What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-07 · 162 added, 145 removed, 238 unchanged (56% of the section changed)

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We also use U.S.-based third-party contract manufacturers for reagent manufacturing.

Our total revenue for the six months ended June 30, 2020 was $53.7 million compared to $58.3 million for the six months ended June 30, 2019.

Our total revenue for the nine months ended September 30, 2020 was $93.5 million compared to $84.8 million for the nine months ended September 30, 2019.

Our total revenue was $117.2 million in 2019 and $113.0 million in 2018.

We have incurred significant net losses since our inception in 1999 and, as of June 30, 2020, our accumulated deficit was $652.7 million.

We have incurred significant net losses since our inception in 1999 and, as of September 30, 2020, our accumulated deficit was $658.7 million.

Recent Developments

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To date we have not needed to take advantage of extended SEC filing deadlines.

While Fluidigm is a designated essential business, widespread global adoption of work-from-home and shelter-in-place orders has resulted in a significant slowdown in customer activities.

We estimate that 30-40% of our customers are either closed or working at reduced capacity as of the end of June 2020 because of the COVID-19 pandemic, compared to 60-70% in April 2020.

These closures and slowdowns have resulted in lower than expected sales of our instrument systems, IFCs, assays, and reagents.

Many of our customers have limited abilities to accept, or prepare facilities to accept, non-critical instrumentation or are limited in their ability continue their lab research activities.

We are seeing and expect to continue to see near-term COVID-19-related priorities temporarily displacing longer term projects and research activities.

Fluidigm has been working with a growing body of researchers around the world who are aggressively responding to the pandemic.

In June 2020, we filed for emergency use authorization (EUA) from the U.S.

Food and Drug Administration (FDA) for our saliva-based Advanta Dx SARS-CoV-2 Assay, which is currently pending FDA revniew.

In addition, Fluidigm is actively supporting customers who are developing lab-developed tests and/or have filed for EUA from the FDA, as well as customers who are providing COVID-19 diagnostic tests outside of the U.S.

Fluidigm’s mass cytometry technology and workflows are also being used in the U.S.

While Fluidigm is a designated essential business, widespread global adoption of work-from-home and shelter-in-place orders have resulted in a significant slowdown in customer activities for much of the year.

In the first half of 2020, we saw near-term COVID-19-related priorities temporarily displacing longer term projects and research activities.

As customers return to work, we have seen some customer ordering recover, but the timing of complete recovery remains uncertain, given additional waves of infection and timing of a vaccine.

We estimate that about 10% of our customers are either closed or working at reduced capacity as of the end of September 2020 because of the COVID-19 pandemic, compared to 30-40% in June 2020.

We believe the impact of COVID-19 on our customers has resulted in expected sales of our mass cytometry instrument systems to be delayed to future periods.

The development of COVID-19-related applications has positively impacted sales of our microfluidics instruments, consumables, and mass cytometry reagents.

Since the beginning of the COVID-19 pandemic, Fluidigm has been working with a growing body of researchers around the world who are aggressively responding to the pandemic.

In June 2020, we submitted an emergency use authorization (EUA) application with the U.S.

Food and Drug Administration (FDA) for our saliva-based Advanta Dx SARS-CoV-2 Assay, and the FDA granted the EUA in August 2020.

In addition, Fluidigm is actively supporting customers who are developing lab-developed tests, as well as customers who are providing COVID-19 diagnostic tests outside of the U.S.

Fluidigm’s mass cytometry technology and workflows are also being used by our customers in the U.S.

and Europe for multi-site COVID-19 patient immune profiling studies.

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Despite these opportunities, there is still uncertainty regarding the impact of COVID-19 on the global economy, our customers, and our business over the near term.

Also, though we are now able to sell our Advanta Dx SARS-CoV-2 Assay for diagnostic use and certain clinical laboratory customers are developing lab developed tests using our technology, our experience selling into diagnostic markets is limited and we face significant competition.

Many of our target customers in these markets do not have significant prior experience using Fluidigm instruments and consumables, and require validation steps and assistance in establishing, integrating and scaling up testing programs using our technology and products.

Also, many such laboratories have experience working with certain of our competitors for diagnostic testing, and we have faced, and expect to continue to face, complex sales processes and competition in the COVID-19 testing market.

We expect to seek collaborations with third parties and invest in customer support infrastructure and personnel to meet the challenges associated with penetrating these markets.

We have actively sought government funding to support our investment to expand our diagnostics capabilities for microfluidics.

In July 2020, we entered into a letter contract with the National Institutes of Health (NIH) for a project under the NIH Rapid Acceleration of Diagnostics (RADx) program.

The RADx program provides grants to support a range of new lab-based and point-of-care tests that could significantly increase the number, type and availability of COVID-19 tests.

On September 28, 2020, we executed a definitive contract with the NIH as an amendment to the letter contract (collectively, the NIH Contract).

The NIH Contract has a total value of up to $34.0 million upon the achievement of certain milestones.

Through September 30, 2020, we have achieved milestones with a total value of $18.6 million and have received cash of $11.2 million.

Proceeds from the NIH Contract will be used primarily to expand production capacity and product throughput capabilities for COVID-19 testing with Fluidigm microfluidics technology.

We expect to spend approximately $30.0 million for capital expenditures over the next two quarters for the expansion of our Singapore facility as a result of the NIH Contract.

The NIH has the right to terminate the NIH Contract for convenience.

In the event of termination for convenience, Fluidigm will be paid a percentage of the NIH Contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges.

In the event of termination for cause due to our default, NIH is not liable for supplies or services not accepted.

