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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019 OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File: Number 001-35980
 
NANOSTRING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-0094687
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
530 Fairview Avenue North
Seattle, Washington 98109
(Address of principal executive offices)
(206) 378-6266
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
NSTG
The NASDAQ Stock Market LLC
(The NASDAQ Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 31, 2019 there were 35,738,089 shares of registrant’s common stock outstanding.
 


Table of Contents

NANOSTRING TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS

 
 
PAGE
 
 
 
Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Loss — Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Changes in Stockholders' Equity — Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2019 and 2018
 
 

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Table of Contents


PART 1. FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements
NanoString Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
(Unaudited)
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,442

 
$
24,356

Short-term investments
105,423

 
69,641

Accounts receivable, net
19,542

 
17,279

Inventory, net
19,040

 
13,173

Prepaid expenses and other
10,877

 
7,258

Total current assets
178,324

 
131,707

Property and equipment, net
14,863

 
15,171

Operating lease right-of-use assets
25,344

 

Other assets
2,228

 
680

Total assets
$
220,759

 
$
147,558

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,724

 
$
8,636

Accrued liabilities
5,632

 
3,705

Accrued compensation and other employee benefits
10,774

 
12,060

Customer deposits
6,462

 
8,167

Deferred revenue, current portion
4,389

 
9,890

Deferred rent, current portion

 
657

Operating lease liabilities, current portion
3,690

 

Total current liabilities
37,671

 
43,115

Deferred revenue, net of current portion
876

 
1,620

Deferred rent and other long-term liabilities, net of current portion
246

 
7,558

Long-term debt, net of discounts
79,194

 
58,396

Operating lease liabilities, net of current portion
30,183

 

Total liabilities
148,170

 
110,689

Commitment and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value, 15,000 shares authorized; none issued

 

Common stock, $0.0001 par value, 150,000 shares authorized; 35,736 and 30,913 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
4

 
3

Additional paid-in capital
528,307

 
428,162

Accumulated other comprehensive income (loss)
217

 
(40
)
Accumulated deficit
(455,939
)
 
(391,256
)
Total stockholders’ equity
72,589

 
36,869

Total liabilities and stockholders’ equity
$
220,759

 
$
147,558


The accompanying notes are an integral part of these condensed consolidated financial statements.

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Product and service
$
26,349

 
$
21,453

 
$
70,069

 
$
59,882

Collaboration
4,255

 
7,163

 
18,568

 
16,818

Total revenue
30,604

 
28,616

 
88,637

 
76,700

Costs and expenses:
 
 
 
 
 
 
 
Cost of product and service revenue
10,925

 
9,291

 
29,239

 
25,538

Research and development
17,007

 
16,651

 
50,063

 
45,068

Selling, general and administrative
23,382

 
17,810

 
69,317

 
57,897

Total costs and expenses
51,314

 
43,752

 
148,619

 
128,503

Loss from operations
(20,710
)
 
(15,136
)
 
(59,982
)
 
(51,803
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
763

 
384

 
2,114

 
826

Interest expense
(2,415
)
 
(1,631
)
 
(6,052
)
 
(4,798
)
Other expense, net
(322
)
 
(46
)
 
(552
)
 
(330
)
Total other expense, net
(1,974
)
 
(1,293
)
 
(4,490
)
 
(4,302
)
Net loss before provision for income tax
(22,684
)
 
(16,429
)
 
(64,472
)
 
(56,105
)
Provision for income tax
(64
)
 
(57
)
 
(211
)
 
(185
)
Net loss
$
(22,748
)
 
$
(16,486
)
 
$
(64,683
)
 
$
(56,290
)
Net loss per share - basic and diluted
$
(0.64
)
 
$
(0.56
)
 
$
(1.90
)
 
$
(2.09
)
Weighted average shares used in computing basic and diluted net loss per share
35,576

 
29,366

 
34,121

 
26,882

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(22,748
)
 
$
(16,486
)
 
$
(64,683
)
 
$
(56,290
)
Change in unrealized gain on short-term investments
13

 
12

 
257

 
45

Comprehensive loss
$
(22,735
)
 
$
(16,474
)
 
$
(64,426
)
 
$
(56,245
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2018
25,421

 
$
2

 
$
353,308

 
$
(99
)
 
$
(313,102
)
 
$
40,109

Cumulative effect of a change in accounting policy(1)

 

 

 

 
(755
)
 
(755
)
Warrants issued for common stock

 

 
749

 

 

 
749

Common stock issued for stock options and restricted stock units
139

 
1

 
411

 

 

 
412

Common stock issued for employee stock purchase plan
136

 

 
767

 

 

 
767

Stock-based compensation

 

 
2,945

 

 

 
2,945

Net loss

 

 

 

 
(19,202
)
 
(19,202
)
Other comprehensive loss

 

 

 
(13
)
 

 
(13
)
Balance at March 31, 2018
25,696

 
$
3

 
$
358,180

 
$
(112
)
 
$
(333,059
)
 
$
25,012

Warrants issued for common stock

 

 
674

 

 

 
674

Common stock issued for stock options and restricted stock units
89

 

 
583

 

 

 
583

Stock-based compensation

 

 
2,903

 

 

 
2,903

Net loss

 

 

 

 
(20,601
)
 
(20,601
)
Other comprehensive income

 

 

 
46

 

 
46

Balance at June 30, 2018
25,785

 
$
3

 
$
362,340

 
$
(66
)
 
$
(353,660
)
 
$
8,617

Common stock issued in public offering, net of $3.7 million of issuance costs
4,600

 

 
53,847

 

 

 
53,847

Warrants issued for common stock

 

 
843

 

 

 
843

Common stock issued for stock options and restricted stock units
163

 

 
1,733

 

 

 
1,733

Common stock issued for employee stock purchase plan
121

 

 
684

 

 

 
684

Exercise of common stock warrants, net
100

 

 

 

 

 

Stock-based compensation

 

 
2,835

 

 

 
2,835

Net loss

 

 

 

 
(16,486
)
 
(16,486
)
Other comprehensive income

 

 

 
12

 

 
12

Balance at September 30, 2018
30,769

 
$
3

 
$
422,282

 
$
(54
)
 
$
(370,146
)
 
$
52,085

 
(1) Effective January 1, 2018, we adopted Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers. See Note 2. Significant Accounting Policies and Note 3. Revenue from Contracts with Customers for more information.
 

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (continued)
(in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2019
30,913

 
$
3

 
$
428,162

 
$
(40
)
 
$
(391,256
)
 
$
36,869

Common stock issued in public offering, net of $4.7 million of issuance costs
3,175

 

 
68,273

 

 

 
68,273

Warrants issued for common stock

 

 
698

 

 

 
698

Common stock issued for stock options and restricted stock units
805

 

 
8,075

 

 

 
8,075

Common stock issued for employee stock purchase plan
151

 

 
939

 

 

 
939

Tax payments from shares withheld for equity awards

 

 
(1,299
)
 

 

 
(1,299
)
Stock-based compensation

 

 
2,882

 

 

 
2,882

Net loss

 

 

 

 
(21,898
)
 
(21,898
)
Other comprehensive income

 

 

 
61

 

 
61

Balance at March 31, 2019
35,044

 
$
3

 
$
507,730

 
$
21

 
$
(413,154
)
 
$
94,600

Warrants issued for common stock

 

 
1,575

 

 

 
1,575

Common stock issued for stock options and restricted stock units
323

 
1

 
4,590

 

 

 
4,591

Stock-based compensation

 

 
5,076

 

 

 
5,076

Net loss

 

 

 

 
(20,037
)
 
(20,037
)
Other comprehensive income

 

 

 
183

 

 
183

Balance at June 30, 2019
35,367

 
$
4

 
$
518,971

 
$
204

 
$
(433,191
)
 
$
85,988

Warrants issued for common stock

 

 
516

 

 

 
516

Common stock issued for stock options and restricted stock units
317

 

 
3,234

 

 

 
3,234

Common stock issued for employee stock purchase plan
52

 

 
1,013

 

 

 
1,013

Tax payments from shares withheld for equity awards

 

 
(175
)
 

 

 
(175
)
Stock-based compensation

 

 
4,748

 

 

 
4,748

Net loss

 

 

 

 
(22,748
)
 
(22,748
)
Other comprehensive income

 

 

 
13

 

 
13

Balance at September 30, 2019
35,736

 
$
4

 
$
528,307

 
$
217

 
$
(455,939
)
 
$
72,589


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

NanoString Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(64,683
)
 
$
(56,290
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Stock-based compensation expense
12,706

 
8,683

Depreciation and amortization
3,625

 
2,975

Non-cash operating lease cost
2,069

 

Amortization of premium on short-term investments
(11
)
 
373

Amortization of deferred financing costs
575

 
276

Conversion of accrued interest to long-term debt
1,565

 
1,130

Provision for bad debts
(62
)
 
467

Provision for inventory obsolescence
784

 
629

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,224
)
 
562

Inventory
(7,161
)
 
3,468

Prepaid expenses and other assets
(5,292
)
 
(2,418
)
Accounts payable
(2,027
)
 
1,261

Accrued liabilities
1,133

 
(1,388
)
Accrued compensation and other employee benefits
(1,232
)
 
532

Customer deposits
(1,705
)
 
1,263

Deferred revenue
(6,244
)
 
(789
)
Operating lease liabilities
(1,701
)
 

Deferred rent and other liabilities

 
(384
)
Net cash used in operating activities
(69,885
)
 
(39,650
)
Investing activities
 
 
 
Purchases of property and equipment
(1,832
)
 
(2,855
)
Proceeds from sale of short-term investments
2,500

 
5,410

Proceeds from maturity of short-term investments
84,070

 
34,100

Purchases of short-term investments
(122,084
)
 
(62,150
)
Net cash used in investing activities
(37,346
)
 
(25,495
)
Financing activities
 
 
 
Borrowings under long-term debt agreement
20,000

 

Deferred costs related to long-term debt
(100
)
 

Proceeds from sale of common stock, net
68,273

 
53,847

Proceeds from issuance of common stock warrants
1,821

 
2,266

Tax withholdings related to net share settlements of restricted stock units
(1,474
)
 
(197
)
Proceeds from issuance of common stock for employee stock purchase plan
1,952

 
1,451

Proceeds from exercise of stock options
15,899

 
2,727

Net cash provided by financing activities
106,371

 
60,094

Net decrease in cash and cash equivalents
(860
)
 
(5,051
)
Effect of exchange rate changes on cash and cash equivalents
(54
)
 
(29
)
Cash and cash equivalents
 
 
 
Beginning of period
24,356

 
26,279

End of period
$
23,442

 
$
21,199

 
 
 
 
Supplemental disclosures
 
 
 
Operating lease right-of-use assets obtained in exchange for lease obligations
$
27,364

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

NanoString Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 
1. Description of the Business
NanoString Technologies, Inc. (the “Company”) was incorporated in the state of Delaware on June 20, 2003. The Company’s headquarters is located in Seattle, Washington. The Company’s proprietary optical barcoding chemistry enables direct detection, identification and quantification of individual target molecules in a biological sample by attaching a unique color coded fluorescent reporter to each target molecule of interest. The Company currently markets and sells two platforms based on its proprietary technology, its nCounter Analysis System and its GeoMx Digital Spatial Profiler, or GeoMx DSP system, both consisting of instruments and consumables, to academic, government, biopharmaceutical and clinical laboratory customers.
The Company has incurred losses to date and expects to incur additional losses for the foreseeable future. The Company continues to invest the majority of its resources in the development and growth of its business, including significant investments in new product development and sales and marketing efforts. The Company’s activities have been financed to date primarily through the sale of equity securities and incurrence of indebtedness and cash received by the Company pursuant to certain product development collaborations.
In March 2019, the Company completed an underwritten public offering of 3,175,000 shares of its common stock, including the exercise in full by the underwriters of their option to purchase 675,000 additional shares of common stock. An additional 2,000,000 shares were sold by a related party stockholder. The Company’s total gross proceeds were $73.0 million. The Company did not receive any proceeds from the sale of shares of common stock by the related party stockholder. After underwriter’s commissions and other expenses of the offering, the Company’s aggregate net proceeds were approximately $68.3 million.
In July 2018, the Company completed an underwritten public offering of 4,600,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock in August 2018, for total gross proceeds of $57.5 million. After underwriter’s commissions and other expenses of the offering, the Company’s aggregate net proceeds were approximately $53.8 million.
In January 2018, the Company entered into a Sales Agreement with a sales agent to sell shares of the Company’s common stock through an “at the market” equity offering program for up to $40.0 million in gross cash proceeds. In March 2019, the Company terminated this agreement and there were no shares of common stock sold under this agreement.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries. The unaudited condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all information and disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for annual financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and U.S. GAAP for unaudited condensed consolidated financial information. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and results of its operations as of and for the periods presented.
Unless indicated otherwise, all amounts presented in financial tables are presented in thousands, except for per share and par value amounts.
The preparation of financial statements in conformity 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. Actual results could differ from those estimates. The results of the Company’s operations for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year or for any other period.

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Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company has transferred control of a product or service to the customer, meaning the customer has the ability to use and obtain the benefit of the product or service. The Company recognizes revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control.
The Company generates the majority of its revenue from the sale of products and services. The Company’s commercial products consist of its proprietary nCounter Analysis System and GeoMx DSP System, and related consumables. Services consist of instrument service contracts and service fees for assay processing.
Revenue from instruments and consumables, including in vitro diagnostic kits, is recognized generally upon shipment to the end customer, which is when title of the product has been transferred to the customer. Performance obligations related to instrument sales are reviewed on a contract-by-contract basis, as individual contract terms may vary, and may include installation and calibration services. Performance obligations for consumable products are generally completed upon shipment to the customer. Instrument revenue related to installation and calibration services is recognized when the customer has possession of the instrument and the services have been performed. Such services can also be provided by the Company’s distribution partners and other third parties. For instruments sold solely to run in vitro diagnostic assays, such as our Prosigna assay, training the customer is a required performance obligation that must be provided by the Company prior to any revenue recognition related to the instrument sale.
Instrument service contracts are sold with contract terms ranging from 1236 months and cover periods after the end of the initial 12-month warranty. These contracts include services to maintain performance within the Company’s designed specifications and a minimum of one preventative maintenance service procedure during the contract term. Revenue from services to maintain designed specifications is considered a stand-ready obligation and recognized evenly over the contract term and service revenue related to preventative maintenance of instruments is recognized when the procedure is completed. Revenue from service fees for assay processing is recognized upon the rendering of the related performance obligation.
For arrangements with multiple performance obligations, the Company allocates the contract price in proportion to its stand-alone selling price. The Company uses its best estimate of stand-alone selling price for its products and services based on average selling prices over a 12-month period and reviews its stand-alone prices annually.
Product and service revenues from sales to customers through distributors are recognized consistent with the policies and practices for direct sales to customers, as described above.
The Company at times may enter into collaboration agreements that may generate upfront fees, and in some cases subsequent milestone payments that may be earned upon completion of certain product development milestones or other designated activities. The Company estimates the expected total cost of product development and other services under these arrangements and recognizes collaboration revenue using a contingency-adjusted proportional performance model. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangements. Revenue recognized at any point in time is limited to cash received, amounts contractually due, or the amounts of any product development or other contractual milestone payments when achievement of a milestone is deemed to be probable. Changes in estimates of total expected collaboration product development or other costs are accounted for prospectively as a change in estimate. From period to period, collaboration revenue can fluctuate substantially based on the achievement or probable achievement of product development or other milestones, or as estimates of total expected collaboration product development or other costs are changed or updated. The Company may recognize revenue from collaboration agreements that do not include upfront or milestone-based payments. Amounts due to collaboration partners are recognized when the related activities have occurred and are classified in the statement of operations, generally as research and development expense, based on the nature of the related activities.

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Reclassifications
Certain reclassifications have been made to prior year financial statements to conform to current year presentation.
Recently Adopted Accounting Pronouncements
In February 2018, FASB issued “ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Act”) on items within accumulated other comprehensive income to retained earnings. The standard became effective for the Company beginning January 1, 2019, and did not have a material impact on its results of operations, financial condition, cash flows or financial statement disclosures, as the Company has not historically recorded the tax effects within accumulated other comprehensive income. The Company maintains a full valuation allowance for its net deferred tax assets.
Leases
In February 2016, FASB issued “ASU 2016-02, Leases – Recognition and Measurement of Financial Assets and Financial Liabilities.” The standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. In August 2018, FASB issued “ASU 2018-11, Leases (Topic 842): Targeted Improvements,” which allows the cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
On January 1, 2019, the Company adopted ASU 2016-02 and has elected the optional modified transition method. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. The adoption of the standard had a material impact on the Company’s condensed consolidated balance sheet as of March 31, 2019, but did not have a material impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows. Upon adoption, the Company recognized operating lease right-of-use assets, current and non-current operating lease liabilities, and derecognized current and non-current deferred rent liabilities, with no cumulative-effect adjustment to the opening balance of retained earnings.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allowed the carry forward of the historical lease classification and assessment of prior conclusions about lease identification. In addition, the Company elected, as an accounting policy election, to use the short-term lease recognition exemption on all classes of assets. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease at inception of a contract. The Company’s leasing portfolio is comprised of operating leases primarily for general office, manufacturing, and research and development purposes. Operating lease liabilities and the corresponding right-of-use assets are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease right-of-use asset is reduced by lease incentives included in the agreement. As the existing leases do not contain an implicit interest rate, the Company estimates its incremental borrowing rate based on information available at commencement date in determining the present value of future payments. The Company includes options to extend the lease in the lease liability and right-of-use asset when it is reasonably certain that the option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For our short-term leases, we recognize lease payments as an expense on a straight-line basis over the lease term. See Note 4. Operating Leases for additional information regarding lease agreements.
Recent Accounting Pronouncements
In June 2016, FASB issued “ASU 2016-13, Financial Instruments: Credit Losses.” The standard requires disclosure regarding expected credit losses on financial instruments at each reporting date, and changes how other than temporary impairments on investment securities are recorded. The standard will become effective for the Company beginning January 1, 2020 with early adoption permitted. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
In August 2018, FASB issued “ASU 2018-15, Intangibles — Goodwill and other — Internal-use software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company has had a practice of expensing the implementation costs related to cloud computing arrangements. Upon adoption of the standard, the Company may capitalize certain implementation costs for new cloud computing arrangements in other assets, and amortize the costs over the related service contract period for the hosted arrangement. The

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amortization of the implementation costs and the related service contract costs will be presented in its results of operations. The impact to the Company’s consolidated financial statements will depend on multiple factors, including the timing, scope and cost of future cloud-based implementation projects. The Company will adopt the standard, on a prospective basis, on January 1, 2020, the effective date of the standard.
In November 2018, the FASB issued “ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.” The new guidance clarifies when certain transactions between collaborative arrangement participants which should be accounted for as revenue under Topic 606. The Company will adopt the standard on January 1, 2020, the effective date of the standard. The Company has assessed its collaborative arrangements and had concluded no adjustment is necessary, based on guidance in the standard.
3. Revenue from Contracts with Customers
Disaggregated Revenues
The following table provides information about disaggregated revenue by major product line and primary geographic market (in thousands):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
5,823

 
$
1,577

 
$
637

 
$
8,037

 
$
11,609

 
$
4,066

 
$
1,620

 
$
17,295

Consumables
8,872

 
3,040

 
824

 
12,736

 
25,241

 
9,084

 
2,331

 
36,656

In vitro diagnostic kits
776

 
1,670

 
71

 
2,517

 
1,852

 
5,350

 
243

 
7,445

Total product revenue
15,471

 
6,287

 
1,532

 
23,290

 
38,702

 
18,500

 
4,194

 
61,396

Service revenue
2,004

 
841

 
214

 
3,059

 
5,965

 
2,136

 
572

 
8,673

Total product and service revenue
17,475

 
7,128

 
1,746

 
26,349

 
44,667

 
20,636

 
4,766

 
70,069

Collaboration revenue
4,255

 

 

 
4,255

 
18,568

 

 

 
18,568

Total revenues
$
21,730

 
$
7,128

 
$
1,746

 
$
30,604

 
$
63,235

 
$
20,636

 
$
4,766

 
$
88,637

 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
3,696

 
$
1,149

 
$
584

 
$
5,429

 
$
9,512

 
$
4,189

 
$
1,890

 
$
15,591

Consumables
7,808

 
2,633

 
699

 
11,140

 
20,770

 
7,882

 
2,126

 
30,778

In vitro diagnostic kits
783

 
1,687

 
77

 
2,547

 
2,382

 
4,600

 
252

 
7,234

Total product revenue
12,287

 
5,469

 
1,360

 
19,116

 
32,664

 
16,671

 
4,268

 
53,603

Service revenue
1,582

 
641

 
114

 
2,337

 
4,383

 
1,589

 
307

 
6,279

Total product and service revenue
13,869

 
6,110

 
1,474

 
21,453

 
37,047

 
18,260

 
4,575

 
59,882

Collaboration revenue
7,163

 

 

 
7,163

 
16,818

 

 

 
16,818

Total revenues
$
21,032

 
$
6,110

 
$
1,474

 
$
28,616

 
$
53,865

 
$
18,260

 
$
4,575

 
$
76,700

Contract balances and remaining performance obligations
Contract liabilities are comprised of the current and long-term portions of deferred revenue of $5.3 million and $11.5 million as of September 30, 2019 and December 31, 2018, respectively, and customer deposits of $6.5 million and $8.2 million as of September 30, 2019 and December 31, 2018, respectively, included within the condensed consolidated balance sheets. Total contract liabilities decreased by $8.0 million for the nine months ended September 30, 2019 as a result of the recognition of previously deferred revenue and customer deposits of $23.9 million for the completion of certain performance obligations

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during the period, partially offset by cash payments received of $16.0 million related to our collaborations and service contracts. The Company did not record any contract assets as of September 30, 2019.
As of September 30, 2019, unsatisfied or partially unsatisfied performance obligations related to the collaboration agreement with Lam Research Corporation (“Lam”) were $6.0 million and are expected to be completed by the first half of 2020. Performance obligations related to undelivered products and service contracts as of September 30, 2019 were $5.7 million and are expected to be completed over the term of the related contract or as products are delivered.
4. Operating Leases
The Company maintains operating leases for its manufacturing, research and development and general operations with terms that expire from 2020 to 2030 and include renewal options to extend the lease term at the then current fair market rental for each of the lease agreements. None of the options to extend the rental term of existing leases were considered reasonably certain as of September 30, 2019. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants.
The components of lease expense were as follows (in thousands):
 
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Operating lease cost
$
1,540

$
4,404

Other information related to leases were as follows (in thousands):
 
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
4,134

The lease term and discount rate was as follows:
 
September 30, 2019
Weighted Average Remaining Lease Term (years)
6.9

 
 
Weighted Average Discount Rate
7.1
%
Future minimum lease payments under the lease agreements as of September 30, 2019 were as follows (in thousands):
Remainder of 2019
$
1,398

2020
6,159

2021
6,266

2022
6,327

2023
6,506

Thereafter
17,676

Total future minimum lease payments
$
44,332

Less: imputed interest
(10,459
)
Total
$
33,873


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Disclosures related to periods prior to adoption
Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows (in thousands):
2019
$
5,526

2020
5,560

2021
5,593

2022
5,708

2023
5,869

Thereafter
13,458

Total future minimum lease payments
$
41,714

5. Net Loss Per Share
Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. Outstanding stock options, restricted stock units and warrants have not been included in the calculation of diluted net loss per share because to do so would be anti-dilutive. Accordingly, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are the same.
The following shares underlying outstanding options, restricted stock units and warrants were excluded from the computation of basic and diluted net loss per share for the periods presented (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Options to purchase common stock
4,448

 
5,302

 
4,682

 
5,496

Restricted stock units
1,864

 
1,194

 
1,675

 
1,135

Common stock warrants
1,231

 
551

 
1,052

 
460

6. Concentration of Risks
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash is invested in accordance with the Company’s investment policy, which includes guidelines intended to minimize and diversify credit risk. Most of the Company’s investments are not federally insured. The Company has credit risk related to the collectability of its accounts receivable. The Company performs initial and ongoing evaluations of its customers’ credit history or financial position and generally extends credit on account without collateral. The Company has not experienced significant credit losses to date.
During the three and nine months ended September 30, 2019, the Company had one collaborator, Lam, that individually represented 13% and 15% of total revenue, respectively. The Company had one collaborator, Lam, that individually represented 18% of total revenue during the three and nine months ended September 30, 2018, respectively. The Company had no customers or collaborators that represented more than 10% of total product and service revenue for the three and nine months ended September 30, 2019 and 2018, respectively. The Company had no customers or collaborators that represented more than 10% of total accounts receivable as of September 30, 2019 or December 31, 2018.
The Company is also subject to supply chain risks related to the outsourcing of the manufacturing and production of its instruments to sole suppliers. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. Similarly, the Company sources certain raw materials used in the manufacture of consumables from certain sole suppliers. A change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results.

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7. Short-term Investments
Short-term investments consisted of available-for-sale securities as follows (in thousands):
Type of securities as of September 30, 2019
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Corporate debt securities
$
66,299

 
$
148

 
$

 
$
66,447

U.S. government-related debt securities
28,431

 
48

 

 
28,479

Asset-backed securities
10,476

 
21

 

 
10,497

Total available-for-sale securities
$
105,206

 
$
217

 
$

 
$
105,423

Type of securities as of December 31, 2018
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Corporate debt securities
$
47,299

 
$
1

 
$
(21
)
 
$
47,279

U.S. government-related debt securities
14,972

 

 
(11
)
 
14,961

Asset-backed securities
7,410

 

 
(9
)
 
7,401

Total available-for-sale securities
$
69,681

 
$
1

 
$
(41
)
 
$
69,641


The fair values of available-for-sale securities by contractual maturity were as follows (in thousands):
 
September 30, 2019
 
December 31, 2018
Maturing in one year or less
$
97,894

 
$
69,641

Maturing in one to three years
7,529

 

Total available-for-sale securities
$
105,423

 
$
69,641

The Company has both the intent and ability to sell its available-for-sale investments maturing greater than one year within 12 months from the balance sheet date and, accordingly, has classified these securities as current in the condensed consolidated balance sheets.
8. Fair Value Measurements
The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices in active markets for identical assets and liabilities.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The recorded amounts of certain financial instruments, including cash, accounts receivable, prepaid expenses and other, accounts payable and accrued liabilities, approximate fair value due to their relatively short-term maturities. The recorded amount of the Company’s long-term debt approximates fair value because the related interest rates approximate rates currently available to the Company.

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The Company’s available-for-sale securities by level within the fair value hierarchy were as follows (in thousands):
As of September 30, 2019
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
15,687

 
$

 
$

 
$
15,687

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities

 
66,447

 

 
66,447

U.S. government-related debt securities

 
28,479

 

 
28,479

Asset-backed securities

 
10,497

 

 
10,497

Total
$
15,687

 
$
105,423

 
$

 
$
121,110

 
 
 
 
 
 
 
 
As of December 31, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
16,293

 
$

 
$

 
$
16,293

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities

 
47,279

 

 
47,279

U.S. government-related debt securities

 
14,961

 

 
14,961

Asset-backed securities

 
7,401

 

 
7,401

Total
$
16,293

 
$
69,641

 
$

 
$
85,934

9. Inventory
Inventory consisted of the following as of the date indicated (in thousands):
 
September 30, 2019
 
December 31, 2018
Raw materials
$
4,610

 
$
3,408

Work in process
4,800

 
4,054

Finished goods
9,630

 
5,711

Total inventory
$
19,040

 
$
13,173

10. Long-term Debt
Term Loan Agreements
In April 2014, the Company entered into a term loan agreement (“2014 Term Loan”), under which it borrowed $45.0 million. Interest on the 2014 Term Loan accrued at an annual rate of 12.0%, payable quarterly, of which 3.0% can be deferred during the first six years of the term at the Company’s option and paid together with the principal at maturity. The 2014 Term Loan had an interest-only period through March 2021 and a final maturity date of March 2022.
In October 2018, the Company entered into an amended and restated term loan agreement (“2018 Term Loan”), under which it may borrow up to $100.0 million, which is due and payable in September 2024. At closing, the Company received net proceeds of approximately $7.8 million, pursuant to borrowings of $60.0 million under the new facility, net of repayment of the Company’s 2014 Term Loan of $50.4 million, including deferred interest and transaction-related fees and expenses. In June 2019, the Company borrowed an additional $20.0 million under the 2018 Term Loan and has the option to borrow the remaining $20.0 million until March 2020, which is subject to the achievement of annual revenue thresholds on or prior to December 31, 2019.
The term loan agreements involved multiple lenders who were considered members of a loan syndicate. In determining whether the most recent amendment was to be accounted for as a debt extinguishment or a debt modification, the Company considered whether lenders remained the same or changed. As all the lenders who were members of the loan syndicate changed as part of the amended and restated loan agreement, the 2014 Term Loan was extinguished, and the 2018 Term Loan was treated as a new borrowing. The extinguishment resulted in a loss of approximately $0.8 million for the year ended December 31, 2018, which was included in interest expense during the fourth quarter of 2018.
The 2018 Term Loan accrues interest at a rate of 10.5%, payable quarterly, of which 3.0% may be deferred during the six-year term at the Company’s option and repaid at maturity together with the principal. The Company paid an upfront fee of 0.5% of the aggregate principal amount of the initial borrowing under the 2018 Term Loan, and will pay a facility fee equal to

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2.0% of the total amount borrowed including any deferred interest at the time the principal is repaid. A long-term liability of $1.9 million is being accreted using the effective interest method for the facility fee over the term of the 2018 Term Loan. Additional borrowings under the 2018 Term Loan will bear the same upfront and facility fees as the initial borrowing.
In connection with entry into the 2018 Term Loan, warrants to purchase an aggregate of 341,578 shares of common stock with an exercise price per share of $21.12 were issued to the lenders. In June 2019, in connection with the borrowing of an additional $20.0 million principal amount, warrants to purchase an aggregate of 128,932 shares of common stock with an exercise price per share of $34.20 were issued to the lenders. If additional amounts are borrowed under the 2018 Term Loan, additional warrants will be issued on each subsequent draw date for 0.3% of the fully-diluted shares then outstanding. The exercise price for additional warrants will be set at a 25.0% premium to the average closing trading price for the 30-day trading period as of the date immediately before the applicable draw date. The warrants issued in conjunction under the 2018 Term Loan were determined to be closely linked to the Company’s stock, and as such, were recorded as an equity security in additional paid-in capital at their relative fair value of $1.6 million and $1.0 million, in October 2018 and June 2019, respectively, with a corresponding debt discount recorded against the 2018 Term Loan balance outstanding.
Total borrowings and deferred interest under the 2018 Term Loan were $82.0 million and $60.4 million as of September 30, 2019 and December 31, 2018, respectively. The balance of the 2018 Term Loan as of September 30, 2019 and December 31, 2018 is net of discounts related to the warrants, debt issuance costs and other upfront fees of $2.8 million and $2.0 million, respectively.
The Company has the option to prepay the 2018 Term Loan, in whole or part, at any time subject to payment of a redemption fee of up to 4.0% during the first year of the term, 3.0% during the second year of the term and with no redemption fee payable if prepayment occurs after the second year of the loan.
Obligations under the 2018 Term Loan are collateralized by substantially all of the Company’s assets. The 2018 Term Loan contains customary conditions to borrowings, events of default and covenants, including negative covenants that could limit the Company’s ability to, among other things, incur additional indebtedness, liens or other encumbrances; make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. The 2018 Term Loan also includes a $2.0 million minimum liquidity covenant and minimum annual revenue-based financial covenants. If the Company’s actual revenue is below the minimum annual revenue requirement for any given year, it may avoid a related default by generating proceeds from an equity or subordinated debt issuance equal to the shortfall between its actual revenues and the minimum revenue requirement.
The Company incurred $2.4 million and $1.6 million of interest expense under the term loan agreements for the three months ended September 30, 2019 and 2018, respectively, and $6.1 million and $4.8 million for the nine months ended September 30, 2019 and 2018, respectively. The Company was in compliance with its financial covenants under the term loan agreement as of September 30, 2019.
2018 Revolving Loan Facility
In January 2018, the Company 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, the Company 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. As of September 30, 2019 and December 31, 2018, no amounts had been drawn on the facility.
Interest on borrowings is payable monthly and accrues at a yearly rate equal to the greater of (i) the prime rate as reported in the Wall Street Journal plus 0.50% and (ii) 4.75%. During an event of default, amounts drawn accrue interest at a yearly rate equal to 8.75%. Obligations under the agreement are secured by the Company’s cash and cash equivalents, accounts receivable and proceeds thereof, and inventory and proceeds from the sale thereof. The lender’s interest in the collateral under the loan facility is senior to the lender’s interest in such collateral under the term loan agreement. The loan facility contains various customary representations and warranties, conditions to borrowing, events of default, including cross default provisions with respect to the loan facility, and covenants, including financial covenants requiring the maintenance of minimum annual revenue and liquidity. The Company was in compliance with its financial covenants under the secured revolving loan facility as of September 30, 2019.

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Long-term debt consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Borrowings under term loan agreements
$
80,000

 
$
60,000

Paid-in-kind interest on term loan agreements
1,965

 
400

Unamortized debt discounts
(2,771
)
 
(2,004
)
Long-term debt, net of discounts
$
79,194

 
$
58,396

Scheduled future principal payments for outstanding debt were as follows at September 30, 2019 (in thousands):
Years Ending December 31,
 
Remainder of 2019
$

2020

2021

2022

2023

Thereafter
81,965

 
$
81,965

11. Collaboration Agreements
At the time of entering into collaboration agreements, the Company evaluates the appropriate presentation and classification of payments within its consolidated financial statements based on the nature of the arrangement, the nature of its business operations and the contractual terms of the arrangement. The Company has determined that amounts to be received from collaborators in connection with its collaboration agreements entered into through September 30, 2019 are related to revenue generating activities.
The Company uses a contingency-adjusted proportional performance model to recognize revenue over the Company’s performance period for each collaboration agreement that includes up front, or milestone-based or other contractual payments. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is a factor of and limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively in the period of change.
The Company recognizes revenue from collaboration agreements that do not include up front, milestone-based or other contractual payments when earned, which is generally in the same period that related costs are incurred. Amounts due to collaboration partners are recognized when the related activities have occurred and are classified in the statement of operations, generally as research and development expense, based on the nature of the related activities.
Lam Research Corporation
In August 2017, the Company entered into a collaboration agreement with Lam with respect to the development of the Company’s Hyb & Seq platform product candidate. Pursuant to the terms of the collaboration agreement, Lam will contribute up to an aggregate of $50.0 million, with amounts thereunder payable quarterly, to be applied to the research and development of the Company’s Hyb & Seq platform, based on allowable development costs. Lam is eligible to receive certain single-digit percentage royalty payments from the Company on net sales of certain products and technologies developed under the collaboration agreement, if any such net sales are ever achieved. The maximum amount of royalties payable to Lam will be capped at an amount up to three times the amount of development funding actually provided by Lam. The Company retains exclusive rights to obtain regulatory approval, manufacture and commercialize the Hyb & Seq products. Lam participates in research and product development through a joint steering committee. The Company will reimburse Lam for the cost of up to 10 full-time Lam employees each year in accordance with the product development plan.
In connection with the execution of the collaboration agreement, the Company issued Lam a warrant to purchase up to 1.0 million shares of the Company’s common stock with the number of underlying shares exercisable at any time proportionate to the amount of the $50.0 million commitment that has been provided by Lam. The exercise price of the warrant is $16.75 per share, and the warrant will expire on the seventh anniversary of the issuance date. The warrant was determined to have a fair value of $6.7 million upon issuance, and such amount will be recorded as additional paid-in capital proportionately from the quarterly collaboration payments made by Lam.

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During the three and nine months ended September 30, 2019, the Company recognized revenue related to the Lam agreement of $4.0 million and $13.2 million, respectively, and $5.3 million and $13.4 million for the three and nine months ended September 30, 2018, respectively. The Company received development funding of $3.4 million and $11.7 million related to the Lam collaboration for the three and nine months ended September 30, 2019, respectively, and $7.0 million and $18.4 million for the three and nine months ended September 30, 2018, respectively. The Company has received $46.8 million in development funding since the inception of the agreement through September 30, 2019.
At September 30, 2019, the Company had recorded $0.5 million of deferred revenue related to the Lam collaboration, all of which is estimated to be recognizable as revenue within one year. In addition, $5.3 million is included in customer deposits in the condensed consolidated balance sheet as of September 30, 2019, which represents amounts received in advance. The Company incurred costs related to services provided by Lam employees under the terms of the agreement of $0.2 million and $0.6 million during the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, Lam had not exercised any warrants.
Celgene Corporation
In March 2014, the Company entered into a collaboration agreement with Celgene Corporation (“Celgene”) to develop, seek regulatory approval for, and commercialize a companion diagnostic using the nCounter Analysis System to identify a subset of patients with Diffuse Large B-Cell Lymphoma. In February 2018, the Company and Celgene entered into an amendment to their collaboration agreement in which Celgene agreed to provide the Company additional funding for work intended to enable a subtype and prognostic indication for the test being developed under the agreement for Celgene’s drug REVLIMID. In connection with this amendment, the Company agreed to remove the right to receive payments from Celgene in the event commercial sales of the companion diagnostic test do not exceed certain pre-specified minimum annual revenues during the first three years following regulatory approval. In addition, the amendment allows Celgene, at its election, to use trial samples with additional technologies for companion diagnostics.
Pursuant to the Company’s agreement as amended in February 2018, the Company is eligible to receive payments from Celgene totaling up to $24.8 million, of which $5.8 million was received as an upfront payment upon delivery of certain information to Celgene and $19.0 million is for development funding and potential success-based development and regulatory milestones. There have been several amendments to the collaboration agreement and in return the Company has received additional payments totaling $2.1 million.
The process of successfully developing a product candidate, obtaining regulatory approval and ultimately commercializing a product candidate is highly uncertain and the attainment of any additional milestones is therefore uncertain and difficult to predict. In addition, certain milestones are outside the Company’s control and are dependent on the performance of Celgene and the outcome of a clinical trial and related regulatory processes. Pursuant to its collaboration with Celgene, the Company has been developing an in vitro diagnostic test, LymphMark, as a potential companion diagnostic to aid in identifying patients with diffuse large B-cell lymphoma (DLBCL) for treatment. In April 2019, Celgene announced that the trial evaluating REVLIMID for the treatment of DLBCL did not meet its primary endpoint. In May 2019, the Company’s collaboration agreement with Celgene was terminated effective July 2019, with substantially all the remaining deferred revenue from the agreement recognized in the three months ended June 30, 2019. In addition, the Company does not intend to file a pre-market approval for LymphMark as a companion diagnostic for REVLIMID.
The Company did not recognize revenue related to the Celgene agreement during the three months ended September 30, 2019 and recognized $4.4 million during the nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, the Company recognized revenue related to the Celgene agreement of $1.6 million and $1.4 million, respectively. The Company received development funding of $0.8 million and $1.1 million related to the Celgene collaboration for the three and nine months ended September 30, 2019.
Merck & Co., Inc.
In May 2015, the Company entered into a clinical research collaboration agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc. (“Merck”), to develop an assay intended to optimize immune-related gene expression signatures and evaluate the potential to predict benefit from Merck’s anti-PD-1 therapy, KEYTRUDA. Under the terms of the collaboration agreement, the Company received $3.9 million in payments during 2015. In connection with the execution of the development collaboration agreement, the Company and Merck terminated the May 2015 clinical research collaboration and moved all remaining activities under the related work plan to the new development collaboration agreement. In February 2016, the Company expanded its collaboration with Merck by entering into a new development collaboration agreement to clinically develop, seek regulatory approval for, and commercialize a companion diagnostic test to predict response to KEYTRUDA in multiple tumor types. During 2016, the Company received $12.0 million upfront as a technology access fee and $8.5 million of preclinical milestone payments. In October 2017, Merck notified the Company of its decision not to pursue regulatory approval

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of the companion diagnostic test for KEYTRUDA and, in August 2018, the Company and Merck agreed to mutually terminate their development collaboration agreement, effective as of September 30, 2018, following the completion of certain close-out activities. As part of the mutual termination agreement, Merck granted to the Company a non-exclusive license to certain intellectual property that relates to Merck’s tumor inflammation signature. The Company recognized revenue of $0.2 million and $1.6 million during the three and nine months ended September 30, 2018, respectively.
12. Commitments and Contingencies
From time to time, the Company may become involved in litigation relating to claims arising from the ordinary course of business. Additionally, the Company operates in various states and local jurisdictions for which sales, occupation, or franchise taxes may be payable to certain taxing authorities. Management believes that there are no claims or actions pending against the Company currently, the ultimate disposition of which would have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows.
13. Information about Geographic Areas
The Company operates as a single reportable segment and enables customers to perform both research and clinical testing on its nCounter Analysis and GeoMx DSP Systems. The Company has one sales force that sells these systems to both research and clinical testing labs, and certain of its nCounter reagents can be used for both research and diagnostic testing. GeoMx DSP reagents are sold for research use only. In addition, the Company’s Prosigna Breast Cancer Assay is marketed to clinical laboratories.
The following table of total revenue is based on the geographic location of distributors or end users who purchase products and services and collaborators. For sales to distributors, their geographic location may be different from the geographic locations of the ultimate end user. For collaboration agreements, revenues are derived from partners located primarily in the United States. Americas consists of the United States, Canada, Mexico and South America; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia, India and Australia.
Revenue by geography was as follows (in thousands):        
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Americas
$
21,730

 
$
21,032

 
$
63,235

 
$
53,865

Europe & Middle East
7,128

 
6,110

 
20,636

 
18,260

Asia Pacific
1,746

 
1,474

 
4,766

 
4,575

Total revenue
$
30,604

 
$
28,616

 
$
88,637

 
$
76,700

Total revenue in the United States was $21.3 million and $20.4 million for the three months ended September 30, 2019 and 2018, respectively, and $61.7 million and $51.2 million for the nine months ended September 30, 2019 and 2018, respectively. The Company’s assets are primarily located in the United States and not allocated to any specific geographic region. Substantially all of the Company’s long-lived assets are located in the United States.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 ability to successfully commercialize our GeoMx DSP platform;
our ability to successfully develop our Hyb & Seq platform;
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 ability to realize the potential payments set forth in our collaboration agreements;
our strategic relationships, including with patent holders of our technologies, manufacturers and distributors of our products, collaboration partners and third parties who conduct our clinical studies;
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 research, primarily in the fields of genomics and proteomics, and also to develop clinical diagnostic tests. We currently have two commercially available product platforms, our nCounter Analysis System instruments and related consumables, and our GeoMx Digital Spatial Profiler, or GeoMx DSP, system and related consumables.
Our GeoMx DSP system, for which we recorded our first revenue during third quarter of 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.
We shipped our first 10 commercial GeoMx DSP systems during the third quarter of 2019. 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 tested in our lab prior to purchasing a GeoMx DSP system. To date, we have completed approximately 170 projects for 110 customers pursuant to this Technology Access Program, or TAP. As a result of the TAP program and other commercial sales activities conducted this year, as of September 30, 2019 we have received more than 70 orders for GeoMx DSP systems.
We market and sell our instruments and related consumables to researchers in academic, government and biopharmaceutical laboratories for research use and to clinical laboratories and medical centers for diagnostic use, both through our direct sales force and through selected distributors in certain markets. As of September 30, 2019, we had an installed base of approximately 820 nCounter systems, which our customers have used to publish more than 2,800 peer-reviewed papers.
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 our Prosigna breast cancer assay. 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 our nCounter and GeoMx DSP systems, we offer extended service contracts and we continue to generate revenue through product development collaborations.
We use third-party contract manufacturers to produce the instruments comprising our nCounter and GeoMx DSP systems. We manufacture consumables at our Seattle, Washington facility.
We focus a substantial portion of our resources on developing new technologies, products and solutions. We invested $50.1 million and $45.1 million for the nine months ended September 30, 2019 and 2018, 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 to complement our growing instrument and consumable product portfolio.
We have discovered other novel applications that utilize our proprietary barcoding chemistry, and we continue to invest in the development of potential new product platforms. For example, our Hyb & Seq molecular profiling system is currently under development, and is designed to use a modified version of our proprietary chemistry to determine and analyze gene sequences within a biological sample, or to potentially profile the activity of an even greater number of genes as compared to our nCounter Analysis System. Following completion of product development, the Hyb & Seq platform is expected to be commercialized as a new instrument along with associated consumables.
Our product and service revenue increased 17.0% to $70.1 million for the nine months ended September 30, 2019, compared to $59.9 million for the first nine months of 2018. Our total revenue was $88.6 million for the nine months ended September 30, 2019, compared to $76.7 million for the first nine months of 2018. We have never been profitable and had net losses of $64.7 million and $56.3 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, our accumulated deficit was $455.9 million.

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Results of Operations
Revenue
Our product revenue consists of sales of our nCounter Analysis Systems, including their related consumables and Prosigna in vitro diagnostic kits, and our GeoMx DSP systems and their 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 our nCounter and GeoMx DSP systems and purchase related consumables. Collaboration revenue is derived primarily from our collaboration with Lam and, historically, our terminated collaboration with Celgene.
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
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Americas
$
21,730

 
$
21,032

 
3
%
 
$
63,235

 
$
53,865

 
17
%
Europe & Middle East
7,128

 
6,110

 
17
%
 
20,636

 
18,260

 
13
%
Asia Pacific
1,746

 
1,474

 
18
%
 
4,766

 
4,575

 
4
%
Total revenue
$
30,604

 
$
28,616

 
7
%
 
$
88,637

 
$
76,700

 
16
%
The following table reflects the breakdown of our revenue into the primary components of our products, services, and collaborations.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
8,037

 
$
5,429

 
48
 %
 
$
17,295

 
$
15,591

 
11
%
Consumables
12,736

 
11,140

 
14
 %
 
36,656

 
30,778

 
19
%
In vitro diagnostic kits
2,517

 
2,547

 
(1
)%
 
7,445

 
7,234

 
3
%
Total product revenue
23,290

 
19,116

 
22
 %
 
61,396

 
53,603

 
15
%
Service revenue
3,059

 
2,337

 
31
 %
 
8,673

 
6,279

 
38
%
Total product and service revenue
26,349

 
21,453

 
23
 %
 
70,069

 
59,882

 
17
%
Collaboration revenue
4,255

 
7,163

 
(41
)%
 
18,568

 
16,818

 
10
%
Total revenue
$
30,604

 
$
28,616

 
7
 %
 
$
88,637

 
$
76,700

 
16
%
Instrument revenue during the three months ended September 30, 2019 increased as compared to the same period in 2018, due primarily to the first commercial shipments of our new GeoMx DSP system, which contributed $2.2 million of revenue during the period. In addition, we experienced an increase in the number of nCounter FLEX instruments sold, which generally have higher average selling prices, as compared to the number of nCounter SPRINT instruments sold during the period. Instrument revenue for the nine months ended September 30, 2019 also benefited from the first commercial shipments of GeoMx DSP system during the third quarter and a favorable mix shift to an increased number of our nCounter MAX and FLEX instruments sold year to date as a percentage of our total nCounter instruments sold, partially offset by a decrease in the number of SPRINT instruments sold during the nine months ended September 30, 2019 compared to same period in 2018.
Consumables revenue increased for the three and nine months ended September 30, 2019, primarily as a result of our growing installed base of nCounter Analysis Systems, as well as growth in sales of our standardized panel consumable products.
In vitro diagnostic kit revenue represents sales of our Prosigna assay. Prosigna sales were approximately flat for the three and nine months ended September 30, 2019 as compared to the same periods last year. Prosigna sales grew in territories

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outside of North America during the periods, in particular in certain territories within the European Union, while sales were stable in the United States, and declined in Canada.
The increase in service revenue for the three and nine months ended September 30, 2019 was related primarily to increases in revenue generated from technology access fees, particularly fees related to services offered pursuant to our GeoMx DSP TAP and, to a lesser extent, increases in the number of installed instruments covered by service contracts.
Our product and service revenue may continue to increase in future periods as a result of the growth in sales of our GeoMx DSP instruments, the growth in sales of our nCounter and GeoMx DSP consumable products as driven by our increasing installed base of these instruments, continued growth in sales of our standardized panel consumable products and the introduction of new nCounter and GeoMx DSP consumable products.
Collaboration revenue decreased for the three months ended September 30, 2019 as compared to the same period in 2018, due primarily to changes in activity levels relating to our collaboration with Lam and, historically, our terminated collaboration with Celgene. For the nine months ended September 30, 2019, collaboration revenue increased as compared to the same period in 2018 as a result of the acceleration of revenue related to our terminated Celgene collaboration. In April 2019, Celgene announced that its clinical trial evaluating REVLIMID for the treatment of DLBCL, which was conducted using our companion diagnostic product candidate LymphMark, did not meet its primary endpoint. As a result of this outcome, our collaboration agreement with Celgene was terminated in July 2019, with substantially all the remaining deferred collaboration revenue recognized during the three months ended June 30, 2019. Our collaboration agreement with Lam represented $4.0 million and $13.2 million of our collaboration revenue for the three and nine months ended September 30, 2019, respectively, and $5.3 million and $13.4 million for the three and nine months ended September 30, 2018, respectively.Lam has committed to provide up to $50.0 million in funding to support the research and development activities relating to Hyb & Seq, of which $46.8 million has been received as of September 30, 2019.
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 on each nCounter Analysis System sold and establish a reserve for warranty repairs based on historical warranty repair costs incurred.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(Dollars in thousands)
 
 
 
(Dollars in thousands)
 
 
Cost of product and service revenue
$
10,925

 
$
9,291

 
18
%
 
$
29,239

 
$
25,538

 
14
%
Product and service gross profit
$
15,424

 
$
12,162

 
27
%
 
$
40,830

 
$
34,344

 
19
%
Product and service gross margin
59
%
 
57
%
 
 
 
