STANDARD BIOTOOLS INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the results of operations and financial condition of Standard BioTools Inc. MD&A is provided as a supplement to, and 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, our restructuring and reduction-in-force plans, 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. S tandard BioTools™, the Standard BioTools logo, Fluidigm®, the Fluidigm logo, 48.Atlas™, Access Array™, AccuLift™, Advanta™, Atlas™, Biomark™, Biomark X™, 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™, FluiDesign™, GeckoGrip™, Helios™, High-Precision 96.96 Genotyping™, HTI™, HTI+™, Hyperion™, 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™, SNP Type™, “Unleashing tools to accelerate breakthroughs in human health” ™, and Xgrade™ are trademarks or registered trademarks of Standard BioTools Inc. or its affiliates. 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 “Standard BioTools” the “Company,” “we,” “us,” and “our” refer to Standard BioTools Inc. and its subsidiaries. Our MD&A is organized in the following sections: • Overview • Recent Developments • Critical Accounting Policies, Significant Judgments and Estimates • Recent Accounting Changes and Accounting Pronouncements • Results of Operations • Liquidity and Capital Resources Overview Standard BioTools Inc. is driven by a bold vision – unleashing tools to accelerate breakthroughs in human health. We have an established portfolio of essential, standardized next-generation technologies that help biomedical researchers develop medicines faster and better. As a leading solutions provider, we provide reliable and repeatable insights in health and disease using our proprietary mass cytometry and microfluidics technologies that help transform scientific discoveries into better 26 patient outcomes. We work with leading academic, government, pharmaceutical, biotechnology, plant and animal research, and clinical laboratories worldwide, focusing on the most pressing needs in translational and clinical research, including oncology, immunology, and immunotherapy. 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 integrated fluidic circuits (IFCs) as well as our microfluidics instruments, which are assembled by our contract manufacturer located within our Singapore facility. Our mass cytometry instruments, assays and reagents are manufactured at our facility in Canada. Our total revenue for the six months ended June 30, 2022 and 2021 was $45.3 million and $63.8 million, respectively. We have incurred significant net losses since our inception in 1999 and, as of June 30, 2022, our accumulated deficit was $875.8 million. Recent Developments Private Placement Issuance On January 23, 2022, we entered into (i) a Loan Agreement (the Casdin Bridge Loan Agreement) with Casdin Private Growth Equity Fund II, L.P. and Casdin Partners Master Fund, L.P. (collectively, Casdin) and (ii) a Loan Agreement (the Viking Bridge Loan Agreement, and together with the Casdin Bridge Loan Agreement, the Bridge Loan Agreements) and each a Bridge Loan) with Viking Global Opportunities Illiquid Investments Sub-Master LP and Viking Global Opportunities Drawdown (Aggregator) LP (collectively, Viking and, together with Casdin, the Purchasers and each, a Purchaser). Each Bridge Loan Agreement provided for a $12.5 million term loan to the Company. The Bridge Loans were fully drawn on January 24, 2022. The Bridge Loans automatically converted into Series B Preferred Stock, defined below, upon the completion of the Preferred Equity Financing, defined below. Also on January 23, 2022, we entered into separate Series B Convertible Preferred Stock Purchase Agreements (the Purchase Agreements) with each of the Purchasers pursuant to which, among other things, at the closing of the transactions contemplated thereby, and on the terms and subject to the conditions set forth therein, including the approval of our stockholders, we issued and sold an aggregate of $225 million of convertible preferred stock on April 4, 2022, consisting of: (i) 112,500 shares of the Company’s Series B-1 Convertible Preferred Stock, par value $0.001 per share (the Series B-1 Preferred Stock), at a purchase price of $1,000 per share to Casdin; and (ii) 112,500 shares of the Company’s Series B-2 Convertible Preferred Stock, par value $0.001 per share (the Series B-2 Preferred Stock, and together with the Series B-1 Preferred Stock, the Series B Preferred Stock) at a purchase price of $1,000 per share to Viking (the Preferred Equity Financing, and together with the issuance of shares of Series B Preferred Stock in connection with the conversion of the Bridge Loans, the Private Placement Issuance). The proceeds from the Private Placement Issuance have been and will be used for expenses related to the Private Placement Issuance, as well as working capital, general corporate purposes and potential future merger and acquisition opportunities that we may identify from time to time. Our board of directors (the Board) called a meeting (Special Meeting) to ask our stockholders to consider, vote upon and approve (i) a proposal to amend the Company’s Eighth Amended and Restated Certificate of Incorporation (the Charter) to, among other things, increase the number of shares of common stock, par value $0.001 per share, (Common Stock) of the Company that we are authorized to issue from two hundred million (200,000,000) shares to four hundred million (400,000,000) shares and to change our name to Standard