If we fail to deliver within the time specified in the NIH Contract and the delay is due to Fluidigm’s fault or negligence, we are required to pay liquidated damages in the amount of 33% of the amount(s) already disbursed to date under the NIH Contract within six months from the date of termination.

In March 2020, we entered into an Open Market Sale Agreement (Sale Agreement) with Jefferies LLC (Jefferies) to sell shares of our common stock having aggregate sales proceeds of up to $50,000,000, from time to time, through an “at the market” (ATM) equity offering program under which Jefferies acts as sales agent.

During the third quarter of 2020, we sold 2.5 million shares of our common stock, $0.001 par value per share, pursuant to the Sale Agreement, for aggregate gross proceeds of $20.9 million.

Our net proceeds were approximately $20.1 million, after deducting related expenses, including commissions of approximately $0.6 million and issuance costs of approximately $0.2 million.

In this period of uncertainty, we are actively managing our operating expenses and cash flows in response to the evolving market conditions.

In addition, we have implemented reductions in our operating expense structure including salary reductions and constrained hiring until our business returns to more normal volumes.

In addition, we implemented reductions in our operating expense structure including temporary salary reductions which began in the second quarter and ended in the third quarter of this year and constrained hiring until our business returns to more normal volumes.

We have also taken advantage of various government programs available to us.

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payroll taxes and are currently evaluating the applicability of other provisions in the CARES Act.

We have improved the company’s capital structure over the last 18 months by reducing our overall debt levels and extending our remaining debt maturities.

In July 2020, we entered into a letter contract with the National Institutes of Health (NIH) for a project under the NIH Rapid Acceleration of Diagnostics (RADx) program.

The RADx program aims to support a range of new lab-based and point-of-care tests that could significantly increase the number, type and availability of COVID-19 tests.

This project, with a total proposed budget of up to $37.0 million, contemplates expanding production capacity and throughput capabilities for COVID-19 testing with Fluidigm microfluidics technology.

The letter contract provides Fluidigm with access to up to $12.2 million of initial funding based on completion and delivery of certain validation milestones prior to execution of a definitive contract.

We are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations.

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To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

We have expanded disclosure of our critical accounting policies and estimates in the preparation of our condensed consolidated financial statements during the three and six months ended June 30, 2020 compared to those disclosed in our annual report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 27, 2020, to reflect the impact of a new development agreement (see Note 14).

We have expanded disclosure of our critical accounting policies and estimates in the preparation of our condensed consolidated financial statements during the nine months ended September 30, 2020 compared to those disclosed in our annual report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 27, 2020, to reflect the impact of the NIH Contract under the RADx program (see Note 4) and a new development agreement (see Note 15).

Recent Accounting Changes and Accounting Pronouncements

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Instead, an entity performs its annual, or interim, goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recording an impairment charge for the amount by which the carrying amount exceeds the fair value.

The ASU is effective for annual and interim goodwill impairment testing performed for our fiscal year beginning January 1, 2020, with early adoption permitted, which we did not exercise.

The ASU is effective for annual and interim goodwill impairment testing

performed for our fiscal year beginning January 1, 2020, with early adoption permitted, which we did not exercise.

The adoption of the new guidance did not have a significant impact on our financial results.

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Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06 Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

The amendment to this ASU reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification, which is expected to result in more convertible instruments being accounted for as a single unit, rather than being bifurcated between debt and equity.

The new guidance is effective for fiscal years beginning after December 15, 2021.

We are currently evaluating the impact of adoption on our condensed consolidated financial statements.

In November 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes.

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There is also new guidance related to consolidated group reporting and tax impacts resulting from business combinations.

new guidance is effective for fiscal years beginning after December 15, 2020.

The new guidance is effective for fiscal years beginning after December 15, 2020.

We are currently evaluating the impact of adoption on our condensed consolidated financial statements.

Results of Operations

The following table presents our historical consolidated statements of operations data for the three and six months ended June 30, 2020 and 2019, and as a percentage of total revenue for the respective periods (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

The following table presents our historical consolidated statements of operations data for the three and nine months ended September 30, 2020 and 2019, and as a percentage of total revenue for the respective periods (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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We sell our products to leading academic, government, pharmaceutical, biotechnology, clinical, plant and animal research laboratories worldwide.

Excluding the impact of the development revenue recognized during the second quarter, no individual customer represented more than 10% of our total revenue for the three and six months ended June 30, 2020 and 2019, respectively.

Including the development revenue, revenues from our five largest customers were 32% and 30% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

Revenues from our five largest customers were 23% and 20% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

The following table presents our revenue by source for the three and six months ended June 30, 2020 and 2019, and as a percentage of total revenue for the respective period (in thousands):

Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change

One customer from which we derived development revenue exceeded 10% of revenue for the three and nine months ended September 30, 2020.

No other customer represented more than 10% of total revenue for the three and nine months ended September 30, 2020 or 2019.

Revenues from our five largest customers were 31% and 25% of total revenue for the three months ended September 30, 2020 and 2019, respectively.

Revenues from our five largest customers were 23% and 20% of total revenue for the nine months ended September 30, 2020 and 2019, respectively.

