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 income and 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, the global supply chain, and our customers, suppliers, and other business partners. 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,” located 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™, Acculift™, Advanta™, Atlas™, Biomark™, Bringing new insights to life™, C1™, Callisto™, Cell-ID™, CyTOF®, CyTOF XT™, CyTOF XT logo, D3™, Delta Gene™, Direct™, Digital Array™, Dynamic Array™, EP1™, EQ™, FC1™, Flex Six™, Flow Conductor™, GeckoGrip™, 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 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. 27 Our total revenue for the nine months ended September 30, 2021 was $92.3 million, compared to $93.5 million for the nine months ended September 30, 2020. We have incurred significant net losses since our inception in 1999 and, as of September 30, 2021, our accumulated deficit was $726.6 million. Recent Developments As vaccines and alternative testing options for the coronavirus have become more available and the perceived threat of the pandemic began to recede in 2021, the demand for our COVID-19 testing products slowed, resulting in a corresponding decline in COVID-19 testing revenue in each of the first three quarters of 2021, compared to the third and fourth quarters of 2020. It is difficult to predict the impact of new strains of the coronavirus on our business or the impact they may have on the research priorities of our customers. For additional information on the various risks posed by the COVID-19 pandemic, refer to Part II, Item 1A. Risk Factors of this Form 10-Q. In addition to the continuing impacts of the COVID-19 pandemic and its aftermath on our business, our financial results for the third quarter of 2021 were negatively impacted by supply chain issues, China trade restrictions, and the ongoing slowdown in the Asia-Pacific region. Global logistics and supply chain disruptions resulted in component delays and supply constraints with some of our suppliers. Shortages of certain components resulted in our being unable to fulfill all of our customer orders during the quarter. We expect to work through these orders over the next few quarters, but continued supply disruptions of components or materials or our inability to obtain components, materials, or assembly services from alternate sources could impact our ability to meet the ongoing demand of our customers. The third quarter of 2021 also saw continued COVID-related shutdowns in Japan. Th ese shutdowns, in addition to shipment delays in China due to the Chinese government’s delay in issuing import tax exemptions for our products, adversely impacted our financial results in the Asia-Pacific region. We are undertaking a review, with the assistance of outside financial, operating, and legal advisors, of various options to maximize stockholder value with regard to strategic alternatives, cost and capital structure, and operations and supply chain. On August 2, 2021, the Company amended its Loan and Security Agreement dated as of August 2, 2018, between the Company and Silicon Valley Bank (SVB) (the Amendment). The Amendment extends the maturity date of our $15.0 million revolving credit facility (Revolving Credit Facility) by one year, to August 2, 2023, and also provides for a term loan facility in an aggregate principal amount of $10.0 million (the Term Loan Facility). The stated maturity date of the Term Loan Facility is July 1, 2025, however if the principal amount of our convertible debt exceeds $0.6 million as of June 1, 2024 or if the maturity date of our 2019 Notes has not been extended beyond January 1, 2026 by June 1, 2024, then the maturity date of the Term Loan Facility will be on June 1, 2024. There were no borrowings outstanding under the Revolving Credit Facility at September 30, 2021 and the Term Loan Facility was fully drawn as of September 30, 2021. 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. Recent Accounting Changes and Accounting Pronouncements Adoption of New Accounting Guidance 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 28 new guidance is effective for fiscal years beginning after December 15, 2020. The adoption of the new guidance did not have a significant impact on our financial results. 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. Results of Operations The following table presents comparative and common size condensed consolidated statements of operations data for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue $ 28,504 100 % $ 39,861 100 % $ 92,316 100 % $ 93,536 100 % Costs and expenses Cost of product revenue 13,327 47 12,773 32 37,720 41 31,896 34 Cost of service revenue 1,508 5 1,769 4 5,465 6 4,531 5 Research and development 9,209 32 8,128 21 29,403 32 25,275 27 Selling, general and administrative 24,072 85 22,655 57 75,928 82 65,966 70 Total costs and expenses 48,116 169 45,325 114 148,516 161 127,668 136 Loss from operations (19,612) (69) (5,464) (14) (56,200) (61) (34,132) (36) Interest expense (968) (4) (885) (2) (2,751) (3) (2,682) (3) Surplus funding from NIH contract 5,000 18 — — 5,000 5 — — Other income (expense), net 315 1 107 — 534 1 (248) — Loss before income taxes (15,265) (54) (6,242) (16) (53,417) (58) (37,062) (39) Income tax benefit 1,422 5 243 1 3,609 4 2,068 2 Net loss $ (13,843) (49) % $ (5,999) (15) % $ (49,808) (54) % $ (34,994) (37) % 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 developed products based on our microfluidics technology. The Development Agreement provided up-front and periodic milestone payments during the development stage, which was completed in the third quarter of 2021, and ongoing annual payments of $0.4 million for sustaining efforts. We recognized $0.1 million and $3.2 million of development revenue during the three months ended September 30, 2021 and 2020, respectively. We recognized $2.4 million and $6.2 million during the nine months ended September 30, 2021 and 2020, respectively. Cumulatively, through September 30, 2021 , we recognized $11.2 million of revenue from the Development Agreement. We recognized revenue associated with the Development Agreement using an input method which determines the extent of our progress toward satisfaction of our performance obligations by comparing actual costs incurred to date to the total expected 29 cost. Costs associated with development revenue were recorded in research and development expense in the condensed consolidated statement of operations. 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 ended in the third quarter of 2021. Costs associated with grant agreements have been recorded in research and development expense in the condensed consolidated statement of operations. License and Royalty Revenue . In March 2020, we entered into an agreement to settle intellectual property infringement cla ims, under which we received a $3.5 million payment in exchange for a perpetual license to 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 customer represented more than 10% of total revenue for the three and nine months ended September 30, 2021. Revenue from one customer exceeded 10% of total revenue for both the three and nine months ended September 30, 2020. Revenue from our five largest customers represented 21% and 31% of total revenue for the three months ended September 30, 2021 and 2020, respectively. Revenue from our five largest customers represented 22% and 23% of total revenue for the nine months ended September 30, 2021 and 2020, respectively. The following table presents our total revenue disaggregated by source for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change 2021 2020 2021 2020 Revenue: Instruments $ 10,056 35 % $ 12,624 32 % (20) % $ 27,943 30 % $ 30,672 33 % (9) % Consumables 11,881 42 16,586 42 (28) % 41,349 45 34,924 37 18 % Product revenue 21,937 77 29,210 74 (25) % 69,292 75 65,596 70 6 % Service revenue 6,016 21 6,131 15 (2) % 18,929 20 16,457 18 15 % Product and service revenue 27,953 98 35,341 89 (21) % 88,221 95 82,053 88 8 % Development revenue 90 — 3,180 7 (97) % 2,420 3 6,180 7 (61) % Grant revenue 461 2 1,340 4 (66) % 1,582 2 2,140 2 (26) % License revenue — — — — — % 93 — 3,163 3 (97) % Total revenue $ 28,504 100 % $ 39,861 100 % (28) % $ 92,316 100 % $ 93,536 100 % (1) % The following table presents our total revenue disaggregated by geographic area for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change 2021 2020 2021 2020 Americas $ 13,013 46 % $ 23,653 60 % (45) % $ 47,656 52 % $ 52,437 56 % (9) % EMEA 10,108 35 8,837 22 14 % 28,470 31 23,490 25 21 % Asia-Pacific 5,383 19 7,371 18 (27) % 16,190 17 17,609 19 (8) % Total revenue $ 28,504 100 % $ 39,861 100 % (28) % $ 92,316 100 % $ 93,536 100 % (1) % Total Revenue Three months ended September 30, 2021 Total revenue decreased by $11.4 million, or 28%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily driven by a decline of COVID-19-related product revenue of $7.9 million and the impact of lower instrument pricing of $1.4 million. In addition, development revenue declined as we completed the development phase of the Development Agreement. 30 Americas revenue decreased by $10.6 million, or 45%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The year over year decline is primarily attributable to a reduction in product revenue driven by the sharp decline in the demand for COVID-19 testing products. Development revenue also declined by $3.1 million as we completed the development phase of the Development Agreement. In Asia-Pacific, revenue decreased by $2.0 million, or 27.0%, primarily due to lower unit sales of instruments, lower average selling prices on instruments and product mix variability. Japan experienced significant disruptions from COVID-19-related shutdowns, and our business in China continued to be impacted by the government failing to resolve tax permit issues. EMEA revenue increased by $1.3 million driven by higher mass cytometry instruments . A weaker dollar contributed 1.1 percentage points of the 14 percentage point increase in EMEA revenue. Foreign exchange had an immaterial impact on total company revenues. Nine months ended September 30, 2021 Total revenue decreased by $1.2 million, or 1%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, driven primarily by lower development, license and grant revenue, partially offset by higher product and service revenue. Americas revenue declined by $4.8 million, or 9%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, driven by lower unit sales of instruments and lower development, grant and license revenue, partially offset by higher consumable and service revenue. The decline in instrument revenue is attributable to reduced demand for analytical test instruments used in COVID-19 test applications. The reduction in development and grant revenue reflects decelerating project activity as the underlying contracts neared completion, while the reduction in license revenue is attributable to the non-recurring nature of last year’s settlement agreement. In Asia-Pacific, revenue decreased by 8% primarily due to lower unit sales of instruments, partially offset by increased consumable and service revenues. EMEA revenue increased by $5.0 million, driven by higher unit sales of instruments. A weaker dollar contributed 5.4 percentage points of the 21 percentage point increase in EMEA revenue. Changes in foreign exchange contributed 1.4 percentage points to the change in total company revenues. Product and Service Revenue . The following table presents our revenue disaggregated by target market and by source for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Year-Over-Year Change Nine Months Ended September 30, Year-over-Year Change 2021 2020 2021 2020 Mass cytometry: Instruments $ 7,125 45% $ 5,758 38% 24% $ 19,491 42% $ 18,668 44% 4 % Consumables 4,254 27 5,056 34 (16)% 13,376 29 12,594 29 6 % Total product revenue 11,379 72 10,814 72 10% 32,867 71 31,262 73 5 % Service revenue 4,458 28 4,295 28 4% 13,631 29 11,358 27 20 % Total product and service revenue $ 15,837 100% $ 15,109 100% 10% $ 46,498 100% $ 42,620 100% 9 % Microfluidics: Instruments $ 2,931 24% $ 6,866 34% (57)% $ 8,452 20% $ 12,004 30% (30) % Consumables 7,627 63 11,530 57 (34)% 27,973 67 22,330 57 25 % Total product revenue 10,558 87 18,396 91 (42)% 36,425 87 34,334 87 6 % Service revenue 1,558 13 1,836 9 (15)% 5,298 13 5,099 13 4 % Total product and service revenue $ 12,116 100% $ 20,232 100% (38)% $ 41,723 100% $ 39,433 100% 6 % Mass cytometry revenue increased during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The year-over-year increase was primarily attributable to sales of the new CyTOF XT instrument, which was released in May 2021, partially offset by lower sales of our Helios instrument and consumables. The decline in Microfluidics revenue during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 is directly attributable to reduced demand for COVID-19 testing products. Mass cytometry revenue increased for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Product revenue increased $1.6 million primarily due to sales of CyTOF XT that was launched in May 2021 and growth in our imaging platforms partially offset by lower Helios sales. Service revenue increased $2.3 million. 31 Microfluidics revenue increased during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The year over year increase is primarily attributable to higher consumables revenue from COVID-19 test products, which received FDA Emergency Use Authorization in August 2020, partially offset by higher 2020 sales of instrument systems for COVID testing. We expect the average selling prices of our products to fluctuate over time based on market conditions, product mix, and currency fluctuations. Product and Service Cost, Gross Profit and 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, 2021 and 2020 (in thousands): Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change 2021 2020 2021 2020 Cost of product revenue $ 13,327 $ 12,773 4 % $ 37,720 $ 31,896 18 % Cost of service revenue 1,508 1,769 (15) % 5,465 4,531 21 % Cost of product and service revenue $ 14,835 $ 14,542 2 % $ 43,185 $ 36,427 19 % Product and service gross profit $ 13,118 $ 20,799 (37) % $ 45,036 $ 45,626 (1) % Product and service margin 46.9 % 58.9 % (12.0) ppt 51.0 % 55.6 % (4.6) ppt Product and service margin decreased by 12.0 percentage points for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Fixed depreciation and amortization costs on a lower revenue base contributed 2.6 percentage points to the decline in product and service margins for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Other factors, including unfavorable product mix from lower COVID-19 consumables sales in 2021 vs 2020 coupled with a new product transition cycle, lower capacity utilization for consumables, and lower average selling prices on mass cytometry instruments, further reduced product and service margin by 9.4 percentage points for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Product and service margin decreased by 4.6 percentage points for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Higher provisions for excess and obsolete inventory primarily related to COVID-19 testing consumables products reduced product and service margin by 0.9 percentage points. Other factors, including lower capacity utilization for consumables manufacturing, lower average selling prices for mass cytometry instruments, and new product transition cycles further reduced product and service margin by 4.4 percentage points. Fixed depreciation and amortization costs on a higher revenue base partially offset these increases, positively impacting product and service margin by 0.7 percentage points. 32 Operating Expenses The following table presents our operating expenses for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change 2021 2020 2021 2020 Research and development $ 9,209 $ 8,128 13 % $ 29,403 $ 25,275 16 % Selling, general and administrative 24,072 22,655 6 % 75,928 65,966 15 % Total operating expenses $ 33,281 $ 30,783 8 % $ 105,331 $ 91,241 15 % 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 $1.1 million, or 13%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Compensation and benefit costs increased by $0.9 million, primarily due to the absence of the 2020 COVID-19 related subsidies received by certain of our foreign subsidiaries. Consulting costs increased by $0.2 million due to development and grant related projects. Research and development expense increased by $4.1 million, or 16%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Compensation and benefit costs increased by $2.7 million, primarily due to the absence of the 2020 temporary salary reductions and government subsidies. Consulting costs increased by $1.1 million driven by development and grant related projects. We believe our continued investment in research and development is essential to our long-term competitive position. Accordingly, 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 $1.4 million, or 6%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Salaries and benefits costs increased by $0.6 million in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the absence of COVID-19 related government subsidies. Consulting costs increased by $1.0 million due to higher market research expenses. Travel and advertising and promotion expense together increased by $1.1 million reflecting a return to more normal spending levels following 2020 expense declines due to the COVID-19 pandemic. Lower commissions, legal expenses and other costs partially offset these cost increases. Selling, general and administrative expense increased by $10.0 million, or 15%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Salaries and benefits costs increased by $4.5 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to the absence of the 2020 temporary salary reductions and COVID-19 related government subsidies, higher headcount and annual merit increases. Consulting costs increased by $2.4 million due to higher market research expenses and the use of contract employees to fill open positions. Commissions increased by $0.8 million, reflecting the impact of higher product sales, while travel and advertising and promotion expense together increased by $1.5 million , reflecting a return to more normal spending levels following 2020 expense declines due to the COVID-19 pandemic. Stock-based compensation costs increased by $1.2 million for the nine months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to retention awards granted in the second quarter of 2020. These increases were partially offset by decreases in a variety of smaller items. 33 Interest Expense and Other Income (Expense), Net The following table presents these items for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Year-over-Year Change Nine Months Ended September 30, Year-over-Year Change 2021 2020 Interest expense $ (968) $ (885) 9 % $ (2,751) $ (2,682) 3 % Surplus funding from NIH contract 5,000 — NA 5,000 — NA Other income (expense), net 315 107 194 % 534 (248) (315) % Total $ 4,347 $ (778) (659) % $ 2,783 $ (2,930) (195) % Interest expense is comprised primarily of interest on our convertible debt and new Term Loan Facility. The increase in the interest expense for the three months ended September 30, 2021 compared to the prior year is due to our new Term Loan Facility. For the three months ended September 30, 2021, we recognized $5.0 million of proceeds under the NIH Contract in excess of amounts expected to be spent for capital expenditures and operating expenses. O ther income, net consisted primarily of $0.3 million from the settlement of an insurance claim. For the nine months ended September 30, 2021, we recognized $5.0 million of proceeds under the NIH Contract in excess of amounts expected to be spent for capital expenditures and operating expenses. Other income, net included $0.5 million from the settlement of insurance claims. Other income, net for the nine months ended September 30, 2021 also includes a $9 thousand loss associated with the February 2021 repurchase of the 2014 Notes. 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 $1.4 million for an effective tax rate of 9.3%, for the three months ended September 30, 2021. In the three months ended September 30, 2020, we recorded a tax benefit of $0.2 million for an effective tax rate of 3.9%. Higher losses in certain of foreign operations in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 resulted in a higher tax benefit for our foreign operations for the three months ended September 30, 2021. For the nine months ended September 30, 2021, we recorded a tax benefit of $3.6 million, resulting in an effective tax rate of 6.8%. For the nine months ended September 30, 2020, we recorded a tax benefit of $2.1 million, resulting in an effective rate of 5.6%. The increased tax benefit for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to discrete items, in addition to the higher losses and corresponding tax benefit in certain parts of our foreign operations. Liquidity and Capital Resources Sources of Liquidity As of September 30, 2021, our principal sources of liquidity consisted of $29.3 million of cash and cash equivalents, as well as $1.0 million of restricted cash and $10.3 million of availability under our Revolving Credit Facility. 34 The following table presents a comparative summary of our cash flows for the nine months ended September 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 2020 Cash flow summary: Net cash used in operating activities $ (37,059) $ (11,684) Net cash provided by (used in) investing activities (10,801) 40,797 Net cash provided by (used in) financing activities 8,662 20,425 Effect of foreign exchange rate fluctuations on cash and cash equivalents (13) 86 Net increase (decrease) in cash, cash equivalents and restricted cash $ (39,211) $ 49,624 Net Cash Used in Operating Activities We derive cash flows from operations primarily from cash collected from the sale of our products and services, development arrangements, 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 for the nine months ended September 30, 2021 was $37.1 million and consisted of net loss of $49.8 million, less non-cash items of $25.8 million and cash used in assets and liabilities, net, of $13.0 million. Non-cash items included stock-based compensation expense of $11.7 million, amortization of developed technology of $8.9 million, depreciation and amortization of $2.7 million, provisions for excess and obsolete inventory of $1.5 million, lease amortization of $0.4 million, and a variety of smaller items. The cash used in assets and liabilities, net was primarily attributable to a $5.4 million reduction of accrued compensation and related benefits from bonus payments made in the first quarter of 2021, a reduction of deferred revenue of $2.3 million, a reduction of other liabilities of $8.0 million, an increase in prepaid expenses and other assets of $2.7 million, and an increase of inventories, net of $7.5 million. These uses of funds were partially offset by a reduction of accounts receivable, net, of $11.4 million, and an increase in accounts payable of $1.4 million. Net cash used in operating activities for the nine months ended September 30, 2020 was $11.7 million and consisted of net loss of $35.0 million, less non-cash items of $25.4 million, partially offset by a net increase in assets and liabilities of $2.1 million. Non-cash items primarily 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, and a variety of smaller items. The cash used by assets and liabilities was primarily due to an increase in inventories of $6.8 million, an increase in prepaid expenses and other assets of $2.4 million, primarily comprised of payments to vendors involved with our facility expansion in Singapore, partially offset by a decrease in accounts receivable, net 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 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 workforce. 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. However, we may choose to decrease or defer certain capital expenditures and development activities, while further optimizing our organization. Net cash used in investing activities for the nine months ended September 30, 2021 was $10.8 million. Capital expenditures of $12.8 million were incurred primarily to expand our microfluidics IFC production capacity in Singapore related to the NIH Contract. We received $2.0 million from the NIH under the terms of the agreement to fund the facility expansion. Net cash provided by investing activities for the nine months ended September 30, 2020 was $40.8 million, which included $11.2 million of proceeds from the NIH contract under the terms of the agreement to fund the facility expansion, $31.8 million of proceeds from maturities of investments, and $5.0 million of proceeds from the sale of investments, partially offset by the $5.2 million expenditure associated with the acquisition of InstruNor AS and $2.0 million of capital expenditures. 