NANOSTRING TECHNOLOGIES, INC. Special Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements that
are based on our management's beliefs and assumptions and on information
currently available. This section should be read in conjunction with our
unaudited condensed consolidated financial statements and related notes included
in Part I, Item 1 of this report. The statements contained in this Quarterly
Report on Form 10-Q that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements can be identified by words such as "believe,"
"anticipate," "could," "continue," "depends," "expect," "expand," "forecast,"
"intend," "predict," "plan," "rely," "should," "will," "may," "seek," or the
negative of these terms and other similar expressions, although not all
forward-looking statements contain these words. You should read these statements
carefully because they discuss future expectations, contain projections of
future results of operations or financial condition, or state other
"forward-looking" information. These statements relate to our future plans,
objectives, expectations, intentions and financial performance and the
assumptions that underlie these statements. These forward-looking statements
include, but are not limited to:
•our expectations regarding our future operating results and capital needs,
including our expectations regarding instrument, consumable and total revenue,
operating expenses, sufficiency of cash on hand and operating and net loss;
•our expectations regarding the impact of the COVID-19 global pandemic as it
relates to our ongoing operations, including our customer order activity levels
and key supplier requirements;
•our ability to successfully commercialize our GeoMx DSP platform;
•our ability to successfully develop our Hyb & Seq platform and pursue potential
commercial applications and partnerships;
•the success, costs and timing of implementation of our business model,
strategic plans for our business and future product development plans;
•the regulatory regime and our ability to secure and maintain regulatory
clearance or approval or reimbursement for the clinical use of our products,
domestically and internationally;
•our strategic relationships, including with patent holders of our technologies,
manufacturers and distributors of our products, and collaboration partners;
•our intellectual property position;
•our ability to attract and retain key scientific or management personnel;
•our expectations regarding the competitive position, market size and growth
potential for our business; and
•our ability to sustain and manage growth, including our ability to expand our
customer base, develop new products, enter new markets, and hire and retain key
personnel.
These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in this report in
Part II, Item 1A - "Risk Factors," and elsewhere in this report. These
statements, like all statements in this report, speak only as of their date, and
we undertake no obligation to update or revise these statements in light of
future developments. In this report, "we," "our," "us," "NanoString ," and "the
Company" refer to NanoString Technologies, Inc. and its subsidiaries.
In addition, statements that "we believe" and similar statements reflect our
beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this Quarterly Report on Form
10-Q, and although we believe such information forms a reasonable basis for such
statements, such information may be limited or incomplete, and our statements
should not be read to indicate that we have conducted a thorough inquiry into,
or review of, all potentially available relevant information. These statements
are inherently uncertain and you are cautioned not to unduly rely upon these
statements.
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Overview
We develop, manufacture, and sell products that unlock scientifically
valuable and clinically actionable information from minute amounts of biological
material. Our core technology is a unique, proprietary optical barcoding
chemistry that enables the labeling and counting of single molecules. This
proprietary chemistry may reduce the number of steps required to conduct certain
types of scientific experiments and allow for multiple experiments to be
conducted at once. As a result, we are able to develop tools that are easier for
researchers to use and that may generate faster and more consistent scientific
results.
We use our technology to develop tools for scientific and clinical research,
primarily in the fields of genomics and proteomics. We currently have two
commercially available product platforms, our nCounter Analysis System and our
GeoMx Digital Spatial Profiler, or GeoMx DSP System, both of which include
instruments and related consumables.
nCounter can be used to analyze the activity of up to 800 genes in a single
experiment. nCounter is also used by clinicians to analyze gene activity
relevant for diagnostic applications. GeoMx DSP, which was made commercially
available in 2019, is designed to enable the field of spatial genomics. While
nCounter and other existing technologies analyze gene activity as a whole
throughout the totality of a biological sample, GeoMx DSP is used to analyze
specifically selected regions of a biological sample in order to see how gene
activity or protein levels might vary across those regions or in certain cell
types. GeoMx DSP operates by enabling users to prepare and select certain
regions of a sample in which to study gene activity, and then use nCounter to
subsequently evaluate, or read out, the activity of up to 96 genes in each of
the selected regions. In August 2020 we announced the commercial availability of
the Cancer Transcriptome Atlas, or CTA, the first GeoMx DSP product optimized
for read-out on next generation sequencing, or NGS, technology. The CTA is
designed to allow for the simultaneous analysis, in selected regions of
interest, of approximately 1,800 well characterized cancer related genes. We
expect an additional product, our Whole Transcriptome Assay, to become
commercially available in 2021.
We market and sell our instruments and related consumables to researchers in
academic, government and biopharmaceutical laboratories for research use, both
through our direct sales force and through selected distributors in certain
markets. As of June 30, 2020 , we had an installed base of approximately 890
nCounter systems, compared with approximately 865 as of March 31, 2020 and
approximately 840 as of December 31, 2019 . Our customers have used these
nCounter systems to publish more than 3,500 peer-reviewed papers. As of June 30,
2020 , we had received over 125 orders for GeoMx DSP systems, we had shipped
approximately 93 GeoMx DSP systems to customer sites. As of June 30, 2020 , our
customers have used GeoMx DSP systems to publish 23 peer-reviewed publications.
In addition, we continue to provide access to the GeoMx DSP's capabilities by
offering selected potential customers the opportunity to send biological samples
to our Seattle facility to be processed in our lab prior to purchasing a GeoMx
DSP system. To date, we have completed nearly 300 projects for approximately 160
customers pursuant to this Technology Access Program, or TAP.
We derive a substantial majority of our revenue from the sale of our
products, which consist of our nCounter and GeoMx DSP instruments and related
proprietary consumables. Our instruments are designed to work only with our
consumable products. Accordingly, as the installed base of instruments grows, we
expect recurring revenue from consumable sales to become an increasingly
important driver of our operating results. Our consumables include our
standardized nCounter and GeoMx DSP panel products, nCounter custom codeset
products that contain a specific set of targets for scientific analysis as
requested by a customer, and the Prosigna breast cancer assay which is
manufactured for our partner Veracyte Inc. We also derive revenue from
processing fees related to proof-of-principle studies, including from our GeoMx
DSP TAP, which we conduct for potential customers. For both nCounter and GeoMx
DSP, we offer extended service contracts and generate service revenue
accordingly.
We use third-party contract manufacturers to produce the instruments
comprising nCounter and GeoMx DSP. We manufacture consumables at our greater
We focus a substantial portion of our resources on developing new
technologies, products, and solutions. We invested $33.2 million and $33.1
million for the six months ended June 30, 2020 and 2019, respectively, in
research and development and intend to continue to make significant investments
in research and development to support our existing instrument platforms and
related consumable offerings, as well as research and development of new
technologies.
In December 2019 , we entered into a License and Asset Purchase Agreement, or
LAPA, and service and supply agreements, or SSAs, with Veracyte Inc., or
Veracyte. Pursuant to the LAPA, we completed a license of intellectual property
and a sale of certain assets to Veracyte relating to our nCounter FLEX System
for use in clinical diagnostic applications. Veracyte also acquired certain
intellectual property rights and worldwide distribution rights relating to our
Prosigna Breast Cancer Assay and our LymphMark assay and certain clinical
diagnostic assay software modules that operate with nCounter FLEX. Pursuant to
the SSAs, we agreed to supply to Veracyte nCounter FLEX Systems, and to
manufacture and supply Prosigna kits, LymphMark kits, and any additional
clinical diagnostic tests that Veracyte may develop in the future for nCounter
for a period of at least four years subsequent to the transaction date. Pursuant
to the SSAs, Veracyte will pay the designated transfer prices for nCounter FLEX,
Prosigna kits, LymphMark kits, and any other nCounter-based diagnostic tests
developed by Veracyte.
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Our product and service revenue increased 4.4% to $45.6 million for the six
months ended June 30, 2020 , compared to $43.7 million for the first six months
of 2019. Our total revenue was $49.2 million for the six months ended June 30,
2020 , compared to $58.0 million for the first six months of 2019. We have never
been profitable and had net losses of $65.8 million and $41.9 million for the
six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020 , our
accumulated deficit was $497.7 million .
Results of Operations
Revenue
Our product revenue consists of sales of nCounter and GeoMx DSP, including
instruments and related consumables. Service revenue consists of fees associated
with service contracts and conducting proof-of-principle studies, including
programs in which we offer customers early access to technologies under
development for which we generate data and perform analysis services on their
behalf. Our customer base is primarily comprised of academic institutions,
government laboratories, biopharmaceutical companies and clinical laboratories
that perform analyses or testing using nCounter and GeoMx DSP. Collaboration
revenue is derived primarily from our now concluded collaboration with Lam and
also, historically, our terminated collaboration with Celgene. We do not expect
to receive further development funding from Lam in future periods, and the
original commitment from Lam to provide up to $50.0 million in development
funding has been fully satisfied. Collaboration revenue also includes revenue
recognized under smaller collaborations.
The following table reflects total revenue by geography based on the
geographic location of our customers, distributors, and collaborators. For sales
to distributors, their geographic location may be different from the geographic
locations of the ultimate end customer.
Three Months Ended Six Months Ended
June 30, June 30,
% %
2020 2019 Change 2020 2019 Change
(In thousands) (In thousands)Americas$ 15,334 $ 22,578 (32) %$ 34,934 $ 41,505 (16) % Europe & Middle East 5,759 6,308 (9) % 10,924 13,508 (19) % Asia Pacific 1,511 1,459 4 % 3,351 3,020 11 % Total revenue$ 22,604 $ 30,345 (26) %$ 49,209 $ 58,033 (15) %
The following table reflects the breakdown of our revenue into the primary components of our products, services, and collaborations.
Three Months Ended Six Months Ended
June 30, June 30,
% %
2020 2019 Change 2020 2019 Change
(In thousands) (In thousands)
Product revenue:
Instruments $ 9,800 $ 4,940 98 % $ 19,634 $ 9,258 112 %
Consumables 8,369 14,388 (42) % 19,869 28,848 (31) %
Total product revenue 18,169 19,328 (6) % 39,503 38,106 4 %
Service revenue 2,975 3,042 (2) % 6,137 5,614 9 %
Total product and service revenue 21,144 22,370 (5) % 45,640 43,720 4 %
Collaboration revenue 1,460 7,975 (82) % 3,569 14,313 (75) %
Total revenue $ 22,604 $ 30,345 (26) % $ 49,209 $ 58,033 (15) %
Instrument revenue during the three and six month periods ended June 30, 2020
increased as compared to the same periods in 2019 due primarily to commercial
shipments of our GeoMx DSP system, which began during the third quarter of 2019
and contributed $6.3 million of revenue during the current three month period.
The increase in instrument revenue related to GeoMx DSP was partially offset by
lower revenue from sales of nCounter instruments as compared to the same period
in 2019. For the three and six month periods ended June 30, 2020 , our nCounter
instrument shipments declined as compared to the same period in the prior year,
primarily as a result of the impact of the COVID-19 pandemic on certain of our
customers, including full or partial closures of their operations or facilities
and being unable to complete purchases or receive product shipments for a
substantial portion of the current year. This impact was more significant during
the current three month period,
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during which the COVID-19 pandemic had a greater impact on customer operations
and activity in North America as compared to the first three months of 2020.
Consumables revenue includes sales of consumables for both nCounter and
GeoMx DSP and also includes sales of Prosigna in vitro diagnostic kits to our
partner Veracyte. Consumables revenue decreased for the three and six month
periods ended June 30, 2020 , with multiple factors impacting consumables revenue
as compared to the same periods of 2019. Sales of consumables for GeoMx DSP
added to consumables revenue in the periods, as compared to the same periods of
2019 where no GeoMx consumables revenue was recorded. GeoMx DSP consumable
revenue contribution was offset by substantially lower nCounter consumables
revenue as compared to the same periods of 2019, due primarily to the impact of
the COVID-19 pandemic on our customer's ability to access their laboratories to
conduct research, complete purchases and receive product shipments. The impact
of the COVID-19 pandemic on nCounter consumable revenue and GeoMx DSP consumable
revenue was more significant during the current three month period, during which
the COVID-19 pandemic had a greater impact on customer operations and activity
in North America as compared to the first three months of 2020. In addition,
while greater unit sales of Prosigna kits were recorded as compared to the same
period of 2019, our revenue recorded from sale of Prosigna kits were lower, as
our Prosigna supply agreement entered into as part of the transaction with
Veracyte completed in December 2019 reduced our average selling price received
on Prosigna kits, which in prior periods had been sold directly to end user
customers or distributors.
Service revenue increased for the six month period ended June 30, 2020 as
compared to the same period of 2019, primarily due to increases in service
revenue generated from our GeoMx DSP technology access program, or TAP. However,
for the three month period ended June 30, 2020 , service revenues were lower as
compared to the same period of 2019 due to the effects of the COVID-19 pandemic
on customer activity, which led to a lower volume of samples received and
processed under our GeoMx TAP program.
The COVID-19 pandemic has impacted our ability to solicit and fulfill
customer orders, and record related product and service revenue, at levels
comparable to historical periods. To the extent the COVID-19 pandemic continues
to have a negative impact on our customers' ability to conduct research, or our
ability to actively engage with our customers or to receive and fulfill customer
orders, we expect our near term revenues will continue to be negatively
impacted. We expect consumables revenue to be more severely impacted by
COVID-19, as consumables revenue more closely correlates with day-to-day
customer research activity. We cannot predict with any certainty if, or how
quickly, our customers will return to previous activity or product order levels,
or our ability to resume our activities and operations at levels consistent with
past performance. Until the effects of the COVID-19 pandemic subside, we expect
our near-term revenues to continue to be negatively impacted. With consideration
to these near-term negative impacts on our business, we expect our product and
service revenue may continue to increase in future periods, as a result of the
growth in sales of GeoMx DSP instruments and consumables, the introduction of
new nCounter and GeoMx DSP consumable products and the introduction of new
capabilities for GeoMx DSP, including the ability to use GeoMx DSP together with
NGS systems.
Collaboration revenue decreased for the three and six month periods ended
June 30, 2020 as compared to the same period in 2019, due primarily to decreased
activity levels after our receipt of the full commitment of development funding
of $50.0 million from Lam during 2019 and our terminated collaboration with
Celgene. Our collaboration agreement with Lam represented $2.9 million and $9.2
million of our collaboration revenue for the three and six months ended June 30,
2020 and June 30, 2019 , respectively.
Cost of Product and Service Revenue; Gross Profit; and Gross Margin
Cost of product and service revenue consists primarily of costs incurred in
the production process including costs of purchasing instruments from
third-party contract manufacturers, consumable component materials and assembly
labor and overhead, installation, warranty, service and packaging, and delivery
costs. In addition, cost of product and service revenue includes royalty costs
for licensed technologies included in our products, provisions for slow-moving
and obsolete inventory, and stock-based compensation expense. We provide a
one-year warranty for both nCounter and GeoMx DSP and establish a reserve for
warranty repairs based on historical warranty repair costs incurred.
Three Months Ended Six Months Ended
June 30, June 30,
% %
2020 2019 Change 2020 2019 Change
(Dollars in thousands) (Dollars in thousands)
Cost of product and service revenue $ 10,712 $ 9,605 12 % $ 21,729 $ 18,314 19 %
Product and service gross profit $ 10,432 $ 12,765 (18) % $ 23,911 $ 25,406 (6) %
Product and service gross margin 49 % 57 % 52 % 58 %
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For the three and six month periods ended June 30, 2020 , cost of product and
service revenue increased as compared to the same periods of 2019 due primarily
to increased costs associated with commercial shipments of GeoMx DSP and
investments made to support the growth, installation, and service of our product
lines, including investments to expand our production and distribution capacity
in late 2019 and early 2020 in consideration of the commercial launch of GeoMx
DSP.
Our gross margin on product and service revenue for the three and six month
periods ended June 30, 2020 was lower as compared to the same period of 2019,
primarily as a result of greater instrument revenue as a percent of our total
sales mix, with instrument sales generally contributing lower gross margins as
compared to consumables sales. Our gross margins were also impacted by our lower
consumables revenue as compared to the same period of 2019 due to the negative
impacts of COVID-19, given certain fixed costs in our consumables manufacturing
operations. In addition, gross margins have been negatively impacted in the
current year due to the investments made in additional production capacity, as
well as the Prosigna supply agreement with Veracyte pursuant to which we sell
Prosigna for a lower realized price while our production costs have generally
remained unchanged from prior periods.
With consideration to the potential near term and uncertain negative impact
of the COVID-19 pandemic on our business, which may impact our product and
service revenue growth and the related costs incurred, we expect our cost of
product and service revenue to increase in future periods. These potential
increases would be coincident with anticipated growth in sales of GeoMx DSP
instruments, continued sales growth of nCounter and GeoMx consumables and our
GeoMx DSP TAP service. We also expect to make investments in our operations to
support the growth of our business.
We expect our gross margin on product and service revenue may fluctuate in
future periods. Variability will depend in part on the uncertain impact of
COVID-19 on our product and service revenue, in particular on our consumables
revenue for which we operate the manufacturing process directly, as well on as
our mix of instrument sales, for which typically have lower gross margins, as
compared to our sales of consumable products or services. In addition, our gross
margins may vary depending on potential expenses we may incur for regulatory
compliance, quality assurance or activities related to the expansion of our
manufacturing capacity. Costs related to collaboration revenue are included in
research and development expense.
Research and Development Expense
Research and development expenses consist primarily of salaries and
benefits, occupancy, laboratory supplies, engineering services, consulting fees,
costs associated with licensing molecular diagnostics rights and clinical study
expenses to support the regulatory approval or clearance of diagnostic products.
We have made substantial investments in research and development since our
inception. Our research and development efforts have focused primarily on the
tasks required to enhance our technologies and to support development and
commercialization of new and existing products and applications.
Given the size of our research and development staff and the number of
active projects at any given time, we have found that it has been effective for
us to manage our research and development activities on a departmental basis.
Accordingly, other than for collaborations and certain major technology
development programs, we have neither required employees to report their time by
project nor allocated our research and development costs to individual projects.
Research and development expense by functional area was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
% %
2020 2019 Change 2020 2019 Change
(In thousands) (In thousands)
Platform technology $ 7,453 $ 7,994 (7) % $ 16,308 $ 15,482 5 %
Manufacturing process development 2,246 1,664 35 % 4,652 2,895 61 %
Life sciences products and applications 3,307 3,110 6 % 6,713 5,784 16 %
Diagnostic product development 243 1,267 (81) % 435 3,201 (86) %
Clinical, regulatory and medical affairs 182 1,326 (86) % 719 2,508 (71) %
Facility allocation 2,308 1,668 38 % 4,414 3,186 39 %
Total research and development expense
(8) %$ 33,241 $ 33,056 1 % For the three month period endedJune 30, 2020 , our research and development expenses decreased, while research and development expenses for the six month period endedJune 30, 2020 increased slightly. The main drivers decreasing research and development expenses related to activities associated with diagnostic and clinical research, due to the termination of certain of our previous collaboration agreements and as a result of the License and Asset Purchase Agreement, or LAPA, with Veracyte which has subsequently reduced the ongoing diagnostic research and support associated with the Prosigna in 22
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Table of Contents vitro diagnostic kits. These decreases were partially offset by continued platform technology development activities associated with our GeoMx DSP platform, including design and development of consumable content and software.
We expect research and development expense may remain relatively constant in
future periods, reflecting the impact of the reductions in research and
development resources in connection with the Veracyte transaction, offset by
continued investments in GeoMx DSP and other future projects and technologies.
In future periods, we may experience moderating research and development costs
related to GeoMx DSP instruments and consumables as we transition to sustaining
levels of activity. As of December 31, 2019 , Lam had provided the full
development funding commitment of $50.0 million and we do not expect to receive
any further funding from Lam in future periods. With the completion of Lam's
development funding, we are working to identify the key applications for our Hyb
& Seq platform and pursuing potential commercial applications and partnerships
that can support our emerging commercial strategy.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of costs for
our sales and marketing, finance, human resources, information technology,
business development, legal, and general management functions as well as
professional fees for legal, consulting, and accounting services. Our sales
force includes roles which are focused mainly on sales of consumables to our
existing instrument base, which enables our sales representatives to focus on
instrument sales and support the growth of our installed instrument base. Legal,
accounting, and compliance costs have increased as a result of our being a
public company and we expect them to continue to increase as our business grows.