The following table presents our revenue by source for the three and nine months ended September 30, 2020 and 2019, and as a percentage of total revenue for the respective period (in thousands):

Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change

2020 2019 2020 2019

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Development revenue 3,180 7 — — NA 6,180 7 — — NA

Grant revenue 450 2 — — NA 800 1 — — NA

Grant revenue 1,340 4 200 1 570 % 2,140 2 200 — 970 %

License revenue — — — — NA 3,163 3 — — NA

Total revenue $ 39,861 100 % $ 26,496 100 % 50 % $ 93,536 100 % $ 84,803 100 % 10 %

The following table presents our total revenue by geographic area of our customers and as a percentage of total revenue for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change

The following table presents our total revenue by geographic area of our customers and as a percentage of total revenue for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change

2020 2019 2020 2019

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Total revenue $ 39,861 100 % $ 26,496 100 % 50 % $ 93,536 100 % $ 84,803 100 % 10 %

The Americas revenue includes revenue generated in the United States of $13.4 million and $27.5 million for the three and six months ended June 30, 2020, respectively.

Sales to customers in the United States represented $9.9 million and $22.4 million for the three and six months ended June 30, 2019, respectively.

No foreign country or jurisdiction had sales in excess of 10% of our total revenues for the three months ended June 30, 2020 and 2019, except for China, which had sales of $3.5 million, or 13%, and $4.0 million, or 14% of total revenues, respectively.

There was no foreign country or jurisdiction with sales in excess of 10% of our total revenues for the six months ended June 30, 2020 or 2019, except for China, which had sales of $7.5 million, or 13% of total revenues, for the six months ended June 30, 2019.

The Americas revenue includes revenue generated in the United States of $23.3 million and $50.7 million for the three and nine months ended September 30, 2020, respectively.

Sales to customers in the United States represented $10.5 million and $32.9 million for the three and nine months ended September 30, 2019, respectively.

No foreign country or jurisdiction had sales in excess of 10% of total revenues for the three months ended September 30, 2020 and 2019, except for China, which had revenues of $3.9 million, or 15% of total revenues for the three months ended September 30, 2019.

There was no foreign country or jurisdiction with sales in excess of 10% of our total revenues for the nine months ended September 30, 2020 or 2019, except for China, which had revenues of $11.4 million, or 13% of total revenues, for the nine months ended September 30, 2019.

Total Revenue

Three Months ended June 30, 2020

Total revenue decreased by $2.1 million or 8%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, driven by the COVID-19 pandemic public health crisis and the ensuing shelter-in-place orders that effectively shuttered customer facilities around the world.

Lower mass cytometry instruments, mass cytometry consumables and microfluidics consumable revenues were partially offset by higher microfluidics instrument sales, development revenue, grant revenue and license revenue.

Americas revenues increased by $2.8 million, or 25%, driven by higher sales of microfluidics products, development revenue of $3.0 million and grant revenue of $0.5 million, partially offset by lower mass cytometry product revenues for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Three Months ended September 30, 2020

Total revenue increased by $13.4 million or 50%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, driven primarily by higher product and service revenue, development revenue, and higher grant revenue.

Product revenue increased primarily due to COVID-19-related applications which resulted in higher sales of our microfluidic instruments and consumables and our mass cytometry consumable products.

Americas revenues increased by $12.5 million, or 113%, which includes $8.2 million of higher product and service revenue driven by COVID-19-related opportunities along with $1.1 million of higher grant revenue and $3.2 million of development revenue for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

EMEA revenues fell $0.3 million or 3%.

Lower consumables and mass cytometry instruments sales were partially offset by modest increases in microfluidics instrument revenue and service revenue.

Unfavorable foreign exchange rates impacted EMEA revenue by less than 1%.

The $0.3 million, or 5%, decrease in Asia-Pacific revenues was broad-based, with declines in both mass cytometry and

microfluidics instrument and consumable revenues, partially offset by higher service revenues.

On a company-wide basis, weaker foreign exchange rates had a negligible impact on revenues for the three months ended June 30, 2020 compared to the same period in 2019.

Six Months ended June 30, 2020

Total revenue decreased by $4.6 million or 8%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, driven by the COVID-19 pandemic public health crisis and the ensuing shelter-in-place orders that effectively shuttered customer facilities around the world.

Lower mass cytometry instruments, mass cytometry consumables, and microfluidics consumable revenues were partially offset by higher microfluidics instrument sales, development revenue, license and grant revenue.

Americas revenues increased by $4.7 million, or 19%, driven by license revenue of $3.1 million, development revenue of $3.0 million and grant revenue of $0.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

These increases were partially offset by lower product revenues.

Lower mass cytometry revenues were partially offset by higher microfluidics revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

EMEA revenues fell $4.7 million or 24%, for the same period, driven by lower instrument and consumable revenues.

Unfavorable foreign exchange rates negatively impacted EMEA revenues by approximately 1%.

The $4.6 million, or 31%, decrease in Asia-Pacific revenues was driven by declines in both mass cytometry and microfluidics instrument and consumable revenues.

On a company-wide basis, weaker foreign exchange rates negatively impacted revenues by less than 1% for the six months ended June 30, 2020 compared to the same period in 2019.

Lower microfluidic consumables and mass cytometry instrument sales were partially offset by increases in microfluidics instrument revenue and service revenue.

Favorable foreign exchange rates impacted EMEA revenue by 3%.

The $1.1 million, or 17%, increase in Asia-Pacific revenues was driven primarily by higher instrument sales.

On a company-wide basis, stronger foreign exchange rates impacted revenues by less than 1% for the three months ended September 30, 2020 compared to the same period in 2019.

Nine Months ended September 30, 2020

Total revenue increased by $8.7 million or 10%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 due to higher development revenue, license revenue, and grant revenue, partially offset by lower product revenue.

Lower mass cytometry instrument revenue was partially offset by higher service revenue and microfluidics instrument and consumables sales, driven primarily by COVID-19-related opportunities.

