Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, “Risk Factors,” located elsewhere in this quarterly report on Form 10-Q, and in our Annual Reportannual report on Form 10-K filed with the Securities and Exchange Commission or SEC.(SEC). Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.
Our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires usmanagement to make estimates and assumptions that affect the amounts reported amounts of assets, liabilities, revenue, costs,in the condensed consolidated financial statements and expenses and related disclosures.accompanying notes. We base our estimates on historical experience and on various other assumptions that we believebelieved to be reasonable, underwhich together form the circumstances. Changesbasis for making judgments about the carrying values of assets and liabilities. We also assessed certain accounting matters that generally require consideration of forecasted financial information, including the unknown impact of the COVID-19 pandemic and the war in accounting estimates may occur from periodUkraine. Accounting matters that rely on forecasted financial information included, but were not limited to, period. Accordingly, actualour inventory, and related reserves, and the carrying value of goodwill and other long-lived assets and liabilities. Actual results could differ significantlymaterially from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent there are material differences between these estimates and actual results,could have a material adverse effect on our futurecondensed consolidated financial statement presentation, financial condition,statements. The full extent to which the COVID-19 pandemic impacts our business, results of operations and cash flowsfinancial condition will be affected.depend on numerous evolving factors including, but not limited to, the magnitude and duration of the pandemic, the extent to which it will impact worldwide macroeconomic conditions, including the speed of recovery, and governmental and business
The following table presents our historical condensed consolidated statements of operations data for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016, and as a percentage of total revenue for the respective periods2021 (in thousands):
Cost of product revenue includes manufacturing costs incurred in the production process, including component materials, labor and overhead, installation, packaging, and delivery costs. In addition, cost of product revenue includes amortization of developed technology and intangibles, royalty costs for licensed technologies included in our products, warranty, and provisions for slow-
Selling, general and administrative expense consists primarily of personnel costs for our sales and marketing, business development, finance, legal, human resources, information technology and general management, as well as professional services, such as legal and accounting services.
We expect selling, general and administrative expense to decrease in 2017 compared to 2016 as we implement efficiency and cost savings initiatives in 2017.
Interest Expense and Other (Income) Expense, Net
Non-Operating Items
The following table presents these items for the three and ninesix months ended SeptemberJune 30, 20172022 and 20162021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Year-over-Year Change | | Six Months Ended June 30, | | Year-over-Year Change |
| | 2022 | | 2021 | | | 2022 | | 2021 | |
| Interest expense | | $ | (1,062) | | | $ | (896) | | | 19% | | $ | (2,092) | | | $ | (1,783) | | | 17% |
| Loss on forward sale of Series B Preferred Stock | | (22,289) | | | — | | | NA | | (60,081) | | | — | | | NA |
| Loss on bridge loans | | (3,064) | | | — | | | NA | | (13,719) | | | — | | | NA |
| | | | | | | | | | | | |
| Other income (expense), net | | (174) | | | 504 | | | (135)% | | (56) | | | 219 | | | (126)% |
| Total | | $ | (26,589) | | | $ | (392) | | | NA | | $ | (75,948) | | | $ | (1,564) | | | NA |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Year-Over-Year Change | | Nine Months Ended September 30, | | Year-Over-Year Change |
| 2017 | | 2016 | | | 2017 | | 2016 | |
| Interest expense | $ | 1,456 |
| | $ | 1,454 |
| | —% | | $ | 4,367 |
| | $ | 4,361 |
| | —% |
| Other (income) expense, net | (379 | ) | | 161 |
| | (335) | | (571 | ) | | 527 |
| | (208) |
| Total | $ | 1,077 |
| | $ | 1,615 |
| | (33)% | | $ | 3,796 |
| | $ | 4,888 |
| | (22)% |
On February 4, 2014, we closed an underwritten public offeringInterest expense is primarily comprised of $201.3 million aggregate principal amount ofinterest on our 2.75% Senior Convertible Notes due 2034, or the Notes.convertible debt and our Term Loan Facility. The Notes accrueincrease in interest at a rate of 2.75% per year, payable semi-annually in arrears on February 1 and August 1 of each year. The Notes will mature on February 1, 2034, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Notes.
Interest expense was $1.5 million for both the three months ended September 30, 2017 and 2016. Interest expense was $4.4 million for both the ninesix months ended SeptemberJune 30, 2017 and 2016.
Other income increased by $0.5 million and $1.1 million for the three month and nine month periods ended September 30, 2017, respectively, compared to the three month and nine month periods ended September 30, 2016, mainly due to the net favorable effects of foreign exchange rate changes during the three and nine month periods ended September 30, 20172022 compared to the same periods in 2016.the prior year is due primarily to our Term Loan Facility, which began on August 1, 2021.
The Purchase Agreements for the issuance of 225,000 shares of Series B Preferred Stock for $225 million at a future date were accounted for as forward sales contracts at fair value in accordance with ASC 480 Distinguishing Liabilities from Equities. The fair value of the payable portion of the Purchase Agreements for 225,000 shares of Series B Preferred Stock was determined to be $262.8 million as of March 31, 2022 and $285.1 million as of April 4, 2022. The $22.3 million increase in the fair value of the Series B Preferred Stock for the three months ended June 30, 2022 was included in the loss on forward sale of Series B Preferred Stock. The loss was primarily due to the increase in our common share price from $3.59 per share on March 31, 2022 to $3.99 per share on April 4, 2022. The $61.3 million loss on forward sales of Series B Preferred Stock for the six months ended June 30, 2022 reflected the increase in the price per share of our common stock from $2.84 at the inception of the contracts to $3.99 per share value as of April 4, 2022.
Applying the guidance in ASC 825 Financial Instruments, we elected to record the Bridge Loans at their fair value. The change in fair value of the Bridge Loans from inception to conversion on April 4, 2022 was included as loss on bridge loans. The fair value of the Bridge Loans was largely driven by the value of our common stock and the value of the Series B Preferred Stock into which they were converted. The loss on the bridge loans of $3.1 million and $13.7 million for the three months ended and six months ended June 30, 2022, respectively, was largely driven by an increase in the value in the price of our common stock over those time periods.
Income Tax Benefit
Our tax provision is generally driven by three components: (i) tax provision from Income Taxes
our foreign operations, (ii) tax benefits from the amortization of acquisition-related intangible assets, and (iii) discrete items, such as changes in valuation allowances or adjustments upon finalization of tax returns. Depending on the relative value of these components, we can have either a tax benefit or expense for any given period.
We recorded a tax benefit of $0.7$1.6 million, and $0.3 millionor an effective tax rate of 2.5%, for the three months ended SeptemberJune 30, 2017 and 2016, respectively. The2022. In the three months ended June 30, 2021, we recorded a tax benefit of $0.5 million, or an effective tax rate of 2.9%. Higher losses in certain of our foreign operations in the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021 resulted in a higher tax benefit for our foreign operations for the three months ended SeptemberJune 30, 2017 and 2016 was primarily attributable to2022.
For the amortization of our acquisition-related deferred tax liability and losses from Canadian operations, partially offset by a tax provision and discrete tax items from our other foreign operations. Wesix months ended June 30, 2022, we recorded a tax benefit of $3.3$2.2 million, and $2.1resulting in an effective tax rate of 1.5%. For the six months ended June 30, 2021, we recorded a tax benefit of $2.2 million, resulting in an effective rate of 5.7%. While the tax benefit was approximately the same for the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively. The tax benefit for the nine months ended September 30, 2017 and 2016 was primarily attributable to the amortization of our acquisition-related deferred tax liability, partially offset by a tax provision and discrete tax items from our other foreign operations. The increase in benefit from income taxes for the three and nine months ended September 30, 20172022 compared to the three and nine months ended September 30, 2016 was mainly driven by increased losses from our Canadian operations.same period the previous year, the lower effective tax rate is due to higher pre-tax losses.
Liquidity and Capital Resources
Sources of Liquidity
As of SeptemberJune 30, 2017,2022, our principal sources of liquidity consisted of $60.9$74.4 million of cash and cash equivalents, and $1.4$136.9 million of short-term investments. Asinvestments and $1.0 million of September 30, 2017, our working capital excluding deferred revenue was $74.2 million.restricted cash, as well as $8.1 million of availability under the Revolving Credit Facility.
The following table presents our cash flow summary for each period presentedthe six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | 2022 | | 2021 |
| Cash flow summary: | | | | |
| Net cash used in operating activities | | $ | (45,578) | | | $ | (27,565) | |
| Net cash used in investing activities | | (139,108) | | | (9,095) | |
| Net cash provided by (used in) financing activities | | 231,033 | | | (1,159) | |
| Effect of foreign exchange rate fluctuations on cash and cash equivalents | | (437) | | | 162 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 45,910 | | | $ | (37,657) | |
Purchase obligations consist of contractual and legally binding commitments to purchase goods and services. The majority of our contracts are cancellable with little or no notice or penalty. However, once a vendor has incurred costs to fulfill a contract with us, and which costs cannot be otherwise deployed, we are liable for those costs upon cancellation. |
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Net cash used in operating activities | $ | (24,759 | ) | | $ | (28,408 | ) |
| Net cash provided by investing activities | 21,537 |
| | 31,317 |
|
| Net cash provided by financing activities | 28,816 |
| | 127 |
|
| Net increase in cash and cash equivalents | 25,899 |
| | 3,189 |
|
We have additional obligations as part of our ordinary course of business, beyond those committed for capital expenditures and other purchase obligations and commitments for purchases of goods and services. See Note 3 within our condensed consolidated financial statements included elsewhere in this Form 10-Q for information on our contingent obligations as a result of our issuance of Series B Preferred Stock. See Note 8 within our condensed consolidated financial statements for information about our short-term and long-term debt obligations. See Note 9 within our condensed consolidated financial statements for information about our lease obligations and see Note 15 within our condensed consolidated financial statements included elsewhere in this Form 10-Q for information about our various contractual and legally binding purchase commitments to purchase goods and services. Other than as disclosed above, there have been no material changes during the six months ended June 30, 2022 to our contractual obligations disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2021. The expected timing of payments of our obligations is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the timing of receipt of goods or services, or changes to agreed-upon amounts for some obligations. In addition, some of our purchasing requirements are not current obligations and are therefore not included in the amounts above. For example, some of these requirements are not managed through binding contracts or are fulfilled by vendors on a purchase order basis within short time horizons.
Net Cash Used in Operating Activities
We derive cash flows from operations primarily from cash collected from the sale of our products and services.services, license agreements and grants. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses and working capital to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have expanded our business and built our infrastructure domestically and internationally. In the first quarter of 2017, we implemented efficiency and cost-savings initiatives and we expect these initiatives to reduce our operating expenses in 2017 compared to 2016.
Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 20172022 was $24.8$45.6 million and consisted of a net loss of $50.1 $139.8 million, adjusted forless non-cash adjustmentsitems of $20.8$99.0 million and net change incash used by assets and liabilities, net, of $4.5$4.8 million. Non-cash items included a loss on forward sale of Series B Preferred Stock of $60.1 million, a loss on Bridge Loans of $13.7 million, stock-based compensation expense of $8.7 million, amortization of developed technology of $8.4 million, stock-based compensation expense of $7.1$5.9 million, depreciation and amortization of $5.8$1.9 million, provision for excess and obsolete inventory of $4.6 million and a gain from other non-cash itemsan impairment of $0.5an intangible of $3.5 million. The net changeincrease in assets and liabilities included a decreasewas primarily attributable to an increase in inventoryinventories, net of $2.1$6.5 million, a decrease of other liabilities of $4.6 million, a decrease of accounts payable of $1.7 million, a decrease of deferred revenue of $1.6 million, and an increase in prepaid expenses and other assets of $1.6 million, an increase in accounts payable of $1.1 million, an increase in deferred revenue of $0.9 million, and a decrease in accounts receivable of $0.8 million,$1.3 million. These items were partially offset by a decreasereduction of accounts receivable, net of $7.3 million, and a $3.6 million increase of accrued compensation and related benefits primarily due to an increase in other liabilities of $1.9 million.severance and retention bonuses.
Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 2016,2021 was $28.4$27.6 million and consisted of a net loss of $58.3$36.0 million, adjusted for non-cash adjustmentsitems of $25.0$17.0 million and a net change incash used by assets and liabilities, net, of $4.9$8.6 million. Non-cash items included stock-based compensation expense of $11.0$7.4 million, amortization of developed technology of $8.4$6.0 million, depreciation and amortization of $5.0$1.9 million, provisions for excess and obsolete inventory of $1.2 million, and a loss from other non-cash itemsvariety of $0.6 million.smaller items. The net change incash used by assets and liabilities, includednet was primarily driven by an increase of inventories, net of $7.5 million a reduction of accrued compensation and related benefits of $5.4 million due primarily to bonus payments in the first quarter of 2021, a reduction of other liabilities of $3.9 million, an increase in prepaid expenses and other assets of $2.6 million and an increase in deferred revenue of $0.6 million. These uses of funds were partially offset by a decrease in accounts receivable, net, of $12.1$9.4 million, and an increase in deferred revenues of $0.5 million, a decrease in other assets of $0.2 million, partially offset by an increase of inventory of $4.1 million, a decrease in other liabilities of $2.3 million and a decrease of accounts payable of $1.5 million.$1.9 million, Also included in net cash from operating activities was $3.5 million of funding from the NIH Contract.
Net Cash Provided byUsed in Investing Activities
Our primary investing activities consist of purchases, sales, and maturities of ourour short-term investments and to a much lesser extent, capital expenditures for manufacturing, laboratory, computer equipment and software to support our infrastructure and work force.workforce. We expect to continue to incur costs for capital expenditures for demonstration unitsto improve manufacturing efficiencies and loaner equipment to support our salesstrengthen information technology and service efforts, and computer equipment and software to support our business operations.network security. However, as a result of our efficiency and cost-savings initiatives, we may choose to decrease or defer certain capital expenditures and development activities, while further optimizing our organization.
Net cash provided byused in investing activities was $21.5 million duringfor the ninesix months ended SeptemberJune 30, 2017. Net cash provided by investing activities2022 was $139.1 million, which was primarily consisted of $24.4 million of proceeds from sales and maturities of investments, partially offset bydue to purchases of short-term investments of $1.5$137.3 million and capital expenditures of $1.4$1.8 million.
NetThe $9.1 million of net cash provided byused in investing activities was $31.3 million during the ninesix months ended SeptemberJune 30, 2016. Net cash provided by investing activities2021 was primarily consisted of $71.9 million of proceeds from sales and maturities of investments and proceeds from the sale of the Verinata investment of $2.3 million, partially offset by purchases of investments of $38.6 million and capital expenditures of $4.4 million.
In February 2013, Illumina, Inc. acquired Verinata Health, Inc. (Verinata) for $350 million in cash and up to an additional $100 million in milestone payments through December 2015. The final milestones related to the saleexpansion our IFC manufacturing capacity in Singapore under the NIH Contract. During the first six months of Verinata to Illumina were met in December 20152021,cash expenditures for manufacturing and accordingly, we recorded our share of these milestone payment obligations in the amount of $2.3plant assets totaled $11.1 million, while cash receipts from the sale of investment in Verinata in the accompanying consolidated statement of operations for the year ended December 31, 2015. We received the $2.3 million payment in January 2016.
contract earmarked to fund capital expenditures totaled $2.0 million.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $28.8totaled $231.0 million during the six months ended June 30, 2022. The principal sources of cash were proceeds from issuance of Series B Preferred Stock of $225.0 million, and proceeds from Bridge Loans of $25.0 million, which were subsequently converted into Series B Preferred Stock on April 4, 2022. These proceeds were also partially offset by a $12.5 million payment for equity issuance costs on the Series B Preferred Stock and a repayment of $6.8 million of advances under the Revolving Credit Facility.
Net cash used in financing activities totaled $1.2 million during the six months ended June 30, 2021. The amount included $0.5 million for the nine months ended September 30, 2017,repurchase of our 2014 Notes and consisted$1.6 million of withholding tax payments for net proceedsshare settlements of $28.8equity awards, The payments were partially offset by $0.7 million of receipts from our "at-the market" equity offering in August 2017,the sale of ESPP shares and proceeds$0.2 million of receipts from the exercise of stock options, offset by payments for taxes related to net share settlement for vested restricted stock units.
There were no significant financing activities for the nine months ended September 30, 2016.
options.
Capital Resources
At SeptemberJune 30, 2017,2022 and December 31, 2021, our working capital, excluding deferred revenues, current and deferred grant income, current, and restricted cash, was $74.2$223.2 million which includesand $38.0 million, respectively, including cash and cash equivalents of $74.4 million and $28.5 million, respectively. We had $136.9 million short-term investments as of $62.4June 30, 2022 and no short-term investments as of December 31, 2021. See Recent Developments - Business Update for additional information regarding our restructuring plans.
In November 2019, we closed a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of $55.0 million aggregate principal amount of our 2019 Notes. The 2019 Notes bear interest at 5.25% per annum, payable semiannually on June 1 and excludes deferred revenueDecember 1 of $9.9 million.each year, beginning on June 1, 2020. The 2019 Notes will mature on December 1, 2024, unless earlier repurchased or converted pursuant to their terms. The 2019 Notes will be convertible at the option of the holder at any point prior to close of business on the second scheduled trading day preceding the maturity date. The initial conversion rate of the 2019 Notes is 344.8276 shares of the Company’s common stock per $1,000 principal amount of 2019 Notes (which is equivalent to an initial conversion price of $2.90 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest.
The 2019 Notes will also be convertible at our option upon certain conditions in accordance with the terms of the indenture governing the 2019 Notes. On or after December 1, 2021 to December 1, 2022, if the price of the Company’s common stock has equaled or exceeded 150% of the Conversion Price (as defined in the indenture, currently $2.90, subject to adjustment) for a specified number of days (Issuer’s Conversion Option), we may, at our option, elect to convert the 2019 Notes in whole but not in part into shares of the Company, determined in accordance with the terms of the indenture. On or after December 1, 2022, if the price of the Company’s common stock has equaled or exceeded 130% of the Conversion Price then in effect for a specified number of days, we may, at our option, elect to convert the 2019 Notes in whole but not in part into shares of the Company, determined in accordance with the terms of the indenture.
The foregoing summary of the 2019 Notes are not complete and are qualified in their entirety by the applicable indentures, forms of global notes, and other agreements and documents filed with the SEC.
On August 3, 2017,2, 2018, we entered into a SalesLoan and Security Agreement with CowenSVB (the Credit Agreement) for our Revolving Credit Facility, which provides for secured revolving loans in an aggregate amount of up to $15.0 million, In August 2021, we amended our Revolving Credit Facility to extend the maturity date to August 2, 2023 and Company, LLC (Cowen) to sellprovide for a new $10.0 million Term Loan Facility (the Term Loan Facility and, together with the Revolving Credit Facility, the Credit Facility). The Credit
Facility is collateralized by substantially all our property, other than intellectual property.The maturity date of the Term Loan Facility is July 1, 2025, subject to the following condition: in the event the principal amount of our convertible debt exceeds $0.6 million as of June 1, 2024 or if the maturity date of our 2019 Notes has not been extended beyond January 1, 2026 by that date, then the maturity date of the Term Loan Facility will be June 1, 2024.