58
%
 
57
%
 
 
For the three and nine months ended September 30, 2019, cost of product and service revenue increased as compared to the same periods in 2018, due primarily to higher volumes of consumables sold during the periods, as well as increased costs associated with the first commercial shipments of GeoMx DSP systems. In addition, cost of product and service revenue increased as a result of a higher volume of service contracts associated with our growing installed base of nCounter instruments and investments made to support the growth, installation and service of our product lines, including our new GeoMx DSP systems. Our gross margin on product and service revenue for the three months ended September 30, 2019 increased as compared to the same period in 2018 due primarily to a mix shift towards our higher margin MAX and FLEX nCounter instruments, as well as due to sales of our new GeoMx DSP instruments, which commenced shipping during the quarter and contributed a higher average gross margin as compared to our nCounter instrument platforms. In addition, we continue to see increases in our TAP service revenue as a percentage of total revenue, which has a favorable impact on our gross margins. Gross margin for the nine months ended September 30, 2019 increased modestly, as a result of higher sales of consumables as a percentage of our sales mix and due to our sales of GeoMx DSP instruments, partially offset by investments made in our operations to support the growth of our business. In addition, increasing revenue from our GeoMx TAP service favorably impacted our overall margins for both the three and nine month periods compared to the same periods in 2018.
We expect our cost of product and service revenue to increase in future periods, primarily due to our expected growth in product and service revenue. We expect our gross margin on product and service revenue may fluctuate in future periods, depending upon our mix of instrument sales from which we typically record lower gross margins, as compared to our sales of consumable products or services, and potential expenses we may incur for regulatory compliance, quality assurance or related

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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. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to continue to increase in future periods. In particular, following our entry into the Lam collaboration in August 2017, which provides up to $50.0 million of funding for our Hyb & Seq program, we have experienced a significant increase in related research and development expenses.
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
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Platform technology
$
8,553

 
$
7,670

 
12
 %
 
$
24,035

 
$
19,878

 
21
 %
Manufacturing process development
1,665

 
1,035

 
61
 %
 
4,560

 
3,313

 
38
 %
Life sciences products and applications
2,994

 
2,643

 
13
 %
 
8,778

 
7,792

 
13
 %
Diagnostic product development
1,230

 
2,516

 
(51
)%
 
4,430

 
5,861

 
(24
)%
Clinical, regulatory and medical affairs
816

 
1,322

 
(38
)%
 
3,325

 
4,065

 
(18
)%
Facility allocation
1,749

 
1,465

 
19
 %
 
4,935

 
4,159

 
19
 %
Total research and development expense
$
17,007

 
$
16,651

 
2
 %
 
$
50,063

 
$
45,068

 
11
 %
The increase in research and development expense for the three months ended September 30, 2019 as compared to the same period in 2018 is due primarily to higher stock-based compensation expense, which was driven by increases in our stock price and by our recent decision to implement the grant of restricted stock units, or RSUs, to our employees as a component of their stock-based compensation. In addition, we experienced increases in staffing and personnel-related costs and facility costs which were offset by decreases in professional fees, clinical trial costs, and lower lab supply costs. The trends in research and development expense during the three month period reflect the conclusion of activities related to our terminated Celgene collaboration agreement and a transition to a sustaining level of activity subsequent to the GeoMx DSP commercial launch.
For the nine months ended September 30, 2019, the increase in research and development expense reflects higher stock-based compensation expense, which was driven by increases in our stock price and by our recent decision to implement the grant of RSUs to our employees as a component of their stock-based compensation. In addition, we experienced increases to staffing and personnel-related costs to support activities related to the GeoMx DSP commercial launch, as well as increased facility costs. These increases were partially offset by decreases in professional fees and clinical trial costs primarily due to fewer diagnostic product related development activities associated with our terminated collaboration agreements as compared to the same period in 2018.
We expect our investments in research and development to remain in line with our current levels in future periods, as we transition to a sustaining level of activity. Lam has committed to provide up to $50.0 million in funding to support the research and development activities relating to Hyb & Seq, of which $46.8 million has been received as of September 30, 2019.

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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
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Selling, general and administrative expense
$
23,382

 
$
17,810

 
31
%
 
$
69,317

 
$
57,897

 
20
%

The increase in selling, general and administrative expense for the three and nine month periods ended September 30, 2019 as compared to the same periods in 2018 is primarily attributable to increased investment of $5.1 million and $9.5 million, respectively, in staffing and personnel-related costs to support activities related to the GeoMx DSP commercial launch, and to higher stock-based compensation expense, which was driven by increases in our stock price and by our recent decision to implement the grant of RSUs to our employees as a component of their stock-based compensation. In addition, professional fees have increased during the three and nine month periods ended September 30, 2019 related to accounting and tax support services, in particular activities relating to our compliance with the Sarbanes Oxley Act.
We expect selling, general and administrative expense to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows to support the expected growth in our existing lines of business, as well as to support the introduction of new products and product platforms, including our GeoMx DSP.
Other Income (Expense)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Interest income
$
763

 
$
384

 
99
%
 
$
2,114

 
$
826

 
156
%
Interest expense
(2,415
)
 
(1,631
)
 
48
%
 
(6,052
)
 
(4,798
)
 
26
%
Other expense, net
(322
)
 
(46
)
 
600
%
 
(552
)
 
(330
)
 
67
%
Total other expense, net
$
(1,974
)
 
$
(1,293
)
 
53
%
 
$
(4,490
)
 
$
(4,302
)
 
4
%
Interest expense increased for the three and nine months ended September 30, 2019 due primarily to increased borrowings outstanding under our term loan agreement. The average balance of long-term debt outstanding for the nine months ended September 30, 2019 and 2018 was $70.2 million and $49.9 million, respectively. The increases in interest expense were partially offset by increased interest income during the three and nine months ended September 30, 2019 resulting from higher average cash and investment balances on hand during the periods as compared to the same periods in 2018.
Liquidity and Capital Resources
As of September 30, 2019, we had cash, cash equivalents and short-term investments of $128.9 million. 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. However, we may need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities. Our future funding requirements will depend on many factors, including: 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.

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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 that 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 may have to liquidate some or all of our assets, delay or reduce the scope of or eliminate some or all of our research and development programs, delay development, launch activities or commercialization of our products or 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 and, to a lesser extent, from borrowings under term loan agreements. Our cash used in operations for the nine months ended September 30, 2019 was $69.9 million, including $12.9 million in cash receipts from our collaboration agreements. The timing and amount of such receipts in the future are uncertain, and therefore we may be required to secure larger amounts of cash to fund our planned operations.
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. An additional 2,000,000 shares were sold by a related party stockholder. Our total gross proceeds were $73.0 million. We did not receive any proceeds from the sale of shares of common stock by the related party stockholder. 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.
In July 2018, we completed an underwritten public offering of 4,600,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock in August 2018, for total gross proceeds of $57.5 million. After underwriter’s commissions and other expenses of the offering, our aggregate net proceeds were approximately $53.8 million.
In January 2018, we entered into a sales agreement with a sales agent to sell shares of our common stock through an “at the market” equity offering program for up to $40.0 million in gross cash proceeds. In March 2019, subsequent to our most recent underwritten public offering, we terminated this agreement. No shares of our common stock were sold under this agreement.    
Debt Instruments
Term Loan Agreements
In April 2014, we entered into a term loan agreement, or the 2014 Term Loan, under which we borrowed $45.0 million. The 2014 Term Loan accrues interest at an annual rate of 12.0%, payable quarterly, of which 3.0% can be deferred during the first six years of the term at our option and paid together with the principal at maturity. The 2014 Term Loan had an interest-only period through March 2021 and a final maturity date of March 2022.
In October 2018, we entered into an amended and restated term loan agreement, or th