Americas revenues increased by $17.2 million, or 49%, driven by higher development revenue of $6.2 million, higher product and service revenue of $5.9 million, license revenue of $3.1 million, and a $2.1 million increase in grant revenue for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Higher microfluidics revenue was partially offset by decreases in mass cytometry instruments and consumables revenue for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

EMEA revenues fell $5.0 million or 17%, for the same period, driven by lower mass cytometry instrument and microfluidics consumables revenue partially offset by higher microfluidics instrument and mass cytometry consumables revenues.

A stronger Euro compared to the U.S.

dollar favorably impacted EMEA revenues by approximately 1%.

The $3.5 million, or 17%, decrease in Asia-Pacific revenues was driven by declines in mass cytometry instrument and microfluidics consumable revenues, partially offset by higher service revenues.

On a company-wide basis, foreign exchange rates had a negligible impact for the nine months ended September 30, 2020 compared to the same period in 2019.

Product Revenue

Product revenue decreased by $5.8 million, or 25%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to lower sales volumes and lower average selling prices of mass cytometry instruments and consumables and lower sales of microfluidics consumables.

Partially offsetting these declines were higher microfluidics instrument revenues, largely driven by higher unit sales of Biomark and Juno instruments reflecting the realization of several early-stage COVID-19 related opportunities.

Product revenue decreased by $11.7 million, or 24%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due to lower sales volumes and lower average selling prices of mass cytometry instruments and consumables, and by lower sales of microfluidics consumables.

Partially offsetting these declines were higher revenue from Biomark and Juno instruments, noted above, and, to a lesser extent, new products.

Product revenue increased by $8.5 million, or 41%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Increases in microfluidic instrument and mass cytometry and microfluidic consumable revenues were partially offset by lower mass cytometry instrument revenue.

Higher microfluidics revenue was largely driven by higher unit sales of Biomark and Juno instruments and related consumables, reflecting several COVID-19-related opportunities.

Product revenue decreased by $3.1 million, or 5%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to lower sales volumes and lower average selling prices of mass cytometry instruments, partially offset by higher revenue from Biomark and Juno instruments and related consumables.

We expect the average selling prices of our products to fluctuate over time based on market conditions, product mix, and currency fluctuations.

Service Revenue

Service revenue increased by $0.2 million, or 4%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Service plan revenues, which are recognized over the life of the service agreement and are not activity-dependent, drove the increase in service revenues.

The increase in service plan revenues was partially offset by lower revenues from training and product maintenance activities.

These revenues declined due primarily to closed customer facilities.

Service revenue increased by $0.1 million, or 1%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Service plan revenues drove the increase, offset by lower revenues from training and product maintenance activities.

Training and product revenues declined due primarily to closed customer facilities.

Service revenue increased by $0.5 million, or 9%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Service plan revenues, which are recognized over the life of the service agreement and are not activity-dependent, drove the majority of the increase in service revenues.

As customers have begun to reopen their facilities, we are also seeing increases in training and repair-related revenues.

Service revenue increased by $0.6 million, or 4%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Service plan revenues drove the majority of the increase, partially offset by lower revenues from training and product maintenance activities.

Training and product maintenance revenues declined due primarily to closed customer facilities.

Development Revenue

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The Development Agreement provides up-front and periodic milestone payments of up to $11.7 million during the development stage.

The development stage is expected to last approximately one year.

We recognized $3.0 million of development revenue from this agreement in the three and six months ended June 30, 2020.

The development stage is expected to last approximately one year from the date of the Development Agreement.

We recognized $3.2 million and $6.2 million of development revenue from this agreement in the three and nine months ended September 30, 2020, respectively.

We recognize revenue under the Development Agreement using an input method based on our costs incurred relative to the total expected cost which determines the extent of our progress toward satisfaction of our obligations under the agreement.

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We receive grants to perform research and development activities over contractually defined periods.

Grant revenue in the current quarter is attributable to a grant agreement entered into in the second half of 2019.

Grant revenue in the current quarter is attributable to a grant agreement entered into in the second half of 2019 and which is expected to end in the first half of 2021.

Costs associated with grant agreements are recorded in research and development expense.

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Our cost of service revenue and related service margin may fluctuate depending on the variability in material and labor costs of servicing instruments.

The following table presents our product and service cost, product and service gross profit and product and service margin for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change

The following table presents our product and service cost, product and service gross profit and product and service margin for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change

2020 2019 2020 2019

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Product and service margin 58.9 % 52.6 % 6.3 ppts 55.6 % 54.6 % 1.0 ppts

Product and service margin decreased by 2.0 percentage points for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Fixed depreciation and amortization costs on a lower revenue base negatively impacted margins by 2.8 percentage points.

Lower factory utilization also negatively impacted margins on mass cytometry instruments.

This decline was partially offset by lower service costs and improved manufacturing efficiencies across our consumables products.

Product and service margin decreased by 2.4 percentage points for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Fixed depreciation and amortization costs on a lower revenue base negatively impacted margins by 2.6 percentage points.

Lower factory utilization also negatively impacted margins on mass cytometry instruments.

This decline was partially offset by lower costs for our microfluidics instruments and mass cytometry consumables and lower service costs.

Product and service margin increased by 6.3 percentage points for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Fixed depreciation and amortization costs on a higher revenue base positively impacted margins by 3.2 percentage points.

Margins were also favorably impacted by COVID-19-related consumable products and lower charges for inventory reserves.

This favorability was partially offset by lower average selling prices, lower production volumes of mass cytometry instruments and product mix, which included lower margin microfluidics instruments.