As of June 30, 2022, the balance outstanding on the Term Loan Facility was $10.2 million. Interest on the term loan accrues on the outstanding principal amount thereof at the greater of (i) a floating per annum rate equal to three quarters of one percentage point (0.75%) above the prime rate (as customarily defined), or 4% with a final payment equal to 6.5% of the aggregate original principal amounts of each term loan advance due on the earlier of the maturity date of the Term Loan Facility, the acceleration of the term loan advances or any prepayment of a term loan advance.Interest is payable monthly. The principal amount of the term loan advances is repayable beginning on August 1, 2023, in twenty-four equal monthly installments of principal plus monthly payments of accrued interest. The Amendment also added a financial covenant to the Credit Facility, requiring us to maintain a minimum Adjusted Quick Ratio (as defined) of at least 1.25 to 1.00.
As of June 30, 2022, total availability under the Revolving Credit Facility was $8.1 million. We currently have no outstanding debt under the Revolving Credit Facility, and we are in compliance with all the terms and conditions of the Revolving Credit Facility as of June 30, 2022. See Note 8 to our condensed consolidated financial statements for more information about the Revolving Credit Facility and Term Loan Facility.
On April 4, 2022, we completed the Private Placement Issuance, issuing 255,559 shares of Series B Preferred Stock. The rights, preferences and privileges of the Series B Preferred Stock are set forth in the Series B-1 Certificate of Designations and Series B-2 Certificate of Designations. The Series B Preferred Stock ranks senior to our common stock having aggregate sales proceedswith respect to dividend rights, redemption rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The holders of Series B Preferred Stock will be entitled to $30 million, from time to time, through an “at-the-market” equity offering program under which Cowen was to act as sales agent. On August 10, 2017, we sold 9,090,909 shares ofparticipate in all dividends declared on our common stock $0.001 par valueon an as-converted basis, on the terms and subject to the conditions set forth in the Series B Certificates of Designations.
The following is a brief summary of the conversion rights and other key provisions of the Series B Preferred Stock:
Holder Voluntary Conversion Rights
The Series B Preferred Stock is convertible at the option of the holders thereof at any time into a number of shares of Common Stock equal to the Conversion Rate (as defined in the Series B Certificates of Designations), which is initially 294.1176 shares of common stock per share through Cowen actingof Series B Preferred Stock, in each case subject to certain adjustments and limitations on conversion.
Issuer Call Provision
At any time after the fifth anniversary of the closing of the Private Placement Issuance, if the last reported sale price of the Common Stock is greater than 250% of the Conversion Price (as defined in the Series B Certificates of Designations) as of such time for at least 20 consecutive trading days immediately preceding the date of the notice of mandatory conversion, we may elect to convert all of the outstanding shares of Series B Preferred Stock into shares of common stock.
Issuer Redemption Provision
After the seventh anniversary of the closing of the Private Placement Issuance, subject to certain conditions, we may, at our agent, for aggregate gross proceedsoption, redeem all of $30.0 million. Our aggregate net proceeds from such sales were approximately $28.8 million, after deducting related expenses, including commissionsthe outstanding shares of Series B Preferred Stock at a redemption price per share of Series B Preferred Stock, payable in cash, equal to Cowenthe Liquidation Preference.
Change of approximately $0.7 million and issuance costsControl Provisions
If we undergo certain change of approximately $0.5 million. We plancontrol transactions, each holder of outstanding shares of Series B Preferred Stock will have the option, subject to use the net proceeds from this offering for general corporate purposes and working capital. These sales exhaustedholder’s right to convert all or a portion of the shares of Series B Preferred Stock held by such holder into Common Stock prior to such redemption, to require us to purchase all or a portion of such holder’s outstanding shares of Series B Preferred Stock that were available for sale underhave not been converted into Common Stock at a purchase price per share of Series B Preferred Stock, payable in cash, equal to the Sales Agreement. greater of (A) the Liquidation Preference of such share of Series B Preferred Stock, and (B) the amount of cash and/or other assets that such holder would have been entitled to receive if such holder had converted such share of Series B Preferred Stock into Common Stock immediately prior to the change of control transaction (Change of Control Put).
In the event of a change of control in which we are anticipated to merge with another person and will not be the surviving corporation or if the Common Stock will no longer be listed on a U.S. national securities exchange, we will have a right to redeem, subject to the holder’s right to convert into Common Stock prior to such redemption, all of such holder’s shares of
Series B Preferred Stock, or if a holder exercises the Change of Control Put in part, the remainder of such holder’s shares of Series B Preferred Stock, at a redemption price per share payable in cash, equal to the greater of (A) the Liquidation Preference of such share of Series B Preferred Stock, and (B) the amount of cash and/or other assets that the holder would have received if such holder had converted such share of Series B Preferred Stock into Common Stock immediately prior to the change of control transaction.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Series B Preferred Stock has a liquidation preference equal to the greater of (i) the Liquidation Preference (as defined in the Certificate of Designations, currently $3.40) and (ii) the amount per share of Series B Preferred Stock that such holder would have received had all holders of Series B Preferred Stock, immediately prior to such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, converted all shares of Series B Preferred Stock into Common Stock pursuant to the terms of the Series B Certificates of Designations (without regard to any limitations on conversion contained therein).
We believe our existing cash, cash equivalents, and short-term investments, along with funding available under the Revolving Credit Facility, will be sufficient to meet our working capital and capital expenditure needs for at least the next 1812 months. However, we may experience lower than expected cash generated from operating activities or greater than expected capital expenditures, cost of revenue, or operating expenses, and we may need to raise additional capital to fund our operations, further our research and development activities, or acquire or invest in a business. Our future funding requirements will depend on many factors, including market acceptance of our products, the cost of our research and development activities, the cost of filing and prosecuting patent applications, the cost associated with litigation or disputes relating to intellectual property rights or otherwise, the cost and timing of regulatory clearances or approvals, if any, the cost and timing of establishing additional sales, marketing, and distribution capabilities, the cost and timing of establishing additional technical support capabilities, the effect of competing technological and market developments, and the effectiveness of our efficiency and cost reduction initiatives. In the future, we may acquire businesses or technologies from third parties, and we may decide to raise additional capital through debt or equity financing to the extent we believe this is necessary to successfully complete these acquisitions.
If we require additional funds in the future, we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders could experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support, research and development, or other resources devoted to our products.
Due to our negative revenue growth in 2016 and 2015, we implemented certain operational efficiency and cost-savings initiatives beginning in the first quarter of 2017 intended to align our resources with our product strategy, reduce our operating expenses, and manage our cash flows. These cost efficiency initiatives include targeted workforce reductions, optimizing our facilities, and reducing excess space. In addition, we may need to decrease or defer capital expenditures and development activities to further optimize our operations; such measures may impair our ability to invest in developing, marketing and selling new and existing products. The efficiency and cost-savings initiatives are expected to reduce operating expenses and enable us to more efficiently align our resources in areas providing the greatest benefit. If our efficiency and cost reduction efforts are unsuccessful, our cash position could be negatively impacted and we may, among other things, be required to seek other sources of financing.
Off-Balance Sheet Arrangements
As of September 30, 2017, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission's Regulation S-K.
Contractual Obligations and Commitments
Our operating lease obligations include a lease for our current headquarters and leases for manufacturing, laboratory, warehousing and office space for our foreign subsidiaries. Please see Note 7 to the financial statements for our lease obligations.
Other than as disclosed above, there have been no material changes during the nine months ended September 30, 2017 to our contractual obligations disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk
As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our revenue is generally denominated in the local currency of the contracting party. Historically, the majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Singapore and Canada where our manufacturing facilities are located. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in our net income or loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. For the ninesix months ended SeptemberJune 30, 2017 our2022, we had a foreign currency gain was $0.3 million. For the nine months ended September 30, 2016 our loss of $0.5 million compared to a foreign currency loss was $0.8 million.of $0.1 million in the prior year for the same period. To date, we have not entered into any foreign currency hedging contracts although we may do so in the future. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. If foreign currency exchange rates had changed by 10% during the periods presented, it would not have had a material impact on our financial position or results of operations.
Interest Rate Sensitivity
We had cash and cash equivalents of $60.9$74.4 million at Septemberas of June 30, 2017.2022. These amounts were held primarily in cash on deposit with banks treasury bills and money market funds which are short-term. We had $1.4held $136.9 million inshort-term investments at Septemberin treasury securities as of June 30, 2017, held primarily in U.S. government and agency securities with contractual maturity dates that are within one year from September 30, 2017.2022. Cash, and cash equivalents and short-term investments are held for working capital purposes. Due to the short-term nature of these investments, weWe believe that we do not have any material exposure to changes in the fair value of our investmentmoney market portfolio due toas a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had decreased by 10% during the periods presented, our interest income would not have been materially affected.
Fair Value of Financial Instruments
We do not have material exposure to market risk with respect to investments. We do not use derivative financial instruments for speculative or trading purposes. However, weWe may adopt specific hedging strategies in the future.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of SeptemberJune 30, 2017,2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the threesix months ended SeptemberJune 30, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.Proceedings
On December 21, 2015, Thermo Fisher Scientific, Inc. (“Thermo”)In September 2020, a putative class action complaint alleging violations of the federal securities laws was filed a complaintagainst the Company (also naming our now-former Chief Executive Officer and our Chief Financial Officer as defendants) in the CircuitU.S. District Court for the CountyNorthern District of KalamazooCalifornia (Reena Saintjermain, et al. v. Fluidigm Corporation, et al). The Court appointed a lead plaintiff and lead counsel in December 2020, and an amended complaint was filed on February 19, 2021. The complaint, as amended, seeks unspecified damages on behalf of Michigan against onea purported class of its former employeespersons and entities who had recently been hiredacquired our common stock between February 7, 2019 and November 5, 2019 and alleges securities laws violations based on statements and alleged omissions made by us alleging, among otherthe Company during such period. The Company filed a motion to dismiss the complaint on April 5, 2021 and, on August 4, 2021, the Court granted defendants’ motion to dismiss with leave to amend. A second amended complaint was filed on September 14, 2021. The Company filed a motion to dismiss the second amended complaint on October 29, 2021 and, on February 14, 2022, the Court granted defendants’ motion and dismissed the second amended complaint with prejudice. The plaintiff has appealed the decision, and the appeal remains pending before the U.S. Court of Appeals for the Ninth Circuit. We believe the claims misappropriation of proprietary informationalleged in the complaint lack merit and breach of contractual and fiduciary obligationswe intend to Thermo while still an employee of Thermo. On November 23, 2016, Thermo amended its complaint to add us as a party to the litigation, making various commercial and employment-related claims and seeking damages and injunctive relief. In July 2017, we entered into a settlement agreement with Thermo. Pursuant to the terms of the settlement agreement, we agreed to pay Thermo a one-time payment of $3.0 million in exchange for a release and dismissal of all claims with prejudice upon payment of the settlement. In August 2017, we paid the settlement of $3.0 million and received an insurance recovery payment of $1.0 million related todefend this matter.action vigorously.
Additionally, inIn the normal course of business, we are from time to time involved in legal proceedings or potential legal proceedings, including matters involving employment, intellectual property, or others. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of any currently pending matters would not have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
ITEMItem 1A. RISK FACTORS
Risk Factors
We operate in a rapidly changing environment that involves numerous uncertainties and risks. The following risks and uncertainties may have a material and adverse effect on our business, financial condition, or results of operations. You should consider these risks and uncertainties carefully, together with all of the other information included or incorporated by reference in this quarterly report on Form 10-Q. The risks described below are not the only ones we face. Our business is also subject to the risks that affect many other companies, such as employment relations, general economic conditions, global sociopolitical events and international operations. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price. If any of thethese risks occur, our business, results of operations, or uncertainties we face were to occur,financial condition could suffer, the trading price of our securities could decline, and you may lose all or part of your investment.
Summary of Risk Factors
Risks Related to Fluidigm’sour Business, Industry, and Strategy
•The COVID-19 pandemic has significantly affected our business operations.
•Our financial results and revenue growth rates have varied significantly from quarter-to-quarter and year-to-year, and may not be consistent with expectations.
•We have incurred losses since inception, and we may continue to incur substantial losses for the foreseeable future.
•The life science markets are highly competitive and subject to rapid technological change.
•If our research and product development efforts do not result in commercially viable products within anticipated timelines, if at all, our business and results of operations will be adversely affected.
•Our future success is dependent upon our ability to expand our customer base and introduce new applications.
•If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected.
•If we fail to achieve the expected financial and operational benefits of our recently announced restructuring plan and reduction in force, our business and financial results may be harmed.
•Implementation of a company-wide enterprise resource planning (ERP) system could adversely affect our business.
•Our business growth strategy involves the potential for significant acquisitions.
Risks Related to Operations and Reliance on Third Parties
•We may experience development or manufacturing problems or delays.
•Our business depends on research and development spending levels of our customers.
•Disruption of our manufacturing facilities or other operations, or in the operations of our customers or business partners, could result in cancellation of orders, delays in deliveries or other business activities, or loss of customers.
•We rely on single and sole source suppliers for some of the components and materials used in our products.
•Any disruption or delay in the shipping or off-loading of our products may have an adverse effect on our financial condition and results of operations.
•Our business operations depend upon the continuing efforts of our management team and other skilled and experienced personnel.
•Our distribution capabilities and direct sales, field support, and marketing forces must be sufficient to meet our customers’ needs.
•To use our analytical systems, customers typically need to purchase specialized reagents.
•Security breaches, loss of data, cyberattacks, and other IT failures could adversely affect our business.
Risks Related to Quality and the Regulatory Environment
•Our products could have defects or errors.
•To the extent we elect to label and promote any of our products as medical devices, we would be required to obtain prior approval or clearance by the FDA or comparable foreign regulatory authority.
•Compliance or the failure to comply with current and future regulations affecting our products and business operations worldwide could cause us significant expense and adversely impact our business.
Risks Related to Economic Conditions and Operating a Global Business
•We generate a substantial portion of our revenue internationally.
•Adverse conditions in the global economy may significantly harm our revenue, profitability, and results of operations.
•We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies.
Financial, Tax, and Accounting Risks
•Our future capital needs are uncertain and we may need to raise additional funds in the future.
•Any failure to maintain effective internal control over financial reporting could adversely affect our business.
•We may not realize the value of our goodwill or other intangible assets.
•If we fail to comply with the covenants and other obligations under our debt facilities, the lenders may be able to accelerate amounts owed under the facilities and, in the case of our Credit Facility (as defined herein), may foreclose upon the assets securing our obligations.
•We are subject to risks related to taxation in multiple jurisdictions.
•We have a significant amount of outstanding indebtedness.
Risks Related to Intellectual Property
•Our ability to protect our intellectual property and proprietary technology is uncertain.
•We may be involved in lawsuits to protect or enforce our patents and proprietary rights.
•We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets.
•We depend on certain technologies that are licensed to us.
•We are subject to certain manufacturing restrictions related to licensed technologies that were developed with the financial assistance of U.S. governmental grants.
•We are subject to certain obligations and restrictions relating to technologies developed in cooperation with Canadian government agencies.
Risks Related to Our Common Stock
•Our stock price is volatile.
•Future sales of our common stock in the public market could cause our stock price to fall.
•If securities or industry analysts publish unfavorable research about us or cease to cover our business, our stock price and/or trading volume could decline.
•Any conversions of our 2014 Notes or 2019 Notes will dilute the ownership interest of our existing stockholders.
Risks Related to our Capital Structure
•The holders of our Series B Preferred Stock own a significant portion of our total outstanding voting securities and may prevent other stockholders from influencing material corporate decisions.
•The market value of our Common Stock could decline if the holders of our Series B Preferred Stock sell their shares when transfer restrictions expire.
•The holders of Series B-1 Preferred Stock and Series B-2 Preferred Stock may exercise influence over us, including through their ability to each designate a member of our board of directors.
RISKS RELATED TO OUR BUSINESS, INDUSTRY, AND STRATEGY
The COVID-19 pandemic has significantly affected our business operations and could continue to adversely impact our financial position and cash flows to an extent that is unknown and difficult to predict.
The pandemic and international public health emergency caused by SARS-CoV-2, the novel strain of coronavirus that causes the disease commonly known as COVID-19, has adversely affected all the countries in which we and our customers, suppliers, and other business partners operate, disrupting supply chains, causing significant volatility in global financial markets, and raising the prospect of an extended global recession. Public health problems resulting from COVID-19 and precautionary measures instituted by governments and businesses to mitigate its spread and resurgence, including travel restrictions and quarantines, could continue to contribute to a general slowdown in the global economy, cause increasingly adverse impacts on our customers, suppliers, and other business partners, and further disrupt our operations. Changes in our operations as a result of the COVID-19 pandemic have resulted in inefficiencies and delays, including in sales and product development efforts, and additional costs related to business continuity initiatives that cannot be fully mitigated through succession planning, employees working remotely, or teleconferencing technologies.
The COVID-19 pandemic and related governmental and societal reactions have had, and may continue to have, a negative impact on our business, liquidity, results of operations, and stock price due to the occurrence of some or all of the following events or circumstances among others:
•reduced demand for some of our products and services due to the impact of COVID-19 on our customers, including in the global academic research community;
•the negative impact of ongoing travel restrictions on our sales operations, marketing efforts, and customer field support;
•diminished business productivity due to inefficiencies in employees working from home or increasing physical distancing and other pandemic response protocols in our production facilities;
•increased voluntary turnover, together with impaired ability to hire and effectively train new personnel due to labor shortages and travel restrictions;
•increased susceptibility to the risk of information technology security breaches and other disruptions due to increased volumes of remote access to our information systems from our employees working at home;
•increased operating costs if one of our facilities were to experience a COVID-19 outbreak;
•disruption of the operations of our contract manufacturers, suppliers, and other business partners;
•shortages or delays in the supply of components and materials used in our products; and
•increased volatility in our stock price due to financial market instability.
In 2021, factors such as supply chain constraints, China trade restrictions, and the ongoing slowdown in the Asia-Pacific region caused our overall revenues to decline more than expected. The extent to which the COVID-19 pandemic will continue to impact our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the continued spread and resurgences of the coronavirus; the emergence of new strains of the disease, such as the Delta and Omicron variants; the availability, efficacy, and acceptance of COVID-19 vaccines and boosters; the scope and duration of the public health emergency; and COVID-19 mitigation measures such as travel bans and restrictions, social distancing, quarantines, and business shutdowns and closures. Additionally, in response to a surge in COVID-19 infections in the first half of 2022, the Chinese government imposed lockdowns in certain parts of the country that have negatively impacted and continue to negatively impact manufacturing and/or supply chains, as well as demand for our products.
