STANDARD BIOTOOLS INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the section entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include information concerning our possible or assumed future cash flow, revenue, sources of revenue and results of operations, cost of product revenue and product margin, operating and other expenses, unit sales and the selling prices of our products, business strategies, financing plans, expansion of our business, competitive position, industry environment, potential growth opportunities, market growth expectations, and the effects of competition and public health crises (including the COVID-19 pandemic) on our business. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, “Risk Factors,” elsewhere in this quarterly report on Form 10-Q, and in our annual report on Form 10-K filed with the Securities and Exchange Commission (SEC). Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. Fluidigm®, the Fluidigm logo, Access Array™, Advanta™, Biomark™, Bringing new insights to life™, C1™, Callisto™, Cell-ID™, CyTOF®, D3™, Delta Gene™, Direct™, Dynamic Array™, EP1™, EQ™, FC1™, Flex Six™, Helios™, High-Precision 96.96 Genotyping™, HTI™, Hyperion™, IMC™, Imaging Mass Cytometry™, Immune Profiling Assay™, Juno™, Maxpar®, MCD™, MSL®, Nanoflex™, Open App™, Pathsetter™, Polaris™, qdPCR 37K™, Script Builder™, Script Hub™, Singular™, SNP Trace™, and SNP Type™ are trademarks or registered trademarks of Fluidigm Corporation. Other service marks, trademarks and trade names referred to in this quarterly report on Form 10-Q are the property of their respective owners. ___________________________ Unless the context requires otherwise, references in this Form 10-Q to “Fluidigm,” the “Company,” “we,” “us,” and “our” refer to Fluidigm Corporation and its subsidiaries. Overview Fluidigm is a global company that improves life through comprehensive health insight. Our innovative technologies and multi-omic tools are used by researchers to reveal meaningful insights into health and disease, identify biomarkers to inform decisions, and accelerate the development of more effective therapies. We create, manufacture, and market a range of products and services, including instruments, reagents and software that are used by researchers and clinical labs worldwide. Our focus is on the most pressing needs in translational and clinical research, including infectious disease, cancer, immunology and immunotherapy. We use proprietary CyTOF® and microfluidics technologies to develop innovative end-to-end solutions that have the flexibility required to meet the needs of translational research and the robustness to support high-impact clinical research studies. We sell our products to leading academic, government, pharmaceutical, biotechnology, clinical, and plant and animal research laboratories worldwide. We distribute our systems through our direct sales force and support organizations located in North America, Europe, and Asia-Pacific, and through distributors or sales agents in several European, Latin American, Middle Eastern, and Asia-Pacific countries. Our manufacturing operations are located in Singapore and Canada. Our facility in Singapore manufactures our genomics instruments, which are assembled by our contract manufacturer located within our Singapore facility. All of our microfluidics IFCs are fabricated at our Singapore facility. Our mass cytometry instruments, assays and reagents are manufactured at our facility in Canada. We also use U.S.-based third-party contract manufacturers for reagent manufacturing. 30 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 September 30, 2020, our accumulated deficit was $658.7 million. Recent Developments We have been responding to the COVID-19 pandemic by taking steps to protect our employees, support our customers, and manage our liquidity. As Fluidigm is a designated essential business, our employees have been working from home offices or our laboratories and offices, and in some cases, at customer sites. We have implemented health and safety practices in accordance with evolving government and public health agency guidelines in all of our facilities around the world, including maintaining social distancing and enhanced cleaning protocols, facilities modifications, temperature checks in some locations, and usage of face masks and other personal protective equipment where appropriate. Other operational adjustments made in response to COVID-19 include increased raw material stocking and proactive supplier management. We have activated our business continuity plans as a result of this pandemic, which include steps taken not only to help keep our workforce healthy and safe, but also to ensure a strong data security and internal control environment. Our controls around financial reporting have been modified slightly as needed to reflect the impact of working remotely. 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 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. We believe our microfluidics and mass cytometry capabilities can play a significant role in virus detection as well as in immune profiling of patients and populations. Furthermore, we believe our technologies and solutions will be important to the durable response from government and medical institutions to be prepared for future outbreaks. 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. 