Product and service margin increased by 1.0 percentage points for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Fixed depreciation and amortization costs on a higher revenue base contributed 0.2 percentage points to the improvement in the product and service margins.

Lower service costs, COVID-19-related consumables products, cost reductions for mass cytometry reagents, and lower charges for inventory reserves also favorably impacted product and service gross margins.

This favorability was partially offset by lower average selling prices and production volumes of mass cytometry instruments and product mix, which included lower margin microfluidics instruments.

Operating Expenses

The following table presents our operating expenses for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change

The following table presents our operating expenses for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change

2020 2019 2020 2019

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We have made substantial investments in research and development since our inception and expect to continue to do so.

Research and development expense increased by $0.6 million, or 7%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Increases were primarily attributable to outside service costs related to various projects and laboratory supplies costs, partially offset by lower compensation costs.

The lower compensation costs reflects temporary salary reductions implemented during the second quarter and reduced recruiting costs.

Research and development expense increased by $0.9 million, or 6%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Increases were primarily attributable to outside service costs related to various projects and higher laboratory supplies costs, partially offset by reduced compensation costs.

We believe that our continued investment in research and development is essential to our long-term competitive position and that these expenses may increase in future periods.

Research and development expense increased by $1.0 million, or 14%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Increases were primarily attributable to higher laboratory supplies and outside service costs related to development and grant projects, partially offset by lower compensation costs.

The lower compensation costs reflect temporary salary reductions implemented during the second quarter of 2020, Singapore and Canadian government subsidy programs, and funding from the NIH Contract.

The temporary salary reduction program ended during the third quarter of 2020.

Research and development expense increased by $1.9 million, or 8%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Increases were primarily attributable to higher laboratory supplies and outside service costs related to development and grants projects, partially offset by reduced compensation costs.

We believe our continued investment in research and development is essential to our long-term competitive position and these expenses may increase in future periods.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of personnel costs for our sales and marketing, business development, finance, legal, human resources, information technology, and general management, as well as professional services, such as legal and accounting services.

Selling, general and administrative expense decreased by $1.5 million, or 7%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Compensation costs fell by $1.0 million compared to the prior year period.

The lower compensation costs includes the impact of temporary salary reductions implemented during the second quarter, partially offset by higher stock-based compensation costs.

Lower sales resulted in reduced sales commissions while reduced travel due to the pandemic caused travel expense to decline $1.2 million in the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

In addition, we received $0.4 million of wage subsidies from the Singapore government during the second quarter which further reduced operating expenses.

These items were partially offset by higher facilities costs.

Facilities cost increased approximately $1.1 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, reflecting lease costs associated with our new corporate headquarters.

Foreign exchange rates had a negligible impact on selling, general and administrative expense.

Selling, general and administrative expense decreased by $1.6 million, or 4%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Decreases in the year-to-date period were largely driven by the same factors as the decreases in the second quarter.

Compensation costs fell by $0.7 million compared to the prior year period along with lower commissions due to lower revenues, along with $0.4 million of wage subsidies from the Singapore government.

costs fell $1.6 million compared to the prior year period, while costs related to trade shows and other events fell $0.7 million due to the cancellation of these events in light of the COVID-19 pandemic.

These items were partially offset by higher facilities costs.

Facilities cost increased approximately $2.1 million for six months ended June 30, 2020 compared to the six months ended June 30, 2019, reflecting moving and lease costs associated with our new corporate headquarters.

Foreign exchange rates had a negligible impact on selling, general and administrative expense.

Selling, general and administrative expense increased by $1.9 million, or 9%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Facilities cost increased approximately $1.3 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, reflecting higher lease costs associated with our new corporate headquarters.

Higher legal expenses and an $0.8 million increase in stock-based compensation costs were partially offset by lower travel costs.

Travel expense declined $1.4 million in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 due to the COVID-19 pandemic.

The remaining increase in selling, general and administrative expense was due to a variety of smaller items.

Selling, general and administrative expense increased by $0.3 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Compensation costs fell compared to the prior year period due to the impact of temporary salary reductions implemented in the second quarter of 2020, which salaries were restored to earlier levels in the third quarter of 2020.

Travel costs fell $3.0 million compared to the prior period, while costs related to trade shows and

other events fell $1.3 million due to the cancellation of these events in light of the COVID-19 pandemic.

Offsetting these declines was $3.4 million of higher facilities costs for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, reflecting higher moving and lease costs associated with our new corporate headquarters.

In addition, stock-based compensation costs increased by $1.4 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The remaining change in selling, general and administrative expense was due to a variety of smaller items.

Interest Expense, Loss on Extinguishment of Debt and Other Income (Expense), Net

The following table presents these items for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change

The following table presents these items for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change

2020 2019 2020 2019

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The 2019 Notes have an effective interest rate of 6.2% compared to the 2014 Notes, which have an effective interest rate 3.0%.

The increase in interest expense for the three months ended June 30, 2020 compared to the prior year period reflects the impact of the higher effective interest rate on the 2019 Notes.

The increase in interest expense for the three months ended September 30, 2020 compared to the prior year period reflects the impact of the higher effective interest rate on the 2019 Notes compared to the 2014 Notes.

In February 2014, we closed an underwritten public offering of $201.3 million aggregate principal amount of our 2014 Notes.

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This amount represents the difference between the fair value of the bonds converted and the carrying value of the bonds at the time of conversion.

Interest expense of $1.8 million for the six months ended June 30, 2020 consists primarily of interest on $55.0 million of 2019 Notes, while interest expense of $3.2 million for the six months ended June 30, 2019 includes both the interest on $51.3 million of 2014 Notes and a partial quarter of interest expense on $150.0 million of 2018 Notes, which accrued at an effective rate of 12.3%.