BioTools Inc. (the Charter Amendment Proposal); (ii) a proposal to approve, in accordance with Nasdaq Listing Rule 5635, the issuance of (A) the Series B-1 Preferred Stock and the Series B-2 Preferred Stock pursuant to the Purchase Agreements, (B) the Series B-1 Preferred Stock and the Series B-2 Preferred Stock issuable pursuant to the terms of the Bridge Loan Agreements and (C) the Common Stock issuable upon the conversion of the Series B Preferred Stock (the Private Placement Issuance Proposal); and (iii) a proposal to adjourn the Special Meeting if the Special Meeting were convened and a quorum were present, but there were not sufficient votes to approve the Charter Amendment Proposal and the Private Placement Issuance Proposal (the Adjournment Proposal, and, together with the Private Placement Issuance Proposal and the Charter Amendment Proposal, the Stockholder Proposals). Each of the Private Placement Issuance Proposal and Charter Amendment Proposal were conditioned on the approval of the other proposal, and neither proposal would take effect unless both were approved by our stockholders. Our stockholders approved the Charter Amendment Proposal and Private Placement Issuance Proposal on April 1, 2022. The Private Placement Issuance closed on April 4, 2022. On April 1, 2022, the Company filed with the Secretary of State of the State of Delaware (i) the Charter Amendment, (ii) the Series B-1 Preferred Stock Certificate of Designations to establish the preferences, limitations and relative rights of the Series B-1 Preferred Stock and (iii) the Series B-2 Preferred Stock Certificate of Designations to establish the preferences, 27 limitations and relative rights of the Series B-2 Preferred Stock. The Charter Amendment, Series B-1 Certificate of Designations and Series B-2 Certificate of Designations became effective upon filing. On April 4, 2022, following stockholder approval of the Charter Amendment Proposal and the Private Placement Issuance Proposal, we received $225 million, before expenses, and issued 225,000 shares of Series B Preferred Stock, pursuant to the Purchase Agreements. The Bridge Loans converted into 30,559 shares of Series B Preferred Stock. With the approval of the proposals, our name was changed to Standard BioTools Inc. Shortly after the closing of the Private Placement Issuance we also changed our trading symbol for our common stock to LAB. Upon the closing of the Private Placement Issuance, Dr. Michael Egholm was appointed as the Company’s President and Chief Executive Officer and as a member of the Board of Directors. Business Update We expect to use the cash from the Private Placement Issuance to help realize identified growth and cost opportunities and allow for new growth drivers as we pursue and consolidate complementary technologies across the life science ecosystem. Our newly assembled management team is focused on streamlining our operations for efficiency and cost reduction, using our Standard BioTools Business Systems (SBS) approach. On August 8, 2022, we announced that a phased restructuring plan, including a reduction in force, was underway which is expected to significantly lower operating cash usage beginning in the second half of 2022. The purpose of the restructuring plan is to improve efficiency and operating costs and better align our workforce with the current needs of our business. As part of the restructuring, the following steps are being taken: • Right Sizing General and Administrative Expenses. We plan to significantly lower general and administrative spend through a reduction in headcount and a decrease in office space to better align our spend with our streamlined operations. Specifically, we plan to reduce our real estate footprint, including our headquarters location in South San Francisco while fostering remote work for certain employees. Beyond these near-term initiatives, we will pursue continued process optimization through a focused SBS-based approach which may result in additional cost savings and will direct resources into areas with the highest impact to the business. • Right Sizing Microfluidics Business. We will significantly reduce investment in research and development and marketing while narrowing our commercial focus to high value niche markets for specialized applications for which the platform is ideally suited. In addition, we plan to pursue additional OEM opportunities, similar to our relationship with Olink® Bioscience, as a lower cost and more efficient go-to-market approach. • Portfolio Rationalization. We are rationalizing our product portfolio by discontinuing our laser capture microdissection (LCM), and Flow Conductor offerings, while deemphasizing our diagnostics/COVID-19 activities. Revenues from these product lines are not significant. We currently expect cash expenses related to the reduction in force, consisting primarily of severance and termination benefits and related costs, to be in the range of $3 million to $5 million. At this time, we are not able, in good faith, to make a determination of the estimated amount or range of amounts to be incurred for every major type of restructuring cost, including the leased office space reduction charges. Upon the determination of such amounts, we expect to provide an update as such information becomes available. We expect to recognize the restructuring costs over the next four quarters. These estimates are subject to a number of assumptions, and actual results may differ. 