35 Net Cash Provided by (Used in) Financing Activities Net cash provided by financing activities totaled $8.7 million during the nine months ended September 30, 2021. The principal source of cash was $10 million of advances drawn against our new Term Loan Facility with Silicon Valley Bank. Other sources include $0.7 million of ESPP proceeds and $0.2 million of proceeds from the exercise of stock options. Partially offsetting these sources was $1.7 million of withholding tax payments related to the net share settlement of equity awards and the $0.5 million repurchase of 2014 Notes completed in February 2021. During the nine months ended September 30, 2020, we generated $20.4 million of cash from financing activities, principally from the $20.2 million “at the market” equity offering. Capital Resources At September 30, 2021 and December 31, 2020, our working capital, excluding deferred revenues and restricted cash, was $39.0 million and $76.9 million, respectively, including cash and cash equivalents of $29.3 million and $68.5 million, respectively. We had no investments as of September 30, 2021 and December 31, 2020. In February 2014, we closed an underwritten public offering of our 2014 Notes. 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 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 of the 2014 Notes caused us to repurchase their notes in accordance with this provision leaving $0.6 million of 2014 Notes outstanding. 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 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 2019 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 and the 2019 Notes 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 an Open Market Sale Agreement (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 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, pursuant to the Sale Agreement. 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 a Loan and Security Agreement with SVB (the Credit Agreement) for our Revolving Credit Facility, which provides for secured revolving loans in an aggregate amount of up to $15.0 million, In August 2021, we amended our Revolving Credit Facility to extend the maturity date to August 2, 2023 and to provide for a new $10.0 million Term Loan Facility (the Term Loan Facility and, together with the Revolving Credit Facility, the Credit Facility). The Credit Facility is collateralized by substantially all our property, other than intellectual property. The maturity date of the Term Loan Facility is July 1, 2025, subject to the following condition: in the event the principal amount of our convertible debt exceeds $0.6 million as of June 1, 2024 or if the maturity date of our 2019 Notes has not been extended beyond January 1, 2026 by that date, then the maturity date of the Term Loan Facility will be June 1, 2024. As of September 30, 2021, the balance outstanding on the Term Loan Facility was $10.0 million. Interest on the term loan accrues on the outstanding principal amount thereof at the greater of (i) a floating per annum rate equal to three quarters of one 36 percentage point (0.75%) above the prime rate (as customarily defined), or 4.0% with a final payment equal to 6.5% of the aggregate original principal amounts of each term loan advance due on the earlier of the maturity date of the Term Loan Facility, the acceleration of the term loan advances or any prepayment of a term loan advance. Interest is payable monthly. The principal amount of the term loan advances is repayable beginning on August 1, 2023, in twenty-four equal monthly installments of principal plus monthly payments of accrued interest. The Amendment also added a financial covenant to the Credit Facility, requiring us to maintain a minimum Adjusted Quick Ratio (as defined) of at least 1.25 to 1.00. As of September 30, 2021, total availability under the Revolving Credit Facility was $10.3 million. We currently have no outstanding debt under the Revolving Credit Facility, and we are in compliance with all the terms and conditions of the Credit Agreement. See Note 8 to our condensed consolidated financial statements for more information about the Revolving Credit Facility and Term Loan Facility. We believe our existing cash, cash equivalents, and investments, along with funding available from the Revolving Credit Facility, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, because we have experienced lower than expected cash generated from operating activities, we anticipate continued near-term supply chain constraints and ongoing uncertainty regarding COVID-19-related lab closures and resolution of tax permit issues in China, and we may also experience greater than expected cost of revenue, we may need to raise additional capital to fund our operations. 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. 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. 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. In the second quarter of 2021, we entered into an agreement to extend our current lease in Singapore from June 2022 to June 2027. 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, 2021 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, 2020. 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.