Because the severity, magnitude, and duration of the COVID-19 pandemic and its economic consequences are uncertain, we are unable to predict the impact of COVID-19 on our operations, our financial performance, and our ability to successfully execute our business strategies and initiatives. The ultimate impact of the COVID-19 pandemic on our operations and financial
performance depends on many factors that are not within our control, including, but not limited, to: governmental, business, and individual actions that have been and continue to be taken in response to the pandemic (including restrictions on travel, transport and workforce pressures); the risk of waning immunity among persons already vaccinated and an increase in fatigue or skepticism with respect to initial or booster vaccinations; the impact of the pandemic and actions taken in response on global and regional economies, travel, and economic activity; the availability of federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; labor and materials shortages; supply chain difficulties, including disruption of logistics, shipping, and other distribution operations; and the pace of recovery when the threat of COVID-19 subsides.
As the COVID-19 pandemic continues to affect our operating and financial results, it may also have the effect of heightening many of the other risks described in our other risk factors below. COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not expect to present significant risks to our operations or financial results, particularly if the pandemic and its associated impacts reoccur in the coming months.
Our financial results and revenue growth rates have varied significantly from quarter-to-quarter and year-to-year due to a number of factors, and a significant variance in our operating results or rates of growth from our financial guidance or market expectations, if any, could lead to substantial volatility in our stock price.
Our total revenue was $104.4 million in 2016, $114.7 million in 2015, and $116.5 million in 2014. The decrease in overall revenue over this period was due in significant part to decreasing sales of single-cell genomics instruments, driven by a combination of factors including changes in customer demand, increased competition, and performance issues in certain IFCs used in our C1 systems.
Our revenue, results of operations, and revenue growth rates have varied in the past and may continue to vary significantly from quarter-to-quarter or year-to-year. For example, in 2011, 2012, 2014 and 2015, we experienced higher sales in the fourth quarter than in the first quarter of the next fiscal year. Although this was not the case in the fourth quarter of 2013 compared to the first quarter of 2014, this seasonal historical trend continued in 2014 and 2015 with a decrease in revenue in the first quarters of 2015 and 2016, respectively. Sales, however, remained relatively flat in the first quarter of 2017 compared to the fourth quarter of 2016. Additionally, for the quarters ended March 31, 2015 and September 30, 2015, we experienced year-over-year revenue growth rates that were substantially lower than revenue growth rates experienced in other periods since our initial public offering, and we experienced a year-over-year decline in revenue for the nine months ended September 30, 2017, September 30, 2016, and September 30, 2015, and for the years ended December 31, 2016 and 2015. We may experience substantial variability in our product mix from period-to-period as revenue from sales of our instruments relative to sales of our consumables may fluctuate or deviate significantly from expectations. Although our revenue increased year-over-year in 2020 compared to 2019 and in 2019 compared to 2018, we experienced a year-over-year decline in revenue in 2021 compared to 2020, and we may be similarly unable to achieve revenue growth in future periods. Variability in our quarterly or annual results of operations, mix of product revenue, or rates of revenue growth, if any, may lead to volatility in our stock price as research analysts and investors respond to these fluctuations. These fluctuations are due to numerous factors that are difficult to forecast, including:
•fluctuations in demand for our products;
•changes in customer budget cycles, capital spending, and capital spending; the availability of VAT and import tax exemptions;
•seasonal variations in customer operations;
•tendencies among some customers to defer purchase decisions to the end of the quarter;
•the large unit value of our systems, particularly our proteomics systems;
•changes in our pricing and sales policies or the pricing and sales policies of our competitors;
•our ability to design, manufacture, market, sell, and deliver products to our customers in a timely and cost-effective manner; fluctuations or reductions in revenue from sales of legacy instruments that may have contributed significant revenue in prior periods; quality
control or yield problems in our manufacturing operations; •our ability to timely obtain adequate quantities of the materials or components used in our products, which in certain cases are purchased through sole and single source suppliers;
•staffing shortages, lack of skilled labor, increased turnover, and competitive job markets;
•fluctuations or reductions in revenue from sales of legacy instruments that may have contributed significant revenue in prior periods;
•quality control or yield problems in our manufacturing operations;
•new product introductions and enhancements by us and our competitors;
•unanticipated increases in costs or expenses;
•our complex, variable and, at times, lengthy sales cycle;
•trade restrictions and government protectionism;
•global economic conditions; and
•fluctuations in foreign currency exchange rates.
Additionally, we have certain customers who have historically placed large orders in multiple quarters during a calendar year. A significant reduction in orders from one or more of these customers could adversely affect our revenue and operating results, and if these customers defer or cancel purchases or otherwise alter their purchasing patterns, our financial results and actual results of operations could be significantly impacted. Other unknown or unpredictable factors also could harm our results.
In addition, inflationary pressure, including as a result of supply shortages, has adversely impacted and could continue to adversely impact our financial results. Our operating costs have increased, and may continue to increase, due to the recent growth in inflation. We may not fully offset these cost increases by raising prices for our products and services, which could result in downward pressure on our margins. Further, our customers may choose to reduce their business with us if we increase our pricing.
The foregoing factors, as well as other factors, could materially and adversely affect our quarterly and annual results of operations and rates of revenue growth, if any. We have experienced significant revenue growth in the past but we may not achieve similar growth rates in future periods. You should not rely on our operating results for any prior quarterly or annual period as an indication of our future operating performance. If we are unable to return toachieve adequate revenue growth, our operating results could suffer and our stock price could decline. In addition, a significant amount of our operating expenses are relatively fixed due to our manufacturing, research and development, and sales and general administrative efforts. Any failure to adjust spending quickly enough to compensate for a shortfall relative to our anticipated revenue could magnify the adverse impact of such shortfalls on our results of operations. We expect that our sales will continue to fluctuate on an annual and quarterly basis and that our financial results for some periods may be below those projected by securities analysts, which could significantly decrease the price of our common stock.
We have incurred losses since inception, and we may continue to incur substantial losses for the foreseeable future.
We have a limited operating history and have incurred significant losses in each fiscal year since our inception, including net losses of $15.9$59.2 million, $53.0 million, and $50.1$64.8 million during the threeyears 2021, 2020, and nine months ended September 30, 2017, respectively, and net losses of $76.0 million and $53.3 million for the years ended December 31, 2016 and 2015,2019, respectively. As of SeptemberJune 30, 2017,2022, we had an accumulated deficit of $489.7 million.$875.8 million. These losses have resulted principally from costs incurred in our research and development programs, and from our manufacturing costs and selling, general, and administrative expenses. We believe thatTo date, we have funded our continued investment in researchoperations primarily through equity offerings, the issuance of debt instruments, and development,from sales and marketing is essential toof our long-term competitive position and future revenue growth.
Due to our negative revenue growth in 2016 and 2015, we implemented certain operational efficiency and cost-savings initiatives beginning in the first quarter of 2017 intended to align our resources with our product strategy, reduce our operating expenses, and manage our cash flows. These cost efficiency initiatives have included targeted workforce reductions, optimizing our facilities, and reducing excess space. Further actions such as these may be required on an ongoing basis to optimize our organization. For example, we may need to decrease or defer capital expenditures and development activities or implement further operating expense reduction measures. Such measures may impair our ability to invest in developing, marketing and selling new and existing products. Furthermore, if our efficiency and cost reduction efforts are unsuccessful, our cash position could be negatively impacted and we may, among other things, be required to seek additional sources of financing. Until we are able to generate additional revenue to support our level of operating expenses, we will continue to incur operating and net losses and negative cash flow from operations. Because
In addition, inflationary pressure, including as a result of supply shortages, could adversely impact our financial results. Our operating costs have increased, and may continue to increase, due to the numerous risksrecent growth in inflation. We may not fully offset these cost increases by raising prices for our products and uncertainties associatedservices, which could result in downward pressure on our margins. Further, our customers may choose to reduce their business with us if we increase our commercialization effortspricing.
We believe that our continued investment in research and development, sales, and marketing is essential to our long-term competitive position and future product development, we are unable to predict when we will become profitable,revenue growth and, as a result, we may incur operating losses for the foreseeable future and may never become profitable. Even if we do achieve profitability, weprofitability.
Market opportunities may not be able to sustain or increase our profitability.
Ifdevelop as quickly as we require additional funds in the future, we may not be able to obtain such funds on acceptable terms, or at all. If we raise funds by issuing equity securities, our stockholders could experience dilution. Debt financing, if available, may involve covenants restricting our operations orexpect, limiting our ability to incur additional debt. Any additional debt or equity financing that we raise may contain terms that are not favorable to ussuccessfully sell our products, or our stockholders.product development and strategic plans may change and our entry into certain markets may be delayed, if it occurs at all.
The application of our technologies to high-throughput genomics, single-cell genomics and, particularly, mass cytometry applications are in many cases emerging market opportunities. We believe these opportunities will take several years to develop or mature and we cannot be certain that these market opportunities will develop as we expect. The future growth of our markets and the success of our products depend on many factors beyond our control, including recognition and acceptance by the scientific community, and the growth, prevalence, and costs of competing methods of genetic and protein analysis. Additionally, our success depends on the ability of our sales organization to successfully sell our products into these new markets. If we do not have, or are not able to obtain sufficient funds, we may have to delay development or commercialization ofsuccessfully market and sell our products, or license to third partiesachieve the rights to commercialize productsrevenue or technologies thatmargins we would otherwise seek to commercialize. We may also have to reduce marketing, customer support, research and development or other resources devoted toexpect, our products.
We have significant outstanding convertible debt, andoperating results may be required to repay, refinance or restructure such debt before 2021. In February 2014, we closed an underwritten public offering of $201.3 million aggregate principal amount of our 2.75% Senior Convertible Notes due 2034 (Notes). The Notes accrue interest at a rate of 2.75% per year, payable semi-annually in arrears on February 1harmed and August 1 of each year. The Notes will mature on February 1, 2034, unless earlier converted, redeemed,
or repurchased in accordance with the terms of the Notes. Holders may require us to repurchase all or a portion of their Notes on each of February 6, 2021, February 6, 2024, and February 6, 2029 at a repurchase price in cash equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. If we undergo a fundamental change, as defined in the terms of the Notes, holders may require us to repurchase the Notes in whole or in part for cash at a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. If we refinance the debt owed under the Notes, we may issue additional convertible notes or other debt with a later maturity date,not recover our product development and marketing expenditures. In addition, our product development and strategic plans may change, which could include additional company obligations and represent more dilution to existing stockholders and note holders.delay or impede our entry into these markets.
The life science markets are highly competitive and subject to rapid technological change, and we may not be able to successfully compete.
The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition, new product introductions, and strong price competition. We compete with both established and development stage life science research companies that design, manufacture, and market instruments and consumables for gene expression analysis, single-cell targeted gene expression orand protein expression analysis, single nucleotide polymorphismSNP genotyping, or SNP genotyping,quantitative polymerase chain reaction or PCR,(qPCR), digital PCR, other nucleic acid detection, flow cytometry, celltissue imaging, and additional applications using well established laboratory techniques, as well as newer technologies such as bead encoded arrays, microfluidics, nanotechnology, high-throughputnext-generation DNA sequencing (NGS), microdroplets, spatial protein expression, and photolithographic arrays. Most of our current competitors have significantly greater name recognition, greater financial and human resources, broader
product lines and product packages, larger sales forces, larger existing installed bases, larger intellectual property portfolios, and greater experience and scale in research and development, manufacturing, and marketing than we do. For example, companies such as 10X Genomics,
We consider Agilent Technologies, Inc., Affymetrix, Inc. (now part of Thermo Fisher Scientific Inc.) (Thermo), Bio-Rad Laboratories, Inc., and Agena Bioscience, Inc., Agilent Technologies, to be our principal competitors in the microfluidics space. We believe that Cytek Biosciences, Inc., and Becton, Dickinson and Company Bio-Rad Laboratories,are currently our principal competitors for our mass cytometry market share, and that IonPath Inc., Cellular Research,Akoya Biosciences, Inc. (now a part of Becton, Dickinson and Company), Danaher Corporation, Illumina, Inc., Life Technologies Corporation (now part of Thermo Fisher Scientific Inc.), LGC Limited, Luminex Corporation, Millipore Corporation, NanoString Technologies, Inc., PerkinElmer,and 10x Genomics, Inc. (through its acquisition of Caliper Life Sciences, Inc.), RainDance Technologies, Inc. (acquisition by Bio-Rad Laboratories, Inc. pending), Roche Diagnostics Corporation, Sony Corporation, Thermo Fisher Scientific Inc.,are our principal competitors for our Imaging Mass Cytometry™ market share. While the aforementioned principal competitors are the largest and WaferGen Bio-systems, Inc. have products that competemost prevalent in certain segments oftheir representative technology areas, the marketcombined markets in which we sell our products. In addition,compete have an additional 10 to 20 smaller competitors with competing approaches and technologies that we haveroutinely face in recent quarters experienced increased competition in the single-cell genomics market, including new product releases from 10X Genomics, Inc. and WaferGen Bio-systems, Inc., as well as the acquisition of Cellular Research by Becton Dickinson and Company and an announced exclusive partnership between Illumina, Inc. and Bio-Rad Laboratories, Inc. In addition due to the release of our Hyperion imaging mass cytometry system, we now are exposed to competition from companies offering imaging-based systems, specialized reagents and/or services including Carl Zeiss Inc., Leica Biosystems, Nikon Corporation, Olympus America Inc., Roche Diagnostics Corporation, PerkinElmer, Inc. Agilent Technologies, Inc. and Neogenomics (Multiomyx).
selling situations.
Competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In light of these advantages, even if our technology is more effective than the product or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our technology. We anticipate that we will continue to face increased competition in the future as existing companies and competitors develop new or improved products and as new companies enter the market with new technologies. Increased competition is likely to result in pricing pressures, which could reduce our profit margins and increase our sales and marketing expenses. In addition, mergers, consolidations, or other strategic transactions between two or more of our competitors, or between our competitor and one of our key customers, could change the competitive landscape and weaken our competitive position, adversely affecting our business.
Market opportunities may not develop as quickly as we expect, limiting our ability to successfully sell our products, or our product development and strategic plans may change and our entry into certain markets may be delayed, if it occurs at all.
The application of our technologies to high-throughput genomics, single-cell genomics and, particularly, mass cytometry applications are in many cases emerging market opportunities. We believe these opportunities will take several years to develop or mature and we cannot be certain that these market opportunities will develop as we expect. The future growth of our markets and the success of our products depend on many factors beyond our control, including recognition and acceptance by the scientific community, and the growth, prevalence, and costs of competing methods of genetic and protein analysis. Additionally, our success depends on the ability of our sales organization to successfully sell our products into these new markets. Our commercial organization has undergone significant changes in 2016 and 2017, and we are in the early stages of establishing sales of our products for many key applications. If we are not able to successfully market and sell our products, or to achieve the revenue or
margins we expect, our operating results may be harmed and we may not recover our product development and marketing expenditures. In addition, our product development and strategic plans may change, which could delay or impede our entry into these markets.
If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected.
Our success depends on our ability to develop and market products that are recognized and accepted as reliable, enabling and cost-effective. Most of our potential customers already use expensive research systems in their laboratories and may be reluctant to replace those systems. Market acceptance of our systems will depend on many factors, including our ability to convince potential customers that our systems are an attractive alternative to existing technologies. Compared to some competing technologies, our technology is relatively new, and most potential customers have limited knowledge of, or experience with, our products. Prior to adopting our systems, some potential customers may need to devote time and effort to testing and validating our systems. Any failure of our systems to meet these customer benchmarks could result in customers choosing to retain their existing systems or to purchase systems other than ours, and revenue from the sale of legacy instruments that may have contributed significant revenue in prior periods may decrease.
In addition, it is important that our systems be perceived as accurate and reliable by the scientific and medical research community as a whole. Historically, a significant part of our sales and marketing efforts has been directed at convincing industry leaders of the advantages of our systems and encouraging such leaders to publish or present the results of their evaluation of our system. If we are unable to continue to induce leading researchers to use our systems, or if such researchers are unable to achieve and publish or present significant experimental results using our systems, acceptance and adoption of our systems will be slowed and our ability to increase our revenue would be adversely affected.
We may experience development or manufacturing problems or delays that could limit the potential growth of our revenue or increase our losses.
We may encounter unforeseen situations in the manufacturing and assembly of our products that would result in delays or shortfalls in our production. For example, our production processes and assembly methods may have to change to accommodate any significant future expansion of our manufacturing capacity, which may increase our manufacturing costs, delay production of our products, reduce our product margin, and adversely impact our business. Conversely, if demand for our products shifts such that a manufacturing facility is operated below its capacity for an extended period, we may adjust our manufacturing operations to reduce fixed costs, which could lead to uncertainty and delays in manufacturing times and quality during any transition period.
Additionally, all of our IFCs for commercial sale are manufactured at our facility in Singapore. Production of the elastomeric block that is at the core of our IFCs is a complex process requiring advanced clean rooms, sophisticated equipment, and strict adherence to procedures. Any contamination of the clean room, equipment malfunction, or failure to strictly follow procedures can significantly reduce our yield in one or more batches. We have in the past experienced variations in yields due to such factors. A drop in yield can increase our cost to manufacture our IFCs or, in more severe cases, require us to halt the manufacture of our IFCs until the problem is resolved. Identifying and resolving the cause of a drop in yield can require substantial time and resources.
Furthermore, developing an IFC for a new application may require developing a specific production process for that type of IFC. While all of our IFCs are produced using the same basic processes, significant variations may be required to ensure adequate yield of any particular type of IFC. Developing such a process can be very time consuming, and any unexpected difficulty in doing so can delay the introduction of a product.
If our manufacturing activities are adversely impacted, or if we are otherwise unable to keep up with demand for our products by successfully manufacturing, assembling, testing, and shipping our products in a timely manner, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products.
If our research and product development efforts do not result in commercially viable products within anticipated timelines, if at all, our business and results of operations will be adversely affected.
Our business is dependent on the improvement of our existing products, our development of new products to serve existing markets, and our development of new products to create new markets and applications that were previously not practical with existing systems. We intend to devote significant personnel and financial resources to research and development activities
designed to advance the capabilities of our technology. We have developed design rules for the implementation of our technology that are frequently revised to reflect new insights we have gained about the technology. In addition, we have discovered that biological or chemical reactions sometimes behave differently when implemented on our systems rather than in a standard laboratory environment. Furthermore, many such reactions take place within the confines of single cells, which have also demonstrated unexpected behavior when grown and manipulated within microfluidic environments. As a result, research and development efforts may be required to transfer certain reactions and cell handling techniques to our systems. In the past, product development projects have been significantly delayed when we encountered unanticipated difficulties in implementing a process on our systems. We may have similar delays in the future, and we may not obtain any benefits from our research and development activities. Any delay or failure by us to develop and release new products or product enhancements would have a substantial adverse effect on our business and results of operations.