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 in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. 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. We also assessed certain accounting matters that generally require consideration of forecasted financial information, including the unknown impact of the COVID-19 pandemic and the war in Ukraine. Accounting matters that rely on forecasted financial information included, but were not limited to, our inventory, and related reserves, and the carrying value of goodwill and other long-lived assets and liabilities. Actual results could differ materially from these estimates and could have a material adverse effect on our condensed consolidated financial statements. 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 28 reactions to the pandemic. We also use significant judgment in determining the fair value of financial instruments, including debt and equity instruments. Recent Accounting Changes and Accounting Pronouncements Adoption of New Accounting Guidance 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 adopted ASU 2020-06 effective January 1, 2022. The adoption of ASU 2020-06 did not have an impact on our 2014 and 2019 Convertible Notes. In November 2021, the FASB issued ASU 2021-10 Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The amendment is effective for annual periods beginning after December 15, 2021. The amendment establishes financial disclosure requirements for business entities that receive government assistance that they account for by analogizing to a grant or contribution model because there is no specific authoritative guidance under U.S. GAAP that applies to the transaction. Entities that receive this type of assistance should include the following information in their annual report: (1) the nature of the transaction, (2) the significant terms and conditions, (3) the accounting treatment, (4) the line items on the balance sheet and income statement that are affected along with (5) the respective amounts that have been recorded. We adopted ASU 2021-10 effective January 1, 2022. The adoption of ASU 2021-10 did not have a material impact on our financial statements. Recent Accounting Pronouncements None. Results of Operations The following table presents our historical condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue $ 18,777 100 % $ 31,018 100 % $ 45,281 100 % $ 63,812 100 % Costs and expenses Cost of product revenue 12,738 68 12,730 41 25,077 55 24,393 38 Cost of service revenue 1,612 9 1,867 6 3,540 8 3,957 6 Research and development 12,606 67 9,441 30 21,471 47 20,194 32 Selling, general and administrative 30,384 162 24,248 78 61,259 135 51,856 81 Total costs and expenses 57,340 306 48,286 156 111,347 245 100,400 157 Loss from operations (38,563) (206) (17,268) (56) (66,066) (145) (36,588) (57) Interest expense (1,062) (6) (896) (3) (2,092) (5) (1,783) (3) Loss on forward sale of Series B Preferred Stock (22,289) (119) — — (60,081) (133) — — Loss on bridge loans (3,064) (16) — — (13,719) (30) — — Other income (expense), net (174) (1) 504 2 (56) — 219 — Loss before income taxes (65,152) (348) (17,660) (57) (142,014) (313) (38,152) (60) Income tax benefit 1,613 9 517 2 2,187 5 2,188 3 Net loss $ (63,539) (339) % $ (17,143) (55) % $ (139,827) (308) % $ (35,964) (56) % Revenue We generate revenue primarily from sales of our products and services and by entering into product development agreements, license and royalty agreements, and grants. Our product revenue consists of sales of instruments and consumables. 29 Consumables revenue is 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 . In March 2020, we entered into an OEM Supply and Development Agreement with a customer to develop OEM products based on our microfluidics technology. The agreement provided for up-front and periodic milestone payments during its development stage, which was completed during the third quarter of 2021, and $0.4 million of annual on-going payments for sustaining efforts. We recognized $0.4 million and $0.9 million of development revenue during the three months ended June 30, 2022 and 2021 , respectively. We recognized $0.4 million and $2.3 million of development revenue during the six months ended June 30, 2022 and 2021 , respectively. Grant Revenue . During the three and six months ended June 30, 2021 we recognized $0.8 million and $1.1 million of grant revenue for research and development services performed under a contract we entered into in the second half of 2019. The contract was completed during the third quarter of 2021. License Revenue . We recognize revenue from license agreements when the contract has been signed, the license has been transferred to the customer and the customer is able to use and benefit from the license. During the three months ended June 30, 2022 and 2021, we recognized $0.4 million and $0.1 million of license revenue, respectively. During the six months ended June 30, 2022 and 2021, we recognized $0.7 million and $0.1 million of license revenue, respectively. No single customer represented more than 10% of total revenues for any of the periods presented in this report. Revenue from our five largest customers represented 17%, and 24% of total revenue, for the three months ended June 30, 2022, and 2021, respectively. For the six months ended June 30, 2022 and 2021, revenue from our five largest customers represented 18%, and 24% of total revenues, respectively. The following table presents our revenue by source for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change 2022 2021 2022 2021 Revenue: Instruments $ 2,661 14 % $ 10,179 33 % (74)% $ 10,184 22 % $ 17,887 28 % (43)% Consumables 9,558 52 12,448 40 (23)% 22,039 50 29,468 46 (25)% Product revenue 12,219 66 22,627 73 (46)% 32,223 72 47,355 74 (32)% Service revenue 5,806 31 6,627 21 (12)% 11,950 26 12,913 20 (7)% Product and service revenue 18,025 97 29,254 94 (38)% 44,173 98 60,268 94 (27)% Development revenue 356 1 850 3 (58)% 444 1 2,330 4 (81)% Grant revenue — — 821 3 (100)% — — 1,121 2 (100)% License revenue 396 2 93 — 326% 664 1 93 — 614% Total revenue $ 18,777 100 % $ 31,018 100 % (39)% $ 45,281 100 % $ 63,812 100 % (29)% The following table presents our revenue based upon the geographic location of our customers’ facilities for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change 2022 2021 2022 2021 Americas $ 9,433 50 % $ 16,120 52 % (41)% $ 22,363 49 % $ 34,643 54 % (35)% EMEA 5,669 30 % 9,220 30 % (39)% 14,278 32 % 18,362 29 % (22)% Asia-Pacific 3,675 20 % 5,678 18 % (35)% 8,640 19 % 10,807 17 % (20)% Total revenue $ 18,777 100 % $ 31,018 100 % (39)% $ 45,281 100 % $ 63,812 100 % (29)% 30 Total Revenue Three months ended June 30, 2022 Total revenue decreased by $12.2 million, or 39%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, driven primarily by a decline in prod uct revenue. Instruments revenue fell by $7.5 million, or 74%, while consumables revenue declined by $2.9 million, or 23%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. A stronger dollar negatively impacted the Company’s total revenues by approximately 4.0 percent. Americas revenue decreased by $6.7 million, or 41%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The decline was primarily due to lower instruments revenue and a sharp decline in demand for COVID-19 testing products. EMEA revenue decreased by $3.6 million, primarily driven by a decline in instruments revenue and to a lesser extent, lower consumables revenue. A stronger dollar negatively impacted EMEA revenues by approximately 10.0 percent. In Asia-Pacific, revenue decreased by $2.0 million, or 35%, for three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to a decline in instruments revenue, and to a lesser extent, consumables revenue. Six months ended June 30, 2022 Total revenue decreased by $18.5 million, or 29%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily driven by a $7.7 million decline in instruments revenue and $7.4 million d ecline in consumables revenue. A stronger dollar negatively impacted the Company’s total revenues by approximately 3.0 percent. Americas revenue decreased by $12.3 million, or 35%, for the six months ended June 30, 2022 compared to th e six months ended June 30, 2021. The decline was primarily attributable to a reduction in product revenue driven by the sharp decline in the demand for COVID-19 testing products, lower instruments revenue and a $1.9 million reduction in development revenue. EMEA revenue decreased by $4.1 million primarily driven by a decline in mass cytometry instruments and, to a lesser extent, lower consumables revenue. A stronger dollar negatively impacted EMEA revenues by approximately 6.0 percent. In Asia-Pacific, revenue decreased by $2.2 million, or 20%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to a decline in consumables revenue. Product and Service Revenue . The following tables present the split of product and service revenue between our mass cytometry and microfluidics product categories for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Year-Over-Year Change Six Months Ended June 30, Year-over-Year Change 2022 2021 2022 2021 Mass cytometry: Instruments $ 2,295 23% $ 7,400 45% (69)% $ 6,665 28% $ 12,366 40% (46)% Consumables 3,835 38 4,545 27 (16)% 8,601 36 9,122 30 (6)% Total product revenue 6,130 61 11,945 72 (49)% 15,266 64 21,488 70 (29)% Service revenue 3,988 39 4,686 28 (15)% 8,382 36 9,173 30 (9)% Total product and service revenue $ 10,118 100% $ 16,631 100% (39)% $ 23,648 100% $ 30,661 100% (23)% Microfluidics: Instruments $ 366 5% $ 2,779 22% (87)% $ 3,519 17% $ 5,521 19% (36)% Consumables 5,723 72 7,903 63 (28)% 13,438 66 20,346 69 (34)% Total product revenue 6,089 77 10,682 85 (43)% 16,957 83 25,867 88 (34)% Service revenue 1,818 23 1,941 15 (6)% 3,568 17 3,740 12 (5)% Total product and service revenue $ 7,907 100% $ 12,623 100% (37)% $ 20,525 100% $ 29,607 100% (31)% Mass cytometry revenue decreased by $6.5 million, or 39%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The year-over-year decrease was primarily due to a decrease in legacy instruments revenue. The decline in microfluidics revenue of $4.7 million, or 37%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021 is attributable to reduced demand for microfluidic instruments and our COVID-19 testing products. 31 Mass cytometry revenue decreased by $7.0 million, or 23%, during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The year-over-year decrease was primarily attributable to an overall decrease in legacy mass cytometry instruments revenue. The decline in microfluidics revenue of $9.1 million, or 31%, during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was attributable to reduced demand for microfluidic instruments and COVID-19 testing products. 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, and provisions for slow-moving and obsolete inventory. 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 of material and labor costs required to service instruments. The following table presents our product and service cost, product and service gross profit, and product and service margin for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change 2022 2021 2022 2021 Cost of product revenue $ 12,738 $ 12,730 —% $ 25,077 $ 24,393 3% Cost of service revenue 1,612 1,867 (14)% 3,540 3,957 (11)% Cost of product and service revenue $ 14,350 $ 14,597 (2)% $ 28,617 $ 28,350 1% Product and service gross profit $ 3,675 $ 14,657 (75)% $ 15,556 $ 31,918 (51)% Product and service margin 20.4 % 50.1 % (29.7) ppt 35.2 % 53.0 % (17.8) ppt Product and service margin decreased by 29.7 percentage points for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Increased provisions for excess and obsolete inventory contributed 17.6 percentage points of the decrease in the product and service margin and reflected the impact of the portfolio rationalization discussed in “Recent Developments” above. Provisions for excess and obsolete inventory were $3.7 million, or 20.8%, of product and service revenue for the three months ended June 30, 2022 compared to $0.9 million, or 3.2%, of product and service revenue for the three months ended June 30, 2021. Fixed depreciation and amortization costs on a lower revenue base contributed 5.5 percentage points to the decline in the product and service margin, while other factors, including unfavorable product mix from lower COVID-19 consumables sales and the impact of lower plant utilization for mass cytometry products accounted for the majority of the remaining decline in the product and service gross margin for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Product and service margin decreased by 17.8 percentage points for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Higher provisions for excess and obsolete inventory, reflected the impact of the portfolio rationalization discussed above and contributed 8.3 percentage points of the decrease in the product and service margin. Provisions for excess and obsolete inventory were $4.6 million, or 10.4%, of product and service revenue for the six months ended June 30, 2022 compared to $1.2 million, or 2.1%, of product and service revenue for the six months ended June 30, 2021. Fixed depreciation and amortization costs on a lower revenue base contributed 3.5 percentage points to the decline in the product and service margin, while other factors, including unfavorable product mix from lower COVID-19 consumables sales coupled with the impact of l ower plant utilization for mass cytometry products accounted for the majority of the remaining decline in the product and service gross margin for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. 32 Operating Expenses The following table presents our operating expenses for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change 2022 2021 2022 2021 Research and development $ 12,606 $ 9,441 34% $ 21,471 $ 20,194 6% Selling, general and administrative 30,384 24,248 25% 61,259 51,856 18% Total operating expenses $ 42,990 $ 33,689 28% $ 82,730 $ 72,050 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 product 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 $3.2 million, or 34%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Research and development costs for the three months ended June 30, 2022 included $3.5 million of an impairment charge on certain developmental technology intangibles and $0.4 million for retention bonuses. These increases were partially offset by $1.0 million of lower laboratory supplies and consulting costs. The impairment charge reflected the decision to discontinue certain product lines supported by the InstruNor developed technology intangible, while lower l aboratory supplies and consulting costs were due to products launched in the second half of 2021 as well as less project activity. Research and development expense increased by $1.3 million, or 6%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to the $3.5 million impairment charge described above, and partially offset by a decrease of $2.3 million in laboratory supplies and consulting costs due to less project activity. 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 $6.1 million, or 25%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase included $2.7 million in retention bonuses and higher severance costs. Stock-based compensation and salaries increased by $0.9 million and $0.3 million, respectively, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, reflecting the impact of new management hires. Legal and consulting fees increased by $1.0 million, reflecting costs associated with the name change and rebranding activities. Travel expenses increased by $0.8 million as COVID-19 related travel restrictions eased and sites visits by senior management increased. Selling, general and administrative expense increased by $9.4 million, or 18%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase included $4.2 million in severance and retention bonuses. Legal and consulting fees increased by $2.8 million, reflecting the costs of the Private Placement Issuance, as well as costs associated with the name change and rebranding activities. Stock-based compensation increased $1.1 million due to equity grants to the new management team and first quarter 2022 retention grants to existing employees, partially offset by the impact of forfeited equity awards by former employees. Travel expenses increased by $1.0 million as COVID travel restrictions eased and site visits by senior management increased. 