The higher interest expense for the six months ended June 30, 2019 compared to the current year period reflects the impact of higher debt balances and higher interest rates for the first half of 2019 compared to the first half of 2020.

Other income, net of $0.5 million for the three months ended June 30, 2020 is primarily attributable to $42 thousand of interest income, and $0.4 million of foreign exchange gains.

Other income, net of $0.2 million for the three months ended June 30, 2019 includes $0.4 million of interest income, partially offset by $0.1 million of foreign exchange losses.

Interest expense of $2.7 million for the nine months ended September 30, 2020 consists primarily of interest on $55.0 million of 2019 Notes, while interest expense of $3.6 million for the nine months ended September 30, 2019 includes both the interest on $51.3 million of 2014 Notes and a partial quarter of interest expense on $150.0 million of 2018 Notes, which accrued at an effective rate of 12.3%.

The higher interest expense for the nine months ended September 30, 2019 compared to the current year-to-date period reflects the impact of higher debt balances and higher interest rates for the first nine months of 2019 compared to the first nine months of 2020.

Other income of $0.1 million for the three months ended September 30, 2020 is primarily attributable to $0.1 million of foreign exchange gains.

Other income of $0.2 million for the three months ended September 30, 2019 includes $0.3 million of interest income, partially offset by $0.1 million of foreign exchange losses.

The lower interest income in the current year period is attributable to lower market interest rates.

The foreign exchange gains in the second quarter reflects a stronger Canadian dollar in the second quarter, compared to the first quarter of 2020.

Other expense, net of $0.4 million for the six months ended June 30, 2020 is primarily attributable to $0.6 million of foreign exchange losses, reflecting the impact of a stronger U.S.

dollar, partially offset by $0.2 million of interest income.

Other income, net of $0.7 million for the six months ended June 30, 2019 consists primarily of $0.8 million of interest income, offset by $0.1 million of foreign exchange losses.

Other expense of $0.2 million for the nine months ended September 30, 2020 is primarily attributable to $0.5 million of foreign exchange losses, reflecting the impact of a stronger U.S.

dollar, partially offset by $0.3 million of interest and other income.

Other income of $0.9 million for the nine months ended September 30, 2019 consists primarily of $1.1 million of interest income, offset by $0.2 million of foreign exchange losses.

Income Tax Benefit

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Depending on the relative value of these components, we can have either a tax benefit or expense for any given period.

We recorded a tax benefit of $1.1 million, for an effective tax rate of 8.1%, for the three months ended June 30, 2020.

For the three months ended June 30, 2019, we recorded a tax benefit of $1.1 million for an effective tax rate of 7.7%.

For the six months ended June 30, 2020, we recorded an income tax benefit of $1.8 million for an effective rate of 5.9%.

months ended June 30, 2019, we recorded a tax benefit of $1.1 million, for an effective tax rate of 2.7%.

We recorded a tax benefit of $0.2 million, for an effective tax rate of 3.9%, for the three months ended September 30, 2020.

For the three months ended September 30, 2019, we recorded a tax benefit of $1.2 million for an effective tax rate of

For the nine months ended September 30, 2020, we recorded an income tax benefit of $2.1 million for an effective rate of 5.6%.

For the nine months ended September 30, 2019, we recorded a tax benefit of $2.3 million, for an effective tax rate of 4.2%.

The benefit for all periods was primarily attributable to the tax benefit from the amortization of our acquisition-related deferred tax liabilities partially offset by a provision from our foreign operation and state minimum income taxes.

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Sources of Liquidity

As of June 30, 2020, our principal sources of liquidity consisted of $43.0 million of cash and cash equivalents, and $2.4 million of short-term investments, as well as $1.1 million of restricted cash and $7.3 million of availability under our Revolving Credit Facility.

The following table presents our cash flow summary for the six months ended June 30, 2020 and 2019 (in thousands):

Six Months Ended June 30,

As of September 30, 2020, our principal sources of liquidity consisted of $72.3 million of cash and cash equivalents, as well as $1.0 million of restricted cash and $15.0 million of availability under our $15.0 million revolving senior credit facility (Revolving Credit Facility).

The following table presents our cash flow summary for the nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

Cash flow summary:

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We have historically experienced negative cash flows from operating activities as we have expanded our business and built our infrastructure domestically and internationally.

Net cash used in operating activities in the six months ended June 30, 2020 was $7.1 million and consisted of net loss of $29.0 million, adjusted for non-cash items of $16.1 million, partially offset by a net decrease in assets and liabilities of $5.8 million.

Non-cash items primarily included amortization of developed technology of $5.9 million, stock-based compensation expense of $6.0 million, amortization of debt discounts, premiums and issuance costs of $0.3 million, depreciation and amortization of $2.0 million, and other non-cash items of $0.1 million.

The net decrease in assets and liabilities was primarily due to a decrease in accounts receivable of $9.1 million, an increase in accounts payable of $3.1 million, and an increase in deferred revenue of $2.0 million, partially offset by an increase of inventories of $4.9 million, a decrease in other liabilities of $2.8 million and an increase in prepaid expenses and other assets of $0.7 million.

Net cash used in operating activities for the six months ended June 30, 2019 was $25.1 million and consisted of net loss of $39.2 million, adjusted for non-cash items of $24.7 million, and an increase in the assets and liabilities of $10.7 million.

Net cash used in operating activities in the nine months ended September 30, 2020 was $11.7 million and consisted of net loss of $35.0 million, adjusted for non-cash items of $25.4 million, partially offset by a net increase in assets and liabilities of $2.1 million.