Our products could have defects or errors, which may give rise to claims against us, adversely affect market adoption of our systems, and adversely affect our business, financial condition, and results of operations.
Our systems utilize novel and complex technology and such systems may develop or contain undetected defects or errors. We cannot assure you that material performance problems, defects, or errors will not arise, and as we increase the density and integration of our systems, these risks may increase. We generally provide warranties that our systems will meet performance expectations and will be free from defects. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating margins. For example, we have experienced a performance issue with respect to certain IFCs used in our C1 systems due to the presence of more than one cell in an IFC chamber. Although we have redesigned such C1 IFCs, we may experience additional unexpected product defects or errors that could affect our ability to adequately address these performance issues.
In manufacturing our products, including our systems, IFCs, and assays, we depend upon third parties for the supply of various components, many of which require a significant degree of technical expertise to produce. In addition, we purchase certain products from third-party suppliers for resale. If our suppliers fail to produce components to specification or provide defective products to us for resale and our quality control tests and procedures fail to detect such errors or defects, or if we or our suppliers use defective materials or workmanship in the manufacturing process, the reliability and performance of our products will be compromised.
If our products contain defects, we may experience:
a failure to achieve market acceptance or expansion of our product sales;
loss of customer orders and delay in order fulfillment;
damage to our brand reputation;
increased cost of our warranty program due to product repair or replacement;
product recalls or replacements;
inability to attract new customers;
diversion of resources from our manufacturing and research and development departments into our service department; and
legal claims against us, including product liability claims, which could be costly and time consuming to defend and result in substantial damages.
In addition, certain of our products are marketed for use with products sold by third parties. For example, certain of our systems are marketed as compatible with major next-generation DNA sequencing instruments. If such third-party products are not produced to specification, are produced in accordance with modified specifications, or are defective, they may not be compatible with our products. In such case, the reliability and performance of our products may be compromised.
The occurrence of any one or more of the foregoing could negatively affect our business, financial condition, and results of operations.
Our business depends on research and development spending levels of academic, clinical, and governmental research institutions, biopharmaceutical, biotechnology, and Ag-Bio companies, and CROs, a reduction in which could limit our ability to sell our products and adversely affect our business.
We expect that our revenue in the foreseeable future will be derived primarily from sales of our systems, IFCs, assays, and reagents to academic institutions, clinical research laboratories that use our technology to develop tests, and biopharmaceutical, biotechnology, Ag-Bio companies and CROs worldwide. Our success will depend upon their demand for and use of our products. Accordingly, the spending policies of these customers could have a significant effect on the demand for our technology. These policies may be based on a wide variety of factors, including concerns regarding any future federal government budget sequestrations, the availability of resources to make purchases, the spending priorities among various types of equipment, policies regarding spending during recessionary periods, and changes in the political climate. In addition, academic, governmental, and other research institutions that fund research and development activities may be subject to stringent budgetary constraints that could result in spending reductions, reduced allocations, or budget cutbacks, which could jeopardize the ability of these customers to purchase our products. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. For example, reductions in capital and operating expenditures by these customers may result in lower than expected sales of our systems, IFCs, assays, and reagents. These reductions and delays may result from factors that are not within our control, such as:
changes in economic conditions;
natural disasters;
changes in government programs that provide funding to research institutions and companies;
changes in the regulatory environment affecting life science and Ag-Bio companies engaged in research and commercial activities;
differences in budget cycles across various geographies and industries;
market-driven pressures on companies to consolidate operations and reduce costs;
mergers and acquisitions in the life science and Ag-Bio industries; and
other factors affecting research and development spending.
Any decrease in our customers’ budgets or expenditures, or in the size, scope, or frequency of capital or operating expenditures, could materially and adversely affect our operations or financial condition.
If one or more of our manufacturing facilities become unavailable or inoperable, we will be unable to continue manufacturing our instruments, IFCs, assays and/or reagents and, as a result, our business will be harmed until we are able to secure a new facility.
We manufacture our genomics analytical and preparatory instruments and IFCs for commercial sale at our facility in Singapore, our mass cytometry instruments for commercial sale at our facility in Canada, and our assays and reagents for commercial sale at our headquarters in the United States. No other manufacturing facilities are currently available to us, particularly facilities of the size and scope of our Singapore and Canada operations. Our facilities and the equipment we use to manufacture our instruments, IFCs, assays, and reagents would be costly to replace and could require substantial lead times to repair or replace. Our facilities may be harmed or rendered inoperable by natural or man-made disasters, which may render it difficult or impossible for us to manufacture our products for some period of time. If any of our facilities become unavailable to us, we cannot provide assurances that we will be able to secure a new manufacturing facility on acceptable terms, if at all. The inability to manufacture our products, combined with our limited inventory of manufactured supplies, may result in the loss of customers or harm our reputation, and we may be unable to reestablish relationships with those customers in the future. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. If our manufacturing capabilities are impaired, we may not be able to manufacture and ship our products in a timely manner, which would adversely impact our business.
We generate a substantial portion of our revenue internationally and are subject to various risks relating to such international activities, which could adversely affect our sales and operating performance. In addition, any disruption or delay in the shipping or off-loading of our products, whether domestically or internationally, may have an adverse effect on our financial condition and results of operations.
During the nine months ended September 30, 2017 and 2016, and the years ended December 31, 2016 and 2015, approximately 53%, 50%, 50% and 52%, respectively, of our product and service revenue was generated from sales to customers located outside of the United States. We believe that a significant percentage of our future revenue will come from international sources as we expand our international operations and develop opportunities in other countries. Engaging in international business inherently involves a number of difficulties and risks, including:
required compliance with existing and changing foreign regulatory requirements and laws that are or may be applicable to our business in the future, such as the RoHS and WEEE directives, which regulate the use of certain hazardous substances in, and require the collection, reuse, and recycling of waste from, products we manufacture;
required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act, data privacy requirements, labor laws, and anti-competition regulations;
export or import restrictions;
laws and business practices favoring local companies;
longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
unstable economic, political, and regulatory conditions;
potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements, and other trade barriers;
difficulties and costs of staffing and managing foreign operations; and
difficulties protecting or procuring intellectual property rights.
If one or more of these risks occurs, it could require us to dedicate significant resources to remedy, and if we are unsuccessful in finding a solution, our financial results will suffer.
During June 2016, the referendum by British voters to exit the European Union ("Brexit") adversely impacted global markets and resulted in a sharp decline of the British pound sterling against the US dollar. In February 2017, the British Parliament voted in favor of allowing the British government to begin the formal process of Brexit, and the United Kingdom submitted its required notice under the applicable treaties that it intended to leave the European Union in March 2017, which initiated a negotiation process between the United Kingdom and the European Union that could last up to two years. In the short-term, volatility in the British pound sterling could continue as the United Kingdom negotiates its anticipated exit from the European Union. In the longer term, any impact from Brexit on our United Kingdom operations will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations.
A majority of our product sales are currently denominated in U.S. dollars and fluctuations in the value of the U.S. dollar relative to foreign currencies could decrease demand for our products and adversely impact our financial performance. For example, if the value of the U.S. dollar increases relative to foreign currencies, our products could become more costly to the international consumer and therefore less competitive in international markets, or if the value of the U.S. dollar decreases relative to the Singapore dollar or the Canadian dollar, it would become more costly in U.S. dollars for us to manufacture our products in Singapore and/or in Canada. Additionally, our expenses are generally denominated in the currencies of the countries in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Singapore and Canada where a significant portion of our manufacturing operations are located. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in our net income or loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that
are denominated in currencies other than the functional currency of the entities in which they are recorded. For example, we experienced foreign currency gain of $0.3 million during the nine months ended September 30, 2017, and losses of $1.5 million and $1.6 million during the years ended December 31, 2016 and 2015, respectively. Fluctuations in currency exchange rates could have an adverse impact on our financial results in the future.
We rely on shipping providers to deliver products to our customers globally. Labor, tariff, or World Trade Organization-related disputes, piracy, physical damage to shipping facilities or equipment caused by severe weather or terrorist incidents, congestion at shipping facilities, inadequate equipment to load, dock, and offload our products, energy-related tie-ups, or other factors could disrupt or delay shipping or off-loading of our products domestically and internationally. Such disruptions or delays may have an adverse effect on our financial condition and results of operations.
We are dependent on single and sole source suppliers for some of the components and materials used in our products, and the loss of any of these suppliers could harm our business.
We rely on single and sole source suppliers for certain components and materials used in our products. Additionally, several of our instruments are assembled at the facilities of contract manufacturers in Singapore. We do not have long term contracts with our suppliers of these components and materials or our assembly service providers. The loss of a single or sole source supplier of any of the following components and/or materials would require significant time and effort to locate and qualify an alternative source of supply, if at all:
The IFCs used in our microfluidic systems are fabricated using a specialized polymer, and other specialized materials, that are available from a limited number of sources. In the past, we have encountered quality issues that have reduced our manufacturing yield or required the use of additional manufacturing processes.
Specialized pneumatic and electronic components for our C1, Callisto, Juno, and Polaris systems are available from a limited number of sources.
The electron multiplier detector included in the Hyperion/Helios/CyTOF 2 systems and certain metal isotopes used with the Hyperion/Helios/CyTOF 2 systems are purchased from sole source suppliers.
The movement stage included in the Hyperion imaging mass cytometer system is purchased from a sole source supplier.
The nickel sampler cone used with the Hyperion/Helios/CyTOF 2 systems is purchased from single source suppliers and is available from a limited number of sources.
The raw materials for our Delta Gene and SNP Type assays and Access Array target-specific primers are available from a limited number of sources.
Our reliance on single and sole source suppliers and assembly service providers also subjects us to other risks that could harm our business, including the following:
we may be subject to increased component or assembly costs;
we may not be able to obtain adequate supply or services in a timely manner or on commercially reasonable terms;
our suppliers or service providers may make errors in manufacturing or assembly of components that could negatively affect the efficacy of our products or cause delays in shipment of our products; and
our suppliers or service providers may encounter capacity constraints or financial hardships unrelated to our demand for components or services, which could inhibit their ability to fulfill our orders and meet our requirements.
We have in the past experienced quality control and supply problems with some of our suppliers, such as manufacturing errors, and may again experience problems in the future. We may not be able to quickly establish additional or replacement suppliers, particularly for our single source components, or assembly service providers. Any interruption or delay in the supply of components or materials or assembly of our instruments, or our inability to obtain components, materials, or assembly services
from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products.
Our future success is dependent upon our ability to expand our customer base and introduce new applications.
Our customer base is primarily composed of academic research institutions, translational research and medicine centers, cancer centers, clinical research laboratories, that use our technology to develop tests, and biopharmaceutical, biotechnology, and Ag-Bioplant and animal research companies, and contract research organizations that perform analyses for research and commercial purposes. Our success will depend, in part, upon our ability to increase our market share among these customers, attract additional customers outside of these markets, and market new applications to existing and new customers as we develop such applications. Attracting new customers and introducing new applications require substantial time and expense. For example, it may be difficult to identify, engage, and market to customers who are unfamiliar with the current applications of our systems. Any failure to expand our existing customer base or launch new applications would adversely affect our ability to increase our revenue.
If our products fail to achieve and sustain sufficient market acceptance, our revenue will be adversely affected.
Our success depends on our ability to develop and market products that are recognized and accepted as reliable, enabling and cost-effective. Most of our potential customers already use expensive research systems in their laboratories and may be reluctant to replace those systems. Market acceptance of our systems will depend on many factors, including our ability to convince potential customers that our systems are an attractive alternative to existing technologies. Compared to some competing technologies, our technology is relatively new, and most potential customers have limited knowledge of, or experience with, our products. Prior to adopting our systems, some potential customers may need to devote time and effort to testing and validating our systems. Any failure of our systems to meet these customer benchmarks could result in customers choosing to retain their existing systems or to purchase systems other than ours, and revenue from the sale of legacy instruments that may have contributed significant revenue in prior periods may decrease.
In addition, it is important that our systems be perceived as accurate and reliable by the scientific and medical research community as a whole. Historically, a significant part of our sales and marketing efforts has been directed at convincing industry leaders of the advantages of our systems and encouraging such leaders to publish or present the results of their evaluation of our system. If we are unable to continue to induce leading researchers to use our systems, or if such researchers are unable to achieve and publish or present significant experimental results using our systems, acceptance and adoption of our systems will be slowed and our ability to increase our revenue would be adversely affected.
We may not be able to develop new products or enhance the capabilities of our existing systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business, revenue, financial condition, and operating results.
Our success depends on our ability to develop new products and applications for our technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques, or products could emerge that might offer better combinations of price and performance than our current or future product lines and systems. Existing markets for our products, including high-throughput genomics, single-cell genomics and mass cytometry, as well as potential markets for our products such as high-throughput DNA sequencingNGS and molecular applications, are characterized by rapid technological change and innovation. It is critical to our success for us to anticipate changes in technology and customer requirements and to successfully introduce new, enhanced, and competitive technology to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. Developing and implementing new technologies will require us to incur substantial development costs and we may not have adequate resources available to be able to successfully introduce new applications of, or enhancements to, our systems. We cannot guarantee that we will be able to maintain technological advantages over emerging technologies in the future. While we typically plan improvements to our systems, we may not be able to successfully implement these improvements. If we fail to keep pace with emerging technologies, demand for our systems will not grow and may decline, and our business, revenue, financial condition, and operating results could suffer materially. In addition, if we introduce enhanced systems but fail to manage product transitions effectively, customers may delay or forgo purchases of our systems and our operating results may be adversely affected by product obsolescence and excess inventory. Even if we successfully implement some or all of these planned improvements, we cannot guarantee that our current and potential customers will find our enhanced systems to be an attractive alternative to existing technologies, including our current products.
Impairment of our goodwill or other intangible assets could materially and adversely affect our business, operating results, and financial condition.
As of September 30, 2017,If we had approximately $181.4 million of goodwill and net intangible assets, including approximately $104.1 million of goodwill and approximately $77.3 million of net intangible assets. These assets represent a significant portion of the assets recorded on our consolidated balance sheet and relate primarily to our acquisition of DVS Sciences, Inc., or DVS, in February 2014. In addition, if in the future we acquire additional businesses, technologies, or other intangible assets, a substantial portion of the value of such assets may be recorded as goodwill or intangible assets.
The carrying amounts of goodwill and intangible assets are affected whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We review goodwill and indefinite lived intangible assets for impairment at least annually and more frequently under certain circumstances. Other intangible assets that are deemed to have finite useful lives will continue to be amortized over their useful lives but must be reviewed for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Events or changes in circumstances that could affect the likelihood that we will be required to recognize an impairment charge include declines in our stock price or market capitalization, declines in our market share or revenues, an increase in our losses, rapid changes in technology, failurefail to achieve the expected financial and operational benefits of capacity increasesour recently announced restructuring plan and utilization, significant litigation arising outreduction in force, our business and financial results may be harmed.
From time to time, we have implemented efficiency and cost-savings initiatives intended to stabilize our business operations. In August 2022, we announced a restructuring plan including a reduction in force. In addition to the reduction in force, we will also seek to reduce leased office space and other operating expenses.The purpose of an acquisition,the restructuring plan is to improve operational efficiency and operating costs and better align our workforce with the current needs of our business. There is no guarantee that the restructuring plan will achieve its intended benefits and cost savings or that our post-restructuring focus will be sufficient for us to achieve success. For example, our cost restructuring efforts may not result in the anticipated savings or other matters. In particular, theseeconomic benefits, or other adverse eventscould result in total costs and expenses that are greater than expected, which would require us to seek potentially dilutive financing alternatives, disrupt or changes in circumstances may affectrestrain the estimated undiscounted future operating cash flows expectedscope of our business activities, and would make it more difficult to be derived from our goodwillattract and intangible assets. We have recently experienced substantial declines in our stock price, and continued weakness or further declines in our stock price increase the likelihood that we may be required to recognize impairment charges. Any impairment chargesretain qualified personnel, each of which could have a material adverse effect on our business, financial condition and prospects.
Risks associated with implementing a company-wide enterprise resource planning (ERP) system could adversely affect our business and results of operations or the effectiveness of internal control over financial reporting.
We are preparing to implement a company-wide ERP system to handle the business and financial processes within our operations and corporate functions. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities that can continue for several years. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. Our business and results of operations may be adversely affected if we experience operating problems and/or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect. Additionally, if we do not effectively implement the ERP system as planned or if the system does not operate as intended, our business, results of operations, and internal controls over financial reporting could be adversely affected.
Our business growth strategy involves the potential for significant acquisitions, and our operating results and net assetprospects could be harmed if we are unable to integrate future acquisitions successfully.
We may acquire other businesses to improve our product offerings or expand into new markets. Our future acquisition strategy will depend on our ability to identify, negotiate, complete, and integrate acquisitions and, if necessary, to obtain satisfactory debt or equity financing to fund those acquisitions. Mergers and acquisitions are inherently risky, and any transaction we complete may not be successful. Any merger or acquisition we may pursue would involve numerous risks, including but not limited to the following:
value•difficulties in integrating and managing the quarteroperations, technologies, and products of the companies we acquire;
•diversion of our management’s attention from normal daily operation of our business;
•our inability to maintain the key business relationships and the reputations of the businesses we acquire;
•our inability to retain key personnel of the acquired company;
•uncertainty of entry into markets in which we recognizehave limited or no prior experience and in which competitors have stronger market positions;
•our dependence on unfamiliar affiliates and customers of the companies we acquire;
•insufficient revenue to offset our increased expenses associated with acquisitions;
•our responsibility for the liabilities of the businesses we acquire, including those which we may not anticipate;
•the possibility that we may not realize the value of acquired assets recorded as goodwill or intangible assets, and would be required to incur material charges relating to the impairment charge. of those assets; and
•our inability to maintain internal standards, controls, procedures, and policies.
We may be unable to secure the equity or debt funding necessary to finance future acquisitions on terms that are acceptable to us. If we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders will likely experience dilution, and if we finance future acquisitions with debt funding, we will incur interest expense and may have to comply with financial covenants and secure that debt obligation with our assets.
RISKS RELATED TO OPERATIONS AND RELIANCE ON THIRD PARTIES
We may experience development or manufacturing problems or delays that could limit the potential growth of our revenue or increase our losses.
We may encounter unforeseen situations in the manufacturing and assembly of our products that would result in delays or shortfalls in our production. For example, our production processes and assembly methods may have to change to accommodate any significant future expansion of our manufacturing capacity, which may increase our manufacturing costs, delay production of our products, reduce our product margin, and adversely impact our business. Conversely, if demand for our products shifts such that a manufacturing facility is operated below its capacity for an extended period, we may adjust our manufacturing operations to reduce fixed costs, which could lead to uncertainty and delays in manufacturing times and quality during any transition period.
Additionally, all of our integrated fluidic circuits (IFCs) for commercial sale are manufactured at our facility in Singapore. Production of the elastomeric block that is at the core of our IFCs is a complex process requiring advanced clean rooms, sophisticated equipment, and strict adherence to procedures. Any contamination of the clean room, equipment malfunction, or failure to strictly follow procedures can significantly reduce our yield in one or more batches. We have in the past experienced variations in yields due to such factors. A drop in yield can increase our cost to manufacture our IFCs or, in more severe cases, require us to halt the manufacture of our IFCs until the problem is resolved. Identifying and resolving the cause of a drop in yield can require substantial time and resources.
Furthermore, developing an IFC for a new application may require developing a specific production process for that type of IFC. While all of our IFCs are produced using the same basic processes, significant variations may be required to ensure adequate yield of any particular type of IFC. Developing such a process can be time consuming, and any unexpected difficulty in doing so can delay the introduction of a product.
If our manufacturing activities are adversely impacted, or if we are otherwise unable to keep up with demand for our products by successfully manufacturing, assembling, testing, and shipping our products in a timely manner, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products.
Our business depends on research and development spending levels of our customers, a reduction in which could limit our ability to sell our products and adversely affect our business.
We expect that our revenue in the foreseeable future will continue to be derived primarily from sales of our systems, IFCs, assays, and reagents to academic research institutions, translational research and medicine centers, cancer centers, clinical research laboratories biopharmaceutical, biotechnology, and plant and animal research companies, and contract research organizations worldwide. Our success will depend upon their demand for and use of our products. Accordingly, the spending policies and practices of these customers—which have been impacted by the COVID-19 pandemic and may additionally be impacted by other factors—have had and will continue to have a significant effect on the demand for our technology. These policies may be based on a wide variety of factors, including concerns regarding any future federal government budget sequestrations, the availability of resources to make purchases, the spending priorities among various types of equipment, policies regarding spending during recessionary periods, tariffs and trade restrictions, and changes in the political climate. In addition, academic, governmental, and other research institutions that fund research and development activities may be subject to stringent budgetary constraints that could result in spending reductions, reduced allocations, or budget cutbacks, which could jeopardize the ability of these customers to purchase our products. Our operating results have fluctuated and may continue to fluctuate substantially due to reductions and delays in research and development expenditures by our customers. For example, reductions in operating expenditures by global academic research facilities because of the COVID-19 pandemic have resulted in lower than expected sales of our mass cytometry instruments. Additionally, the imposition of tariffs and delays in issuing VAT and import tax exemptions have adversely affected the sales of our products in China. Similar reductions and delays in customer spending have resulted and may continue to result from other factors that are not within our control, such as:
•changes in economic conditions;
•natural disasters or public health crises;
•changes in government programs that provide funding to research institutions and companies;
•macroeconomic conditions and the political climate;
•governmental protectionism, the escalation of tariffs and other trade barriers;
•availability of tax permits and incentives, including VAT and import tax exemptions;
•changes in the regulatory environment affecting life science and plant and animal research companies engaged in research and commercial activities;
•changes in our customers’ research priorities;
•differences in budget cycles across various geographies and industries;
•personnel shortages among our customers;
•market-driven pressures on companies to consolidate operations and reduce costs;
•mergers and acquisitions in the life science and plant and animal research industries; and
•other factors affecting research and development spending.
Any decrease in our customers’ budgets or expenditures or in the size, scope, or frequency of capital or operating expenditures, as well as any increase in local tariffs could materially and adversely affect our operations or financial condition.
If one or more of our manufacturing facilities become unavailable or inoperable, we will be unable to continue manufacturing our instruments, IFCs, assays and/or reagents and, as a result, our business will be harmed until we are able to secure a new facility.
We manufacture our microfluidics analytical and preparatory instruments and IFCs for commercial sale at our facility in Singapore and our mass cytometry instruments, assays, and reagents for commercial sale at our facility in Canada. No other manufacturing facilities are currently available to us, particularly facilities of the size and scope of our Singapore and Canada operations. Our facilities and the equipment we use to manufacture our instruments, IFCs, assays, and reagents would be costly to replace and could require substantial lead times to repair or replace. Our facilities may be harmed or rendered inoperable by natural or man-made disasters, which may render it difficult or impossible for us to manufacture our products for some period of time. If any of our facilities become unavailable to us, we cannot provide assurances that we will notbe able to secure a new manufacturing facility on acceptable terms, if at all. The inability to manufacture our products, combined with our limited inventory of manufactured supplies, may result in the loss of customers or harm our reputation, and we may be unable to reestablish relationships with those customers in the future. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. If our manufacturing capabilities are impaired, we may not be able to manufacture and ship our products in a timely manner, which would adversely impact our business.
Disruption of our manufacturing facilities or other operations, or in the operations of our customers or business partners, due to earthquake, flood, other natural catastrophic events, public health crises, or terrorism could result in cancellation of orders, delays in deliveries or other business activities, or loss of customers and could seriously harm our business.
We have significant manufacturing operations in Singapore and Canada and operations in the United States. In addition, our business is international in nature, with our sales, service and administrative personnel and our customers located in numerous countries throughout the world. Operations at our manufacturing facilities and our subcontractors, as well as our other operations and those of our customers, are subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, public health crises (including the ongoing COVID-19 pandemic), fire, earthquake, volcanic eruptions, energy shortages, flooding, or other natural disasters. Such disruption could cause delays in, among other things, shipments of products to our customers, our ability to perform services requested by our customers, or the installation of our products at customer sites.
We cannot provide any assurance that alternate means of conducting our operations (whether through alternate production capacity or service providers or otherwise) would be available if a major disruption were to occur or that, if such alternate means were available, they could be obtained on favorable terms.
We rely on a limited number of third-party suppliers for some of the components and materials used in our products, and the loss of any of these suppliers, or delays or problems in the supply of components and materials could harm our business.
We rely on a limited number of third-party suppliers for certain components and materials used in our products, including single and sole source suppliers. Additionally, several of our instruments are assembled at the facilities of contract manufacturers in Singapore. We do not have long-term contracts with our suppliers of these components and materials or our assembly service providers. The loss of a single or sole source supplier of any of the following components and/or materials would require significant time and effort to locate and qualify an alternative source of supply, if at all:
•The IFCs used in our microfluidic systems are fabricated using a specialized polymer, and other specialized materials, that are available from a limited number of sources. In the past, we have encountered quality issues that have reduced our manufacturing yield or required the use of additional manufacturing processes.
•The electron multiplier detector included in the Hyperion/Hyperion+/CyTOF/CyTOF XT systems and certain metal isotopes used with the Hyperion/Hyperion+/CyTOF/CyTOF XT systems are purchased from sole source suppliers.
•The raw materials for our Delta Gene and SNP Type assays and Access Array target-specific primers are available from a limited number of sources.
Our reliance on single and sole source suppliers and assembly service providers also subjects us to other risks that could harm our business, including the following:
•we may be subject to increased component or assembly costs and
•we may not be able to obtain adequate supply or services in a timely manner or on commercially reasonable terms.
If, as a result of global economic or political instability or health pandemics, such as the ongoing escalation of the situation in Ukraine or the COVID-19 pandemic, our suppliers experience shortages or delays for materials sourced or manufactured in the affected countries, their ability to supply us with instruments or product components may be affected. If any of these events occur, our business and operating results could be harmed. In connection with the global supply chain disruptions following the onset of the COVID-19 pandemic, we have experienced and are continuing to experience problems with some of our suppliers. In the third quarter of 2021, shortages of certain components caused a backlog and we were unable to fulfill all of the demand for our products during the quarter. We have in the past experienced supply issues, as well as quality control problems such as manufacturing errors, with some of our suppliers, and may again experience problems in the future. We may not be able to quickly establish additional or replacement suppliers, particularly for our single source components, or assembly service providers. Any continued or future interruption or delay in the supply of components or materials or assembly of our instruments, or our inability to obtain components, materials, or assembly services from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products, which would harm our business. In response to surges in COVID-19 infections, the Chinese government imposed lockdowns in certain parts of the country, which may negatively impact manufacturing and/or supply chains.
We may not be requiredable to recognize impairment charges.convert our orders in backlog into revenue.
Our backlog represents product orders from our customers that we have confirmed but have not been able to fulfill, and, accordingly, for which we have not yet recognized revenue. We may not receive revenue from these orders, and any order backlog we report may not be indicative of our future revenue.
Many events can cause an order to be delayed or not completed at all, some of which may be out of our control, including the potential impacts from the COVID-19 pandemic and our suppliers not being able to provide us with products or components. If we delay fulfilling customer orders or if customers reconsider their orders, those customers may seek to cancel or modify their orders with us. Customers may otherwise seek to cancel or delay their orders even if we are prepared to fulfill them. If our orders in backlog do not result in sales, our operating results may suffer.
Any disruption or delay in the shipping or off-loading of our products, whether domestically or internationally, may have an adverse effect on our financial condition and results of operations.
We rely on shipping providers to deliver products to our customers globally. Labor, tariff, or World Trade Organization-related disputes, piracy, physical damage to shipping facilities or equipment caused by severe weather or terrorist incidents, congestion at shipping facilities, complications related to public health crises (including the ongoing COVID-19 pandemic), inadequate equipment to load, dock, and offload our products, energy-related tie-ups, or other factors could disrupt or delay shipping or off-loading of our products domestically and internationally. Such disruptions or delays may have an adverse effect on our financial condition and results of operations.
Our business operations are dependentdepend upon the continuing efforts of our new senior management team and the ability of our other new employees to learn their new roles. Ifskilled and experienced personnel, and if we are unable to retain them or to recruit and retaintrain new key executives, scientists, and technical support personnel, we may be unable to achieve our goals.
Our performance is substantially dependentsuccess depends largely on the skills, experience, and performance of our senior management, which has substantially changed over the last year, including, for example, a change in our chief executive officer in October 2016. In addition to our chief executive officer, several other members of our senior management team have started at Fluidigm since mid-2016. As new employees gain experience in their roles, we could experience inefficiencies or a lack of business continuity due to loss of historical knowledge and a lack of familiarity of new employees with business processes, operating requirements, policiesscientific and procedures, and we may experience additional costs as new employees learn their roles and gain necessary experience. It is important to our success that these key employees quickly adapt to and excel in their new roles. If they are unable to do so, our business and financial results could be materially adversely affected. In addition, thetechnical support personnel. The loss of the services of any membercertain members of our senior management team or our scientific or technical support staff might significantly delay or prevent the development of our products or achievement of other business objectives by diverting management’s attention to transition matters and identification of suitable replacements, if any, and staffing shortages could have a material adverse effect onalso negatively impact our ability to expand and scale functions that are needed to support the development of our products and the growth of our business. Our research and product development efforts could also be delayed or curtailed if we are unable to attract, train, and retain highly skilled employees, particularly, senior scientists and engineers. Competition for qualified senior management and key employees in our industry is intense. This competition has become exacerbated by the increase in employee resignations reported by employers nationwide in 2021 and continued high rates of employee turnover continuing into 2022. The loss of qualified employees, or an inability to attract, retain, and motivate employees could prevent us from pursuing collaborations and materially and adversely affect our support of existing products, product development and introductions, business growth prospects, results of operations and financial condition. We have experienced increased turnover at all levels since the start of the COVID-19 pandemic and general labor shortages in various areas of our business, all of which could have a material adverse impact on our business. We may need to increase employee wages and benefits in order to attract and retain the personnel necessary to achieve our goals, and our business, operations, and financial results may suffer if we are unable to do so. Attrition and workforce reductions, such as the August 2022 restructuring plan, including the related reduction in force, could adversely affect our reputation among job seekers, and our existing employees may experience distractions or decreases in employee morale, and result in a loss of institutional know-how, reduced productivity, slower customer service response, reduced effectiveness of internal compliance and risk-mitigation programs, and cancellations of or delays in completing new product developments and other strategic projects. We do not maintain fixed term employment contracts or significant key manperson life insurance with any of our employees.
employees and all our employees, including our management team, may terminate employment without notice and without cause or good reason.
Additionally, to expand our research and product development efforts, we need to retain and recruit key scientists skilled in areas such as molecular and cellular biology, assay development, engineering physics, and manufacturing. We also need highly trained technical support personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively support potential new customers and the expanding needs of current customers. Competition for these personnelpeople is intense and we may face challenges in retaining and recruiting such individuals if, for example, our stock price declines, reducing the retention value of equity awards, or our business or technology is no longer perceived as leading in our field. Because of the complex and technical nature of our systems and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our technology.
If we are unable to expand our direct sales, field support, and marketing forces or distribution capabilities to adequately address our customers’ needs, our business will be adversely affected.
We may not be able to market, sell, and distribute our products effectively enough to support our planned growth. We sell our products primarily through our own sales force and through distributors in certain territories. Our efficiencyfuture sales will depend in large part on our ability to continue to increase the scope of our marketing efforts and cost-savings initiatives coulddevelop and substantially expand our direct sales force and field application specialist and service engineer teams. Our products are technically complex and used for highly specialized applications. As a result, we believe it is necessary to continue to develop a direct sales force that includes people with specific scientific backgrounds and expertise, and a marketing group with technical sophistication.
In the past year, we have experienced significant changes and increased turnover in our sales and marketing organizations, and we face considerable challenges in recruiting and training qualified replacements. Our future success will depend largely on our ability to recruit, retain, and motivate the skilled sales and marketing force necessary to support our business activities, and any failure to maintain competitive levels of compensation will negatively impact our ability to so. Because competition for such employees is intense, we can provide no assurance that we will be disruptiveable to retain them on favorable or commercially reasonable terms, if at all. Failure to attract and retain our operationscurrent personnel or to build an efficient and adversely affecteffective sales and marketing force would negatively impact sales of our resultsproducts and reduce our revenue and profitability.
In addition, we may continue to enlist one or more sales representatives and distributors to assist with sales, distribution, and customer support globally or in certain regions of operations and financial condition, andthe world. If we do seek to enter into such arrangements, we may not realize somebe successful in attracting desirable sales representatives and distributors, or all of the anticipated benefits of these initiatives in the time frame anticipated or at all.
Beginning in the first quarter of 2017, we implemented efficiency and cost-savings initiatives intended to stabilize our business operations and return to growth. We identified areas for cost efficiencies including targeted workforce reductions and optimizing our facilities, and reducing excess space. Other initiatives may also include decreasing or deferring capital expenditures and development activities. The implementation of these efficiency and cost-savings initiatives, including the impact of workforce reductions, could impair our ability to invest in developing, marketing and selling new and existing products, be disruptive to our operations, make it difficult to attract or retain employees, result in higher than anticipated charges, divert the attention of management, result in a loss of accumulated knowledge, impact our customer and supplier relationships, and otherwise adversely affect our results of operations and financial condition. In addition, our ability to complete our efficiency and cost-savings initiatives and achieve the anticipated benefits within the expected time frame is subject to estimates and assumptions and may vary materially from our expectations, including as a result of factors that are beyond our control. Furthermore, our efforts to stabilize our business and return to growth may not be successful.able to enter into such arrangements on favorable terms. If our sales and marketing efforts, or those of any third-party sales representatives and distributors, are not successful, our technologies and products may not gain market acceptance, which would materially and adversely impact our business operations.
To use our products, products—our Biomark, EP1, CyTOF, and Helios/CyTOF 2Hyperion systems in particular, particular—customers typically need to purchase specialized reagents. Any interruption in the availability of these reagents for use in our products could limit our ability to market our products.
Our products, our Biomark, EP1, CyTOF, and Helios/CyTOF 2Hyperion systems in particular, must be used in conjunction with one or more reagents designed to produce or facilitate the particular biological or chemical reaction desired by the user. Many of these reagents are highly specialized and available to the user only from a single supplier or a limited number of suppliers. Although we sell reagents for use with certain of our products, our customers may purchase these reagents directly from third-party suppliers, and we have no control over the supply of those materials. In addition, our products are designed to work with these reagents as they are currently formulated. We have no control over the formulation of reagents sold by third-party suppliers, and the
performance of our products might be adversely affected if the formulation of these reagents is changed. If one or more of these reagents were to become unavailable or were reformulated, our ability to market and sell our products could be materially and adversely affected.
In addition, the use of a reagent for a particular process may be covered by one or more patents relating to the reagent itself, the use of the reagent for the particular process, the performance of that process, or the equipment required to perform the process. Typically, reagent suppliers, who are either the patent holders or their authorized licensees, sell the reagents along with a license or covenant not to sue with respect to such patents. The license accompanying the sale of a reagent often purports to restrict the purposes for which the reagent may be used. If a patent holder or authorized licensee were to assert against us or our customers that the license or covenant relating to a reagent precluded its use with our systems, our ability to sell and market our products could be materially and adversely affected. For example, our Biomark system involves real-time quantitative PCR, or qPCR.polymerase chain reaction (qPCR) technology. Leading suppliers of reagents for real-time qPCR reactions include Life Technologies Corporation (now part of Thermo Fisher Scientific)Thermo) and Roche Diagnostics Corporation, who are our direct competitors, and their licensees. These real-time qPCR reagents are typically sold pursuant to limited licenses or covenants not to sue with respect to patents held by these companies. We do not have any contractual supply agreements for these real-time qPCR reagents, and we cannot assure you that these reagents will continue to be available to our customers for use with our systems, or that these patent holders will not seek to enforce their patents against us, our customers, or suppliers.
Security breaches, loss of data, cyberattacks, and other information technology failures could disrupt our operations, damage our reputation, and adversely affect our business, operations, and financial results.
We are dependent upon our data and information technology systems for the effective operation of our business and for the secure maintenance and storage of confidential data relating to our business and third-party businesses. Our information technology systems may be damaged, disrupted or shut down due to attacks by experienced programmers or hackers who may be able to penetrate our security controls and deploy computer viruses, cyberattacks, phishing schemes, or other malicious software programs, or due to employee error or malfeasance, power outages, hardware failures, telecommunication or utility
failures, catastrophes or other unforeseen events, and our system redundancy and other disaster recovery planning may be ineffective or inadequate in preventing or responding to any of these circumstances. Furthermore, there may be a heightened risk of potential cyberattacks by state actors or others since the escalation of the war in Ukraine. Any such compromise of our information technology systems could result in the unauthorized publication of our confidential business or proprietary information and unauthorized release of customer, supplier or employee data, any of which could expose us to a risk of legal claims or proceedings, liability under privacy or other laws, disruption of our operations and damage to our reputation, which could divert our management’s attention from the operation of our business and materially and adversely affect our business, revenues and competitive position. In addition, our liability insurance may not be sufficient in type or amount to cover us against claims related to security breaches, cyberattacks and other related breaches. The cost and operational consequences of implementing further data protection measures, either as a response to specific breaches or as a result of evolving risks, could be significant. In addition, our inability to use or access our information systems at critical points in time could adversely affect the timely and efficient operation of our business. Any delayed sales, significant costs or lost customers resulting from these technology failures could adversely affect our business, operations, and financial results.