33 Interest Expense and Other Non-Operating Items The following table presents these items for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Year-over-Year Change Six Months Ended June 30, Year-over-Year Change 2022 2021 2022 2021 Interest expense $ (1,062) $ (896) 19% $ (2,092) $ (1,783) 17% Loss on forward sale of Series B Preferred Stock (22,289) — NA (60,081) — NA Loss on bridge loans (3,064) — NA (13,719) — NA Other income (expense), net (174) 504 (135)% (56) 219 (126)% Total $ (26,589) $ (392) NA $ (75,948) $ (1,564) NA I nterest expense is primarily comprised of interest on our convertible debt and our Term Loan Facility. The increase in interest expense for the three months ended and six months ended June 30, 2022 compared to the same periods in the prior year is due primarily to our Term Loan Facility, which began on August 1, 2021. The Purchase Agreements for the issuance of 225,000 shares of Series B Preferred Stock for $225 million at a future date were accounted for as forward sales contracts at fair value in accordance with ASC 480 Distinguishing Liabilities from Equities. The fair value of the payable portion of the Purchase Agreements for 225,000 shares of Series B Preferred Stock was determined to be $262.8 million as of March 31, 2022 and $285.1 million as of April 4, 2022. The $22.3 million increase in the fair value of the Series B Preferred Stock for the three months ended June 30, 2022 was included in the loss on forward sale of Series B Preferred Stock. The loss was primarily due to the increase in our common share price from $3.59 per share on March 31, 2022 to $3.99 per share on April 4, 2022. The $61.3 million loss on forward sales of Series B Preferred Stock for the six months ended June 30, 2022 reflected the increase in the price per share of our common stock from $2.84 at the inception of the contracts to $3.99 per share value as of April 4, 2022. Applying the guidance in ASC 825 Financial Instruments, we elected to record the Bridge Loans at their fair value. The change in fair value of the Bridge Loans from inception to conversion on April 4, 2022 was included as loss on bridge loans. The fair value of the Bridge Loans was largely driven by the value of our common stock and the value of the Series B Preferred Stock into which they were converted. The loss on the bridge loans of $3.1 million and $13.7 million for the three months ended and six months ended June 30, 2022, respectively, was largely driven by an increase in the value in the price of our common stock over those time periods. 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 $1.6 million, or an effective tax rate of 2.5%, for the three months ended June 30, 2022. In the three months ended June 30, 2021, we recorded a tax benefit of $0.5 million, or an effective tax rate of 2.9%. Higher losses in certain of our foreign operations in the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021 resulted in a higher tax benefit for our foreign operations for the three months ended June 30, 2022. For the six months ended June 30, 2022, we recorded a tax benefit of $2.2 million, resulting in an effective tax rate of 1.5%. For the six months ended June 30, 2021, we recorded a tax benefit of $2.2 million, resulting in an effective rate of 5.7%. While the tax benefit was approximately the same for the six months ended June 30, 2022 compared to the same period the previous year, the lower effective tax rate is due to higher pre-tax losses. Liquidity and Capital Resources Sources of Liquidity As of June 30, 2022, our principal sources of liquidity consisted of $74.4 million of cash and cash equivalents, $136.9 million of short-term investments and $1.0 million of restricted cash, as well as $8.1 million of availability under the Revolving Credit Facility. 34 The following table presents our cash flow summary for the six months ended June 30, 2022 and 2021 (in thousands): Six Months Ended June 30, 2022 2021 Cash flow summary: Net cash used in operating activities $ (45,578) $ (27,565) Net cash used in investing activities (139,108) (9,095) Net cash provided by (used in) financing activities 231,033 (1,159) Effect of foreign exchange rate fluctuations on cash and cash equivalents (437) 162 Net increase (decrease) in cash, cash equivalents and restricted cash $ 45,910 $ (37,657) 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. We have additional obligations as part of our ordinary course of business, beyond those committed for capital expenditures and other purchase obligations and commitments for purchases of goods and services. See Note 3 within our condensed consolidated financial statements included elsewhere in this Form 10-Q for information on our contingent obligations as a result of our issuance of Series B Preferred Stock. See Note 8 within our condensed consolidated financial statements for information about our short-term and long-term debt obligations. See Note 9 within our condensed consolidated financial statements for information about our lease obligations and see Note 15 within our condensed consolidated financial statements included elsewhere in this Form 10-Q for information about our various contractual and legally binding purchase commitments to purchase goods and services. Other than as disclosed above, there have been no material changes during the six months ended June 30, 2022 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, 2021. The expected timing of payments of our obligations