Non-cash items included amortization of developed technology of $8.9 million, stock-based compensation expense of $10.4 million, depreciation and amortization of $3.0 million, lease amortization of $1.9 million, a provision for excess and obsolete inventory of $0.7 million and a variety of smaller items.

The net change in assets and liabilities was primarily due to an increase in inventories of $6.8 million caused by increases in mass cytometry instruments, chips, and reagents, an increase in prepaid expenses and other assets of $2.4 million, primarily comprised of payments to vendors for our Singapore capacity expansion under the NIH Contract and prepaid insurance and a decrease in other liabilities of $0.2 million, partially offset by a decrease in accounts receivable of $1.0 million, an increase in accounts payable of $5.0 million, and an increase in deferred revenue of $1.3 million.

Net cash used in operating activities for the nine months ended September 30, 2019 was $29.7 million and consisted of net loss of $52.1 million, adjusted for non-cash items of $32.5 million, and an increase in the assets and liabilities of $10.1 million.

Non-cash items primarily included a $9.0 million loss on extinguishment of debt, amortization of developed technology of $8.4 million, stock-based compensation expense of $8.3 million, amortization of debt discounts, premiums, and issuance costs of $2.1 million, depreciation and amortization of $3.5 million, and a provision for excess and obsolete inventory of $1.4 million.

The net change in assets and liabilities included a decrease in other liabilities of $9.2 million, an increase in accounts receivable of $2.4 million, an increase in inventories of $2.0 million, and an increase in prepaid and other assets of $1.0 million, partially offset by an increase accounts payable of $3.4 million, and an increase in deferred revenue of $0.5 million.

The net change in assets and liabilities included a decrease in other liabilities of $10.5 million, an increase in inventories of $3.7 million, and an increase in prepaid and other assets of $1.3 million, partially offset by a decrease in accounts receivable of $3.2 million, an increase in accounts payable of $0.6 million, and an increase in deferred revenue of $1.6 million.

Net Cash Provided by (Used in) Investing Activities

Our primary investing activities consist of purchases, sales, and maturities of our short-term investments and to a much lesser extent, capital expenditures for manufacturing, laboratory, computer equipment and software to support our infrastructure and work force.

We expect to continue to incur costs for capital expenditures to improve manufacturing efficiencies and strengthen information technology and network security, as well as capital expenditures incurred in moving our corporate

headquarters in 2020.

We expect to continue to incur costs for capital expenditures to expand capacity under the NIH Contract, improve manufacturing efficiencies and strengthen information technology and network security, as well as capital expenditures incurred in moving our corporate headquarters in 2020.

However, we may choose to decrease or defer certain capital expenditures and development activities, while further optimizing our organization.

Net cash provided by investing activities in the six months ended June 30, 2020 was $27.6 million, which was mainly due to proceeds from maturities of investments of $29.4 million and proceeds from the sale of investments of $5.0 million, partially offset by the acquisition of InstruNor AS, net of cash acquired, of $5.2 million.

Net cash used in investing activities in the six months ended June 30, 2019 was $45.3 million, which consisted of purchases of investments of $44.6 million and capital expenditures of $0.7 million to support our commercial and manufacturing operations.

Net cash provided by investing activities in the nine months ended September 30, 2020 was $40.8 million, which was mainly due to proceeds from the NIH Contract of $11.2 million, proceeds from maturities of investments of $31.8 million and proceeds from the sale of investments of $5.0 million, partially offset by the acquisition of InstruNor AS, net of cash acquired, of $5.2 million, and capital expenditures of $2.0 million to support our commercial and manufacturing operations.

We expect to spend approximately $30.0 million for capital expenditures over the next two quarters for the expansion of our Singapore facility as a result of the NIH Contract, which will be offset by the proceeds of the NIH Contract.

Net cash used in investing activities in the nine months ended September 30, 2019 was $38.8 million, which consisted of purchases of investments of $52.7 million and capital expenditures of $2.0 million to support our commercial and manufacturing operations, partially offset by $16.0 million of proceeds from maturities of investments.

Net Cash Provided by Financing Activities

We generated cash from financing activities of $8 thousand during the six months ended June 30, 2020, which was primarily due to proceeds from stock issuance from the ESPP of $0.6 million, offset almost entirely by payments of accrued debt issuance costs of $0.4 million from the 2019 Notes offering, and payments for income taxes related to net share settlement of equity awards of $0.3 million.

We generated cash from financing activities of $1.2 million during the six months ended June 30, 2019, which included $1.0 million from exercise of stock options, and $0.6 million of ESPP proceeds, partially offset by $0.5 million for income taxes related to net share settlement of equity awards.

We generated cash from financing activities of $20.4 million during the nine months ended September 30, 2020, which was primarily due to proceeds from our ATM equity offering of $20.2 million, net of commissions, proceeds from stock issuance from the ESPP of $0.6 million, and proceeds from the exercise of stock options of $0.5 million, partially offset by payment of debt and equity issuance costs of $0.5 million, which includes costs from the 2019 Notes offering and the ATM equity offering, and payments for income tax withholding related to net share settlement of equity awards of $0.4 million.

We generated cash from financing activities of $1.0 million during the nine months ended September 30, 2019, which included $1.0 million from the exercise of stock options and $0.6 million of ESPP proceeds, partially offset by $0.6 million for income tax withholding related to net share settlement of equity awards, and payment of debt and equity issuance costs of $0.1 million.

