Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with our consolidated financial statements and the notes to those statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Fluidigm and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in “Risk factors” in Item 1A of this Form 10-K, in this Item 7, and elsewhere in this Form 10-K. Except as may be required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Overview
Fluidigm improves life by driving meaningful insights in health and disease. Our innovative technologies explore the biological complexities of disease to advance human health through research, diagnostics and clinical applications. We create, manufacture, and market a range of products and services, including instruments, consumables, reagents and software that are used by researchers and clinical labs worldwide. Our customers are leading academic and government laboratories, as well as pharmaceutical, biotechnology, plant and animal research organizations, and clinical laboratories worldwide. Together with our customers, we strive to increase the quality of life for all.
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 microfluidics instruments, which are assembled by our contract manufacturer located within our Singapore facility. All of our microfluidic products 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.
Our total revenue was $138.1 million in 2020, of which $122.5 million was product and service revenue; $117.2 million in 2019, of which $116.7 million was product and service revenue and $113.0 million in 2018, which was entirely product and service revenue. We have incurred significant net losses since our inception in 1999 and, as of December 31, 2020, our accumulated deficit was $676.8 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, some of our essential workers have been working at our laboratories and offices, and in some cases, at customer sites, while our administrative employees have been working from home. 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 stocking levels of raw materials and proactive supplier management. We have taken steps to help keep our workforce healthy and safe, and to ensure a strong data security and internal control environment.
While Fluidigm is a designated essential business, widespread global adoption of work-from-home and shelter-in-place orders resulted in a significant slowdown in customer activities. We also saw near-term COVID-19-related priorities temporarily displace longer term projects and research activities. As customers have returned to work, we have seen some customer ordering recover, but the timing of complete recovery remains uncertain given additional waves of infection and the need to distribute vaccines. We estimate that about 10% of our customers are either closed or working at reduced capacity as of the end of 2020 because of the COVID-19 pandemic, compared to 60% to 70% in the first quarter and an estimated 30% to 40% of our global academic research community either remaining closed or working at a slower pace at the end of the second quarter. Although most of our customers are working, they have not returned to pre-pandemic levels of activity. We believe the impact of COVID-19 on our customers has resulted in the delay of sales of our mass cytometry instrument systems to future periods.
In August 2020, we received Emergency Use Authorization (EUA) from the U.S. Food and Drug Administration (FDA) for our Advanta™ Dx SARS-CoV-2 RT-PCR Assay, a newly developed, extraction-free saliva-based test to detect nucleic acid from the SARS-CoV-2 virus, designed to be run on the Fluidigm® Biomark™ HD microfluidics platform. In January 2021, we received the CE-IVD mark for our saliva-based Advanta Dx SARS-CoV-2 Assay allowing for commercial sales of this CE-IVD commercial kit in Europe. In addition, Fluidigm is actively supporting customers who are developing lab-developed tests,
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as well as customers who are providing COVID-19 diagnostic tests outside of the U.S. The development of COVID-19 related applications has positively impacted sales of our microfluidics instruments, consumables, and mass cytometry reagents.
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 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 September 2020, we executed a contract with the National Institutes of Health (NIH) for a project under the NIH Rapid Acceleration of Diagnostics (RADx) program (collectively the NIH Contract). 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. The NIH Contract has a total value of up to $34.0 million upon the achievement of certain milestones. Through December 31, 2020, we have achieved milestones and received funding of $25.4 million. Proceeds from the NIH Contract will be used primarily to expand production capacity for COVID-19 testing with Fluidigm microfluidics technology and, to a lesser extent, to reimburse research and development costs. We have spent approximately $10.2 million for capital expenditures through December 31, 2020 for the expansion of our Singapore facility as a result of the NIH Contract. We expected to complete the NIH Contract and related spending for the expansion in 2021.
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. We have not paid, and do not currently expect to pay any liquidated damages and are in compliance with the terms of the contract. We are working with the NIH continuously to ensure we are in compliance with the contract requirements and milestones.
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 million, from time to time, through an at-the-market 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 2020 and constrained hiring until our business returned 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.
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 I, Item 1A. Risk Factors of this Form 10-K.
Critical Accounting Policies, Significant Judgments and Estimates
Our consolidated financial statements and the related notes included elsewhere in this Form 10-K are prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other
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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 assessed certain accounting matters that generally require consideration of forecasted financial information, including the unknown impact of COVID-19 as of December 31, 2020. These accounting matters included, but were not limited to, our allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of goodwill and other long-lived assets. Actual results could differ materially from these estimates and could have a material adverse effect on our consolidated financial statements.
We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our audited 2020 consolidated financial statements.