31 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 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. For example, we have applied for or received wage subsidies in certain countries. In the U.S., the Coronavirus Aid, Relief and Economic Security (CARES) Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, and other tax-related provisions. As a result, we have been preserving cash by deferring payment of U.S. payroll taxes and are currently evaluating the applicability of other provisions in the CARES Act. We are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations. For additional information on the various risks posed by the pandemic, refer to Part II, Item 1A. Risk Factors of this Form 10-Q. Critical Accounting Policies, Significant Judgments and Estimates Our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions believed to be reasonable, which together form the basis for making judgments about the carrying values of assets and liabilities. The full extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on numerous evolving factors including, but not limited to, the magnitude and duration of the pandemic, the extent to which it will impact worldwide macroeconomic conditions, including the speed of recovery, and governmental and business reactions to the pandemic. We evaluate our estimates and assumptions on an ongoing basis. 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 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 Adoption of New Accounting Guidance In August 2018, the FASB issued ASU 2018-15-Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) which establishes new guidance on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the capitalization of such costs, aligning it with the accounting for costs associated with developing or obtaining internal-use software. The new guidance is effective for fiscal years beginning after December 15, 2019. The adoption of the new guidance did not have a significant impact on our financial results. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU eliminates the requirement for an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge. 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 32 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. The FASB issued two ASUs related to financial instruments – credit losses. The ASUs issued were: (i) in June 2016, ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and (ii) in November 2018, ASU 2018-19-Codification Improvements to Topic 326, Financial Instruments-Credit Losses. ASU 2016-13 is intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leasing standard. These ASUs are effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. The modified retrospective method is required upon adoption. The adoption of the new guidance resulted in an adjustment of $0.1 million to reduce the accumulated deficit component of stockholders’ equity and decrease current assets by the same amount in the condensed consolidated balance sheet. 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. The amendments in this update improve consistent application of and simplify GAAP for Topic 740 by clarifying and amending existing guidance for, among other items, intra-period allocation, reporting tax law changes and losses in interim periods, state and local taxes not fully based on income and recognition of deferred tax liability related to certain transactions. There is also new guidance related to consolidated group reporting and tax impacts resulting from business combinations. 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 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 Revenue: Total revenue $ 39,861 100 % $ 26,496 100 % $ 93,536 100 % $ 84,803 100 % Costs and expenses: Cost of product revenue 12,773 32 10,520 40 31,896 34 33,009 39 Cost of service revenue 1,769 4 1,938 7 4,531 5 5,403 6 Research and development 8,128 21 7,125 27 25,275 27 23,362 28 Selling, general and administrative 22,655 57 20,729 78 65,966 70 65,687 77 Total costs and expenses 45,325 114 40,312 152 127,668 136 127,461 150 Loss from operations (5,464) (14) (13,816) (52) (34,132) (36) (42,658) (50) Interest expense (885) (2) (444) (1) (2,682) (3) (3,636) (4) Loss from extinguishment of debt — — — — — — (9,000) (11) Other income (expense), net 107 — 205 1 (248) — 920 1 Loss before income taxes (6,242) (16) (14,055) (52) (37,062) (40) (54,374) (64) Income tax benefit 243 1 1,168 4 2,068 3 2,269 3 Net loss $ (5,999) (15) % $ (12,887) (48) % $ (34,994) (37) $ (52,105) (61) % 33 Revenue We generate revenue primarily from sales of our products and services, and from development agreements, license and royalty agreements, and grants. Our product revenue consists of sales of instruments and consumables. Consumable revenues are largely driven by the size of our installed base of instruments and the annual level of pull-through per instrument. Service revenue is linked to our sales of instruments as our service revenue consists of post-warranty service contracts, preventive maintenance plans, instrument parts, installation and training. We sell our products to leading academic, government, pharmaceutical, biotechnology, clinical, plant and animal research laboratories worldwide. 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 Revenue: Instruments $ 12,624 32 % $ 9,159 35 % 38 % $ 30,672 33 % $ 34,200 40 % (10) % Consumables 16,586 42 11,507 43 44 % 34,924 37 34,528 41 1 % Product revenue 29,210 74 20,666 78 41 % 65,596 70 68,728 81 (5) % Service revenue 6,131 15 5,630 21 9 % 16,457 18 15,875 19 4 % Product and service revenue 35,341 89 26,296 99 34 % 82,053 88 84,603 100 (3) % Development revenue 3,180 7 — — NA 6,180 7 — — 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 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 Americas $ 23,653 60 % $ 11,112 42 % 113 % $ 52,437 56 % $ 35,203 41 % 49 % EMEA 8,837 22 9,092 34 (3) % 23,490 25 28,465 34 (17) % Asia-Pacific 7,371 18 6,292 24 17 % 17,609 19 21,135 25 (17) % 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 $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. 34 Total Revenue 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 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 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 $0.5 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. 