Selling, general, and administrative expense was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
% %
2020 2019 Change 2020 2019 Change
(In thousands) (In thousands)
Selling, general and administrative expense
(11) %$ 45,633 $ 45,935 (1) % The decrease in selling, general, and administrative expense for the three month period endedJune 30, 2020 as compared to the same period in 2019, is due in part to a reduction of selling related expenses associated with the sale of the Prosigna assets to Veracyte, which also included the transfer of substantially all of our sales and marketing team dedicated to this business. Additionally, during the three month period endedJune 30, 2020 , the COVID-19 pandemic has reduced certain commercial activities, including lower travel and trade-show related costs, and has also resulted in estimates for lower variable compensation expenses, including changes to certain estimates associated with the vesting of shares under our performance-based stock awards which have been granted to our employees and executive and resulted in reducing our stock-based compensation expense during the current period. These decreases were partially offset by continued investment in GeoMx-related commercial initiatives, in particular investments made in our customer experience and service group, as well as in certain digital marketing and related initiatives. For the six month period endedJune 30, 2020 as compared to the same period in 2019, selling, general, and administrative expenses have decreased due primarily to lower costs resulting from the elimination of the Prosigna sales and marketing team inDecember 2019 coincident with the completion of the transaction with Veracyte, and lower stock-based compensation expense, resulting from a change in estimate related to certain vesting assumptions associated with performance-based stock awards which have been granted to our employees and executives. This decrease was partially offset by higher professional service fees from our audit firm and external advisors relating to our compliance with the Sarbanes Oxley Act and increased investment in sales and marketing personnel associated with our GeoMx DSP commercial launch. With consideration to the potential near term and uncertain negative impact of the COVID-19 pandemic on our business, which may impact our product and service revenue growth and the related costs incurred, we expect selling, general and administrative expenses to increase in future periods as the number of sales, technical support, marketing, and administrative personnel grows to support the expected growth in our business and the introduction of new products and product platforms. 23 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense) Three Months Ended Six Months Ended June 30, June 30, % % 2020 2019 Change 2020 2019 Change (In thousands) (In thousands) Interest income$ 479 $ 828 (42) %$ 1,183 $ 1,351 (12) % Interest expense (4,116) (1,889) 118 % (6,999) (3,637) 92 % Other income (expense), net 332 (120) (377) % (1,275) (230) 454 % Loss on extinguishment of debt and termination of revolving loan facility - - N/A (7,143) - N/A Total other expense, net$ (3,305) $ (1,181) 180 %$ (14,234) $ (2,516) 466 % Interest expense increased for the three and six month periods endedJune 30, 2020 due primarily to an increase in our average outstanding debt balance during the period. The average balance of long-term debt outstanding for the six month periods endedJune 30, 2020 and 2019 was$181.5 million and$64.3 million , respectively, which reflects the increase in our long-term debt related to our recently completed convertible debt financing. DuringMarch 2020 , we successfully concluded a convertible debt offering totaling$230.0 million . In conjunction with closing our convertible debt financing, we terminated our existing term loan facility withCapital Royalty Group and our revolving credit facility withSilicon Valley Bank , and as a result we recorded a charge of$7.1 million representing certain fees and prepayment penalties associated with these facilities. After taking into consideration the repayment of outstanding term debt, accrued interest expense and termination fees associated with these facilities, net proceeds from our convertible debt financing totaled approximately$130.0 million . The increases in interest expense during the three and six month periods endedJune 30, 2020 were partially offset by increased interest income resulting from higher average cash and investment balances on hand during the period as compared to the same period of 2019. For the six month period endedJune 30, 2020 , other expense, net includes certain expenses for pending state and local tax obligations, as well as the unfavorable impact of fair value declines related to our equity securities. As ofJune 30, 2020 , the Company's holdings of Veracyte common stock equity securities have been sold pursuant to certain terms and conditions included within the LAPA and all net proceeds from the sale of the common stock have been included in our cash and cash equivalents. Liquidity and Capital Resources As ofJune 30, 2020 , we had cash, cash equivalents and short-term investments of$248.7 million . While we believe our existing cash, cash equivalents, and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months, we may need to raise additional capital to expand the commercialization of our products, fund our operations, and further our research and development activities. In addition, the COVID-19 pandemic has impacted our ability to solicit and fulfill customer orders and record related product and service revenue at levels comparable to historical periods. To the extent the COVID-19 pandemic continues to have a negative impact on our customers' ability to conduct research or our ability to actively engage with our customers and take or fulfill customer orders, we expect our revenues, and consequently our liquidity and capital resources, in the near term to be negatively impacted. We cannot predict with any certainty if, or how quickly, our customers will return to previous levels of activity or product order levels, or our ability to resume our activities and operations at levels consistent with past performance. Until the effects of the COVID-19 pandemic subside, we expect our near term revenues, as well as our use of our liquidity and capital resources, to be negatively impacted. Our future funding requirements will depend on many factors, including: the duration of the COVID-19 pandemic and the impact on our customer and operational activity; market acceptance and the level of sales of our existing products and new product candidates; the nature and timing of any additional research, product development or other partnerships or collaborations we may establish; the cost and timing of establishing additional sales, marketing, and distribution capabilities; the cost of our research and development activities; the cost and timing of regulatory clearances or approvals; the effect of competing technological and market developments; and the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. We may require additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through partnership, collaboration or licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds we 24 -------------------------------------------------------------------------------- Table of Contents may have to liquidate some or all of our assets; delay, reduce the scope or eliminate some or all of our research and development programs, launch activities, or commercialization of our products; license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize; or reduce marketing, customer support, or other resources devoted to our products; or cease operations. Sources of Funds Since inception, we have financed our operations primarily through the sale of equity securities, borrowings under term loan agreements and convertible notes, licensing of intellectual property, and, to a lesser extent, sales of certain assets. Our cash used in operations for the six months endedJune 30, 2020 was$50.1 million . Debt Instruments 2.625% Convertible Senior Notes due 2025 InMarch 2020 , we issued$230.0 million in aggregate principal amount of 2.625% Convertible Senior Notes due 2025, or the Convertible Notes, in a private offering. The Convertible Notes are governed by an indenture datedMarch 9, 2020 between us andU.S. Bank, National Association , as trustee. We received net proceeds from the offering of$222.6 million . We used$88.6 million to repay in full all outstanding amounts borrowed, accrued interest and fees owed in connection with the termination of the amended and restated term loan agreement, or the 2018 Term Loan, withCapital Royalty Group , and the fees owed in connection with the termination of our revolving credit facility withSilicon Valley Bank . We intend to use the remainder of the net proceeds for general corporate purposes, including the continued development and commercialization of GeoMx DSP, the continued commercialization of our portfolio of nCounter based products, and for working capital needs. The Convertible Notes bear interest at a rate of 2.625% per year, payable semi-annually in arrears onMarch 1 andSeptember 1 , beginning onSeptember 1, 2020 . The Convertible Notes may bear additional interest under specified circumstances relating to the Company's failure to comply with its reporting obligations under, or if the Convertible Notes are not freely tradeable as required by, the indenture governing the Convertible Notes. Upon conversion, the Convertible Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election. Our current intent is to settle the principal amount of the Convertible Notes in cash upon conversion, with any remaining conversion value being delivered in shares of our common stock. The Convertible Notes are general unsecured senior obligations and will mature onMarch 1, 2025 , unless earlier repurchased, redeemed, or converted, subject to satisfaction of certain conditions and during the periods described below. The initial conversion rate for the Convertible Notes is 20.9161 shares of common stock, par value$0.0001 per share, per$1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately$47.81 per share). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that may occur prior to the maturity date or if we issue a notice of redemption, we will increase the conversion rate for a holder who elects to convert our Convertible Notes in connection with such corporate event or in connection with such redemption, as the case may be, in certain circumstances. Prior to the close of business on the business day immediately precedingDecember 1, 2024 , the Convertible Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending onJune 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any five consecutive trading-day period in which the trading price per$1,000 principal amount of Convertible Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; (3) if we call any or all of the Convertible Notes for redemption, the Convertible Notes called for redemption (or, in the case of a partial redemption, if we make an election to deem all Convertible Notes, irrespective of whether they are called for redemption, to be convertible, all Convertible Notes) may be submitted for conversion at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date as set forth in the related redemption notice; or (4) upon the occurrence of specified corporate events. On or afterDecember 1, 2024 , until the close of business on the business day immediately preceding the maturity date, holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time, regardless of the foregoing circumstances. We may not redeem the Convertible Notes prior toMarch 5, 2023 , and no sinking fund is provided for the Convertible Notes. On or afterMarch 5, 2023 , we may redeem for cash all or any portion of the Convertible Notes, at our option, if the last reported sale price of the common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) 25 -------------------------------------------------------------------------------- Table of Contents ending on, and including, the trading day immediately preceding the date on which we provide a notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. Upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes) prior to the maturity date, subject to certain conditions, holders may require us to repurchase all or a portion of the Convertible Notes in increments of$1,000 for cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Convertible Notes do not contain any financial or operating covenants or any restrictions on the issuance of other indebtedness or the issuance or repurchase of securities by us. The Convertible Notes indenture contains customary events of default, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the Convertible Notes will automatically become due and payable. Term Loan Agreement
In
In March 2020 , the Company terminated the 2018 Term Loan agreement. The
Company used $88.6 million of the proceeds from the Convertible Notes to repay
in full all outstanding principle, interest and fees owed associated with
termination of the loan.
2018 Revolving Loan Facility
In January 2018 , we entered into a $15.0 million secured revolving loan
facility, with availability subject to a borrowing base consisting of eligible
accounts receivable. In November 2018 , we entered into an amended and restated
loan and security agreement to increase the borrowing capacity under the
facility to $20.0 million , amend the borrowing base to include finished goods
inventory, and extend the final maturity under the facility to November 2021 .
In March 2020 , we terminated the revolving loan facility and paid termination
fees of $0.5 million . There were no amounts outstanding under the revolving loan
facility at the time of termination.
Equity Financings
In March 2019 , we completed an underwritten public offering of 3,175,000
shares of our common stock, including the exercise in full by the underwriters
of their option to purchase 675,000 additional shares of common stock. Our total
gross proceeds were $73.0 million . After underwriter's commissions and other
expenses of the offering, and net of proceeds received by the related party
stockholder, our aggregate net proceeds were approximately $68.3 million .
Use of Funds
Our principal uses of cash are funding our operations, capital expenditures,
working capital requirements, and satisfaction of any outstanding obligations
under our debt agreements, respectively. Over the past several years, our
revenue has increased from year to year and, as a result, our cash flows from
customer collections have increased. Our operating expenses have also increased
as we have invested in our sales and marketing activities and in research and
development of new product platforms and technologies that we believe have the
potential to drive the long-term growth of our business.
