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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________
FORM 10-Q
____________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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
ý

Accelerated filer
¨
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 May 5, 2020 there were 37,728,994 shares of registrant’s common stock outstanding.
 



NANOSTRING TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
TABLE OF CONTENTS

 
 
PAGE
 
 
 
Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019
 
Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2020 and 2019
 
Condensed Consolidated Statements of Comprehensive Loss — Three Months Ended March 31, 2020 and 2019
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity — Three Months Ended March 31, 2020 and 2019
 
Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2020 and 2019
 
 

-1-



PART 1. FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements
NanoString Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
(Unaudited)
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
155,592

 
$
29,033

Short-term investments
112,762

 
127,822

Accounts receivable, net
21,217

 
27,153

Inventory, net
22,219

 
19,781

Prepaid expenses and other
5,419

 
8,818

Total current assets
317,209

 
212,607

Property and equipment, net
21,400

 
20,184

Operating lease right-of-use assets
24,043

 
24,648

Other assets
2,223

 
2,315

Total assets
$
364,875

 
$
259,754

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,236

 
$
10,282

Accrued liabilities
4,543

 
4,973

Accrued compensation and other employee benefits
9,670

 
15,579

Customer deposits
4,084

 
6,389

Deferred revenue, current portion
5,038

 
3,997

Operating lease liabilities, current portion
3,877

 
3,766

Total current liabilities
35,448

 
44,986

Deferred revenue, net of current portion
1,049

 
976

Other long-term liabilities

 
322

Long-term debt, net
164,704

 
79,951

Operating lease liabilities, net of current portion
28,540

 
29,368

Total liabilities
229,741

 
155,603

Commitment and contingencies (Note 11)

 

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

 

Common stock, $0.0001 par value, 150,000 shares authorized; 37,703 and 36,298 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
4

 
4

Additional paid-in capital
605,622

 
535,954

Accumulated other comprehensive income
84

 
145

Accumulated deficit
(470,576
)
 
(431,952
)
Total stockholders’ equity
135,134

 
104,151

Total liabilities and stockholders’ equity
$
364,875

 
$
259,754


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

-2-


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

 
Three Months Ended
March 31,
 
2020
 
2019
Revenue:
 
 
 
Product and service
$
24,496

 
$
21,350

Collaboration
2,109

 
6,338

Total revenue
26,605

 
27,688

Costs and expenses:
 
 
 
Cost of product and service revenue
11,017

 
8,709

Research and development
17,502

 
16,027

Selling, general and administrative
25,721

 
23,436

Total costs and expenses
54,240

 
48,172

Loss from operations
(27,635
)
 
(20,484
)
Other income (expense):
 
 
 
Interest income
704

 
523

Interest expense
(2,883
)
 
(1,748
)
Other expense, net
(1,607
)
 
(110
)
Loss on extinguishment of debt and termination of revolving loan facility
(7,143
)
 

Total other expense, net
(10,929
)
 
(1,335
)
Net loss before provision for income tax
(38,564
)
 
(21,819
)
Provision for income tax
(60
)
 
(79
)
Net loss
$
(38,624
)
 
$
(21,898
)
Net loss per share - basic and diluted
$
(1.04
)
 
$
(0.69
)
Weighted average shares used in computing basic and diluted net loss per share
36,999

 
31,569

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

-3-


NanoString Technologies, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2020
 
2019
Net loss
$
(38,624
)
 
$
(21,898
)
Change in unrealized gain (loss) on available-for-sale debt securities
(61
)
 
61

Comprehensive loss
$
(38,685
)
 
$
(21,837
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

-4-


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, 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

Balance at January 1, 2020
36,298

 
$
4

 
$
535,954

 
$
145

 
$
(431,952
)
 
$
104,151

Equity component of convertible notes, net

 

 
58,543

 

 

 
58,543

Warrants issued for common stock

 

 
737

 

 

 
737

Common stock issued for stock options and restricted stock units
948

 

 
6,969

 

 

 
6,969

Common stock issued for employee stock purchase plan
50

 

 
1,122

 

 

 
1,122

Exercise of common stock warrants, net
407

 

 

 

 

 

Tax payments from shares withheld for equity awards

 

 
(2,006
)
 

 

 
(2,006
)
Stock-based compensation

 

 
4,303

 

 

 
4,303

Net loss

 

 

 

 
(38,624
)
 
(38,624
)
Other comprehensive income

 

 

 
(61
)
 

 
(61
)
Balance at March 31, 2020
37,703

 
$
4

 
$
605,622

 
$
84

 
$
(470,576
)
 
$
135,134


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

-5-


NanoString Technologies, Inc.
Condensed Consolidated Statements of Cash Flows (in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Operating activities
 
 
 
Net loss
$
(38,624
)
 
$
(21,898
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Stock-based compensation expense
4,303

 
2,882

Depreciation and amortization
1,213

 
1,177

Payment of accrued interest of long-term debt
(2,593
)
 

Loss on extinguishment of long-term debt
7,143

 

Amortization of deferred financing costs
819

 
163

Loss on equity securities
1,360

 

Amortization of premium on short-term investments
(141
)
 
(6
)
Non-cash operating lease cost
775

 
651

Conversion of accrued interest to long-term debt

 
453

Provision for bad debts
6

 
38

Provision for inventory obsolescence
8

 
442

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,926

 
(833
)
Inventory
(2,712
)
 
(465
)
Prepaid expenses and other assets
3,318

 
(1,377
)
Accounts payable
(260
)
 
(1,893
)
Accrued liabilities
(426
)
 
1,124

Accrued compensation and other employee benefits
(5,821
)
 
(4,765
)
Customer deposits
(2,305
)
 
(2,226
)
Deferred revenue
1,115

 
(833
)
Operating lease liabilities
(887
)
 
(811
)
Net cash used in operating activities
(27,783
)
 
(28,177
)
Investing activities
 
 
 
Purchases of property and equipment
(3,939
)
 
(165
)
Proceeds from sale of short-term investments
4,000

 

Proceeds from maturity of short-term investments
48,584

 
39,520

Purchases of short-term investments
(38,804
)
 
(28,100
)
Net cash provided by investing activities
9,841

 
11,255

Financing activities
 
 
 
Proceeds from issuance of 2025 convertible senior notes
230,000

 

Fees paid for issuance of 2025 convertible senior notes
(7,403
)
 

Repayment of long-term debt
(80,000
)
 

Fees paid upon extinguishment of debt
(4,845
)
 

Proceeds from sale of common stock, net

 
68,273

Proceeds from issuance of common stock warrants
737

 
697

Tax withholdings related to net share settlements of restricted stock units
(2,006
)
 
(1,299
)
Proceeds from issuance of common stock for employee stock purchase plan
1,122

 
939

Proceeds from exercise of stock options
6,969

 
8,075

Net cash provided by financing activities
144,574

 
76,685

Net increase in cash and cash equivalents
126,632

 
59,763

Effect of exchange rate changes on cash and cash equivalents
(73
)
 
(10
)
Cash and cash equivalents
 
 
 
Beginning of period
29,033

 
24,356

End of period
$
155,592

 
$
84,109

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

-6-


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, the incurrence of indebtedness and through cash received by the Company pursuant to certain product development collaborations.
In March 2020, the Company issued $230.0 million in aggregate principal amount of 2.625% Convertible Senior Notes due 2025 (“Convertible Notes”) in a private offering. The Convertible Notes are governed by an indenture dated March 9, 2020 between the Company and U.S. Bank, National Association, as trustee. The Company received net proceeds from the offering of $222.6 million. The Company used $88.6 million to repay in full all outstanding amounts borrowed and fees owed with the termination of the Company’s amended and restated term loan agreement (“2018 Term Loan”) with Capital Royalty Group, and the fees owed in connection with the termination of the Company’s revolving credit facility with Silicon Valley Bank. The Company intends to use the remainder of the net proceeds for general corporate purposes, including the continued development and commercialization of its GeoMx DSP system, the continued commercialization of its portfolio of nCounter-based products and for working capital needs. See Note 9. Long-term Debt, Net for more information.
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.
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, 2019 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, 2019. 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. Given the global economic climate and additional or unforeseen effects from the COVID-19 pandemic, certain estimates are becoming more challenging, and actual results could differ materially from

-7-


those estimates. The results of the Company’s operations for the three month period ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year or for any other period.
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.
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. For collaboration agreements of this type, 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. The Company may also recognize revenue from collaboration agreements that do not include upfront or milestone-based payments and generally recognizes revenue on these types of agreements based on the timing and amount of development activities. 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. From period to period, collaboration revenue can fluctuate substantially based on the level of product development activities devoted to these collaborations, based on 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.
Convertible Senior Notes
In accordance with accounting guidance for debt with conversion and other options, the Company separately accounted for the liability and equity components of the 2.625% Convertible Senior Notes due 2025 (“Convertible Notes”) by allocating the proceeds between the liability component and the embedded conversion feature, or the equity component, due to the Company’s ability to settle the Convertible Notes in cash, common stock or a combination of cash and common stock, at its option. The Company’s current intent is to settle the principal amount of the Convertible Notes in cash upon conversion, with any remaining conversion value being delivered in shares of its common stock. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The equity component of the Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the Convertible Notes and the fair value of the liability of the Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying amount is the debt discount and is amortized to interest expense using the effective interest method over five years. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In connection with the issuance of the Convertible Notes, the Company also incurred certain financing costs associated directly with the issuance of the Convertible Notes. These issuance costs will be deferred, and a portion of the deferred issuance costs have been deemed attributable to the equity component and have been allocated to additional paid-in capital. The remaining deferred issuance costs will also be amortized to interest expense over five years using the effective interest method. See Note 9. Long-term Debt, Net for additional information regarding the Convertible Notes.
Leases
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

-8-


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.
Recently Adopted 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 Company adopted the ASU on January 1, 2020 using the modified retrospective transition approach and the adoption did not have a material impact on its condensed 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 adopted the standard, on a prospective basis, on January 1, 2020. Historically, 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 amortization of the implementation costs and the related service contract costs will be presented in its results of operations. The adoption did not have a material impact to the condensed consolidated results of operations, financial condition, cash flows and financial statement disclosures for the three months ended March 31, 2020.
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 adopted the standard on January 1, 2020. The Company has assessed its collaborative arrangements and had concluded no adjustment is necessary, based on guidance in the standard.
In December 2019, the FASB issued “ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new guidance simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company adopted this ASU effective January 1, 2020 and as a result, was able to determine the effect of income or loss from continuing operations using a computation that does not consider the tax effects of items that are not included in continuing operations. As such, for the three month period ended March 31, 2020, the Company did not record a tax expense or benefit in its net loss from operations related to deferred tax assets and liabilities associated with its Convertible Notes. See to Note 9. Long-term Debt, Net for additional information.
Recent Accounting Pronouncements
The Company has evaluated recently issued, but not yet effective, accounting pronouncements through the date the accompanying condensed consolidated financial statements were issued and filed with the Securities and Exchange Commission and believe that there are none that have a material impact on the Company’s present.
3. Revenue from Contracts with Customers
The Company operates as a single reportable segment. The Company has one sales force that sells the Company’s nCounter and GeoMx DSP instruments, consumables and related services.
Disaggregated Revenues
The following table of total revenue is based on the geographic location of end users or distributors who purchase products and services, and of our collaborators. For sales to distributors, their geographic location may be different from the geographic location 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.
The following table provides information about disaggregated revenue by major product line and primary geographic market (in thousands):
 
Three Months Ended March 31, 2020
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
Product revenue:
 
 
 
 
 
 
 
Instruments
$
7,081

 
$
1,788

 
$
965

 
$
9,834

Consumables
8,372

 
2,535

 
593

 
11,500

Total product revenue
15,453

 
4,323

 
1,558

 
21,334

Service revenue
2,038

 
874

 
250

 
3,162

Total product and service revenue
17,491

 
5,197

 
1,808

 
24,496

Collaboration revenue
2,109

 

 

 
2,109

Total revenues
$
19,600

 
$
5,197

 
$
1,808

 
$
26,605

 
Three Months Ended March 31, 2019
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
Product revenue:
 
 
 
 
 
 
 
Instruments
$
2,189

 
$
1,530

 
$
599

 
$
4,318

Consumables
8,606

 
5,056

 
798

 
14,460

Total product revenue
10,795

 
6,586

 
1,397

 
18,778

Service revenue
1,794

 
614

 
164

 
2,572

Total product and service revenue
12,589

 
7,200

 
1,561

 
21,350

Collaboration revenue
6,338

 

 

 
6,338

Total revenues
$
18,927

 
$
7,200

 
$
1,561

 
$
27,688

Total revenue in the United States was $18.9 million and $18.2 million for the three months ended March 31, 2020 and 2019, 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.
Contract balances and remaining performance obligations
Contract liabilities are comprised of the current and long-term portions of deferred revenue of $6.1 million and $5.0 million as of March 31, 2020 and December 31, 2019, respectively, and customer deposits of $4.1 million and $6.4 million as of March 31, 2020 and December 31, 2019, respectively, included within the condensed consolidated balance sheets. Total contract liabilities decreased by $1.2 million for the three months ended March 31, 2020 as a result of the recognition of previously deferred revenue and customer deposits of $3.8 million for the completion of certain performance obligations during the period, partially offset by an increase of $2.7 million related to additional deferred revenue associated primarily with new or extended service contracts. The Company did not record any contract assets as of March 31, 2020.
As of March 31, 2020, unsatisfied or partially unsatisfied performance obligations related to the collaboration agreement with Lam Research Corporation (“Lam”) were $3.0 million and are expected to be substantially completed during the first half of 2020. Performance obligations related to undelivered products and service contracts as of March 31, 2020 were $7.1 million and are expected to be completed over the term of the related contract or as products are delivered.
4. 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.

-9-


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 March 31,
 
2020
 
2019
Options to purchase common stock
3,946

 
4,837

Restricted stock units
1,451

 
1,207

Common stock warrants
597

 
907


5. 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. Additionally, the Company evaluates collectability risk over the life of its receivables in order to establish an appropriate reserve for certain receivables that may become uncollectible in future periods. The Company has not experienced significant credit losses to date.
During the three months ended March 31, 2020, the Company had no customers or collaborators that individually represented more than 10% of total revenue. The Company had one collaborator, Lam, that individually represented 17% of total revenue during the three months ended March 31, 2019. The Company had no customers or collaborators that represented more than 10% of total product and service revenue for the three months ended March 31, 2020 and 2019, respectively. The Company had no customers or collaborators that represented more than 10% of total accounts receivable as of March 31, 2020 or December 31, 2019.
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. The impact of the COVID-19 global pandemic has not had a significant impact on the Company’s ability to source raw materials or its instruments to date. However, a change in or loss of suppliers could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. Should COVID-19 continue to impact the global economy at the same or heightened levels during future periods, or if certain geographies where the Company’s key suppliers or manufacturing facilities are located are more severely impacted than others, this could negatively impact our ability to manufacture new products, fulfill customer orders and collect from customers, which would adversely affect future operating results.
6. Short-term Investments
Short-term investments consisted of available-for-sale and equity securities as follows (in thousands):
Type of securities as of March 31, 2020
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Corporate debt securities
$
68,049

 
$
6

 
$
(131
)
 
$
67,924

U.S. government-related debt securities
26,519

 
213

 

 
26,732

Asset-backed securities
8,952

 
6

 
(10
)
 
8,948

Total available-for-sale debt securities
$
103,520

 
$
225

 
$
(141
)
 
$
103,604

Corporate equity securities
10,518

 

 
(1,360
)
 
9,158

Total short-term investment securities
$
114,038

 
$
225

 
$
(1,501
)
 
$
112,762


-10-


Type of securities as of December 31, 2019
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Corporate debt securities
$
78,243

 
$
89

 
$
(2
)
 
$
78,330

U.S. government-related debt securities
26,966

 
37

 

 
27,003

Asset-backed securities
11,950

 
21

 

 
11,971

Total available-for-sale debt securities
$
117,159

 
$
147

 
$
(2
)
 
$
117,304

Corporate equity securities
9,893

 
625

 

 
10,518

Total short-term investment securities
$
127,052

 
$
772

 
$
(2
)
 
$
127,822



The fair values of available-for-sale debt securities by contractual maturity were as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
Maturing in one year or less
$
90,170

 
$
101,751

Maturing in one to three years
13,434

 
15,553

Total available-for-sale debt securities
$
103,604

 
$
117,304


The Company has both the intent and ability to sell its available-for-sale debt securities 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.
The following table summarizes investments that have been in a continuous unrealized loss position as of March 31, 2020 (in thousands).
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair Value
 
Gross unrealized losses
 
Fair Value
 
Gross unrealized losses
 
Fair Value
 
Gross unrealized losses
Corporate debt securities
$
40,886

 
$
(131
)
 
$

 
$

 
$
40,886

 
$
(131
)
Asset-backed securities
4,952

 
(10
)
 

 

 
4,952

 
(10
)
Total
$
45,838

 
$
(141
)
 
$

 
$

 
$
45,838

 
$
(141
)

The Company invests in securities that are rated investment grade or better. The unrealized losses on available-for-sale debt securities as of March 31, 2020 and December 31, 2019 were primarily caused by interest rate increases.
The Company reviews the individual securities in its portfolio for impairment when events indicate the fair value of the investments may be below the carrying value. The Company reviews the individual securities in its portfolio for indications that unrealized losses are credit related and require an allowance to be recorded at the present value of the future expected cash flows. The Company determined unrealized losses were not for credit losses and so did not record an allowance related to its available-for-sale debt investments for the three month period ended March 31, 2020. The Company did not record any impairment charges related to its available-for-sale debt investments for the three month period ended March 31, 2020.
7. 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.

-11-


The Company’s investments by level within the fair value hierarchy were as follows (in thousands):
As of March 31, 2020
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
149,517

 
$

 
$

 
$
149,517

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities

 
67,924

 

 
67,924

U.S. government-related debt securities

 
26,732

 

 
26,732

Asset-backed securities

 
8,948

 

 
8,948

Corporate equity securities
9,158

 

 

 
9,158

Total
$
158,675

 
$
103,604

 
$

 
$
262,279

 
 
 
 
 
 
 
 
As of December 31, 2019
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
22,152

 
$

 
$

 
$
22,152

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities

 
78,330

 

 
78,330

U.S. government-related debt securities

 
27,003

 

 
27,003

Asset-backed securities

 
11,971

 

 
11,971

Corporate equity securities
10,518

 

 

 
10,518

Total
$
32,670

 
$
117,304

 
$

 
$
149,974


During the first quarter of 2020, the Company issued $230.0 million of Convertible Notes. As of March 31, 2020, the fair value of the Convertible Notes was $199.3 million. The estimated fair value of the Convertible Notes, which are classified as Level 2 financial instruments, was determined based on the estimated or actual bid prices of the Convertible Notes in an over-the-counter market. See Note 9. Long-term Debt, Net for more information.
8. Inventory
Inventory, net of related allowances, consisted of the following as of the date indicated (in thousands):
 
March 31, 2020
 
December 31, 2019
Raw materials
$
4,419

 
$
4,620

Work in process
5,627

 
4,617

Finished goods
12,173

 
10,544

Total inventory, net
$
22,219

 
$
19,781



-12-


9. Long-term Debt, Net
Convertible Notes    
In March 2020, the Company issued $230.0 million in aggregate principal amount of 2.625% Convertible Senior Notes due 2025 (“Convertible Notes”) in a private offering. The Convertible Notes are governed by an indenture dated March 9, 2020 between the Company and U.S. Bank, National Association, as trustee.
The Company received net proceeds from the offering of $222.6 million. The Company used $88.6 million to repay in full all outstanding amounts borrowed and fees owed in connection with the termination of the Company’s amended and restated term loan agreement (“2018 Term Loan”) with Capital Royalty Group, and the fees owed in connection with the termination of the Company’s revolving credit facility with Silicon Valley Bank. The Company intends to use the remainder of the net proceeds for general corporate purposes, including the continued development and commercialization of its GeoMx DSP system, the continued commercialization of its portfolio of nCounter-based products and for working capital needs.
The Convertible Notes bear interest at a rate of 2.625% per year, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020. The Convertible Notes may bear additional interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under, or if the Convertible Notes are not freely tradeable as required by, the indenture governing the Convertible Notes. Upon conversion, the Convertible Notes will be convertible into cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election. The Company’s current intent is to settle the principal amount of the Convertible Notes in cash upon conversion, with any remaining conversion value being delivered in shares of its common stock.
The Convertible Notes are general unsecured senior obligations and will mature on March 1, 2025, unless earlier repurchased, redeemed or converted, subject to satisfaction of certain conditions and during the periods described below. The initial conversion rate for the Convertible Notes is 20.9161 shares of common stock, par value $0.0001 per share, per $1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately $47.81 per share). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that may occur prior to the maturity date or if the Company issues a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or in connection with such redemption, as the case may be, in certain circumstances.
Prior to the close of business on the business day immediately preceding December 1, 2024, the Convertible Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business-day period after any five consecutive trading-day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the Convertible Notes for redemption, the Convertible Notes called for redemption (or, in the case of a partial redemption, if the Company makes an election to redeem all Convertible Notes, irrespective of whether they are called for redemption, to be convertible, all Convertible Notes) may be submitted for conversion at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date as set forth in the related redemption notice; or (4) upon the occurrence of specified corporate events. On or after December 1, 2024, until the close of business on the business day immediately preceding the maturity date, holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time, regardless of the foregoing circumstances.
The Company may not redeem the Convertible Notes prior to March 5, 2023, and no sinking fund is provided for the Convertible Notes. On or after March 5, 2023, the Company may redeem for cash all or any portion of the Convertible Notes, at its option, if the last reported sale price of the common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
Upon the occurrence of a fundamental change (as defined in the indenture governing the Convertible Notes) prior to the maturity date, subject to certain conditions, holders may require the Company to repurchase all or a portion of the Convertible Notes in increments of $1,000 for cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Convertible Notes do not contain any financial or operating covenants or any restrictions on the issuance of other indebtedness or the issuance or repurchase of securities by the Company. The Convertible Notes indenture contains customary

-13-


events of default, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the Convertible Notes will automatically become due and payable.
As the Company has the ability to settle the Convertible Notes in cash, common stock or a combination thereof, the Company separately accounted for the embedded conversion feature of the Convertible Notes by allocating proceeds between a liability and an equity component. The initial amount of the liability component of $169.5 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The borrowing rate was determined to be 9.35% based on the market rates for nonconvertible debt instruments issued by other companies with publicly available credit ratings considered to be comparable to the Company. The residual between the proceeds from the issuance of $230.0 million and the fair value of the liability component of $169.5 million is allocated to the equity component (residual method), which was recorded at $60.5 million and recognized as a debt discount. The Company incurred approximately $7.4 million of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees directly associated with the issuance. The issuance costs were allocated to the liability and equity component proportionately based on the allocation of total proceeds. The equity component, net of issuance costs of $1.9 million, was recorded in additional paid-in capital in the Company’s condensed consolidated balance sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. The liability component, net of issuance costs of $5.5 million, was recorded as long-term debt, net in the Company’s condensed consolidated balance sheets. The debt discount and debt issuance costs allocated to the liability component will be amortized to interest expense using the effective interest method over five years, the term of the Convertible Notes.
While the Convertible Notes are classified on the Company’s condensed consolidated balance sheet at March 31, 2020 as long-term, the resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon whether the Convertible Notes are convertible or subject to an event triggering potential redemption during the prescribed measurement periods. In the event that the holders of the Convertible Notes have the election to convert the Convertible Notes or the Convertible Notes become redeemable at any time during the prescribed measurement period, the Convertible Notes would then be considered a current obligation and classified as such.
While for GAAP purposes, the Convertible Notes are allocated between the liability component and the equity component, for U.S. tax purposes there is no allocation, and a deferred tax liability is recognized related to such difference. Because the Company has a full valuation allowance recorded against its net deferred tax assets, there is no net impact on the Company’s condensed consolidated balance sheets or condensed consolidated statements of operations as a result of establishing this deferred tax liability. 
All future principal payments related to the Convertible Notes are due in March 2025. The outstanding balances of the Company’s Convertible Notes and previously outstanding term loan consisted of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Outstanding principal of Convertible Note
$
230,000