35 Development Revenue Effective March 31, 2020, we signed an OEM Supply and Development Agreement (Development Agreement) with a customer. Under the Development Agreement, Fluidigm will develop products based on our microfluidics technology. 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 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. Costs associated with the Development Agreement are recorded in research and development expense. Grant Revenue 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 and which is expected to end in the first half of 2021. Costs associated with grant agreements are recorded in research and development expense. License and Royalty Revenue In March 2020, we entered into an agreement to settle intellectual property infringement claims, in which we received a $3.5 million payment in exchange for a perpetual license under certain of our intellectual property. The settlement is considered a multiple-element arrangement with each element accounted for individually. Accordingly, $3.1 million of the proceeds was recognized as license revenue and $0.4 million was offset against legal costs. Product and Service Cost, Product and Service Gross Profit, and Product and Service Margin Cost of product revenue includes manufacturing costs incurred in the production process, including component materials, labor and overhead, installation, packaging, and delivery costs. In addition, cost of product revenue includes amortization of developed technology and intangibles, royalty costs for licensed technologies included in our products, warranty, provisions for slow-moving and obsolete inventory, and stock-based compensation expense. Our cost of product revenue and related product margin may fluctuate depending on the capacity utilization of our manufacturing facilities in response to market conditions and the demand for our products. Cost of service revenue includes direct labor hours, overhead, and instrument parts. Our cost of service revenue and related service margin may fluctuate depending on the variability in material and labor costs of servicing instruments. 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 Cost of product revenue $ 12,773 $ 10,520 21 % $ 31,896 $ 33,009 (3) % Cost of service revenue 1,769 1,938 (9) % 4,531 5,403 (16) % Cost of product and service revenue $ 14,542 $ 12,458 17 % $ 36,427 $ 38,412 (5) % Product and service gross profit $ 20,799 $ 13,838 50 % $ 45,626 $ 46,191 (1) % Product and service margin 58.9 % 52.6 % 6.3 ppts 55.6 % 54.6 % 1.0 ppts 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. 36 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 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 Research and development $ 8,128 $ 7,125 14 % $ 25,275 $ 23,362 8 % Selling, general and administrative 22,655 20,729 9 % 65,966 65,687 — Total $ 30,783 $ 27,854 11 % $ 91,241 $ 89,049 2 % Research and Development Research and development expense consists primarily of compensation-related costs, product development and material expenses, and other allocated facilities and information technology expenses. Our research and development efforts have focused primarily on enhancing our technologies and supporting development and commercialization of new and existing products and services. Research and development expense also includes costs incurred in conjunction with research grants and development arrangements. 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 $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 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 37 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 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 Interest expense $ (885) $ (444) 99 % $ (2,682) $ (3,636) (26) % Loss from extinguishment of debt — — NA — (9,000) NA Other income (expense), net 107 205 (48) % (248) 920 (127) % Total $ (778) $ (239) 226 % $ (2,930) $ (11,716) (75) % In November 2019, we issued $55.0 million aggregate principal amount of our 5.25% Senior Convertible Notes due 2024 (2019 Notes). Net proceeds of the 2019 Notes issuance were used primarily to retire $50.2 million aggregate principal amount of our Senior Convertible Notes due 2034 (2014 Notes). 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 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. In March 2018, we entered into separate privately negotiated transactions with certain holders of our 2014 Notes to exchange $150.0 million in aggregate principal amount of the 2014 Notes for our 2.75% Exchange Senior Convertible Notes due 2034 (2018 Notes). The 2018 Notes had an effective interest rate of 12.3%. In the first quarter of 2019, the 2018 Notes were converted into 19.5 million shares of our common stock and the 2018 Notes were retired. We recognized a loss of $9.0 million on the conversion of 2018 Notes, which was included in loss on extinguishment of debt. 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 $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. 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 Our tax provision is generally driven by three components: (i) tax provision from our foreign operations, (ii) tax benefits from the amortization of acquisition-related intangible assets, and (iii) discrete items, such as changes in valuation allowances or adjustments upon finalization of tax returns. 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 $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 38 8.3%. 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. Liquidity and Capital Resources Sources of Liquidity 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, 2020 2019 Cash flow summary: Net cash used in operating activities $ (11,684) $ (29,691) Net cash provided by (used in) investing activities 40,797 (38,750) Net cash provided by financing activities 20,425 1,006 Effect of foreign exchange rate fluctuations on cash and cash equivalents 86 (5) Net increase (decrease) in cash, cash equivalents and restricted cash $ 49,624 $ (67,440) Net Cash Used in Operating Activities We derive cash flows from operations primarily from cash collected from the sale of our products and services, and license agreements and grants. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses and working capital to support our business. 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 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 $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 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. 39 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 $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 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. In March 2018, we entered into privately negotiated transactions with certain holders of our 2014 Notes to exchange $150.0 million in aggregate principal amount of the 2014 Notes for $150.0 million in aggregate principal amount of 2018 Notes. In the first quarter of 2019, we received notices from holders of the 2018 Notes electing to voluntarily convert $138.1 million in aggregate principal amount of the 2018 Notes. In February 2019, we notified trustee U.S. Bank National Association of our intention to exercise our issuer’s conversion option with respect to the remaining $11.9 million in aggregate principal amount of 2018 Notes. In total, $150.0 million of the 2018 Notes were converted into 19.5 million shares of our common stock and the 2018 Notes were retired. In November 2019, we closed a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of $55.0 million aggregate principal amount of our 2019 Notes. Net proceeds of the 2019 Notes issuance were $52.7 million, after deductions for commissions and other debt issuance costs. $51.8 million of the proceeds was used to retire $50.2 million aggregate principal amount of our 2014 Notes, leaving $1.1 million of aggregate principal amount of our 2014 Notes outstanding. Pursuant to the Indenture governing the 2014 Notes, holders of the 2014 Notes have the right, subject to certain conditions specified in such indenture, to require the Company to purchase their 2014 Notes beginning in February 2021. The private placement of the 2019 Notes, and concurrent repurchase of a portion of the 2014 Notes, had the effect of refinancing a portion of the Company’s outstanding debt under the 2014 Notes to December 2024. The 2019 Notes bear interest at 5.25% per annum, payable semiannually on June 1 and December 1 of each year, beginning on June 1, 2020. The Notes will mature on December 1, 2024, unless earlier repurchased or converted pursuant to their terms. The 2019 Notes will be convertible at the option of the holder at any point prior to close of business on the second scheduled trading day preceding the maturity date. The initial conversion rate of the Notes is 344.8276 shares of the Company’s common stock per $1,000 principal amount of 2019 Notes (which is equivalent to an initial conversion price of $2.90 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. 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 40 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. 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. Outstanding loans under the Revolving Credit Facility bear interest, at the greater of (i) prime rate plus 0.50% or (ii) 5.50%. Amounts drawn under the Revolving Credit Facility will be used for working capital and general corporate purposes. 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). The Amendment extends the maturity date by two years, to August 2, 2022. We also amended the interest rate to be the greater of (i) prime rate (as customarily defined), plus 0.50%, floating, and (ii) 5.25%. Interest on any outstanding loans continues to be due and payable monthly and the principal balance is due at maturity though loans can be prepaid at any time without penalty. Annual administration fees are unchanged. The Amendment also includes various administrative changes. 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. However, we may experience lower than expected cash generated from operating activities or greater than expected capital expenditures, cost of revenue, or operating expenses, and we may need to raise additional capital to fund our operations, further our research and development activities, or acquire or invest in a business. Our future funding requirements will depend on many factors, including market acceptance of our products, the cost of our research and development activities, the cost of filing and prosecuting patent applications, the cost associated with litigation or disputes relating to intellectual property rights or otherwise, the cost and timing of regulatory clearances or approvals, if any, the cost and timing of establishing additional sales, marketing, and distribution capabilities, the cost and timing of establishing additional technical support capabilities, and the effect of competing technological and market developments. In the future, we may acquire businesses or technologies from third parties, and we may decide to raise additional capital through debt or equity financing to the extent we believe this is necessary to successfully complete these acquisitions. If we require additional funds in the future, we may not be able to obtain such funds on acceptable terms, or at all, and our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic. If we raise additional funds by issuing equity securities, our stockholders could experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support, research and development, or other resources devoted to our products. 41 Contractual Obligations and Commitments Our operating lease obligations relate to leases for our current corporate headquarters and leases for manufacturing and office space for our foreign subsidiaries. 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 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.