We have implemented security controls to protect our information technology infrastructure but, due to the ever-evolving nature of information security threats, we are not fully insulated from technology disruptions that could adversely impact us. For example, in early 2019, we experienced a ransomware attack that infiltrated and encrypted certain of our information technology systems, including systems containing critical business data. Immediately following the attack, actions were taken to recover the compromised systems and we were able to restore their operation without significant loss of business data within weeks. Based on the nature of the attack and its impact on our systems, we believe no confidential data was lost or disclosed. If, however, confidential data were determined to have been released in the course of any future event, it is possible that we could be the subject of actions by governmental authorities or claims from persons alleging they suffered damages from such a release. We believe our mitigation measures and expanded information security program have reduced, but cannot eliminate, the risk of a similar attack, and we anticipate additional work and expense in the future as we continuously improve our security processes and initiatives in response to ever-changing information security challenges.
In addition to risks affecting our own systems, we could also be negatively impacted by a data breach or cyber incident happening to a third party’s network and affecting us. Third parties with which we conduct business have access to certain portions of our sensitive data, including information pertaining to our customers and employees. In the event that these third parties do not adequately safeguard our data, security breaches could result and negatively impact our business, operations, and financial results.
Since the beginning of the COVID-19 pandemic, a significant percentage of our employees has been working remotely. As a result, we may have increased cyber security and data security risks, due to increased use of home wi-fi networks and virtual private networks, as well as increased disbursement of physical machines. While we have implemented security controls, updated our policies, and augmented our information security training program to reduce the risk of cyberattacks and security breaches, there is no guarantee that these measures will be adequate to safeguard all systems with the increased number of employees working remotely.
RISKS RELATED TO QUALITY AND THE REGULATORY ENVIRONMENT
Our products could have defects or errors, which may give rise to claims against us, adversely affect market adoption of our systems, and adversely affect our business, financial condition, and results of operations.
Our systems utilize novel and complex technology and such systems may develop or contain undetected defects or errors. We cannot assure you that material performance problems, defects, or errors will not arise, and as we increase the density and integration of our systems, these risks may increase. We generally provide warranties that our systems will meet performance expectations and will be free from defects. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating margins. For example, we have experienced a performance issue with respect to certain IFCs used in our C1 systems due to the presence of more than one cell in an IFC chamber. Although we have redesigned such C1 IFCs, we may experience additional unexpected product defects or errors that could affect our ability to adequately address these performance issues.
In manufacturing our products, including our systems, IFCs, and assays, we depend upon third parties for the supply of various components, many of which require a significant degree of technical expertise to produce. In addition, we purchase certain products from third-party suppliers for resale. If our suppliers fail to produce components to specification or provide defective products to us for resale and our quality control tests and procedures fail to detect such errors or defects, or if we or our suppliers use defective materials or workmanship in the manufacturing process, the reliability and performance of our products will be compromised.
If our products contain defects, we seekmay experience:
•a failure to achieve market acceptance or expansion of our product sales;
•loss of customer orders and delay in order fulfillment;
•damage to our brand reputation;
•increased cost of our warranty program due to product repair or replacement;
•product recalls or replacements;
•inability to attract new customers;
•diversion of resources from our manufacturing and research and development departments into our service department; and
•legal claims against us, including product liability claims, which could be costly and time consuming to defend and result in substantial damages.
In addition, certain of our products are marketed for use with products sold by third parties. For example, certain of our systems are marketed as compatible with major NGS instruments. If such third-party products are not produced to specification, are produced in accordance with modified specifications, or are defective, they may not be compatible with our products. In such case, the reliability and performance of our products may be compromised.
The occurrence of any one or more of the foregoing could negatively affect our business, financial condition, and results of operations.
Although the FDA granted Emergency Use Authorization (EUA) for our Advanta Dx SARS-CoV-2 RT-PCR Assay in August 2020 (which was updated for use with the AZOVA COVID-19 Test Collection Kit in February 2021, among other updates) and our Advanta Dx COVID-19 EASE Assay in February 2022, these authorizations are only valid during the COVID-19 public health emergency, and when the federally declared public health emergency ends, we will be required to stop commercial distribution of our assay and the collection kit immediately in the United States unless we comply with FDA requirements, which may include obtaining FDA clearance or approval for our assay under a traditional regulatory pathway for in vitro diagnostics, which is lengthy and expensive.
Under section 564 of the Federal Food, Drug, and Cosmetic Act (FD&C Act), the FDA has authority to allow certain unapproved medical products or unapproved uses of approved medical products to be regulated asused during a medical device manufacturerpublic health emergency under an EUA. In issuing an EUA, the FDA will consider the totality of scientific evidence available to the FDA regarding safety, efficacy and known and potential risks of such products and availability of alternatives to the emergency use products, among others. EUAs issued by the U.S. FoodFDA will specify the scope of authorization and Drug Administration,conditions of authorization, including limitations on distribution and conditions related to product advertising and promotion. Once granted, an EUA is effective until the declaration that circumstances exist justifying the authorization of the emergency use is terminated under Section 564(b)(2) of the FD&C Act or the EUA is revoked under Section 564(g) of the FD&C Act, after which the product must be cleared or approved by the FDA under a traditional pathway as defined by the FDA and we must comply with the FDA quality system regulations in order to remain on the market or to continue commercialization of the product.
In August 2020, the FDA granted EUA for our Advanta Dx SARS-CoV-2 RT-PCR Assay for qualitative detection of nucleic acid from SARS-CoV-2 in saliva specimens from individuals suspected by their healthcare providers of having COVID-19, with the use of the assay limited to CLIA high complexity laboratories. Four supplements have been submitted and authorized as follows: S001 for addition of the FDA Reference Panel Results, S002 for software updates and labeling changes, S003 for addition of alternative source of targets and labeling updates, and S004 for addition of AZOVA home collection kit. In February 2021, the FDA updated that EUA for our Advanta Dx SARS-CoV-2 RT-PCR Assay for use with the AZOVA COVID-19 Test Collection Kit, which is authorized for self-collection of saliva specimens at home. In February 2022, we were granted EUA for our the Advanta Dx COVID-19 EASE Assay, which is authorized for the qualitative detection of nucleic acid from SARS-CoV-2 in nasopharyngeal swab, oropharyngeal swab, mid-turbinate nasal swab, and anterior nasal swab specimens from individuals suspected of COVID-19 by their healthcare provider. As set forth in each EUA, we are required to comply with the conditions of authorization, including certain requirements pertaining to FDA notification, distribution, printed materials, advertising and promotion. If we, our distributors, or authorized laboratories do not comply with the EUA requirements, our business, financial condition and results of operations may be adversely impacted, and we may be subject to regulatory or enforcement actions, including recall of our products and the issuance of an untitled letter, a warning letter, penalties, or fines, among other adverse actions.
If the FDA’s policies and guidance change unexpectedly and/or materially or if we misinterpret them, potential sales of Advanta Dx SARS-CoV-2 RT-PCR and the AZOVA COVID-19 Test Collection Kit could be adversely impacted. In addition,
the FDA will revoke an EUA where it is determined that the underlying public health emergency no longer exists or warrants such authorization, or if new evidence becomes available that indicates the test does not meet the conditions of authorization or perform as provided in the EUA application. We cannot predict how long this EUA will remain effective. The termination or revocation of the EUA and changing policies and regulatory requirements could adversely impact our business, financial condition and results of operations. The demand for our product and our profitability may decline or be adversely impacted by the federal government’s implementation of a national COVID-19 testing strategy. Given the uncertain nature of the COVID-19 pandemic and future legislation and regulation in this space, we can provide no assurance with respect to our ability to achieve or sustain profitability on a quarterly or annual basis.
The healthcare industry is highly regulated and if we fail to comply with applicable healthcare laws and regulations, we could suffer fines and penalties or be required to make significant changes to our operations which could have a significant adverse effect on the results of our business operations.
We compete in markets in which we or our customers must comply with federal, state, local and foreign regulations, such as healthcare fraud and abuse, data privacy and medical product laws and regulations. The healthcare industry is subject to extensive and frequently changing international and United States federal, state and local laws and regulations. In addition, federal and state enforcement agencies have substantial powers and remedies to pursue suspected violations under broad laws and regulations relating to healthcare fraud and abuse, interactions and financial arrangements with healthcare professionals or entities, data privacy and misconduct involving government programs or contracts. If we, our employees, collaborators or contractors fail to comply with applicable laws and regulations, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in governmental healthcare programs, and the loss of various licenses and authorizations necessary to operate our business, as well as incur liabilities from third-party claims, all of which could have a significant adverse effect on our business.
To the extent we elect to label and promote any of our non-EUA products as medical devices, we would be required to obtain prior approval or clearance by the FDA or comparable foreign regulatory authorities, and seek approval and/or clearance for our products, the regulatory approval process wouldauthority, which could take significant time and expense and could fail to result in FDA clearance or approvala marketing authorization for the intended uses we believe are commercially attractive. IfObtaining marketing authorization in one jurisdiction does not mean that we will be successful in obtaining marketing authorization in other jurisdictions where we conduct business.
Except for the Advanta Dx SARS-CoV-2 RT-PCR Assay and the AZOVA COVID-19 Test Collection Kit authorized by the FDA under an EUA granted in August 2020 and updated in February 2021, among other updates, and our products were successfully approved and/or cleared, we would be subject to ongoing and extensive regulatory requirements, which would increaseAdvanta Dx COVID-19 EASE Assay authorized by the FDA under an EUA granted in February 2022, our costs and divert resources away from other projects. If we obtained FDA clearance or approval and we failed to comply with these requirements, our business and financial condition could be adversely impacted.
Our products are currently labeled, promoted and sold to academic research institutions, life sciencestranslational research and medicine centers, cancer centers, clinical research laboratories, contract research organizations, and biopharmaceutical, biotechnology, Ag-Bioand plant and animal research companies and CRO's for researchas “research use only, or RUO,only” (RUO), and are not designed, for, or intended to be used, for clinical diagnostic tests or as medical devices as currently marketed. BeforeIf we can beginelect to label and market our products for use as, or in the performance of, clinical diagnostics in the United States, thereby subjecting them to FDA regulation as medical devices, we would be required to obtain premarket 510(k) clearance or premarket approval (PMA) from the FDA, unless an exception applies.
We may in the future registerare currently registered with the FDA as a medical device manufacturer, with the reagents for the Advanta Dx SARS-CoV-2 RT-PCR Assay listed as our sole medical device product. As noted in the issued EUA for the Advanta Dx SARS-CoV-2 RT-PCR Assay (including the EUA update for use with the AZOVA COVID-19 Test Collection Kit, among other updates) and the issued EUA for the Advanta Dx COVID-19 EASE Assay, the FDA has waived certain quality system requirements under 21 CFR Part 820 for the duration of each EUA. We may in the future list some of our other products with the FDA pursuant to an FDA Class I listing for general purpose laboratory equipment if we pursue clinical applications for such equipment. We are currently assessing whether and when to make an initial registration. While this regulatory classification is generally exempt from certain FDA requirements, such as the need to submit a premarket notification commonly known as a 510(k), and some of the requirements of the FDA’s Quality System Regulations or QSRs,(QSRs), we would be subject to ongoing FDA “general controls,” which include compliance with FDA regulations for labeling, inspections by the FDA, complaint evaluation, corrections and removals reporting, promotional restrictions, reporting adverse events or malfunctions for our products, and general prohibitions against misbranding and adulteration.
If we do not comply with all the requirements of the EUA or the normal regulatory requirements for any of our medical device products, including additional regulatory requirements that would apply to the Advanta Dx SARS-CoV-2 RT-PCR Assay and the AZOVA COVID-19 Test Collection Kit after the expiration or termination of the EUA, we may be subject to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, penalties, or fines, among other adverse actions, any of which may adversely impact our business, financial condition and results of operations. Compliance with additional or changing regulatory requirements can be time-consuming and costly.
In addition, we may in the future submit 510(k) premarket notifications to the FDA to obtain FDA clearance of certain of our products on a selected basis. It is possible, in the event we elect to submit 510(k) applications for certain of our products,
that the FDA would take the position that a more burdensome premarket application, such as a premarket approval application or a de novo application is required for some of our products. If such applications were required, greater time and investment would be required to obtain FDA approval. Even if the FDA agreed that a 510(k) was appropriate, FDA clearance can be expensive and time consuming. It generally takes a significant amount of time to prepare a 510(k), including conducting appropriate testing on our products, and several months to years for the FDA to review a submission. Notwithstanding the effort and expense, FDA clearance or approval could be denied for some or all of our products. Even if we were to seek and obtain regulatory approval or clearance, it may not be for the intended uses we believe are important or commercially attractive.
If we sought and received regulatory clearance or approval for certain of our products, we would be subject to ongoing FDA obligations and continued regulatory oversight and review, including the general controls listed above and the FDA’s QSRs for our development and manufacturing operations. In addition, we would be required to obtain a new 510(k) clearance before we could introduce subsequent material modifications or improvements to such products. We could also be subject to additional FDA post-marketing obligations for such products, any or all of which would increase our costs and divert resources away from other projects.If we sought and received regulatory clearance or approval and are not able to maintain regulatory compliance with
applicable laws, we could be prohibited from marketing our products for use as, or in the performance of, clinical diagnostics and/or could be subject to enforcement actions, including warning letters and adverse publicity, fines, injunctions, and civil penalties; recall or seizure of products; operating restrictions; and criminal prosecution.
In addition, to the extent we could decide to seek similar regulatory clearance or approvalmarketing authorization for certain of our products in countries outside of the United States.States, we or our partners, or collaborators, will need to obtain regulatory marketing authorization for our products for the intended use in the jurisdiction where such products will be marketed. Regulatory clearance or approval in one jurisdiction does not mean that we will be successful in obtaining regulatory marketing authorization in other jurisdictions where we conduct business. Sales of such products outside the United States will likely be subject to foreign regulatory requirements, which can vary greatly from country to country. As a result, the time required to obtain clearances or approvals outside the United States may differ from that required to obtain FDA clearance or approval and we may not be able to obtain foreign regulatory approvals on a timely basis or at all. Clearance or approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA. In Europe, we would need to comply with the Medical Device Directive 93/42 EEC and/or the In Vitro Diagnostics Directive 98/79/EC, which are required to market medical devices in the European Union. In addition, the FDA regulates exports of medical devices. Failure to comply with these regulatory requirements or obtain and maintain required approvals, clearances and certifications could impair our ability to commercialize our products for diagnostic use outside of the United States.
In February 2021, we announced a supply and distribution agreement to market our CyTOF technology, panels, and reagents to clinical labs in China.As part of the agreement, we are working to seek National Medical Products Administration (NMPA) approval for our CyTOF instrument for diagnostic use in China.As we increase our operations outside of the United States, our compliance and operational costs will increase, and we will be exposed to greater liability under additional laws and regulations.
Our products could become subject to regulation as medical devices by the FDA or other regulatory agencies beforeeven if we have obtaineddo not elect to seek regulatory clearance or approval to market our products for diagnostic purposes, which would adversely impact our ability to market and sell our products and harm our business.
As products that are currently labeled, promoted and intended foras RUO, our products are not currently subject to regulation as medical devices by the FDA or comparable agencies of other countries. However, the FDA or comparable agencies of other countries could disagree with our conclusion that our products are currently intended for research use only or deem our current sales, marketing and promotional efforts as being inconsistent with research use only products. For example, our customers may independently elect to use our research use only labeled products in their own laboratory developed tests or LDTs,(LDTs) for clinical diagnostic use. The FDA has historically exercised enforcement discretion in not enforcing the medical device regulations against laboratories offering LDTs. However, on October 3, 2014, the FDA issued two draft guidance documents that set forth the FDA’s proposed risk-based framework for regulating LDTs, which are designed, manufactured, and used within a single laboratory. The draft guidance documents provide the anticipated details through which the FDA would propose to establish an LDT oversight framework, including premarket review for higher-risk LDTs, such as those that have the same intended use as FDA-approved or cleared companion diagnostic tests currently on the market. In January 2017, the FDA announced that it would not issue final guidance on the oversight of LDTs and LDT manufacturers of products used for LDTs, but would seek further public discussion on an appropriate oversight approach, and give Congress an opportunity to develop a legislative solution. More recently, the FDA has issued warning letters to certain genomics labs for illegally marketing genetic tests that claim to predict patients’ responses to specific medications, noting that the FDA has not created a legal “carve-out” for LDTs and retains discretion to take action when appropriate, such as when certain genomic tests raise significant public health concerns. As manufacturers develop more complex genetic tests and diagnostic software, the FDA may increase its regulation of LDTs. Any future legislative or administrative rule making or oversight of LDTs, and LDT manufacturers, if and when finalized, may impact the sales of our products and how customers use our products, and may require us to change our business model in order to maintain compliance with these laws. We cannot predict how these various efforts will be resolved, how Congress or the FDA will regulate LDTs in the future, or how that regulatory system will impact our business.
Additionally, on November 25, 2013, the FDA issued Final Guidance “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only.” The guidance emphasizes that the FDA will review the totality of the circumstances when it comes to evaluating whether equipment and testing components are properly labeled as RUO. The final guidance states that merely including a labeling statement that the product is for research purposes only will not necessarily render the device exempt from the FDA’s clearance, approval, and other regulatory requirements if the circumstances surrounding the distribution, of the productmarketing and promotional practices indicate that the manufacturer knows its product is,products are, or intends for its productproducts to be, used for clinical diagnostic purposes. These circumstances may include written or verbal sales and marketing claims or links to articles regarding a product’s performance in clinical applications and a manufacturer’s provision of technical support for clinical applications.
In August 2020, as part of the U.S. government’s efforts to combat COVID-19 and consistent with the direction in Executive Orders 13771 and 13924, the Department of Health and Human Services (HHS) announced rescission of guidances and other informal issuances of the FDA regarding premarket review of LDTs absent notice-and-comment rulemaking, stating that, absent notice-and-comment rulemaking, those seeking approval or clearance of, or an emergency use authorization, for an LDT may nonetheless voluntarily submit a premarket approval application, premarket notification or an EUA request, respectively, but are not required to do so. However, laboratories opting to use LDTs without FDA premarket review or authorization would not be eligible for liability protection under the Public Readiness and Emergency Preparedness Act, or the PREP Act. In November 2021, HHS under the Biden administration issued a statement that withdrew the August 2020 policy announcement, stating that HHS does not have a policy on LDTs that is separate from FDA’s longstanding approach. The FDA also issued a revised version of its COVID-19 test policy that states the FDA expects newly offered COVID-19 tests, including LDTs, to have an EUA, or traditional marketing authorization such as a granted De Novo or cleared 510(k), prior to clinical use. Further, in June 2021, Congress introduced an updated legislation called the Verifying Accurate, Leading-edge IVCT Development Act (VALID Act), which, if enacted, will establish a new risk-based regulatory framework for in vitro clinical tests (IVCTs), which include IVDs, LDTs, collection devices, and instruments used with such tests, and a technology certification program, among other proposals. The adoption of new restrictions on IVDs, LDTs, or RUOs, whether by the FDA or Congress, could adversely affect our ability to commercialize our products and the demand for our specialized reagents and instruments. Further, we could be required to obtain premarket clearance or approval from the FDA before we can sell our products to certain customers.
If the FDA modifies its approach to our products labeled and intended for RUO, or otherwise determines our products or related applications should be subject to additional regulation as in vitro diagnostic devices based upon customers’ use of our products for clinical diagnostic or therapeutic purposes, before we have obtained regulatory clearance or approval to market our products for diagnosticdecision-making purposes, our ability to market and sell our products could be impeded and our business, prospects, results of operations and financial condition may be adversely affected. In addition, if the FDA determines thatcould consider our products labeled for RUO were intended, based on a review of the totality of circumstances, for use in clinical investigation or diagnosis, those products couldto be considered misbranded or adulterated under the Federal Food, Drug, and Cosmetic Act and subject to recall and/or other enforcement action.
Compliance or the failure to comply with current and future regulations affecting our products and business operations worldwide, such as environmental regulations enacted in the European Union, could cause us significant expense and adversely impact our business.
We are subject to many federal, state, local, and foreign regulations relating to various aspects of our business operations. Governmental entities at all levels are continuously enacting new regulations, and it is difficult to identify all applicable regulations and anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with applicable regulations. To comply with applicable regulations, we have and will continue to incur significant expense and allocate valuable internal resources to manage compliance-related issues. In addition, such regulations could restrict our ability to expand or equip our facilities, or could require us to acquire costly equipment or to incur other significant expenses to comply with the regulations. For example, the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive or RoHS,(RoHS) and the Waste Electrical and Electronic Equipment Directive or WEEE,(WEEE), both enacted in the European Union, regulate the use of certain hazardous substances in, and require the collection, reuse, and recycling of waste from, products we manufacture. Certain of our products sold in these countries are subject to WEEE requirements may become subject toand RoHS. These and similar regulations that have been or are in the process of being enacted in other countries may require us to redesign our products, use different types of materials in certain components, or source alternative components to ensure compliance with applicable standards, and may reduce the availability of parts and components used in our products by negatively impacting our suppliers’ ability to source parts and components in a timely and cost-effective manner.
The Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) regulation (EC) No. 1907/206 is the European Union’s regulation on chemicals and their safe use. The list of chemicals has been updated and some of the updates affect chemicals used in our products. We will request a research exception, but if not granted, we will need to reduce the concentration of some of the chemicals in our products, which will require significant research and development and operations efforts.
Any such redesigns, required use of alternative materials, or limited availability of parts and components used in our products may detrimentally impact the performance of our products, add greater testing lead times for product introductions, reduce our product margins, or limit the markets for our products, and if we fail to comply with any present and future regulations, we could be subject to future fines, penalties, and restrictions, such as the suspension of manufacturing of our products or a prohibition on the sale of products we manufacture. Any of the foregoing could adversely affect our business, financial condition, or results of operations.
RISKS RELATED TO ECONOMIC CONDITIONS AND OPERATING A GLOBAL BUSINESS
We generate a substantial portion of our revenue internationally and our international business exposes us to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States.
During the years 2021, 2020, and 2019, approximately 56%, 54%, and 63% respectively, of our product and service revenue was generated from sales to customers located outside of the United States. We believe that a significant percentage of our future revenue will continue to come from international sources as we expand our international operations and develop opportunities in other countries. Engaging in international business inherently involves a number of difficulties and risks, including:
•required compliance with existing and changing foreign regulatory requirements and laws that are or may be applicable to our business in the future, such as the European Union’s General Data Protection Regulation, the California Consumer Privacy Act, and other data privacy requirements, labor and employment regulations, anticompetition regulations, the U.K. Bribery Act of 2010 and other anticorruption laws, and the RoHS and WEEE directives and REACH regulation, which regulate the use and importation of certain hazardous substances in, and require the collection, reuse, and recycling of waste from, products we manufacture;
•required compliance with U.S. laws such as the Foreign Corrupt Practices Act, and other U.S. federal laws and regulations established by the Office of Foreign Assets Control;
•export requirements and import or trade restrictions;
•laws and business practices favoring local companies;
•longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
•changes in social, economic, and political conditions or in laws, regulations and policies governing foreign trade, manufacturing, development, and investment both domestically as well as in the other countries and jurisdictions in which we operate and into which we sell our products, including as a result of the separation of the United Kingdom from the European Union (Brexit) or the Russian invasion of Ukraine;
•business interruptions and travel restrictions resulting from global sociopolitical events, including war and terrorism, public health crises (including the ongoing COVID-19 pandemic), and natural disasters including earthquakes, typhoons, floods and fires;
•potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements, and other trade barriers;
•difficulties and costs of staffing and managing foreign operations; and
•difficulties protecting or procuring intellectual property rights.
Since the beginning of the COVID-19 pandemic, travel restrictions have caused significant slowdowns in China, Japan, and other parts of the Asia-Pacific region. These slowdowns, in addition to shipment delays in China due to delays in obtaining VAT and import tax exemptions for our products, have caused our financial results to suffer. If these situations continue, or if other risks occur, we could be forced to dedicate significant resources to their resolution, and if we are unsuccessful in finding a solution, our financial condition and results will suffer.
In addition, political instability, civil unrest, the deterioration of the political situation in a country in which we have significant sales or operations, or the breakdown of trade relations between the United States and a foreign country in which we have significant operations, could adversely affect our business, financial condition, and results of operations. For example, a change in trade status between the United States and a foreign country could result in a substantial increase in the import duty of products manufactured in that foreign country and imported into the United States. The United States has commenced certain trade actions, including imposing increased tariffs on certain goods imported into the United States from China, which has resulted in retaliatory tariffs by China. In addition, the United States has commenced certain trade actions as a result of the
Russian invasion of Ukraine, which are widely expected to result in retaliatory measures or actions, including tariffs, by Russia. Any increased trade barriers or restrictions on global trade imposed by the United States, or further retaliatory trade measures taken by China, Russia, or other countries in response, could adversely affect our business, financial condition, and results of operations.
Our business is subject to a variety of new U.S. and foreign export controls and economic sanctions regulations that were issued in response to Russia’s invasion of Ukraine; our failure to comply with these laws and regulations could harm our business.
Due to recent regulations, U.S. companies can no longer provide or receive services or conduct any business with, including selling, shipping, or otherwise transferring any U.S.-controlled products to, the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine. Additionally, existing U.S. sanctions continue to extend these prohibitions to the Crimea region of Ukraine. Our business is also subject to the expansion of previously existing sanctions imposed by the Treasury Department’s Office of Foreign Assets Controls that now cover a significant number of individuals and entities located in Russia, Belarus, and surrounding regions as well as new U.S. export controls imposed by the U.S. Department of Commerce’s Export Administration Regulations on exports to Russia. These laws and regulations cover U.S. persons as well as U.S.-controlled products, software, and technologies wherever located. Failure to comply with U.S. and foreign export control and economic sanctions laws and regulations can result in criminal sanctions, civil fines, debarment from government contracting, the loss of export privileges, and, in some cases, imprisonment.
We have implemented new measures to reduce our exposure to this liability. Any additional changes in export control laws, sanctions requirements, or our operations in the affected regions may require us to expend additional resources or to discontinue certain products or services, which would negatively affect our business, financial condition, and operating results.In addition, the increased attention focused upon liability issues as a result of lawsuits, regulatory proceedings, and legislative proposals could damage our brand or otherwise impact the growth of our business. Finally, our ability to receive payment from these regions has been significantly impacted. Any costs incurred or loss of business that occurs as a result of compliance or other liabilities under these laws or regulations could harm our business and operating results.
Adverse conditions in the global economy and disruption of financial markets may significantly harm our revenue, profitability, and results of operations.
Adverse economic conditions in the U.S. and international markets, including the worldwide economic disruption related to the COVID-19 pandemic and related slowdowns in China, Japan, and elsewhere in the Asia-Pacific region, have negatively affected our revenues and operating results and may continue to do so. Even before the current public health crisis took hold, the global credit and financial markets had been experiencing volatility and disruptions, including diminished liquidity and credit availability, increased concerns about inflation and deflation, and the downgrade of U.S. debt and exposure risks on other sovereign debts, decreased consumer confidence, lower economic growth, volatile energy costs, increased unemployment rates, and uncertainty about economic stability. Geopolitical events including the COVID-19 pandemic, the Russian invasion of Ukraine, including any resulting adoption and expansion of trade restrictions by the United States, Russia, and/or China, and Brexit have caused significant economic, market, political and regulatory uncertainty in some of our markets. Volatility and disruption of financial markets could limit our customers’ ability to obtain adequate financing or credit to purchase and pay for our products in a timely manner or to maintain operations, which could result in a decrease in sales volume that could harm our results of operations. General concerns about the fundamental soundness of domestic and international economies may also cause our customers to reduce their purchases. Changes in governmental banking, monetary, and fiscal policies to address liquidity and increase credit availability may not be effective. Significant government investment and allocation of resources to assist the economic recovery of sectors that do not include our customers may reduce the resources available for government grants and related funding for life science, plant and animal research, and clinical research and development. Continuation or further deterioration of these financial and macroeconomic conditions could significantly harm our sales, profitability, and results of operations.
We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies.
A majority of our product sales are currently denominated in U.S. dollars and fluctuations in the value of the U.S. dollar relative to foreign currencies could decrease demand for our products and adversely impact our financial performance. For example, if the value of the U.S. dollar increases relative to foreign currencies, our products could become more costly to the international consumer and therefore less competitive in international markets, or if the value of the U.S. dollar decreases relative to the Singapore dollar or the Canadian dollar, it would become more costly in U.S. dollars for us to manufacture our products in Singapore and/or in Canada. Additionally, our expenses are generally denominated in the currencies of the countries in which our operations are located, which is primarily in the United States, with a portion of expenses incurred in Singapore and Canada where a significant portion of our manufacturing operations are located. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. The volatility of exchange rates
depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in our net income or loss as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. Fluctuations in currency exchange rates could have an adverse impact on our financial results in the future.
FINANCIAL, TAX, AND ACCOUNTING RISKS
Our future capital needs are uncertain and we may need to raise additional funds in the future, which may cause dilution to stockholders or may be upon terms that are not favorable to us.
We believe our existing cash, cash equivalents, and short-term investments, along with funding available under the Revolving Credit Facility, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, we have continued to experience losses and, if that trend continues, we may need to seek additional sources of financing. In addition, we may need to raise substantial additional capital for various purposes, including:
•funding our operations;
•expanding the commercialization of our products;
•furthering our research and development; and
•acquiring other businesses or assets and licensing technologies.
Our future funding requirements will depend on many factors, including:
•market acceptance of our products;
•the cost of our research and development activities;
•the cost of filing and prosecuting patent applications;
•the cost of defending any litigation including intellectual property, employment, contractual or other litigation;
•the cost and timing of regulatory clearances or approvals, if any;
•the cost and timing of establishing additional sales, marketing, and distribution capabilities;
•the cost and timing of establishing additional technical support capabilities;
•fluctuations in cash demands (e.g., due to interest or principal payments or payouts under existing cash compensation plans);
•variability in sales and timing of related cash collections;
•the effectiveness of our efficiency and cost-savings initiatives;
•the impact of any natural disasters or public health crises (including the COVID-19 pandemic);
•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.
To the extent we draw on our Credit Facility or otherwise incur additional indebtedness, the risks described above could increase. Further, if we increase our indebtedness, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. The ongoing COVID-19 pandemic has led to significant disruption and volatility in the global capital markets, increasing the cost of—and adversely impacting access to—capital. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing in addition to the Credit Facility, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders, and our ability to raise additional capital may be adversely impacted by the impact of the COVID-19 pandemic on the economy.
If we raise additional funds through collaboration and 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 do not have or are unable to raise adequate funds, we may have to liquidate some or all of our assets, delay development or commercialization of our products, or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support, research and development, or other resources devoted to our products, or cease operations. Any of these factors could harm our operating results.
If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be impaired, which could adversely affect our business and our stock price.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.
Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management time on compliance-related issues. We currently do not have an internal audit group, and we continue to evaluate our need for additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we do not comply with the requirements of Section 404, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Global SelectThe Nasdaq Stock Market or NASDAQ,LLC, the SEC, or other regulatory authorities, which would require additional financial and management resources.
We may not realize the value of our goodwill or other intangible assets, which would be reflected in an impairment charge.
Our business acquisitions typically result in goodwill and other intangible assets, which affect the amount of future capital needs are uncertainperiod amortization expense and possible impairment expense. We make estimates and assumptions in valuing such intangible assets that affect our condensed consolidated financial statements. As of June 30, 2022, we may needhad approximately $125.3 million of goodwill and net intangible assets, including approximately $106.2 million of goodwill and $19.1 million of net intangible assets. These assets represent a significant portion of the assets recorded on our condensed consolidated balance sheet and relate primarily to raise additional fundsour acquisition of DVS Sciences, Inc. (DVS) in February 2014 and InstruNor in 2020. In addition, if in the future which may cause dilution to stockholderswe acquire additional businesses, technologies, or other intangible assets, a substantial portion of the value of such assets may be upon terms that are not favorable to us.
recorded as goodwill or intangible assets.
We believeassess the realizability of goodwill and indefinite-lived intangible assets annually as well as whenever events or changes in circumstances indicate that our existing cashthese assets may be impaired. We assess the realizability of definite-lived intangible assets whenever events or changes in circumstances indicate that these assets may be impaired. These events or circumstances would generally include operating losses or a significant decline in earnings associated with the acquired business or asset. Our ability to realize the value of the goodwill and cash equivalents will be sufficient to meet our anticipated cash requirements for at least the next 18 months. We have continued to experience losses and, if that trend continues, we may need to seek additional sources of financing. In addition, we may need to raise substantial additional capital for various purposes, including:
expanding the commercialization of our products;
funding our operations;
furthering our research and development; and
acquiring other businesses orintangible assets and licensing technologies.
Our future funding requirements will depend on many factors, including:the future cash flows of these businesses. These cash flows in turn depend in part on how well we have integrated these businesses. If we are not able to realize the value of the goodwill and intangible assets, we may be required to incur material charges relating to the impairment of those assets.
market acceptanceIf we fail to comply with the covenants and other obligations under our Credit Facility, the lenders may be able to accelerate amounts owed under the facilities and may foreclose upon the assets securing our obligations.
In August 2021, we amended our Revolving Credit Facility, which provides for secured revolving loans in an aggregate amount of up to $15.0 million, to extend the maturity date to August 2, 2023 and to provide for a new $10.0 million term loan facility (the Term Loan Facility and, together with the Revolving Credit Facility, the Credit Facility). The Credit Facility is secured by substantially all of our products;assets, other than intellectual property. The Credit Facility contains customary affirmative and negative covenants which, unless waived by the bank, limit our ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets, enter into affiliate transactions, undergo a change of control, or engage in merger and acquisition activity, including merging or consolidating with a third party. Additionally, we are required to maintain a minimum Adjusted Quick Ratio (as defined in the amendment) of at least 1.25 to 1.00. If we fail to comply with the covenants and our other obligations under the Credit Facility, the lenders would be able to accelerate the required repayment of amounts due under the Credit Facility and, if they are not repaid, could foreclose upon the assets securing our obligations under the Credit Facility.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes and other tax benefits may be limited.
Section 382 of the costInternal Revenue Code of 1986, as amended (the Code), imposes an annual limitation on the amount of taxable income that may be offset by net operating loss carryforwards (NOLs) if a corporation experiences an “ownership change.” As provided in Section 382 of the Code, an “ownership change” occurs when a company’s “five-percent shareholders” collectively increase their ownership in the company by more than 50 percentage points (by value) over a rolling three-year period. Various states also have limitations on the use of state NOLs following an ownership change.
Future changes in our research and development activities;
stock ownership, some of which are outside our control, could result in an ownership change under Section 382 of the cost of filing and prosecuting patent applications;
the cost of defending any litigation including intellectual property, employment, contractualCode. If we experience an ownership change, our ability to use our NOLs or other litigation;
the cost and timing of regulatory clearances or approvals, if any;
the cost and timing of establishing additional sales, marketing, and distribution capabilities;
the cost and timing of establishing additional technical support capabilities;
the effectiveness of our recent efficiency and cost-savings initiatives;
the effect of competing technological and market developments; and
the extent totax benefits could be substantially limited, which we acquire or invest in businesses, products, and technologies, although we currently havecould significantly impair their value. There is no commitments or agreements relating to any of these types of transactions.
We cannot assure youassurance that we will be able to obtain additional fundsfully utilize our NOLs or other tax benefits, which could adversely impact our results of operations.
We believe that these tax benefits are a valuable asset for us and we monitor our stock ownership to determine whether our NOLs are at material risk of limitation based on acceptable terms,an ownership change pursuant to Section 382. If our board of directors determines a potential risk exists that our NOLs could be limited, it could elect to adopt a tax benefit preservation plan in an effort to protect our tax benefits. Adoption of a tax benefit preservation plan could make it more difficult for a third party to acquire, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt or equity financing that we raise may contain terms that are not favorable tocould discourage a third party from acquiring, us or our stockholders. If we raise additional funds through collaboration and 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 alla large block of our assets, delay development or commercialization of our products, or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support, or other resources devoted to our products, or cease operations. Any of these factors could harm our operating results.common stock.
We are subject to risks related to taxation in multiple jurisdictions and if taxing authorities disagree with our interpretations of existing tax laws or regulations, our effective income tax rate could be adversely affected and we could have additional tax liability.
liability if existing tax laws or regulations change or if taxing authorities disagree with our interpretations of tax laws or regulations.
We are subject to income taxes in both the United States and certain foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining the provision for income taxes. For example, we have made certain interpretations of existing tax laws or regulations based upon the operations of our business internationally and we have implemented intercompany agreements based upon these interpretations and related transfer pricing analyses. If the U.S. Internal Revenue Service or other taxing authorities disagree with the positions, our effective income tax rate could be adversely affected and we could have additional tax liability, including interest and penalties. We recently completed a review of our European corporate structure and tax positions and, based upon our existing business operations, we restructured our European intercompany transactions, which increased our income tax liability. From time to time, we may review our corporate structure and tax positions in otherthe various international jurisdictions in which we operate and such review may result in additional changes to how we structure our international business operations, which may adversely impact our effective income tax rate. Our effective income tax rate could also be adversely affected by changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax laws or tax rates, changes in the level of non-deductible expenses (including share-based compensation), changes in our future levels of research and development spending, mergers and acquisitions, or the result of examinations by various tax authorities. Payment of additional amounts as a result of changes in applicable tax law or upon final adjudication of any disputes could have a material impact on our results of operations and financial position.