Capital Resources

At June 30, 2020 and December 31, 2019, our working capital, excluding deferred revenues and restricted cash, was $54.3 million and $74.0 million, respectively, including cash and cash equivalents of $43.0 million and $21.7 million, respectively, and short-term investments of $2.4 million and $37.0 million, respectively.

At September 30, 2020 and December 31, 2019, our working capital, excluding deferred revenues and restricted cash, was $93.3 million and $74.0 million, respectively, including cash and cash equivalents of $72.3 million and $21.7 million, respectively, and short-term investments of $37.0 million at December 31, 2019.

We had no investments outstanding as of September 30, 2020.

In February 2014, we closed an underwritten public offering of $201.3 million in aggregate principal amount of our 2014 Notes.

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The 2019 Notes will also be convertible at our option upon certain conditions in accordance with the terms of the indenture governing the 2019 Notes.

On or after December 1, 2021 to December 1, 2022, if the price of the Company’s common stock has equaled or exceeded 150% of the Conversion Price (as defined in the indenture, currently $2.90, subject to adjustment) for a specified number of days (Issuer’s Conversion Option), we may, at our option, elect to convert the 2019 Notes in whole but not in part into shares of the Company, determined in accordance with the terms of the indenture.

December 1, 2022, if the price of the Company’s common stock has equaled or exceeded 130% of the Conversion Price then in effect for a specified number of days, we may, at our option, elect to convert the 2019 Notes in whole but not in part into shares of the Company, determined in accordance with the terms of the indenture.

specified number of days (Issuer’s Conversion Option), we may, at our option, elect to convert the 2019 Notes in whole but not in part into shares of the Company, determined in accordance with the terms of the indenture.

On or after December 1, 2022, if the price of the Company’s common stock has equaled or exceeded 130% of the Conversion Price then in effect for a specified number of days, we may, at our option, elect to convert the 2019 Notes in whole but not in part into shares of the Company, determined in accordance with the terms of the indenture.

The foregoing summaries of the 2014 Notes, the 2018 Notes, the 2019 Notes and the exchange transactions completed in March 2018 and November 2019 are not complete and are qualified in their entirety by the applicable indentures, forms of global notes, and other agreements and documents filed with the SEC.

On August 2, 2018, we entered into a $15.0 million revolving senior credit facility (Revolving Credit Facility) with Silicon Valley Bank (SVB), with a maturity date of August 2, 2020.

In March 2020, we entered into the Sale Agreement with Jefferies to sell shares of our common stock having aggregate sales proceeds of up to $50,000,000, from time to time, through the ATM equity offering program under which Jefferies acts as sales agent.

During the third quarter of 2020, we sold 2.5 million shares of our common stock, pursuant to the Sale Agreement, for aggregate gross proceeds of $20.9 million.

Our net proceeds were approximately $20.1 million, after deducting related expenses, including commissions of approximately $0.6 million and issuance costs of approximately $0.2 million.

On August 2, 2018, we entered into our Revolving Credit Facility with Silicon Valley Bank (SVB), with a maturity date of August 2, 2020.

The Revolving Credit Facility is collateralized by substantially all our property, other than intellectual property.

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Amounts drawn under the Revolving Credit Facility will be used for working capital and general corporate purposes.

As of June 30, 2020, total availability under the Revolving Credit Facility was $7.3 million.

We currently have no outstanding debt under the Revolving Credit Facility, and we are in compliance with all the terms and conditions of the loan agreement governing the Revolving Credit Facility.

See Note 7 to our consolidated financial statements for more information about the Revolving Credit Facility.

On April 21, 2020, we entered into the Third Amendment to Loan and Security Agreement with SVB (the Amendment), which amends the Loan and Security Agreement dated as of August 2, 2018, between the Company and SVB (as amended by the Default Waiver and First Amendment to Loan and Security Agreement dated September 7, 2018, and the Second Amendment to Loan and Security Agreement dated November 20, 2019, the Revolving Credit Agreement).

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The Amendment also includes various administrative changes.

In March 2020, we entered into an Open Market Sale Agreement (Sale Agreement) with Jefferies LLC (Jefferies) to sell shares of our common stock having aggregate sales proceeds of up to $50,000,000, from time to time, through an “at the market” equity offering program under which Jefferies will act as sales agent.

The Sale Agreement allows us to set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limits on the number of shares that may be sold in any one trading day and a minimum price below which sales may not be made.

The compensation to Jefferies for sales of the Company’s common stock will be an amount equal to 3.0% of the gross proceeds of any shares of common stock sold under the Sale Agreement.

The Company and Jefferies may each terminate the Sale Agreement upon prior notice.

As of the date of this report, there had been no shares of common stock sold under the Sale Agreement.

As of September 30, 2020, total availability under the Revolving Credit Facility was $15.0 million.

We currently have no outstanding debt under the Revolving Credit Facility, and we are in compliance with all the terms and conditions of the Revolving Credit Agreement governing the Revolving Credit Facility.

See Note 8 to our consolidated financial statements for more information about the Revolving Credit Facility.

We believe our existing cash, cash equivalents, and investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 18 months.

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We also may have to reduce marketing, customer support, research and development, or other resources devoted to our products.

Off-Balance Sheet Arrangements

Since our inception, we have not had any off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S-K.

Contractual Obligations and Commitments

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Please see Note 9 to our condensed consolidated financial statements for a discussion of our lease obligations.

Other than as disclosed above, there have been no material changes during the six months ended June 30, 2020 to our contractual obligations disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2019.

Other than as disclosed above, there have been no material changes during the nine months ended September 30, 2020 to our contractual obligations disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

Since our inception, we have not had any off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis