industrial robots being sold today and to support specific types of commercially available robots with additional development and the necessary application programming interface (API). The AI/ML Software Platform is expected to enable robotic systems to perform tasks that involve variations in the environment and the objects being manipulated by the robot. Specifically, we expect our AI/ML Software Platform to incorporate internal and external environmental inputs that allow robots to comprehend their environment, determine reasonable behavior given these inputs and to act in real time to achieve the expected task. Each newly learned task will then be incorporated and used to perform future tasks. We believe this closed-loop autonomy approach is the key to how our software can expedite robot training, expand the tasks that a robot can perform, reduce costly workflow stoppages, mitigate downtimes and reduce human labor requirements.
As a result of our refined strategy we are optimizing our organization in pursuit of this AI/ML Software Platform opportunity and are reducing costs, including our recent RIFs, shifting all operations to the Salt Lake City, Utah location and winding down substantially all of our operations in Pittsburgh, Pennsylvania. For additional information around the risks associated with our strategy decision-making see Part I Item 1A Risk Factors “Due to our limited resources and access to capital, and our failure to properly estimate the time and expense required to commercialize our hardware-centric industrial robotics solutions, we must make decisions on the allocation of resources and have discontinued development and commercialization of certain products; these decisions may prove to be wrong and may adversely affect our business.”
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Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part I Item 1A Risk Factors of this Annual Report on Form 10-K.
Development, Testing and Commercial Launch of our AI/ML Software Platform
We currently expect to derive revenue from our AI/ML Software Platform, which is in its development phase. Prior to commercialization, we must complete the development and testing of our product. Whether we are successful depends on many factors, including those discussed under Part I Item 1A Risk Factors “Risks Related to Our Business.” Such risks may result in delay of the anticipated commercial launch of our software platform, which would adversely affect our financial condition and operating results.
Financing of Operations
Prior to commercialization, we must complete the development and testing of our AI/ML Software Platform. As a result, we will use our cash on hand to develop our software platform and fund operations as we seek to commercialize and achieve revenue from the sale of the product. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to sell our software products and thereby recognize associated revenue, capital and human capital requirements to develop a commercial version of our software platform prior to receiving payments sufficient to cover our costs and our ability to lower product costs as volumes increase. In addition, we have taken numerous steps to manage our use of cash. For example, on July 12, 2023 and on November 14, 2023 we announced reductions in force intended to further conserve our current cash resources and manage operating expenses. The majority of the cash payments related to the expenses from the RIF announced on July 12, 2023 were paid out during the third quarter of 2023. The majority of the cash payments related to the RIF announced on November 14, 2023 were paid out during the fourth quarter of 2023 and the first quarter of 2024. The November RIF is expected to be completed by the end of the first quarter of 2024. We believe we have sufficient liquidity to operate for at least the next twelve months without the need to raise additional capital. However, we may need to seek additional financing during that time to bolster our cash reserves and increase our ability to continue to pursue our business objectives. As a result, we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when we consider market conditions are good or a favorable opportunity exists. Any delays in the successful commercialization and sales of our AI/ML Software Platform will negatively impact our ability to generate revenue, our profitability, our cash flows and our overall operating performance and result in the need to raise additional capital sooner than expected.
Customer Demand
Although demand for AI/ML platforms and applications has grown in recent years, the market for these platforms and applications continues to evolve. The market demand for our software platform is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate. While we believe that our AI/ML Software Platform will provide significant benefits and return on investment to customers, as it is a new technology and product, we are dependent on customers who are willing to adopt, purchase, and implement new technologies and products. If customer demand does not develop as expected or we do not accurately forecast pricing, adoption rates and sales cycles for our AI/ML Software Platform, our business, results of operations and financial condition will be adversely affected.
Continued Investment and Innovation
We are a pioneer in the robotic systems industry and benefit from lessons learned over 30-plus years and significant investment in research and development in our proprietary technologies. Through our development efforts on our hardware products such as the Guardian XO, Guardian XT, Guardian XM and Guardian Sea Class, we have developed a significant amount of advanced technology that we are leveraging to develop our AI/ML Software Platform. We believe our financial performance is significantly dependent on our ability to successfully commercialize our advanced AI/ML technologies and further dependent on the investments we make in research and development. It is important that we continually identify and respond to rapidly evolving customer requirements and competitive threats, develop and introduce innovative products, enhance our products and generate active market demand for our products. If we fail to do this, our market position and revenue may be adversely affected, and our investments in these technologies will not be recovered.
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Geopolitical and Macro-economic Environment
Geopolitical and macro-economic factors, such as inflation, interest rates, oil prices, unemployment rates, international conflicts, such as the wars between Israel and Hamas and between Russia and Ukraine, volatility in the stock market and political or social unrest, can have significant impacts on economic activity, which in turn could affect demand for our AI/ML Software Platform or our ability to cost-effectively develop and sell our software platform. Among other things, these and similar factors can affect our ability to hire or retain qualified personnel, our labor and materials costs, the prices we charge for our software platform and the budgets of our customers and their expected return-on-investment from the purchase of a license for our software platform. Many of these factors are outside of our control but can have a significant impact on our business success and operating results. If we are unable to manage our business successfully in response to any such factors, our business and results of operations would be adversely affected.
Basis of Presentation
Currently, we conduct business through one operating segment. All long-lived assets are maintained in, and all losses are attributable to, the United States of America. See Note 13, Segment Information, in the accompanying consolidated financial statements for more information about our operating segment.
Components of Results of Operations
Revenue, net
We historically derived our revenue from two sources. First, we enter into research and development agreements primarily relating to the commercialization of our products. We expect to continue to derive revenue from research and development agreements in future periods. Product development contract revenue consists of revenue arising from different types of contractual arrangements, including cost-type contracts and fixed-price contracts.
Second, we have historically sold our products and related parts and repair services. Product revenue primarily consists of sales of our products. Due to our recent shift in focus away from sales of our hardware products and to licensing of our AI/ML Software Platform, in the future we expect to derive revenue from licensing fees. We have not yet recognized any such licensing revenue.
Product Development Contract Revenue
Cost-type contracts – Research, development and/or testing service contracts, including cost-plus-fixed-fee and time and material contracts, relate primarily to the development of our robotics systems, software and related technology. Cost-type contracts are generally entered into with the U.S. government. These contracts are billed at cost plus a margin as defined by the contract and Federal Acquisition Regulation (“FAR”). The FAR establishes regulations around procurement by the government and provides guidance on the types of costs that are allowable in establishing prices for goods and services delivered under government contracts. Revenue on cost-type contracts is recognized over time as goods and services are provided.
Fixed-price contracts – Fixed-price development contracts relate primarily to the development of technology in the area of robotic systems. Fixed-price development contracts generally require a significant service of integrating a complex set of tasks and components into a single deliverable. Revenue on fixed-price contracts is generally recognized over time as goods and services are provided. To the extent our actual costs vary from the fixed fee, we will generate more or less profit or could incur a loss. In accordance with Accounting Standards Codification 606, for fixed price contracts, we will recognize losses at the contract level in earnings in the period in which they are incurred.
Product Revenue
Product revenue has related to sales of our products, and certain miscellaneous parts, accessories and repair services. We have generally provided a limited one-year warranty on hardware product sales. Product warranties are considered assurance-type warranties and are not considered to be separate performance obligations. Product revenue is recognized at the point in time when ownership of the goods is transferred, generally at the time of shipment to the customer. At the time product revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance.
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Operating Expenses
Cost of Revenue
Our cost of revenue consists of direct and overhead expenses related to either the sale of our products or our product development contract revenue. Direct expenses include direct labor used in the production of a product or in our product development contracts, benefits expense associated with direct labor and materials directly tied to our product sale or product development contracts. Overhead expenses include allocable supervisory labor, benefits expense associated with supervisory labor, allocation of facilities expense including rent and utilities and allocation of IT labor support and equipment. Overhead expenses not allocated to cost of revenue are expensed across research and development, general and administrative and sales and marketing expenses, as applicable.
Research and Development
Research and development expenses are mainly comprised of costs from the continuing development and refinement of robotic systems, which are now suspended, and our AI/ML Software Platform and the continuing research and development costs associated with future products. These expenses include labor and related benefit expenses, materials and supplies used in our laboratories, patent expenses and related overhead expenses. Our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
General and Administrative
Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, people success and other administrative teams, as well as certain executives. In addition, general and administrative expenses include insurance, public company compliance related costs, including outside legal and accounting expenses, other professional fees, facilities and IT expense not allocated to other operating expense categories, and related overhead expense.