is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the timing of receipt of goods or services, or changes to agreed-upon amounts for some obligations. In addition, some of our purchasing requirements are not current obligations and are therefore not included in the amounts above. For example, some of these requirements are not managed through binding contracts or are fulfilled by vendors on a purchase order basis within short time horizons. Net Cash Used in Operating Activities We derive cash flows from operations primarily from cash collected from the sale of our products and services, 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 for the six months ended June 30, 2022 was $45.6 million and consisted of net loss of $139.8 million, less non-cash items of $99.0 million and cash used by assets and liabilities, net, of $4.8 million. Non-cash items included a loss on forward sale of Series B Preferred Stock of $60.1 million , a loss on Bridge Loans of $13.7 million, st ock-based compensation expense of $8.7 million, amortization of developed technology of $5.9 million, depreciation and amortization of $1.9 million, provision for excess and obsolete inventory of $4.6 million and an impairment of an intangible of $3.5 million. The net increase in assets and liabilities was primarily attributable to an increase in inventories, net of $6.5 million, a decrease of other liabilities of $4.6 million, a decrease of accounts payable of $1.7 million, a decrease of deferred revenue of $1.6 million, and an increase in prepaid expenses and other assets of $1.3 million. These items were partially offset by a reduction of accounts receivable, net of $7.3 million, and a $3.6 million increase of accrued compensation and related benefits primarily due to an increase in severance and retention bonuses. Net cash used in operating activities for the six months ended June 30, 2021 was $27.6 million and consisted of net loss of $36.0 million, adjusted for non-cash items of $17.0 million and cash used by assets and liabilities, net, of $8.6 million. Non-cash items included stock-based compensation expense of $7.4 million, amortization of developed technology of $6.0 million, depreciation and amortization of $1.9 million, provisions for excess and obsolete inventory of $1.2 million, and a variety of smaller items. The cash used by assets and liabilities, net was primarily driven by an increase of inventories, net of $7.5 million a reduction of accrued compensation and related benefits of $5.4 million due primarily to bonus payments in the first quarter of 2021, a reduction of other liabilities of $3.9 million, an increase in prepaid expenses and other assets of $2.6 million and an increase in deferred revenue of $0.6 million. These uses of funds were partially offset by a decrease in accounts receivable, net, of $9.4 million, and an increase in accounts payable of $1.9 million, Also included in net cash from operating activities was $3.5 million of funding from the NIH Contract. 35 Net Cash Used in Investing Activities Our primary investing activities consist of purchases, sales, and maturities of ou r 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 used in investing activities for the six months ended June 30, 2022 was $139.1 million, which was primarily due to purchases of short-term investments of $137.3 million and capital expenditures of $1.8 million. The $9.1 million of net cash used in investing activities during the six months ended June 30, 2021 was primarily related to the expansion our IFC manufacturing capacity in Singapore under the NIH Contract. During the first six months of 2021,cash expenditures for manufacturing and plant assets totaled $11.1 million, while cash receipts from the contract earmarked to fund capital expenditures totaled $2.0 million. Net Cash Provided by (Used in) Financing Activities Net cash provided by financing activities totaled $231.0 million during the six months ended June 30, 2022. The principal sources of cash were proceeds from issuance of Series B Preferred Stock of $225.0 million, and proceeds from Bridge Loans of $25.0 million, which were subsequently converted into Series B Preferred Stock on April 4, 2022. These proceeds were also partially offset by a $12.5 million payment for e qui ty issuance costs on the Series B Preferred Stock and a repayment of $6.8 million of advances under the Revolving Credit Facility. Net cash used in financing activities totaled $1.2 million during the six months ended June 30, 2021. The amount included $0.5 million for the repurchase of our 2014 Notes and $1.6 million of withholding tax payments for net share settlements of equity awards, The payments were partially offset by $0.7 million of receipts from the sale of ESPP shares and $0.2 million of receipts from the exercise of stock options. Capital Resources At June 30, 2022 and December 31, 2021, our working capital, excluding deferred revenues, current and deferred grant income, current, and restricted cash, was $223.2 million and $38.0 million, respectively, including cash and cash equivalents of $74.4 million and $28.5 million, respectively. We had $136.9 million short-term investments as of June 30, 2022 and no short-term investments as of December 31, 2021. See Recent Developments - Business Update for additional information regarding our restructuring plans. 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 2019 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 summary of 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. 