Our operating cash requirements may increase in the future as we invest in
research and development related to existing or new product platforms, as well
as in sales and marketing activities. We cannot be certain our revenue will grow
sufficiently to offset our operating expense increases. As a result, we may need
to raise additional funds to support our operations, and such funding may not be
available to us on acceptable terms, or at all. If we are unable to raise
additional funds when needed, our operations and ability to execute our business
strategy could be adversely affected.
Historical Cash Flow Trends
The following table shows a summary of our cash flows for the periods indicated (in thousands):
Six Months Ended
June 30,
2020 2019
Cash used in operating activities $ (50,139) $ (49,156)
Cash provided by (used in) investing activities 42,333 (43,606) Cash provided by financing activities
147,246 101,784
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Operating Cash Flows
We derive operating cash flows from cash collected from the sale of our
products and services and, historically, from collaborations. These cash flows
received are offset by our use of cash for operating expenses to support the
growth of our business. We have historically experienced negative cash flows
from operating activities, with such negative cash flows likely to continue for
the foreseeable future.
For the six month period ended June 30, 2020 , net cash used in operating
activities consisted of our net loss of $65.8 million , and net increases in our
operating assets and liabilities of $5.1 million , partially offset by $20.7
million of net non-cash income and expense items, such as the loss on
extinguishment of debt, payment of accrued interest on the 2018 Term Loan,
stock-based compensation, depreciation and amortization, amortization of our
right-of-use assets and deferred financing costs.
For the six months ended June 30, 2019 , net cash used in operating
activities consisted of our net loss of $41.9 million , and net increases in our
operating assets and liabilities of $21.0 million , partially offset by $13.8
million of net non-cash income and expense items, such as stock-based
compensation, depreciation and amortization, amortization of our right-of-use
assets, deferred interest converted to principal pursuant to the 2018 Term Loan,
and provisions for inventory obsolescence.
Investing Cash Flows
Our most significant investing activities for the six month periods ended
June 30, 2020 and 2019 were related to the purchase, maturity and sale of
short-term investments. Because we manage our cash usage with respect to our
total cash, cash equivalents and short-term investments, we do not consider
these cash flows to be important to an understanding of our liquidity and
capital resources.
During the six month periods ended June 30, 2020 and 2019, we purchased
property and equipment totaling $5.4 million and $1.1 million , respectively. The
equipment purchased during the six month period ended June 30, 2020 includes
costs incurred for construction, furniture and fixtures, and manufacturing
equipment utilized in our new production facility in the greater Seattle,
Washington area. We believe the investments we have made to date in expanding
our manufacturing capabilities will be sufficient to support the growth and
expansion of our operations for the foreseeable future.
Financing Cash Flows
Historically, we have funded our operations through the issuance of equity securities and various forms of debt facilities.
Net cash provided by financing activities for the six month period ended
June 30, 2020 consisted primarily of net proceeds of from the issuance of 2.625%
Convertible Senior Notes of $230.0 million and $8.8 million of net proceeds from
the exercise of stock options and other equity awards and our Employee Stock
Purchase Plan. These cash inflows were partially offset by payments related to
the termination of our term loan agreement and revolving loan facility of $84.8
million .
Net cash provided by financing activities for the six months ended June 30,
2019 consisted of net proceeds of $68.3 million from an underwritten public
offering of our common stock, borrowings of $20.0 million under our term loan
agreement, and $12.3 million of net proceeds from the exercise of stock options
and other equity awards and our Employee Stock Purchase Plan.
Contractual Obligations and Commitments
The following table reflects a summary of our contractual obligations as of
June 30, 2020 .
Payments due by period
Less than 1 More than 5
Contractual Obligations(1) Total Year 1-3 Years 3-5 Years Years
(In thousands)
Convertible notes(2) $ 230,000 $ - $ - $ 230,000 $ -
Lease obligations(3) 40,399 $ 3,198 $ 19,524 $ 13,569 $ 4,108
Purchase obligations(4) 21,398 21,398 - - -
Total $ 291,797 $ 24,596 $ 19,524 $ 243,569 $ 4,108
(1) Excludes royalty obligations based on net sales of products as any such
amounts are not currently determinable.
(2) Includes principal on our convertible notes.
(3) Lease costs are primarily for office, laboratory and manufacturing space.
(4) Purchase obligations consist of contractual and legally binding commitments
under outstanding purchase orders to purchase long lead time inventory and other
research and development items.
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Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been prepared in
accordance with U.S. generally accepted accounting principles, or GAAP. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities and related
disclosure of contingent assets and liabilities, revenue and expenses at the
date of the financial statements. Generally, we base our estimates on historical
experience and on various other assumptions in accordance with GAAP that we
believe to be reasonable under the circumstances. Actual results may differ from
these estimates.
Critical accounting policies and significant estimates are those that we
consider the most important to the portrayal of our financial condition and
results of operations because they require our most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Our critical accounting
policies and estimates include those related to:
•revenue recognition;
•lease recognition;
•convertible senior notes valuation;
•inventory valuation;
•fair value measurements; and
•income taxes.
For additional information, see Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our Annual Report
on Form 10-K for the year ended December 31, 2019 , as filed with the SEC on
March 2, 2020 and Note 2 of the Notes to the Condensed Consolidated Financial
Statements under Item 1 of this report.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 of
the Notes to the Condensed Consolidated Financial Statements under Item 1 of
this report.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or for any other contractually
narrow or limited purpose.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are subject to certain risks that may affect our results of operations,
cash flows and fair values of assets and liabilities, including volatility in
foreign currency exchange rates, interest rate movements and pricing pressures
worldwide, as well as changes in economic conditions in the markets in which we
operate as a result of the COVID-19 pandemic.