Sales and Marketing
Our sales and marketing expenses arise from our activities relating to our efforts to market and sell our products and services. The expenses consist primarily of labor, benefits and employee-related costs, marketing programs and events, customer service, lead generation fees, product marketing expense, public relations fees and travel associated with sales generation and marketing support and related overhead expense.
We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness. The trend and timing of sales and marketing expenses will depend in part on the timing of the commercial launch of our products and their reception by the market. As our product sales grow, we expect that sales and marketing expenses will increase in absolute dollars in future periods; however, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Intangible Amortization Expense
Amortization of intangible assets primarily consists of amortization of identified finite-lived trade name and trademarks, developed technology, and customer relationship assets that were allocated a portion of the purchase price from the acquisition of RE2. These costs are amortized on a straight-line basis over their expected useful lives.
Asset Write-down and Restructuring
Asset write-down and restructuring expenses consist primarily of severance and benefit payments, and acceleration of stock-based compensation expense related to the RIFs announced during 2023, the write-down of inventory, accelerated amortization of our intangible assets, accelerated depreciation of our property, plant and equipment and the write-off of certain assets as a result of our product development reprioritization and pivot in strategy.
Goodwill Impairment
Goodwill represents the excess of consideration transferred over the fair value of tangible and identifiable intangible net assets acquired and the liabilities assumed in a business combination. All of our goodwill was recognized from the acquisition of RE2. During the fourth quarter of 2022, due to the sustained decreases in our publicly quoted share price and market
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capitalization, we performed a quantitative goodwill impairment test. Based on the results of the quantitative goodwill impairment assessment we concluded that the carrying value of our goodwill exceeded its fair value and that our goodwill was fully impaired as of December 31, 2022.
Other Income (Loss)
Interest Income, net
Interest income consists primarily of interest received or earned on our cash and marketable securities balances. Portions of our cash resided in money market investments and in U.S. Treasury securities at various points during the year.
Gain (Loss) Warrant Liability
Gain (loss) on warrant liability consists of the change in fair value of the private placement warrants we assumed as part of the Business Combination.
Other Income, net
Other income, net consists primarily of other miscellaneous non-operating items such as proceeds from the CARES Act employee retention credit.
Income Tax Benefit (Expense)
Income taxes consist of taxes currently due plus deferred income taxes related primarily to differences between the tax bases and financial reporting bases of assets and liabilities. The deferred income taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Results of Operations
The discussion below regarding our results of operations for the twelve months ended December 31, 2022, includes the financial results of RE2 beginning on the acquisition date of April 25, 2022 through December 31, 2022. Our results do not include RE2’s financial information prior to the acquisition.
Comparison of the Years Ended December 31, 2023 and 2022
Revenue, net
The following table presents our revenue for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | 2023 vs. 2022 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Product Development Contract Revenue | $ | 5,256 | $ | 14,239 | $ | (8,983 | ) | (63 | )% | |||||||
| Product Revenue | 890 | 330 | 560 | 170 | % | |||||||||||
| Revenue, net | $ | 6,146 | $ | 14,569 | $ | (8,423 | ) | (58 | )% |
Revenue decreased by $8.4 million, or 58%, from $14.6 million in the year ended December 31, 2022, to $6.1 million in the year ended December 31, 2023, as explained below.
Product Development Contract Revenue
Revenue derived from product development contracts decreased by $9.0 million, or 63%, from $14.2 million for the year ended December 31, 2022 to $5.3 million for the year ended December 31, 2023. The decrease was primarily due to the completion of certain product development contracts during 2023 that have not yet been replaced with new contracts. We expect future revenue from product development contracts to fluctuate due to the timing of additional development contracts signed and the completion of existing contracts. For the time being, we intend to take on only those development contracts that we believe support and contribute to our AI/ML Software Platform development efforts under our refined sales and product development strategy.
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Product Revenue
Revenue derived from product sales increased by $0.6 million, or 170%, from $0.3 million for the year ended December 31, 2022 to $0.9 million for the year ended December 31, 2023. The increase was primarily due to the sale of two Guardian Sea Class systems during 2023.
Operating Expenses
The following table presents our operating expenses for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | 2023 vs. 2022 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Cost of revenue | $ | 5,041 | $ | 11,614 | $ | (6,573 | ) | (57 | )% | |||||||
| Research and development | 39,012 | 34,144 | 4,868 | 14 | % | |||||||||||
| General and administrative | 31,454 | 63,480 | (32,026 | ) | (50 | )% | ||||||||||
| Sales and marketing | 10,828 | 9,949 | 879 | 9 | % | |||||||||||
| Intangible amortization expense | 2,821 | 2,184 | 637 | 29 | % | |||||||||||
| Asset write-down and restructuring | 37,946 | — | 37,946 | *NM | ||||||||||||
| Goodwill impairment | — | 70,236 | (70,236 | ) | (100 | )% | ||||||||||
| Total operating expenses | $ | 127,102 | $ | 191,607 | $ | (64,505 | ) | (34 | )% |
*NM - Not Meaningful
Cost of Revenue
Cost of revenue decreased by $6.6 million, or 57%, from $11.6 million for the year ended December 31, 2022, to $5.0 million for the year ended December 31, 2023. Cost of revenue decreased mainly due to decreased labor and material expense charged to product development contracts during the year ended December 31, 2023.
Research and Development
Research and development expenses increased by $4.9 million, or 14%, from $34.1 million for the year ended December 31, 2022, to $39.0 million for the year ended December 31, 2023. The increase was driven primarily by an increase in labor and overhead expense as a result of increased headcount (due in part to the RE2 acquisition) and the shift of labor from cost of revenue to research and development due to the timing of new product development contracts being signed and the focus on new product development and commercialization efforts. As a result, allocated overhead and fringe related costs also increased due to the increase in labor costs. We expect that future research and development costs will decrease significantly due to the reduction in headcount actions taken during 2023 and early 2024 and other cost savings resulting from the pivot in strategy to prioritize development of our AI/ML Software Platform and discontinue substantially all other research and development efforts.
General and Administrative
General and administrative expenses decreased by $32.0 million, or 50%, from $63.5 million for the year ended December 31, 2022, to $31.5 million for the year ended December 31, 2023. General and administrative expense decreased primarily due to reduced stock-based compensation expense of $28.4 million due to certain awards vesting in the prior year. In addition to the decrease in stock-based compensation expense, business insurance expenses decreased during the current year period to more favorable rates resulting from the latest renewal and legal fees decreased in comparison to the prior year primarily due to the lack of acquisition-related legal expenses arising from the RE2 acquisition during the prior year period. We also expect that future general and administrative expenses will decrease significantly due to the reduction in headcount actions taken during 2023 and early 2024 and other cost savings resulting from our pivot in strategy to prioritize development of our AI/ML Software Platform with a lower overall cost structure.
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Sales and Marketing
Sales and marketing expenses increased by $0.9 million, or 9%, from $9.9 million for the year ended December 31, 2022, to $10.8 million for the year ended December 31, 2023. This increase was driven by an increase in professional service fees related to third-party platform expense utilized in data management of our products and services, increased promotional and event expense during the current year period, and increased expenses related to additional headcount due in part to our RE2 acquisition. Even considering the expected launch of the AI/ML Software Platform, we expect that future sales and marketing expenses will decrease significantly due to the reduction in headcount actions taken during 2023 and other cost savings resulting from our pivot in strategy to prioritize development of our AI/ML Software Platform with a lower overall cost structure.
Intangible Amortization Expense
Intangible amortization expenses increased by $0.6 million, from $2.2 million for the year ended December 31, 2022, to $2.8 million for the year ended December 31, 2023. The increase in intangible amortization expense is due to the recognition of amortization expenses on identified intangible assets recorded as part of the RE2 acquisition.
Asset Write-down and Restructuring
Asset write-down and restructuring expenses were $37.9 million for the year ended December 31, 2023, which includes a write-down of inventory of $11.3 million, a $17.6 million charge for the accelerated amortization and write-off of our intangibles and certain other assets as a result our product development reprioritization, $1.2 million of accelerated depreciation related to the shutting down our facilities in Pittsburgh, Pennsylvania, $0.5 million for contract restructuring accruals, $2.9 million in severance and benefit payments, and $4.4 million due to the acceleration of stock-based compensation expense resulting from the early termination of our redemption right over certain shares held by our former Chief Operating Officer in connection with the termination of his employment.
Goodwill Impairment
During the year ended December 31, 2022, we fully impaired our goodwill and recorded a non-cash goodwill impairment of $70.2 million. The non-cash goodwill impairment was primarily driven by the sustained decrease in our publicly quoted share price and market capitalization.
Other Income (Loss)
The following table presents other income (loss) for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | 2023 vs. 2022 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Other income | ||||||||||||||||
| Interest income, net | $ | 3,294 | $ | 1,831 | $ | 1,463 | 80 | % | ||||||||
| Gain on warrant liability | 162 | 13,442 | (13,280 | ) | (99 | )% | ||||||||||
| Other income, net | 1,914 | 743 | 1,171 | 158 | % | |||||||||||
| Total other income | $ | 5,370 | $ | 16,016 | $ | (10,646 | ) | (66 | )% |
Other income decreased by $10.6 million for the year ended December 31, 2023 as compared to the prior year period as a result of decreased unrealized mark-to-market gains on our outstanding private placement warrants, partially offset by increased interest income from our investments in marketable securities and increased other income related to employee retention credit refunds received during the current year.
Income Tax Benefit (Expense)
Income tax benefit decreased to $7,000 for the year ended December 31, 2023, compared to $3.9 million in income tax benefit for the year ended December 31, 2022. The income tax benefit recorded during the year ended December 31, 2022 was due to the removal of a portion of our previously recorded valuation allowance on our net deferred tax assets associated with net deferred tax liabilities recorded as part of the acquisition of RE2, resulting in an income tax benefit recognized during the prior year period.
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Backlog and Total Estimated Contract Value
Our backlog, as of December 31, 2023, was $8.1 million, $6.5 million of which was funded and $1.6 million of which was unfunded. Our backlog is equal to our remaining performance obligations under contracts or the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. Our total estimated contract value, which combines backlog with estimated potential contract value, including unexercised options from existing firm contracts, was $18.1 million as of December 31, 2023.
Liquidity and Capital Resources
We currently use cash to fund operations and capital expenditures and meet working capital requirements. As of December 31, 2023, we had $39.1 million in cash, cash equivalents and marketable securities. We believe that our cash, cash equivalents and marketable securities on hand will be sufficient to support operations, working capital and capital expenditure requirements for at least the next 12 months from the date of this Report.
The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to develop and deliver our commercial AI/ML Software Platform and thereby recognize associated revenue and capital requirements to develop our commercial AI/ML Software Platform prior to receiving payments sufficient to cover our costs. Any delays in the successful commercialization of our software product will negatively impact our ability to generate revenue, our profitability and our overall operating performance.
In addition, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, which may require acquisition capital as well as operational capital for these acquisitions or arrangements. We may be required to seek additional equity or debt financing to facilitate these arrangements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired or needed, our business, results of operations and financial condition would be materially and adversely affected.
If additional funds are required to support our working capital requirements, for acquisitions or for other purposes, we may seek to raise funds through additional debt or equity financings or from other sources. We have taken numerous steps to manage our use of cash, including conducting the RIFs announced on July 12, 2023 and November 14, 2023, and other related actions, and believe we have sufficient capital to fund our business for at least the next 12 months without seeking additional capital. However, we may need to seek additional financing during that time to bolster our cash reserves and increase our ability to continue to pursue our business objectives. As a result, we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when we consider market conditions are good or a favorable opportunity exists. Any delays in the successful commercialization and sales of our software platform will negatively impact our ability to generate revenue, our profitability and our overall operating performance and result in the need to raise additional capital sooner than expected. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur additional interest expense. Additional financing may not be available at all or, if available, may not be available on terms favorable to us or that we find acceptable. For additional information around the risks associated with our capital needs see Part I Item 1A Risk Factors “Our business plans require a significant amount of capital. Our future capital needs may require us to sell additional equity or debt securities that may dilute our stockholders or introduce covenants that may restrict our operations or our ability to pay dividends. If we require additional capital and are not able to secure new funding, we may not be able to continue our business operations.”
As of December 31, 2023, our total minimum lease payments are $15.6 million, of which $2.0 million are due in the next 12 months. For detail regarding our lease obligations refer to Note 4 Leases to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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Cash Flows
The following table summarizes our cash flow data for the periods presented:
| Year Ended December 31, | 2023 vs. 2022 Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | Change | % Change | ||||||||||||
| Net cash provided by (used in): | ||||||||||||||||
| Net cash used in operating activities | $ | (76,620 | ) | $ | (65,391 | ) | $ | (11,229 | ) | 17 | % | |||||
| Net cash provided by (used in) investing activities | 64,682 | (109,045 | ) | 173,727 | (159 | )% | ||||||||||
| Net cash used in financing activities | (82 | ) | (7,519 | ) | 7,437 | (99 | )% | |||||||||
| Net decrease in cash, cash equivalents | $ | (12,020 | ) | $ | (181,955 | ) | $ | 169,935 | (93 | )% |
Net Cash Used in Operating Activities
Cash flows used in operating activities during the twelve months ended December 31, 2023, increased by $11.2 million to $76.6 million from $65.4 million during the same period in 2022. The increase to net cash used in operating activities was primarily attributable to a net decrease of $50.2 million in non-cash expenses driven mainly by decreases in goodwill impairment and stock-based compensation, offset partially by a $41.5 million decrease to net loss, a decrease to gains on warrant liability revaluation and an increase in asset write-down expenses. Additionally, net cash used in operating activities related to changes in operating assets and liabilities increased by $2.5 million, driven mainly by increased inventory purchases, offset partially by decreases in unbilled receivables.
Net Cash Provided by (Used in) Investing Activities
Our net cash provided by investing activities during the twelve months ended December 31, 2023 increased by $173.7 million. The increase in cash provided by investing activities is predominantly due to $65.5 million of maturities of marketable securities, net of purchases, during the twelve months ended December 31, 2023, as compared to the $77.9 million of purchase of marketable securities, net of maturities, and $29.7 million of net cash that was included as part of the purchase consideration for the RE2 acquisition during the twelve months ended December 31, 2022.
Net Cash Used In Financing Activities
Our net cash used in financing activities during the twelve months ended December 31, 2023 decreased by $7.4 million as compared to the prior year period. The decrease in financing activities was mainly due to a $8.0 million decrease in funds used to remit taxes due upon vesting of equity awards resulting from the withholding of shares valued at such amount from the applicable employees, consultants or directors, to cover such taxes.
Emerging Growth Company Status
Section 102(b)(1) of the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act, and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of Common Stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2025, and we expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:
Revenue Recognition
We have historically recognized revenue from our products and from contractual arrangements to perform product development contract services that are fully funded by our customers. We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue from product development contracts is recognized over time as products and services are provided. For fixed priced contracts we measure progress toward satisfaction of performance obligations using costs incurred to date relative to total estimated costs (“cost-to-cost”). Research and development contracts may last multiple years and estimation of the total transaction price and expected cost requires management’s judgment. Based on the nature of the Company’s research and development contracts, the work to be performed is often complex and may involve new processes, procedures, and tasks which creates uncertainty in estimating contract costs. All estimates impacting revenue recognition, including estimates of total expected costs, or Estimates at Completion, are reviewed on a periodic basis, at least quarterly.
For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition.
Stock-Based Compensation
We use the fair value approach to account for stock-based compensation in accordance with current accounting guidance and recognize stock-based compensation expenses over the period the recipient is required to provide service in exchange for the award. The Black-Scholes option pricing model is used to estimate the fair value of stock options, which requires the use of a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The fair value of restricted stock grants is based on the closing market price of our stock on the date of grant less the expected dividend yield. For awards with market based vesting conditions, we estimate the grant date fair value using a Monte-Carlo simulation model or other similar valuation model. These models require the use of assumptions such as the risk-free rate, expected volatility, expected dividends and the correlation coefficient. As we accumulate additional employee stock-based awards data over time and as we incorporate market data related to our common stock, we may calculate significantly different volatilities and expected lives, which could materially impact the valuation of our stock-based awards and the stock-based compensation expense that we will recognize in future periods.
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.