 
$

Borrowings under term loan agreement

 
80,000

Paid-in-kind interest on term loan agreement

 
2,593

Less: unamortized debt discounts and issuance costs
(65,296
)
 
(2,642
)
Long-term debt, net
$
164,704

 
$
79,951

Fair value of outstanding Convertible Notes
$
199,327

 
$

Amount by which the Convertible Notes if-converted value exceeds their principal amount
$

 
$

 
 
 
 
Net carrying amount of equity component of Convertible Notes
$
58,543

 
$


The following table sets forth total interest expense recognized related to the Convertible Notes (in thousands):
Three months ended March 31,
2020
Contractual interest expense
$
386

Amortization of debt discount and issuance costs
650

Total interest expense
$
1,036



-14-


Term Loan Agreement
In October 2018, the Company entered into an amended and restated term loan agreement with Capital Royalty Group (the “2018 Term Loan”), under which it could borrow up to $100.0 million, which was due and payable in September 2024.  The 2018 Term Loan accrued interest at a rate of 10.5%, payable quarterly, of which 3.0% could be deferred, at the Company’s election, during the six-year term 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 was required to pay a facility fee equal to 2.0% of the total amount borrowed including any deferred interest at the time the principal is repaid. The Company borrowed a total of $80.0 million under the 2018 Term Loan and obligations were collateralized by substantially all of the Company’s assets.
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.
In March 2020, the Company terminated the 2018 Term Loan agreement. The Company used $88.6 million of the proceeds from the Convertible Notes to repay in full all outstanding principle, interest and fees associated with termination of the loan.
For the three month period ended March 31, 2020, the Company incurred interest expense of $1.8 million related to the 2018 Term Loan and the Convertible Notes. For the three months ended March 31, 2019, the Company incurred interest expense of $1.7 million associated with the 2018 Term Loan.
The terminations of the previous debt facilities were accounted for as debt extinguishment and the Company recorded a charge of $6.6 million associated with the elimination of previously deferred financing costs, and for fees and penalties incurred upon termination of the facilities and other costs. These costs have been included as a Loss on extinguishment of debt and termination of revolving loan facility in the Company’s condensed consolidated statements of operations.
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.
In March 2020, the Company terminated the revolving loan facility and paid termination fees of $0.5 million. There were no amounts outstanding under the revolving loan facility at the time of termination. These costs have been included as a Loss on extinguishment of debt and termination of revolving loan facility in the Company’s condensed consolidated statements of operations.
10. Collaboration Agreements
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 and related assays. Pursuant to the terms of the collaboration agreement, Lam contributed up to an aggregate of $50.0 million towards the project. 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 recorded. 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.
During the three months ended March 31, 2020 and March 31, 2019, the Company recognized revenue related to the Lam agreement of $1.8 million and $4.8 million, respectively. The Company received development funding of $2.7 million for the three months ended March 31, 2019. At March 31, 2020, the Company had recorded customer deposits of $3.0 million representing amounts received in advance.
In January 2020, having received the full commitment of development funding from Lam, the remaining warrants for shares of the Company’s common stock became exercisable and Lam elected to net exercise, in full, its warrant for 1.0 million shares of common stock, for which the Company issued an aggregate of 407,247 shares to Lam. In connection with Lam’s exercise of the warrant, the Company agreed to waive certain restrictions associated with the sale of the common stock in exchange for commitments by Lam related to the method and timing of Lam’s sale of the shares.

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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. Pursuant to its collaboration with Celgene, the Company had 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.
During the three months ended March 31, 2019, the Company recognized revenue related to the Celgene agreement of $1.3 million. The Company received development funding of $0.2 million related to the Celgene collaboration for the three months ended March 31, 2019.
11. 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.

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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 expectations regarding the impact of the recent COVID-19 global pandemic and our response to it;
our ability to successfully commercialize our GeoMx DSP platform;
our ability to successfully develop our Hyb & Seq platform and pursue partnerships;
the success, costs and timing of implementation of our business model, strategic plans for our business and future product development plans;
the regulatory regime and our ability to secure and maintain regulatory clearance or approval or reimbursement for the clinical use of our products, domestically and internationally;
our 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.