Interest Rate Risk
Generally, our exposure to market risk has been primarily limited to
interest income sensitivity, which is affected by changes in the general level
of U.S. interest rates, particularly because the majority of our investments are
in short-term debt securities. The primary objective of our investment
activities is to preserve principal while at the same time maximizing the income
we receive without significantly increasing risk. To minimize risk, we maintain
our portfolio of cash, cash equivalents and short-term investments in a variety
of interest-bearing instruments, which have included U.S. government and agency
securities, high-grade U.S. corporate bonds, asset-backed securities, and money
market funds. Declines in interest rates, however, would reduce future
investment income. A 10% decline in interest rates, occurring on July 1, 2020
and sustained throughout the period ended June 30, 2021 , would not be material.
Our Convertible Notes are based on a fixed rate; accordingly, we do not have
economic interest rate exposure on the Convertible Notes. However, changes in
interest rates could impact the fair market value of the Convertible Notes.
Generally, the fair market value of the fixed interest rate of the Convertible
Notes will increase as interest rates fall and decrease as interest rates rise.
In addition, the fair market value of the Convertible Notes fluctuates when the
market price of our common stock fluctuates. As of June 30, 2020 , the fair
market value of the Convertible Notes was $211.9 million and was determined
based on the estimated or actual bid prices of the Convertible Notes in an
over-the-counter market.
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--------------------------------------------------------------------------------Foreign Currency Exchange Risk
As we continue to expand internationally our results of operations and cash
flows will become increasingly subject to fluctuations due to changes in foreign
currency exchange rates. Historically, a majority of our revenue has been
denominated in U.S. dollars, although we sell our products and services directly
in certain markets outside of the United States denominated in local currency,
principally the Euro. Our expenses are generally denominated in the currencies
in which our operations are located, which is primarily in the United States .
The effect of a 10% adverse change in exchange rates on foreign denominated
cash, receivables and payables would not have been material for the periods
presented. As our operations in countries outside of the United States grow, our
results of operations and cash flows are and will be subject to potentially
greater fluctuations due to foreign currency exchange rate fluctuations,
including the impact of the COVID-19 pandemic. To date, we have not entered into
any material foreign currency hedging contracts although we may do so in the
future.
Inflation Risk
We do not believe that inflation has had a material effect on our business,
financial condition or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or failure to do
so could adversely affect our business, financial condition and results of
operations.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our management, with
the participation of our Chief Executive Officer and our Chief Financial
Officer, have evaluated our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) prior to the filing of this quarterly report. Based on that evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that,
as of the end of the period covered by this quarterly report, certain of our
disclosure controls and procedures were not effective due to material weaknesses
in internal control over financial reporting, specifically with respect to the
following: not having sufficient resources with an appropriate level of controls
knowledge, expertise and training, commensurate with the Company's financial
reporting requirements, as well as not designing and maintaining effective
information technology general controls, controls related to creating and
posting journal entries, controls related to customer order entry, price and
quantity during the product and services billing and revenue processes, and
controls related to periodic inventory counts, receiving of inventory, and
recording adjustments to inventory quantities. These material weaknesses were
disclosed in our Annual Report on Form 10-K for the fiscal year ended December
31, 2019 .
(b) Changes in internal control over financial reporting. There were no
changes in our internal control over financial reporting during the quarter
ended June 30, 2020 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting, other than the
continued remediation efforts disclosed in (c) below.
(c) Remediation Efforts. We continue to implement and execute the material
weakness remediation plan previously described in Part II, Item 9A of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 . During the
quarter ended June 30, 2020 , our continued remediation actions included: (i)
significant evaluation of certain design considerations related to improving how
our information technology key controls are designed to function, ultimately
supporting the operation of certain process level key controls in the impacted
areas; (ii) improved the consistency of execution steps associated with the
performance of control activities in the impacted areas, including the precision
of documentation that is prepared and retained to support the performance and
reviews of our key controls; (iii) conducted training sessions for key control
owners and other key participants that perform activities which are tied to our
key controls over financial reporting to ensure they are trained in a manner
such that they have sufficient knowledge and understanding of our internal
control environment, their impact to those controls, and our expectations around
adherence to processes and procedures as it relates to performing control
activities; (iv) developed and delivered training content on a company-wide
basis regarding public company requirements around internal control
environments, including management certification requirements and external
auditor opinion related to our internal control environment; and (v) evaluated
and revised certain design considerations associated with internal controls to
ensure the completeness, occurrence and accuracy of customer order entry
processes, including validation of price and quantity during our customer
billing and revenue recognition procedures. We believe the above actions that
were undertaken during the quarter ended June 30, 2020 support our continued
efforts to remediate the previously identified and disclosed material
weaknesses. The material weaknesses will not be considered remediated until
internal controls have been designed, or redesigned, and implemented which
specifically address the material weaknesses, and these internal controls must
operate for a sufficient period of time and management must then conclude,
through testing, that these controls are operating effectively.
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Table of Contents Inherent limitation on the effectiveness of internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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