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 36 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 o f 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 June 30, 2022, the balance outstanding on the Term Loan Facility was $10.2 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 percentage point (0.75%) above the prime rate (as customarily defined), or 4% 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 June 30, 2022, tota l availability unde r the Revolving Credit Facility was $8.1 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 Facility as of June 30, 2022. See Note 8 to our condensed consolidated financial statements for more information about the Revolving Credit Facility and Term Loan Facility. On April 4, 2022, we completed the Private Placement Issuance, issuing 255,559 shares of Series B Preferred Stock. The rights, preferences and privileges of the Series B Preferred Stock are set forth in the Series B-1 Certificate of Designations and Series B-2 Certificate of Designations. The Series B Preferred Stock ranks senior to our common stock with respect to dividend rights, redemption rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The holders of Series B Preferred Stock will be entitled to participate in all dividends declared on our common stock on an as-converted basis, on the terms and subject to the conditions set forth in the Series B Certificates of Designations. The following is a brief summary of the conversion rights and other key provisions of the Series B Preferred Stock: Holder Voluntary Conversion Rights The Series B Preferred Stock is convertible at the option of the holders thereof at any time into a number of shares of Common Stock equal to the Conversion Rate (as defined in the Series B Certificates of Designations), which is initially 294.1176 shares of common stock per share of Series B Preferred Stock, in each case subject to certain adjustments and limitations on conversion. Issuer Call Provision At any time after the fifth anniversary of the closing of the Private Placement Issuance, if the last reported sale price of the Common Stock is greater than 250% of the Conversion Price (as defined in the Series B Certificates of Designations) as of such time for at least 20 consecutive trading days immediately preceding the date of the notice of mandatory conversion, we may elect to convert all of the outstanding shares of Series B Preferred Stock into shares of common stock. Issuer Redemption Provision After the seventh anniversary of the closing of the Private Placement Issuance, subject to certain conditions, we may, at our option, redeem all of the outstanding shares of Series B Preferred Stock at a redemption price per share of Series B Preferred Stock, payable in cash, equal to the Liquidation Preference. Change of Control Provisions If we undergo certain change of control transactions, each holder of outstanding shares of Series B Preferred Stock will have the option, subject to the holder’s right to convert all or a portion of the shares of Series B Preferred Stock held by such holder into Common Stock prior to such redemption, to require us to purchase all or a portion of such holder’s outstanding shares of Series B Preferred Stock that have not been converted into Common Stock at a purchase price per share of Series B Preferred Stock, payable in cash, equal to the greater of (A) the Liquidation Preference of such share of Series B Preferred Stock, and (B) the amount of cash and/or other assets that such holder would have been entitled to receive if such holder had converted such share of Series B Preferred Stock into Common Stock immediately prior to the change of control transaction (Change of Control Put). In the event of a change of control in which we are anticipated to merge with another person and will not be the surviving corporation or if the Common Stock will no longer be listed on a U.S. national securities exchange, we will have a right to redeem, subject to the holder’s right to convert into Common Stock prior to such redemption, all of such holder’s shares of 37 Series B Preferred Stock, or if a holder exercises the Change of Control Put in part, the remainder of such holder’s shares of Series B Preferred Stock, at a redemption price per share payable in cash, equal to the greater of (A) the Liquidation Preference of such share of Series B Preferred Stock, and (B) the amount of cash and/or other assets that the holder would have received if such holder had converted such share of Series B Preferred Stock into Common Stock immediately prior to the change of control transaction. Liquidation Rights In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Series B Preferred Stock has a liquidation preference equal to the greater of (i) the Liquidation Preference (as defined in the Certificate of Designations, currently $3.40) and (ii) the amount per share of Series B Preferred Stock that such holder would have received had all holders of Series B Preferred Stock, immediately prior to such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, converted all shares of Series B Preferred Stock into Common Stock pursuant to the terms of the Series B Certificates of Designations (without regard to any limitations on conversion contained therein). We believe our existing cash, cash equivalents, and short-term investments, along with funding available under the Revolving Credit Facility, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.