Revenue Recognition
We generate revenue primarily from the sale of our products and services. Product revenue is derived from the sale of instruments and consumables, assays and reagents. Service revenue is primarily derived from the sale of instrument service contracts, repairs, installation, training and other specialized product support services. We also generate revenue from development agreements, license and royalty agreements and grants. Revenue is reported net of any sales, use and value-added taxes we collect from customers as required by government authorities. Research and development cost includes costs associated with development and grant revenue.
We recognize revenue based on the amount of consideration we expect to receive in exchange for the goods and services we transfer to the customer. Our commercial arrangements typically include multiple distinct products and services, and we allocate revenue to these performance obligations based on their relative standalone selling prices. Standalone selling prices (SSP) are generally determined using observable data from recent transactions. In cases where sufficient data is not available, we estimate a product’s SSP by using a cost plus a margin approach or by applying a discount to the product’s list price.
Product Revenue
We recognize product revenue at the point in time when control of the goods passes to the customer and we have an enforceable right to payment. This generally occurs either when the product is shipped from one of our facilities or when it arrives at the customer’s facility, based on the contractual terms. Customers generally do not have a unilateral right to return products after delivery. Invoices are generally issued at shipment and generally become due in 30 to 60 days.
We sometimes perform shipping and handling activities after control of the product passes to the customer. We have made an accounting policy election to account for these activities as product fulfillment activities rather than as separate performance obligations.
Service Revenue
We recognize revenue from repairs, maintenance, installation, training and other specialized product support services at the point in time the work is completed. Installation and training services are generally billed in advance of service. Repairs and other services are generally billed at the point the work is completed.
Revenue associated with instrument service contracts is recognized on a straight-line basis over the life of the agreement, which is generally one to three years. We believe this time-elapsed approach is appropriate for service contracts because we provide services on demand throughout the term of the agreement. Invoices are generally issued in advance of service on a monthly, quarterly, annual or multi-year basis. Payments made in advance of service are reported on our consolidated balance sheet as deferred revenue.
Development Revenue
The Company has entered and may continue to enter into development agreements with third parties that provide for up-front and periodic milestone payments. Our development agreements may include more than one performance obligation. At the inception of the contract, we assess whether each obligation represents a separate performance obligation or whether such obligations should be combined as a single performance obligation. The transaction price for each development agreement is determined based on the amount of consideration we expect to be entitled to for satisfying all performance obligations within the agreement.
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We assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. In arrangements where we satisfy performance obligation(s) over time, we recognize development revenue typically using an input method based on our costs incurred relative to the total expected cost which determines the extent of our progress toward completion. As part of the accounting for these arrangements, we develop estimates and assumptions that require judgment to determine the transaction price and progress towards completion. We review our estimate of the transaction price and progress toward completion based on the best information available to recognize the cumulative progress toward completion as of the end of each reporting period, and make revisions to such estimates as necessary.
We also generate revenue from development or collaboration agreements that do not include upfront or milestone-based payments and generally recognize revenue on these types of agreements based on the timing of development activities.
Other Revenue
Other revenue consists of license and royalty revenue and grant revenue. We recognize revenue from license agreements when the license is transferred to the customer and the customer is able to use and benefit from the license. For contracts that include sales-based royalties, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied.
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 Fluidigm 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.
We receive grants from various entities to perform research and development activities over contractually defined periods. Revenue is generally recognized provided that the conditions under which the grants were provided have been met and any remaining performance obligations are perfunctory.
Product Warranties
We generally provide a one-year warranty on our instruments. We accrue for estimated warranty obligations at the time of product shipment. We periodically review our warranty liability and record adjustments based on the terms of warranties provided to customers, and historical and anticipated warranty claim experience. This expense is recorded as a component of cost of product revenue in the consolidated statements of operations.
Significant Judgments
Applying the revenue recognition practices discussed above often requires significant judgment. Judgment is required when identifying performance obligations, estimating SSP and allocating purchase consideration in multi-element arrangements and estimating the future amount of our warranty obligations. Significant judgment is also required when interpreting commercial terms and determining when control of goods and services passes to the customer. Any material changes created by errors in judgment could have a material effect on our operating results and overall financial condition.
Accounts Receivable
Trade accounts receivable are recorded at net invoice value. We review our exposure to accounts receivable and provide allowances of specific amounts if collectability is no longer reasonably assured based on historical experience and specific customer collection issues. We evaluate such allowances on a regular basis and adjust them as needed. To reduce credit risk, we perform credit evaluations of our customers. We generally do not require collateral to support credit sales.
Inventories, net
Inventories are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. We regularly review inventory for excess and obsolete products and components. Provisions for slow-moving, excess, and obsolete inventories are recorded when required to reduce inventory values to their estimated net realizable values based on product life cycle, development plans, product expiration, and quality issues.
Leases
We determine if an arrangement is a lease, or contains a lease, at inception. Operating leases are included in operating lease right-of-use (ROU) assets, net and current and non-current operating lease liabilities in our consolidated balance sheets. ROU
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assets represent our right-to-use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Significant judgment is required in determining the incremental collateralized borrowing rate. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We elected the short-term lease recognition exemption for all leases that qualify. For those leases that qualify, we will not recognize ROU assets or lease liabilities for leases with an initial lease term of one year or less. We also elected not to separate lease and nonlease components for our building leases. The nonlease components are generally variable in nature and are expected to represent most of our variable lease costs. Variable costs are expensed as incurred. We have taken a portfolio approach for our vehicle leases by country.
Business Combinations, Goodwill, Intangible Assets and Other Long-Lived Assets
We have completed acquisitions of businesses in the past and may acquire additional businesses or technologies in the future. The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of acquisition. We allocate the purchase price, which is the sum of the consideration provided in a business combination, to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies and estimates of future revenue.
Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Our intangible assets include developed technology, patents and licenses. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives. Goodwill and intangible assets with indefinite lives are not subject to amortization but are tested for impairment on an annual basis during the fourth quarter or whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Events or changes in circumstances that could affect the likelihood that we will be required to recognize an impairment charge include, but are not limited to, declines in our stock price or market capitalization, economic downturns and other macroeconomic events, including the current COVID-19 pandemic, declines in our market share or revenues, and an increase in our losses, rapid changes in technology, failure to achieve the benefits of capacity increases and utilization, significant litigation arising out of an acquisition, or other matters. Any impairment charges could have a material adverse effect on our operating results and net asset value in the quarter in which we recognize the impairment charge. In evaluating our goodwill and intangible assets with indefinite lives for indications of impairment, we first conduct an assessment of qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we compare the fair value of our reporting unit to its carrying value. If the fair value of our reporting unit exceeds its carrying value, goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds its fair value, then an impairment loss equal to the difference would be recorded to goodwill. There were no indications of impairment in 2020. We did not recognize any impairment of goodwill for any of the periods presented herein.
We evaluate our long-lived assets, including finite-lived intangibles, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If any indicator of impairment exists, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of the asset can be recovered through undiscounted future operating cash flows. If impairment is indicated, we estimate the asset’s fair value using future discounted cash flows associated with the use of the asset and adjust the carrying value of the asset accordingly. In the fourth quarter of 2019, we recognized an impairment charge of $0.4 million on patents and licenses that were not used in then current products and were not expected to be used in future product offerings.
Deferred Grant Income
In September 2020, we executed the NIH Contract. The NIH Contract has a total value of up to $34.0 million upon the achievement of certain milestones. Proceeds from the NIH Contract will be used primarily to expand production capacity for COVID-19 testing with Fluidigm microfluidics technology and, to a lesser extent, to offset applicable operating expenses.
Accounting for the NIH Contract does not fall under ASC 606, Revenue from Contracts with Customers, as the NIH will not benefit directly from our expansion or product development. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we applied International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, by analogy when accounting for the NIH Contract payments to Fluidigm.
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The NIH Contract proceeds used for production capacity expansion meet the definition of grants related to assets as the primary purpose for the payments is to fund the purchase and construction of capital assets to scale up production capacity. Under IAS 20, government grants related to assets are presented in the statement of financial position either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset. Either of these two methods of presentation of grants related to assets in financial statements are regarded as acceptable alternatives under IAS 20. We have elected to record the grants received as deferred income using the first method.
Under IAS 20, grant proceeds are recognized when there is reasonable assurance the conditions of the grant will be met and the grant will be received. With the NIH Contract, this occurs when either each milestone has been accepted by NIH or management concludes the conditions of the grant have been substantially met. Deferred income related to production capacity expansion will be amortized over the period of depreciation for the related assets as a reduction of depreciation expense. Deferred income related to reimbursement of operating expenses is recorded as a reduction of those expenses incurred to date.
Convertible 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 2.75% Exchange Convertible Senior Notes due 2034 (2018 Notes). Following the exchange, approximately $51.3 million in aggregate principal amount of the 2014 Notes remained outstanding, together with $150.0 million in aggregate principal amount of the 2018 Notes.
As the 2018 Notes were convertible, at our election, into cash, shares of our common stock, or a combination of cash and shares of our common stock, we accounted for the 2018 Notes under the cash conversion guidance in ASC 470, whereby the embedded conversion option in the 2018 Notes was separated and accounted for in equity. The embedded conversion option value was calculated as the difference between (i) the total fair value of the 2018 Notes and (ii) the fair value of a similar debt instrument excluding the embedded conversion option. We determined an embedded conversion option value of $29.3 million, which was recorded in additional paid-in-capital and reduced the carrying value of the 2018 Notes. The resulting discount on the 2018 Notes was amortized over the expected term of the 2018 Notes, using the effective interest method through the first note holder put date, of February 6, 2023. In the first quarter of 2019, the 2018 Notes were converted into approximately 19.5 million shares of common stock and the 2018 Notes were retired. We recorded a loss of $9.0 million on the retirement of the 2018 Notes. This amount represented the difference between the fair value of the bonds converted and the carrying value of the bonds at the time of conversion, including unamortized premiums, discounts and debt issuance costs. We determined the fair value of the 2018 Notes using valuation techniques that required us to make assumptions related to the implied discount rate.
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. The majority of the issuance proceeds were used to retire approximately $50.2 million of aggregate principal amount of our 2014 Notes, leaving approximately $1.1 million of aggregate principal amount of our 2014 Notes outstanding. We recorded a loss of $3.0 million on the extinguishment of the 2014 Notes. This amount represented the difference between the fair value of the 2019 Notes used to extinguish the debt and the carrying value of the 2014 Notes, including unamortized debt issuance costs.
As the 2019 Notes do not provide for a cash conversion feature, the 2019 Notes are recorded as debt in their entirety in accordance with ASC 470. For the 2014, 2018 and 2019 Notes, offering-related costs, including underwriting costs, were capitalized as debt issuance costs, recorded as an offset to the carrying value of the related Notes, and are amortized over the expected term of the related Notes using the effective interest method.
Stock-Based Compensation
Our board of directors sets the terms, conditions, and restrictions related to our Employee Stock Purchase Plan (ESPP) and the grant of stock options, Restricted Share Units (RSUs) and performance-based awards (PSUs) under our various stock-based plans. Our board of directors determines the number of awards to grant and sets the vesting criteria. For PSUs, our board of directors sets the performance objectives and other vesting provisions in determining the number of shares or value of performance units and performance shares that will be paid out. Such payout will be a function of the extent to which performance objectives or other vesting provisions have been achieved.
We recognize compensation costs for all stock-based awards, including stock options, RSUs, PSUs and stock purchased under our ESPP, based on the grant date fair value of the award. We recognize stock-based compensation expense on a straight-line basis over the requisite service periods for non-performance-based awards. For RSUs, fair value is measured based on the closing fair market value of our common stock on the date of grant. For PSUs with a market condition, we used a Monte Carlo simulation pricing model to incorporate the market condition effects at our grant date. For PSUs with performance conditions,
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stock-based compensation expense is recognized over the requisite service period when the achievement of each individual performance goal becomes probable.
The fair value of options and stock purchases under ESPP on the grant date is estimated using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions, including expected term, volatility, risk-free interest rate and the fair value of our common stock. These assumptions generally require significant judgment. We determine the expected volatility based on our historical stock price volatility generally commensurate with the estimated expected term of the stock awards. The expected term of an award is based on historical forfeiture experience, exercise activity, and the terms and conditions of the stock awards. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each grant’s expected term. We account for forfeitures as they occur.
Income Taxes
We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. Our provision for income taxes primarily consists of foreign tax expense/benefit.
As part of the process of preparing our consolidated financial statements, we continuously monitor the circumstances impacting the expected realization of our deferred tax assets for each jurisdiction. We consider all available evidence, including historical operating results in each jurisdiction, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. A valuation allowance is established to reduce our deferred tax assets to the amount that is more likely than not to be realized. These deferred tax assets primarily consist of net operating loss carryforwards and research and development tax credits. We intend to maintain such valuation allowance until sufficient evidence exists to support its reduction. Our deferred tax liabilities primarily consist of book and tax basis differences in fixed assets and acquired identifiable intangible assets. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Changes in these estimates may result in significant increases or decreases to our tax provision in a period in which such estimates are changed, which in turn would affect net income or loss.
We recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Any interest and penalties related to uncertain tax positions are reflected in the income tax provision.
At December 31, 2017, we changed our permanent reinvestment assertion and will not permanently reinvest our foreign earnings outside the United States. The cash generated from some of our foreign subsidiaries may be used domestically to fund operations. Any domestic foreign withholding tax and state taxes that may be due upon future repatriation of earnings is not expected to be significant.
Recent Accounting Changes and Accounting Pronouncements
Adoption of New Accounting Guidanc e
In August 2018, the FASB issued Accounting Standard Update (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 was 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 was effective for annual and interim goodwill impairment testing
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performed for our fiscal year beginning January 1, 2020. 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 were effective for fiscal years beginning after December 15, 2019, and interim periods within those years. The modified retrospective method was required upon adoption. The new guidance was effective for fiscal years beginning after December 15, 2019. The adoption of the new guidance resulted in an adjustment of approximately $0.1 million to reduce the accumulated deficit component of stockholders’ equity and decrease current assets by the same amount in our 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 of the new guidance on our 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. The adoption of the new guidance is not expected to have a significant impact on our financial results.
Results of Operations
The following table presents our historical consolidated statements of operations data for the years ended December 31, 2020, 2019, and 2018, and as a percentage of total revenue for the respective years (in thousands):
Year Ended December 31,
2020 2019 2018
Revenue:
Total revenue $ 138,144 100 % $ 117,243 100 % $ 112,964 100 %
Costs and expenses:
Cost of product revenue 47,527 34 45,461 39 44,861 39
Cost of service revenue 7,291 5 7,503 6 6,454 6
Research and development 36,461 26 31,640 27 30,030 27
Selling, general and administrative 97,901 71 84,478 72 79,783 71
Total costs and expenses 189,180 136 169,082 144 161,128 143
Loss from operations (51,036) (36) (51,839) (44) (48,164) (43)
Interest expense (3,572) (3) (4,279) (4) (13,893) (12)
Loss from extinguishment of debt — — (12,020) (10) — —
Other income, net 507 — 1,433 1 637 1
Loss before income taxes (54,101) (39) (66,705) (57) (61,420) (54)
Income tax benefit 1,081 1 1,915 2 2,407 2
Net loss $ (53,020) (38) % $ (64,790) (55) % $ (59,013) (52) %
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Revenue
We generate revenue primarily from sales of our products and services, development agreements, license and royalty agreements, and grants. Our product revenue consists of sales of instruments and consumables. Consumables revenue 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 the sales and active installed base of our instruments as our service revenue primarily consists of post-warranty service contracts, preventive maintenance plans, instrument parts, installation and training. We sell our products to leading academic and government laboratories, as well as pharmaceutical, biotechnology, clinical, plant and animal research organizations and clinical laboratories worldwide.
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 $8.8 million of development revenue from this agreement for the year ended December 31, 2020.
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 year is attributable to a grant agreement entered into in the second half of 2019, 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 and 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.
No single customer represented more than 10% of our total revenue for 2020, 2019, or 2018. Revenue from our five largest customers was 23% of total revenue for 2020 and 17% for both the years ended December 31, 2019 and 2018.
The following table presents our revenue by source for the years ended December 31, 2020, 2019, and 2018, and as a percentage of total revenue for the respective years (in thousands):
Year Ended December 31, Change
2020 2019 2018 2020 2019
Revenue:
Instruments $ 45,536 33 % $ 50,004 43 % $ 45,491 40 % (9) % 10 %
Consumables 54,408 39 45,412 39 48,159 43 20 % (6) %
Product revenue 99,944 72 95,416 82 93,650 83 5 % 2 %
Service revenue 22,579 16 21,277 18 19,314 17 6 % 10 %
Product and service revenue 122,523 88 116,693 100 112,964 100 5 % 3 %
Development revenue 8,865 6 — — — — NA NA
Grant revenue 3,593 3 550 — — — 553 % NA
License revenue 3,163 3 — — — — NA NA
Total revenue $ 138,144 100 % $ 117,243 100 % $ 112,964 100 % 18 % 4 %
The following table presents our total revenue by geographic area of our customers and as a percentage of total revenue for each year presented (in thousands):
Year Ended December 31, Change
2020 2019 2018 2020 2019
Americas $ 74,586 54 % $ 47,016 40 % $ 51,172 46 % 59 % (8) %
EMEA 37,776 27 40,024 34 36,617 32 (6) % 9 %
Asia-Pacific 25,782 19 30,203 26 25,175 22 (15) % 20 %
Total revenue $ 138,144 100 % $117,243 100 % $112,964 100 % 18 % 4 %
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The Americas revenue includes revenue generated in the United States of $72.0 million, $43.4 million, and $48.1 million for 2020, 2019 and 2018, respectively . Asia-Pacific revenue includes sales to customers in China of $11.1 million, $15.4 million and $14.0 million for 2020, 2019 and 2018, respectively. There was no foreign country or jurisdiction with sales in excess of 10% of total revenue in 2020. Except for China, no other foreign country or jurisdiction had sales in excess of 10% of our total revenue during the years 2019 and 2018.
The following section includes management discussion and analysis for the fiscal year ended December 31, 2020. Refer to Part I Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 27, 2020, for a discussion of the comparative results for 2019 and 2018, which discussion of comparative results is incorporate d by reference into this Form 10-K.
Total Revenue. Total revenue increased by $20.9 million or 18%, to $138.1 million for 2020 compared to $117.2 million for 2019. Americas revenue increased by 59%, driven by sales of our Advanta Dx SARS-CoV-2 RT-PCR test and related sales of microfluidics instruments; development revenue; and grant revenue; partially offset by lower mass cytometry product sales. COVID-19 microfluidics revenues only partially offset lower mass cytometry instrument revenues for EMEA, resulting in a 6% decline in EMEA revenues. Stronger European currencies in 2020 compared to 2019 added approximately 2% to EMEA's reported revenues. The 15% decrease in Asia-Pacific revenues is due to decreases in revenue in all product categories due to the pandemic and shelter-in-place orders. On a company-wide basis, stronger foreign exchange rates positively impacted revenues by less than 1% for 2020 compared to 2019.
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Product and Service Revenue. The following tables present the split of product and service revenue between mass cytometry and microfluidic product categories and as a percentage of the respective category’s total product and service revenue for each year presented (in thousands):
Year Ended December 31, Change
2020 2019 2018 2020 2019
Mass cytometry:
Instruments $ 28,484 46 % $ 41,575 57 % $ 34,308 58 % (31) % 21 %
Consumables 18,023 29 17,850 24 14,962 25 1 19
Total product revenue 46,507 75 59,425 81 49,270 83 (22) 21
Service revenue 15,625 25 13,895 19 10,230 17 12 36
Total product and service revenue $ 62,132 100 % $ 73,320 100 % $ 59,500 100 % (15) % 23 %
Year Ended December 31, Change
2020 2019 2018 2020 2019
Microfluidics:
Instruments $ 17,053 28 % $ 8,429 19 % $ 11,183 21 % 102 % (25) %
Consumables 36,384 60 27,562 64 33,197 62 32 (17)
Total product revenue 53,437 88 35,991 83 44,380 83 48 (19)
Service revenue 6,954 12 7,382 17 9,084 17 (6) (19)
Total product and service revenue $ 60,391 100 % $ 43,373 100 % $ 53,464 100 % 39 % (19) %
The decline in mass cytometry instrument revenue was primarily attributable to lower volumes of instrument sales due to ordering delays created by lab closures in response to the COVID-19 pandemic and, to a lesser extent, the impact of lower average unit selling prices on mass cytometry instruments. Customers are also shifting their resources to COVID-19 related projects. Mass cytometry consumables revenues benefited from COVID-19 immune profiling studies.
Microfluidics revenues increased due to sales of our newly developed SARS-CoV-2 diagnostic test and related sales of instrument systems. Diagnostic revenue, comprised of both consumables and instruments was $22.4 million in 2020, and more than offset the decline in other microfluidics revenue caused by a pandemic-related slowdown in key account activity.
The COVID-19 pandemic is still ongoing, and although we expect it to dissipate in 2021 as vaccinations proliferate worldwide, the timing and pace of the recovery remain uncertain. Reallocations of research budgets to COVID-related projects that started in 2020 are still in place as we enter 2021, and these continuing budget reallocations and any other pandemic-related impacts may result in variability in sequential quarterly revenue growth.
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.
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The following table presents our product and service cost, product and service gross profit, and product and service margin for each year presented (in thousands):
Year Ended December 31, Change Change
2020 2019 2018 2020 2019
Cost of product revenue $ 47,527 $ 45,461 $ 44,861 5 % 1 %
Cost of service revenue 7,291 7,503 6,454 (3) % 16 %
Cost of product and service revenue $ 54,818 $ 52,964 $ 51,315 4 % 3 %
Product and service gross profit $ 67,705 $ 63,729 $ 61,649 6 % 3 %
Product and service margin 55.3 % 54.6 % 54.6 % 0.7 ppts — ppts.
Product and service margin increased by 0.7 percentage points during 2020 compared to 2019. The impact of spreading fixed depreciation and amortization over a higher revenue base contributed 0.6 percentage points of the improvement in margin. The impact of lower average unit selling prices on mass cytometry instruments was offset by lower service costs and lower production costs associated with mass cytometry consumables.
Product and service margin was unchanged in 2019 compared to the prior year. Higher capacity utilization, as well as the impact of spreading fixed depreciation and amortization over a higher revenue base, was offset by higher inventory reserves, unfavorable product mix and lower average selling prices on mass cytometry products.
Operating Expenses
The following table presents our operating expenses for each year presented (in thousands):
Year Ended December 31, Change
2020 2019 2018 2020 2019
Research and development $ 36,461 $ 31,640 $ 30,030 15 % 5 %
Selling, general and administrative 97,901 84,478 79,783 16 % 6 %
Total operating expenses $ 134,362 $ 116,118 $ 109,813 16 % 6 %
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. 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 $4.8 million, or 15%, to $36.5 million for 2020 compared to $31.6 million for 2019. Increases are primarily due to higher compensation costs, including higher employee incentive compensation and stock-based compensation costs, and outside service costs related to development and grant projects. Proceeds of the NIH Contract offset $1.4 million of research and development costs.
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 $13.4 million, or 16%, to $97.9 million for 2020 compared to $84.5 million for 2019. The increase in expense is primarily attributable to higher compensation costs, including higher employee incentive compensation and stock-based compensation, and higher legal costs. In addition, we incurred $4.9 million of increased facilities costs reflecting costs associated with our new lease, effective March 2020, for our corporate headquarters and related moving expenses. Lease rates had increased since entering into our previous, now expired, lease. Travel costs fell
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$3.6 million compared to the prior period, while costs related to trade shows and other events fell $1.9 million due to the cancellation of in-person events in light of the COVID-19 pandemic.
Interest Expense, Loss from Extinguishment of Debt and Other Income, Net
The following table presents these items for each year presented (in thousands):
Year Ended December 31, Change
2020 2019 2018 2020 2019
Interest expense $ (3,572) $ (4,279) $ (13,893) 17 % 69 %
Loss from extinguishment of debt — (12,020) — (100) % NA
Other income, net 507 1,433 637 65 % (125) %
Total $ (3,065) $ (14,866) $ (13,256) 79 % (12) %
In November 2019, we issued $55.0 million aggregate principal amount of our 2019 Notes. Net proceeds of the 2019 Notes issuance were used primarily to retire $50.2 million aggregate principal amount of our 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%.
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 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 $3.6 million for the twelve months ended December 31, 2020 consists primarily of interest on $55.0 million of 2019 Notes, while interest expense of $4.3 million for the twelve months ended December 31, 2019 included 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 lower interest expense of $3.6 million for the twelve months ended December 31, 2020 compared to $4.3 million for the twelve months ended December 31, 2019 reflects the impact of higher debt balances and higher interest rates for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2020.
Other income, net primarily consists of interest income and gains or losses on foreign exchange. Other income, net, of $0.5 million for 2020 is primarily attributable to $0.2 million of interest income, and $0.2 million of foreign exchange gains.
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 $1.1 million, or an effective tax rate benefit of 2.0%, for the year ended December 31, 2020. The tax benefit was principally due to the amortization of our acquisition-related deferred tax liabilities, partially offset by a provision from our foreign operations.
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2020, our principal sources of liquidity consisted of $68.5 million of cash and cash equivalents, as well as $1.0 million of restricted cash and $15.0 million of availability under our Revolving Credit Facility.
The following table presents our cash flow summary for each year presented (in thousands):
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Year Ended December 31,
2020 2019 2018
Cash flow summary:
Net cash used in operating activities $ (15,417) $ (35,210) $ (25,201)
Net cash provided by (used in) investing activities 39,975 (39,301) 4,719
Net cash provided by financing activities 20,857 2,790 57,660
Net increase (decrease) in cash, cash equivalents and restricted cash 45,800 (71,665) 37,345
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 the business. We have historically experienced negative cash flows from operating activities as we have expanded our business and built our infrastructure domestically and internationally.
Net cash used in operating activities in 2020 was $15.4 million and consisted of net loss of $53.0 million less non-cash adjustments of $35.2 million, and a net increase in assets and liabilities of $2.4 million. Non-cash items include stock-based compensation expense of $14.5 million, amortization of developed technology of $11.9 million, depreciation and amortization of $4.0 million, and lease amortization of $2.0 million. Increases in inventories and accounts receivable balances represent working capital increases due to higher revenues. Higher incentive compensation and other accruals largely offset these increases.
Net cash used in operating activities in 2019 was $35.2 million and consisted of net loss of $64.8 million less non-cash adjustments of $43.2 million, and a net increase in assets and liabilities of $13.6 million. Non-cash items primarily included a loss from extinguishment of debt of $12.0 million, amortization of developed technology of $11.2 million, stock-based compensation expense of $11.4 million, and depreciation and amortization of $4.6 million. The net increase in assets and liabilities was primarily due to lower accrued liabilities for retention bonuses and other variable compensation.
Net cash used in operating activities in 2018 was $25.2 million and consisted of net loss of $59.0 million less non-cash adjustments of $37.4 million, and a net reduction in assets and liabilities of $3.6 million. Non-cash items primarily included amortization of developed technology of $11.2 million, stock-based compensation of $11.0 million and depreciation and amortization of $5.4 million. The net increase in assets and liabilities was primarily due to lower accrued liabilities for retention bonuses.
Net Cash Provided by (Used in) Investing Activities. Our primary investing activities consist of purchases, sales, and maturities of our short-term investments and capital expenditures for manufacturing, laboratory, computer equipment and software to support our infrastructure and workforce. We expect to continue to incur costs for capital expenditures to improve manufacturing efficiencies and strengthen information technology and network security. 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 2020 was $40.0 million and includes $36.8 million of proceeds from the sales and maturities of investments as well as $21.0 million of proceeds from the NIH Contract, reflecting the portion
of the proceeds from the NIH Contract attributable to the capacity expansion. These inflows were partially offset by capital expenditures of $12.7 million, including $10.2 million of capital expenditures funded by the NIH Contract to expand our Singapore manufacturing facility, and $5.2 million of net cash paid for the InstruNor acquisition.
Total proceeds from the NIH Contract are expected to be $34.0 million, of which we received $25.4 million in 2020. We expect to incur the balance of the capital expenditures for the manufacturing capacity expansion and receive the remaining proceeds from the NIH, subject to satisfactory completion of all remaining milestones, in 2021.
Net cash used in investing activities in 2019 was $39.3 million, which included purchases of investments of $62.4 million and capital expenditures of $2.5 million to support our commercial and manufacturing operations, partially offset by proceeds from maturities of investments of $25.6 million.
Net cash provided by investing activities in 2018 was $4.7 million, which included proceeds from maturities of investments of $6.5 million, partially offset by purchases of investments of $1.5 million, and capital expenditures of $0.4 million to support our commercial and manufacturing operations.
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Net Cash Provided by Financing Activities. We generated cash from financing activities of $20.9 million during 2020. Proceeds from our ATM equity offering were $20.2 million, net of commissions and offering costs. Proceeds from our ESPP program and stock options exercises were largely offset by payments of debt issuance costs and income tax withholding related to net share settlement of equity awards.
We generated cash from financing activities of $2.8 million during 2019. $51.8 million of proceeds from a new $55.0 million debt issuance were used to retire 2014 Notes, as discussed below in more detail. Payments of debt and equity issuance costs of $1.9 million were partially offset by cash inflows from equity programs.
We generated cash from financing activities of $57.7 million during 2018, and approximately $59.5 million was generated from a public offering of our common stock. The remainder reflects the proceeds from stock option exercises and ESPP purchases, offset by debt and equity issuance costs and payments of taxes for the net settlement of equity awards.
Capital Resources. At December 31, 2020 and December 31, 2019, our working capital, excluding deferred revenues and restricted cash, was $76.9 million and $74.0 million, respectively, including cash and cash equivalents of $68.5 million and $21.7 million, respectively, and short-term investments of $37.0 million at December 31, 2019.
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. Following the exchange transactions, approximately $51.3 million in aggregate principal amount of 2014 Notes remained outstanding.
In the first quarter of 2019, we received notices from holders of the 2018 Notes electing to voluntarily convert approximately $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 approximately $11.9 million in aggregate principal amount of 2018 Notes. In total, $150.0 million of the 2018 Notes were converted into approximately 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 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. The remaining cash proceeds from the issuance of the 2019 Notes were used for general corporate purposes. 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 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 our Revolving Credit Facility with 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
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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 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 December 31, 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 9 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.
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
The following summarizes our contractual obligations as of December 31, 2020 (in thousands):
Payments Due by Period
Total Less than 1
Year 1-3 Years 3-5 Years Thereafter
Debt obligations $ 67,851 $ 3,411 $ 5,807 $ 57,920 $ 713
Operating lease obligations, net 68,272 7,565 14,205 14,594 31,908
Purchase obligations 12,928 12,928 — — —
Total $ 149,051 $ 23,904 $ 20,012 $ 72,514 $ 32,621
Debt obligations include the principal amount of the Notes and interest payments to be made under the Notes. Although the 2014 and 2019 Notes mature in 2034 and 2024, respectively, they can be converted into shares of our common stock prior to maturity if certain conditions are met. In addition, holders of the 2014 Notes may require us to repurchase all or a portion of their 2014 Notes on each of February 6, 2021, February 6, 2024, and February 6, 2029, at a repurchase price in cash equal to 100% of the principal amount of the 2014 Notes plus accrued and unpaid interest. On February 6, 2021, holders of $0.5 million
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of the 2014 Notes caused us to repurchase their notes in accordance with this provision. This repayment is reflected in the above commitments schedule as due in less than one year. See Note 9 to our consolidated financial statements for additional information regarding the terms of the Notes.
Our operating lease obligations primarily relate to leases for our corporate headquarters and leases for manufacturing and office space for our foreign subsidiaries. We currently lease facilities and equipment under non-cancellable lease agreements expiring at various times through 2027. Our lease payments are expensed on a straight-line basis over the life of the leases. Rental expense under operating leases, net of amortization of lease incentive, totaled $9.7 million, $6.1 million and $5.0 million, for 2020, 2019, and 2018 respectively.
Purchase obligations consist of contractual and legally binding commitments to purchase goods and services. The majority of our contracts are cancellable with little or no notice or penalty. However, once a vendor has incurred costs to fulfill a contract with us, and which costs cannot be otherwise deployed, we are liable for those costs upon cancellation. For example, if a supplier has purchased raw materials to produce a good for us, and those goods cannot be returned or otherwise used by our vendor, we are obligated to reimburse them for the costs they incurred. Purchase obligations also includes $10.4 million for capital expenditures related to the NIH Contract.
We have entered into several license and patent agreements. Under these agreements, we pay annual license maintenance fees, non-refundable license issuance fees, and royalties as a percentage of net sales for the sale or sublicense of products using the licensed technology. Future payments related to these license agreements have not been included in the contractual obligations table above as the period of time over which the future license payments will be required to be made, and the amount of such payments, are indeterminable. We do not expect the license payments to be material in any particular year.