-17-


Overview
We develop, manufacture and sell products that unlock scientifically valuable and clinically actionable information from minute amounts of biological material. Our core technology is a unique, proprietary optical barcoding chemistry that enables the labeling and counting of single molecules. This proprietary chemistry may reduce the number of steps required to conduct certain types of scientific experiments and allow for multiple experiments to be conducted at once. As a result, we are able to develop tools that are easier for researchers to use and that may generate faster and more consistent scientific results.
We use our technology to develop tools for scientific and clinical research, primarily in the fields of genomics and proteomics. We currently have two commercially available product platforms, our nCounter Analysis System and our GeoMx Digital Spatial Profiler, or DSP System, both of which include instruments and related consumables.
nCounter can be used to analyze the activity of up to 800 genes in a single experiment. nCounter is also used by clinicians to analyze gene activity relevant for diagnostic applications. GeoMx DSP, which was made commercially available in 2019, is designed to enable the field of spatial genomics. While nCounter and other existing technologies analyze gene activity as a whole throughout the totality of a biological sample, GeoMx DSP is used to analyze specifically selected regions of a biological sample in order to see how gene activity or protein levels might vary across those regions or in certain cell types. GeoMx DSP operates by enabling users to prepare and select certain regions of a sample in which to study gene activity, and then use nCounter to subsequently evaluate, or read out, the activity of up to 96 genes in each of the selected regions. In addition to applications that allow the use of GeoMx DSP together with nCounter, we are developing new applications for GeoMx DSP that will allow researchers to evaluate the activity of greater numbers of genes by using GeoMx DSP together with next generation sequencers, or NGS. We expect the first of these applications to be made commercially available in 2020, with additional applications expected in 2021.
We market and sell our instruments and related consumables to researchers in academic, government and biopharmaceutical laboratories for research use, both through our direct sales force and through selected distributors in certain markets. As of March 31, 2020, we had an installed base of approximately 880 nCounter systems, which our customers have used to publish more than 3,300 peer-reviewed papers. As of March 31, 2020, we had received over 105 orders for GeoMx DSP systems, we had shipped approximately 70 GeoMx DSP systems to customer sites and had installed approximately 55 of those systems. As of March 31, 2020, our customers have used GeoMx DSP systems to publish 17 peer-reviewed publications. In addition, we continue to provide access to the GeoMx DSP’s capabilities by offering selected potential customers the opportunity to send biological samples to our Seattle facility to be tested in our lab prior to purchasing a GeoMx DSP system. To date, we have completed over 240 projects for approximately 140 customers pursuant to this Technology Access Program, or TAP.
We derive a substantial majority of our revenue from the sale of our products, which consist of our nCounter and GeoMx DSP instruments and related proprietary consumables. Our instruments are designed to work only with our consumable products. Accordingly, as the installed base of instruments grows, we expect recurring revenue from consumable sales to become an increasingly important driver of our operating results. Our consumables include our standardized nCounter and GeoMx DSP panel products, nCounter custom codeset products that contain a specific set of targets for scientific analysis as requested by a customer, and our Prosigna breast cancer assay which is manufactured for our partner Veracyte Inc. We also derive revenue from processing fees related to proof-of-principle studies, including from our GeoMx DSP TAP, which we conduct for potential customers. For both nCounter and GeoMx DSP, we offer extended service contracts and we continue to generate revenue through product development collaborations.
We use third-party contract manufacturers to produce the instruments comprising nCounter and GeoMx DSP. We manufacture consumables at our greater Seattle, Washington area facilities.
We focus a substantial portion of our resources on developing new technologies, products and solutions. We invested $17.5 million and $16.0 million for the three months ended March 31, 2020 and 2019, respectively, in research and development and intend to continue to make significant investments in research and development to support our existing instrument platforms and related consumable offerings, as well as research and development of new technologies.
In December 2019, we entered into a License and Asset Purchase Agreement, or LAPA, and service and supply agreements, or SSAs, with Veracyte, Inc, or Veracyte. Pursuant to the LAPA, we completed a license of intellectual property and a sale of certain assets to Veracyte relating to our nCounter FLEX System for use in clinical diagnostic applications. Veracyte also acquired certain intellectual property rights and worldwide distribution rights relating to our Prosigna Breast Cancer Assay and our LymphMark assay and certain clinical diagnostic assay software modules that operate with nCounter FLEX. Pursuant to the SSAs, we agreed to supply to Veracyte nCounter FLEX Systems, and to manufacture and supply Prosigna kits, LymphMark kits and any additional clinical diagnostic tests that Veracyte may develop in the future for nCounter, for a period of at least four years subsequent to the transaction date. Pursuant to the SSAs, Veracyte will pay the designated transfer prices for nCounter FLEX, Prosigna kits, LymphMark kits and any other nCounter-based diagnostic tests developed by Veracyte.

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Our product and service revenue increased 14.7% to $24.5 million for the three months ended March 31, 2020, compared to $21.4 million for the first three months of 2019. Our total revenue was $26.6 million for the three months ended March 31, 2020, compared to $27.7 million for the first three months of 2019. We have never been profitable and had net losses of $38.6 million and $21.9 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, our accumulated deficit was $470.6 million.
Results of Operations
Revenue
Our product revenue consists of sales of nCounter and GeoMx DSP, including instruments, and related consumables. Service revenue consists of fees associated with service contracts and conducting proof-of-principle studies, including programs in which we offer customers early access to technologies under development for which we generate data and perform analysis services on their behalf. Our customer base is primarily comprised of academic institutions, government laboratories, biopharmaceutical companies and clinical laboratories that perform analyses or testing using nCounter and GeoMx DSP. Collaboration revenue is derived primarily from our collaboration with Lam and, historically, our terminated collaboration with Celgene. We do not expect to receive further development funding from Lam in future periods, and the original commitment from Lam to provide up to $50.0 million in development funding has been fully satisfied. Collaboration revenue also includes revenue recognized under several smaller collaborations.
The following table reflects total revenue by geography based on the geographic location of our customers, distributors and collaborators. For sales to distributors, their geographic location may be different from the geographic locations of the ultimate end customer.
 
Three Months Ended
March 31,
 
2020
 
2019
 
%
Change
 
(In thousands)
 
 
Americas
$
19,600

 
$
18,927

 
4
 %
Europe & Middle East
5,197

 
7,200

 
(28
)%
Asia Pacific
1,808

 
1,561

 
16
 %
Total revenue
$
26,605

 
$
27,688

 
(4
)%
The following table reflects the breakdown of our revenue into the primary components of our products, services, and collaborations.
 
Three Months Ended
March 31,
 
2020
 
2019
 
%
Change
 
(In thousands)
 
 
Product revenue:
 
 
 
 
 
Instruments
$
9,834

 
$
4,318

 
128
 %
Consumables
11,500

 
14,460

 
(20
)%
Total product revenue
21,334

 
18,778

 
14
 %
Service revenue
3,162

 
2,572

 
23
 %
Total product and service revenue
24,496

 
21,350

 
15
 %
Collaboration revenue
2,109

 
6,338

 
(67
)%
Total revenue
$
26,605

 
$
27,688

 
(4
)%
Instrument revenue during the three month period ended March 31, 2020 increased as compared to the same period in 2019, due primarily to commercial shipments of our GeoMx DSP system which began during the third quarter of 2019, and which contributed $6.5 million of revenue during the current period. The increase in instrument revenue resulting from our GeoMx DSP shipments was partially offset by lower revenues related to lower sales of nCounter instruments as compared to the same period in 2019. For the three months ended March 31, 2020, our overall nCounter instrument shipments declined by approximately 20% as compared to the same period in the prior year largely as a result of softness in certain of our distribution

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markets, such as China, which contributed significant revenue in the first quarter of the prior year but was impacted by the COVID-19 pandemic for a substantial portion of the current period. The decline in nCounter instrument shipments was also due, to a lesser extent, to our general inability to ship new instruments to customers during the last few weeks of the quarter due to the impact of the COVID-19 pandemic. More specifically, COVID-19 has disrupted global research activity and supply chains, and has led to closure of many of our customer sites.
Consumables revenue includes sales of consumables for both nCounter and GeoMx DSP, and also includes sales of Prosigna in vitro diagnostic kits to our partner Veracyte. Consumables revenue decreased for the three months ended March 31, 2020, with multiple factors impacting consumables revenue as compared to the same period of 2019. Sales of consumables for GeoMx DSP added to consumables revenue in the period, as compared to the same period of 2019 where no GeoMx consumables revenue was recorded. The new GeoMx DSP consumable revenue contribution was offset by lower nCounter consumables revenue as compared to the same period of 2019, due primarily to the effects of the COVID-19 pandemic on customer activity. In addition, while greater unit sales of Prosigna kits were recorded as compared to the same period of 2019, our revenues recorded from sale of Prosigna kits were lower, as our Prosigna supply agreement, entered into as part of the transaction with Veracyte completed in December 2019, reduced our average selling price received on Prosigna kits, which in prior periods had been sold directly to end user customers or distributors.
Service revenue increased for the three month period ended March 31, 2020 as compared to the same period of 2019, primarily due to increases in service revenue generated from our GeoMx DSP technology access program, or TAP.
The COVID-19 pandemic has impacted our ability to solicit and fulfill customer orders, and record related product and service revenue, at levels comparable to historical periods. To the extent the COVID-19 pandemic continues to have a negative impact on our customers’ ability to conduct research, or our ability to actively engage with our customers and our ability to fulfill customer orders, we expect our revenues in the near term to be negatively impacted, especially in our nCounter business. We expect consumables revenue to be more severely impacted by COVID-19 related shutdowns as it more closely correlates with day-to-day customer activity. We cannot predict with any certainty if, or how quickly, our customers will return to previous activity or product order levels, or our ability to resume our activities and operations at levels consistent with past performance. Until the effects of the COVID-19 pandemic subside, we expect our near-term revenues to continue to be negatively impacted. With consideration to these near-term negative impacts on our business, we expect our product and service revenue may continue to increase in future periods, as a result of the growth in sales of GeoMx DSP instruments and consumables, the introduction of new nCounter and GeoMx DSP consumable products and the introduction of new capabilities for GeoMx DSP, including the ability to use GeoMx DSP together with NGS systems.
Collaboration revenue decreased for the three month period ended March 31, 2020 as compared to the same period in 2019, due primarily to decreased activity levels after our receipt of the full commitment of development funding of $50.0 million from Lam during 2019 and our terminated collaboration with Celgene. Our collaboration agreement with Lam represented $1.8 million and $4.8 million of our collaboration revenue for the three months ended March 31, 2020 and March 31, 2019, respectively.
Cost of Product and Service Revenue; Gross Profit; and Gross Margin
Cost of product and service revenue consists primarily of costs incurred in the production process, including costs of purchasing instruments from third-party contract manufacturers, consumable component materials and assembly labor and overhead, installation, warranty, service and packaging and delivery costs. In addition, cost of product and service revenue includes royalty costs for licensed technologies included in our products, provisions for slow-moving and obsolete inventory and stock-based compensation expense. We provide a one-year warranty for both nCounter and GeoMx DSP and establish a reserve for warranty repairs based on historical warranty repair costs incurred.
 
Three Months Ended
March 31,
 
2020
 
2019
 
%
Change
 
(Dollars in thousands)
 
 
Cost of product and service revenue
$
11,017

 
$
8,709

 
27
%
Product and service gross profit
$
13,479

 
$
12,641

 
7
%
Product and service gross margin
55
%
 
59
%
 
 
For the three month period ended March 31, 2020, cost of product and service revenue increased as compared to the same period of 2019, due primarily to increased costs associated with commercial shipments of GeoMx DSP and investments made to support the growth, installation and service of our product lines, including investments to expand our production and distribution capacity in late 2019 and early 2020 in consideration of the commercial launch of GeoMx DSP.

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Our gross margin on product and service revenue for the three months ended March 31, 2020 was lower as compared to the same period of 2019, resulting from greater instrument revenue as a percent of our total sales mix due to the GeoMx DSP launch, with instrument sales generally contributing lower gross margins as compared to consumables sales. Our gross margins were also impacted by our lower consumables revenue as compared to the same period of 2019, the investments made in additional production capacity, as well as the Prosigna supply agreement with Veracyte pursuant to which we sell Prosigna for a lower realized price pursuant to production costs that are unchanged from prior periods.
With consideration to the potential near term and uncertain negative impact of the COVID-19 pandemic on our business, which may impact our product and service revenue growth and the related costs incurred, we expect our cost of product and service revenue to increase in future periods. These potential increases would be coincident with anticipated growth in sales of GeoMx DSP instruments, continued sales growth of nCounter and GeoMx consumables and our GeoMx DSP TAP service. We also expect to make investments in our operations to support the growth of our business.
We expect our gross margin on product and service revenue may fluctuate in future periods. Variability will depend in part on the uncertain impact of COVID-19 on our product and service revenue, as well as our mix of instrument sales which typically have lower gross margins, as compared to our sales of consumable products or services. In addition, our gross margins may vary depending on potential expenses we may incur for regulatory compliance, quality assurance or activities related to the expansion of our manufacturing capacity. Costs related to collaboration revenue are included in research and development expense.
Research and Development Expense
Research and development expenses consist primarily of salaries and benefits, occupancy, laboratory supplies, engineering services, consulting fees, costs associated with licensing molecular diagnostics rights and clinical study expenses to support the regulatory approval or clearance of diagnostic products. We have made substantial investments in research and development since our inception. Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products and applications.
Given the size of our research and development staff and the number of active projects at any given time, we have found that it has been effective for us to manage our research and development activities on a departmental basis. Accordingly, other than for collaborations and certain major technology development programs, we have neither required employees to report their time by project nor allocated our research and development costs to individual projects. Research and development expense by functional area was as follows:
 
Three Months Ended
March 31,
 
2020
 
2019
 
Change
 
(In thousands)
 
 
Platform technology
$
8,787

 
$
7,488

 
17
 %
Manufacturing process development
2,545

 
1,230

 
107
 %
Life sciences products and applications
3,404

 
2,674

 
27
 %
Diagnostic product development
192

 
1,934

 
(90
)%
Clinical, regulatory and medical affairs
606

 
1,183

 
(49
)%
Facility allocation
1,968

 
1,518

 
30
 %
Total research and development expense
$
17,502

 
$
16,027

 
9
 %
The increase in research and development expense for the three month period ended March 31, 2020 as compared to the same period of 2019 is due primarily to increases in supply, consulting and personnel-related costs to support development activities related to the commercial launch of GeoMx DSP. These increases were partially offset by decreases in professional fees and clinical trial costs, primarily due to fewer diagnostic product related development activities and our terminated collaboration agreements as compared to the prior year.
We expect research and development expense may remain relatively constant in future periods, reflecting the impact of the reductions in research and development resources for the development of nCounter-based diagnostic products made in connection with the Veracyte transaction. In addition, we expect moderating future development costs related to GeoMx DSP instruments and consumables, as we transition to sustaining levels of activity.  As of December 31, 2019, Lam had provided the full development funding commitment of $50.0 million associated with our Hyb & Seq program and we do not expect to receive any further funding from Lam in future periods. With the completion of Lam’s development funding, we are working to identify the key applications for our Hyb & Seq platform and pursuing partnerships that can support our emerging commercial strategy.

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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
March 31,
 
2020
 
2019
 
%
Change
 
(In thousands)
 
 
Selling, general and administrative expense
$
25,721

 
$
23,436

 
10
%

The increase in selling, general and administrative expense for the three month period ended March 31, 2020 as compared to the same period in 2019 is due primarily to higher stock-based compensation expense driven by recent increases in our stock price as well as changes in the form of equity compensation granted to our employees and executives, higher fees incurred by our audit firm and external advisors relating to our compliance with the Sarbanes Oxley Act and increased investment in sales and marketing personnel associated with our GeoMx DSP commercial launch. These increases were partially offset by a reduction in costs from the elimination of our Prosigna sales and marketing personnel in December 2019 coincident with the completion of the transaction with Veracyte.
With consideration to the potential near term and uncertain negative impact of the COVID-19 pandemic on our business, which may impact our product and service revenue growth and the related costs incurred, we expect selling, general and administrative 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 business, and the introduction of new products and product platforms.
Other Income (Expense)
 
Three Months Ended
March 31,
 
2020
 
2019
 
%
Change
 
(In thousands)
 
 
Interest income
$
704

 
$
523

 
35
%
Interest expense
(2,883
)
 
(1,748
)
 
65
%
Other expense, net
(1,607
)
 
(110
)
 
1,361
%
Loss on extinguishment of debt and termination of revolving loan facility
(7,143
)
 

 
N/A

Total other expense, net
$
(10,929
)
 
$
(1,335
)
 
719
%
Interest expense increased for the three month period ended March 31, 2020 due primarily to an increase in our average outstanding debt balance during the period. The average balance of long-term debt outstanding for the three month periods ended March 31, 2020 and 2019 was $133.0 million and $60.7 million, respectively, which reflects the increase in our long-term debt related to our recently completed convertible debt financing. During March 2020, we successfully concluded a convertible debt offering totaling $230.0 million. In conjunction with closing our convertible debt financing, we terminated our existing term loan facility with Capital Royalty Group and our revolving credit facility with Silicon Valley Bank, and as a result we recorded a charge of $7.1 million representing certain fees and prepayment penalties associated with these facilities. After taking into consideration the repayment of outstanding term debt, accrued interest expense and termination fees associated with these facilities, we netted approximately $130.0 million of proceeds from the convertible debt financing. The increases in interest expense were partially offset by increased interest income during the three month period ended March 31, 2020 resulting from higher average cash and investment balances on hand during the period as compared to the same period of 2019. Other expense, net includes the unfavorable impact of fair value declines related to our holdings of Veracyte common stock, which was received as part of the consideration pursuant to the transaction with Veracyte entered into in December 2019.

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Liquidity and Capital Resources
As of March 31, 2020, we had cash, cash equivalents and short-term investments of $268.4 million. While we believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months, we may need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities.
In addition, the COVID-19 pandemic has impacted our ability to solicit and fulfill customer orders, and record related product and service revenue, at levels comparable to historical periods. To the extent the COVID-19 pandemic continues to have a negative impact on our customers’ ability to conduct research, or our ability to actively engage with our customers and our ability to fulfill customer orders, we expect our revenues, and coincidentally our liquidity and capital resources, in the near term to be negatively impacted. We cannot predict with any certainty if, or how quickly, our customers will return to previous activity or product order levels, or our ability to resume our activities and operations at levels consistent with past performance. Until the effects of the COVID-19 pandemic subside, we expect our near term revenues, as well as our use of our liquidity and capital resources, to be negatively impacted.
Our future funding requirements will depend on many factors, including: market acceptance and the level of sales of our existing products and new product candidates; the nature and timing of any additional research, product development or other partnerships or collaborations we may establish; the cost and timing of establishing additional sales, marketing and distribution capabilities; the cost of our research and development activities; the cost and timing of regulatory clearances or approvals; the effect of competing technological and market developments; and the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. We may require additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing 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, borrowings under term loan agreements and convertible notes, licensing of intellectual property and, to a lesser extent, sales of certain assets. Our cash used in operations for the three months ended March 31, 2020 was $27.8 million.
Equity Financings
In March 2019, we completed an underwritten public offering of 3,175,000 shares of our common stock, including the exercise in full by the underwriters of their option to purchase 675,000 additional shares of common stock. Our total gross proceeds were $73.0 million. After underwriter’s commissions and other expenses of the offering, and net of proceeds received by the related party stockholder, our aggregate net proceeds were approximately