Adverse conditions in the global economy and disruption of financial markets may significantly harm our revenue, profitability, and results of operations.
The global credit and financial markets have in recent years experienced volatility and disruptions, including diminished liquidity and credit availability, increased concerns about inflation and deflation, and the downgrade of U.S. debt and exposure risks on other sovereign debts, decreased consumer confidence, lower economic growth, volatile energy costs, increased unemployment rates, and uncertainty about economic stability. Volatility and disruption of financial markets could limit our customers’ ability to obtain adequate financing or credit to purchase and pay for our products in a timely manner or to maintain operations, which could result in a decrease in sales volume that could harm our results of operations. General concerns about the fundamental soundness of domestic and international economies may also cause our customers to reduce their purchases. Changes in governmental banking, monetary, and fiscal policies to address liquidity and increase credit availability may not be effective. Significant government investment and allocation of resources to assist the economic recovery of sectors which do not include our customers may reduce the resources available for government grants and related funding for life science, Ag-Bio, and clinical research and development. Continuation or further deterioration of these financial and macroeconomic conditions could significantly harm our sales, profitability, and results of operations.
If we are unable to integrate future acquisitions successfully, our operating results and prospects could be harmed.
In addition to our acquisition of DVS, we may make additional acquisitions to improve our product offerings or expand into new markets. Our future acquisition strategy will depend on our ability to identify, negotiate, complete, and integrate acquisitions and, if necessary, to obtain satisfactory debt or equity financing to fund those acquisitions. Mergers and acquisitions are inherently risky, and any transaction we complete may not be successful. Our acquisition of DVS was our first acquisition of another company. Any merger or acquisition we may pursue would involve numerous risks, including but not limited to the following:
difficulties in integrating and managing the operations, technologies, and products of the companies we acquire;
diversion of our management’s attention from normal daily operation of our business;
our inability to maintain the key business relationships and the reputations of the businesses we acquire;
our inability to retain key personnel of the acquired company;
uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
our dependence on unfamiliar affiliates and customers of the companies we acquire;
insufficient revenue to offset our increased expenses associated with acquisitions;
our responsibility for the liabilities of the businesses we acquire, including those which we may not anticipate; and
our inability to maintain internal standards, controls, procedures, and policies.
We may be unable to secure the equity or debt funding necessary to finance future acquisitions on terms that are acceptable to us. If we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders will likely experience dilution, and if we finance future acquisitions with debt funding, we will incur interest expense and may have to comply with financial covenants and secure that debt obligation with our assets.
If we are unable to expand our direct sales and marketing force or distribution capabilities to adequately address our customers’ needs, our business may be adversely affected.
We may not be able to market, sell, and, distribute our products effectively enough to support our planned growth. We sell our products primarily through our own sales force and through distributors in certain territories. Our future sales will depend in large part on our ability to develop and substantially expand our direct sales force and to increase the scope of our marketing efforts. Our products are technically complex and used for highly specialized applications. As a result, we believe it is necessary to develop a direct sales force that includes people with specific scientific backgrounds and expertise, and a marketing group with technical sophistication. Competition for such employees is intense. In addition, we have experienced significant changes in our
sales organization in recent quarters due to reorganizations and changes in leadership. We may not be able to attract and retain personnel or be able to build an efficient and effective sales and marketing force, which would negatively impact sales of our products and reduce our revenue and profitability.
In addition, we may continue to enlist one or more sales representatives and distributors to assist with sales, distribution, and customer support globally or in certain regions of the world. If we do seek to enter into such arrangements, we may not be successful in attracting desirable sales representatives and distributors, or we may not be able to enter into such arrangements on favorable terms. If our sales and marketing efforts, or those of any third-party sales representatives and distributors, are not successful, our technologies and products may not gain market acceptance, which would materially and adversely impact our business operations.
If we seek to implement a company-wide implementation of an enterprise resource planning, or ERP, system, such implementation could adversely affect our business and results of operations or the effectiveness of internal control over financial reporting.
We have considered implementing a company-wide ERP system to handle the business and financial processes within our operations and corporate functions. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities that can continue for several years. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. If we decide to implement a company-wide ERP system, our business and results of operations could be adversely affected if we experience operating problems and/or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect. If we do not effectively implement the ERP system as planned or if the system does not operate as intended, our business, results of operations, and internal controls over financial reporting could be adversely affected.
Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America referred to as U.S. GAAP.(U.S. GAAP). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.
For example, the U.S.-based Financial Accounting Standards Board, referred to as FASB, is currently working together with the International Accounting Standards Board, referred to IASB, on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow U.S. GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards outside of the United States. These efforts by the FASB and IASB may result in different accounting principles under U.S. GAAP that may result in materially different financial results for us in areas including, but not limited to, principles for recognizing revenue and lease accounting. Additionally, significant changes to U.S. GAAP resulting from the FASB’s and IASB’s efforts may require that we change how we process, analyze and report financial information and that we change financial reporting controls. Additionally, the FASB issued new guidance relating to Revenue from Contracts with Customers which supersedes nearly all existing U.S. GAAP revenue recognition guidance. The new guidance will be effective for our fiscal year 2018. The new revenue guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. While we have not completed our assessment of the new revenue guidance, we currently expect that this new guidance will not have a material impact on our consolidated financial statements. As we complete the evaluation of this new guidance, new information may arise that could change our current understanding of the impact to revenue and expense recognized. Additionally, we will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust our assessment and implementation plans accordingly.
It is not clear if or when these potential changes in accounting principles may become effective, whether we have the proper systems and controls in place to accommodate such changes and the impact that any such changes may have on our financial position and results of operations.
We have a significant amount of outstanding indebtedness, and our financial condition and results of operations could be adversely affected if we do not efficiently manage our liabilities.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposesWe have significant outstanding convertible debt. As of June 30, 2022, we had outstanding $0.6 million aggregate principal amount of our 2.75% Senior Convertible Notes due 2034 (2014 Notes) and other tax benefits may be limited.
Section 382$55.0 million aggregate principal amount of our 5.25% convertible senior notes due 2024 (2019 Notes). The 2014 Notes will mature on February 1, 2034, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Internal Revenue Code2014 Notes. Pursuant to the terms of 1986, as amended, referredthe indenture governing the 2014 Notes (2014 Notes Indenture), holders of the 2014 Notes may require us to asrepurchase all or a portion of the “Code,” imposes an annual limitation on2014 Notes at a repurchase price in cash equal to 100% of the principal amount of taxable income that may be offset if a corporation experiences an “ownership change” as definedsuch 2014 Notes plus accrued and unpaid interest thereon, on each of February 6, 2024 and February 6, 2029. The 2019 Notes will mature on December 1, 2024, unless earlier converted, or repurchased in Section 382accordance with the terms of the Code. An ownership2019 Notes.
If we undergo a fundamental change occurs when a company’s “five-percent shareholders” (as defined in Section 382the 2014 Notes Indenture or the indenture governing the 2019 Notes, as applicable (collectively, the Convertible Notes)), holders of the Code) collectively increase their ownershipapplicable series of Convertible Notes may require us to repurchase such Convertible Notes in whole or in part for cash at a repurchase price equal to 100% of the principal amount of the applicable series of Convertible Notes plus accrued and unpaid interest. If we refinance all or any portion of the Convertible Notes, we may issue additional convertible notes or other debt, which could include additional company byobligations and represent more than 50 percentage points (by value) overdilution to existing stockholders and noteholders.
This significant amount of debt has important risks to us and our investors, including:
•requiring a rolling three-year period. Additionally, various states have similar limitationsportion of our cash flow from operations to make interest payments on this debt;
•increasing our vulnerability to general adverse economic and industry conditions;
•reducing the use of state net operating losses, referredcash flow available to asfund capital expenditures and other corporate purposes and to grow our NOL's, following an ownership change.business;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry; and
If we experience an ownership change,•limiting our ability to useborrow additional funds as needed or take advantage of business opportunities as they arise.
In addition, to the extent we draw on our NOLs, any lossRevolving Credit Facility or deduction attributableotherwise incur additional indebtedness, the risks described above could increase. Further, if we increase our indebtedness, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to a “net unrealized built-in loss” and other tax attributes, which we refer to as tax benefits, could be substantially limited, and the timingrepay all of the usage of the tax benefits could be substantially delayed, which could significantly impair the value of the tax benefits. There is no assurance thatoutstanding debt as it becomes due, and we willmay not be able to fully utilize the tax benefits and we could be requiredborrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to record an additional valuation allowance related to the amount of the tax benefits that may not be realized, which could adversely impactrefinance our results of operations.debt.
We believe that these tax benefits are a valuable asset for us. On November 21, 2016, our board of directors approved a tax benefit preservation plan, or Tax Benefit Preservation Plan, in an effort to protect our tax benefits during the effective period of the tax benefit preservation plan. Our board of directors elected to let the Tax Benefit Preservation Plan expire in August 2017 based on its determination, in consultation with our management and tax advisors, that our NOLs were not at material risk of limitation based on an ownership change pursuant to Section 382. Our board of directors will continue to monitor our NOLs, however, and could elect to adopt a similar plan if it believes a potential risk exists that our NOLs could be limited. Any future tax benefit preservation plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, us or a large block of our common stock. The value of our tax benefits reflects the currently prescribed Federal corporate income tax rate. A reduction in the corporate income tax rate would cause a reduction to our deferred tax assets and the related valuation allowance.RISKS RELATED TO INTELLECTUAL PROPERTY
Risks Related to Intellectual Property
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.
Our commercial success depends in part on our ability to protect our intellectual property and proprietary technologies. We rely on patent protection, where appropriate and available, as well as a combination of copyright, trade secret, and trademark laws, and nondisclosure, confidentiality, and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We apply for patents covering our products and technologies and uses thereof, as we deem appropriate. However, we may fail to apply for patents on important products and technologies in a timely fashion or at all. Our pending U.S. and foreign patent applications may not issue as patents or may not issue in a form that will be sufficient to protect our proprietary technology and gain or keep our competitive advantage. Any patents we have obtained or do obtain may be subject to re-examination, reissue, opposition, or other administrative proceeding, or may be challenged in litigation, and such challenges could result in a determination that the patent is invalid or unenforceable. In addition, competitors may be able to design alternative methods or devices that avoid infringement of our patents. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.
Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:
We•we might not have been the first to make the inventions covered by each of our pending patent applications;
We•we might not have been the first to file patent applications for these inventions;
The•the patents of others may have an adverse effect on our business; and
Others•others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies.
To the extent our intellectual property, including licensed intellectual property, offers inadequate protection, or is found to be invalid or unenforceable, our competitive position and our business could be adversely affected.
We may be involved in lawsuits to protect or enforce our patents and proprietary rights, to determine the scope, coverage and validity of others’ proprietary rights, or to defend against third partythird-party claims of intellectual property infringement, any of which could be time-intensive and costly and may adversely impact our business or stock price.
Litigation may be necessary for us to enforce our patent and proprietary rights, determine the scope, coverage, and validity of others’ proprietary rights, and/or defend against third partythird-party claims of intellectual property infringement against us as well as against our suppliers, distributors, customers, and other entities with whomwhich we do business. Litigation could result in substantial legal fees and could adversely affect the scope of our patent protection. The outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us, and we might not be able to obtain licenses to technology that we require. Even if such licenses are obtainable, they may not be available at a reasonable cost. We could therefore incur substantial costs
related to royalty payments for licenses obtained from third parties, which could negatively affect our product margins or financial position. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products.
As we move into new markets and applications for our products, incumbent participants in such markets may assert their patents and other proprietary rights against us as a means of impeding our entry into such markets or as a means to extract substantial license and royalty payments from us. Our commercial success may depend in part on our non-infringement of the patents or proprietary rights of third parties. Numerous significant intellectual property issues have been litigated, and will likely continue to be litigated, between existing and new participants in our existing and targeted markets. For example, some of our products provide for the testing and analysis of genetic material, and patent rights relating to genetic materials remain a developing area of patent law. A recent U.S. Supreme Court decision held, among other things, that claims to isolated genomic
DNA occurring in nature are not patent eligible, while claims relating to synthetic DNA may be patent eligible. We expect the ruling will result in additional litigation in our industry. In addition, third parties may assert that we are employing their proprietary technology without authorization, and if they are successful in making such claims, we may be forced to enter into license agreements, pay additional royalties or license fees, or enter into settlements that include monetary obligations or restrictions on our business.
Our customers have been sued for various claims of intellectual property infringement in the past, and we expect that our customers will be involved in additional litigation in the future. In particular, our customers may become subject to lawsuits claiming that their use of our products infringes third-party patent rights, and we could become subject to claims that we contributed to or induced our customer’s infringement. In addition, our agreements with some of our suppliers, distributors, customers, and other entities with whomwhich we do business may require us to defend or indemnify these parties to the extent they become involved in infringement claims against us, including the claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify any of these third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results, or financial condition.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our employees’ former employers or other institutions or third parties with whomwhich such employees may have been previously affiliated.
Many of our employees were previously employed at universities or other life science or Ag-Bioplant and animal research companies, including our competitors or potential competitors. In the future, we may become subject to claims that our employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or other third parties or institutions with whomwhich our employees may have been previously affiliated. Litigation may be necessary to defend against these claims. For example, we were a defendant in litigation brought against us and one of our non-executive employees by Thermo Fisher Scientific Inc. (Thermo) alleging, among other claims, misappropriation of proprietary information and breach of contractual and fiduciary obligations. While we resolved our dispute with Thermo in July 2017, if we fail in defending against similar claims brought in the future we could be subject to injunctive relief against us. A resulting loss of key research personnel work product could hamper or prevent our ability to commercialize certain potential products or a loss of or inability to hire key marketing, sales or research and development personnel could adversely affect our future product development, sales and revenues, any of which could severely harm our business. Even if we are successful in defending against any similarsuch claims, brought in the future, litigation could result in substantial costs and be a distraction to management.
We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products, which would have an adverse effect on our business.
We rely on licenses in order to be able to use various proprietary technologies that are material to our business, including our core IFC, multi-layer soft lithography, and mass cytometry technologies. In some cases, we do not control the prosecution, maintenance, or filing of the patents to which we hold licenses, or the enforcement of these patents against third parties. Additionally, our business and product development plans anticipate and may substantially depend on future in-license agreements with additional third parties, some of which are currently in the early discussion phase. For example, Fluidigm Canada Inc., or Fluidigm Canada, an Ontario corporation and wholly-ownedour Canadian subsidiary of Fluidigm Sciences,(SB Canada) was party to an interim license agreement, now expired, with Nodality, Inc., or Nodality, under which Nodalitythe licensor granted FluidigmSB Canada a worldwide, non-exclusive, research use only, royalty bearing license to certain cytometric reagents, instruments, and other products. While we were able to secure a license under a new license agreement with Nodality,the licensor, we cannot provide assurances that we will always be able to obtain suitable license rights to technologies or intellectual property of other third parties on acceptable terms, if at all.
In-licensed intellectual property rights that are fundamental to theour business being operated present numerous risks and limitations. For example, all or a portion of the license rights granted may be limited for research use only, and in the event we attempt to expand into diagnostic applications, we would be required to negotiate additional rights, which may not be available to us on commercially reasonable terms, if at all.
Our rights to use the technology we license are also subject to the negotiation and continuation of those licenses. Certain of our licenses contain provisions that allow the licensor to terminate the license upon specific conditions. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the
license. Because of the complexity of our products and the patents we have licensed, determining the scope of the license and related royalty obligation can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful and the license is terminated, we might be barred from marketing, producing, and selling some or all of our products, which would have an adverse effect on our business. Potential disputes between us and one of our existing licensors concerning the terms or conditions of the applicable license agreement could result, among other risks, in substantial management distraction; increased expenses associated with litigation or efforts to resolve disputes; substantial customer uncertainty concerning the direction of our product lines; potential infringement claims against us and/or our customers, which could include efforts by a licensor to enjoin sales of our products; customer requests for indemnification by us; and, in the event of an adverse determination, our inability to operate our business as currently operated. Termination of material license agreements could prevent us from manufacturing and selling our products unless we can negotiate new license terms or develop or acquire alternative intellectual property rights that cover or enable similar functionality. Any of these factors would be expected to have a material adverse effect on our business, operating results, and financial condition and could result in a substantial decline in our stock price.
We are subject to certain manufacturing restrictions related to licensed technologies that were developed with the financial assistance of U.S. governmental grants.
We are subject to certain U.S. government regulations because we have licensed technologies that were developed with U.S. government grants. In accordance with these regulations, these licenses provide that products embodying the technologies are subject to domestic manufacturing requirements. If this domestic manufacturing requirement is not met, the government agency that funded the relevant grant is entitled to exercise specified rights, referred to as “march-in rights,” which if exercised would allow the government agency to require the licensors or us to grant a non-exclusive, partially exclusive, or exclusive license in any field of use to a third party designated by such agency. All of our microfluidic systems revenue is dependent upon the availability of our IFCs, which incorporate technology developed with U.S. government grants. Our genomics instruments, including microfluidic systems and IFCs, are manufactured at our facility in Singapore. The federal regulations allow the funding government agency to grant, at the request of the licensors of such technology, a waiver of the domestic manufacturing requirement. Waivers may be requested prior to any government notification. We have assisted the licensors of these technologies with the analysis of the domestic manufacturing requirement, and, in December 2008, the sole licensor subject to the requirement applied for a waiver of the domestic manufacturing requirement with respect to the relevant patents licensed to us by this licensor. In July 2009, the funding government agency granted the requested waiver of the domestic manufacturing requirement for a three-year period commencing in July 2009. In June 2012, the licensor requested a continued waiver of the domestic manufacturing requirement with respect to the relevant patents, but the government agency has not yet taken any action in response to this request. If the government agency does not grant the requested waiver or the government fails to grant additional waivers of such requirement that may be sought in the future, then the U.S. government could exercise its march-in rights with respect to the relevant patents licensed to us. In addition, the license agreement under which the relevant patents are licensed to us contains provisions that obligate us to comply with this domestic manufacturing requirement. We are not currently manufacturing instruments and IFCs in the United States that incorporate the relevant licensed technology. If our lack of compliance with this provision constituted a material breach of the license agreement, the license of the relevant patents could be terminated or we could be compelled to relocate our manufacturing of microfluidic systems and IFCs to the United States to avoid or cure a material breach of the license agreement. Any of the exercise of march-in rights, the termination of our license of the relevant patents or the relocation of our manufacturing of microfluidic systems and IFCs to the United States could materially adversely affect our business, operations and financial condition.
We may be subject to information technology failures, including data protection breaches and cyber-attacks, that could disrupt our operations, damage our reputation and adversely affect our business, operations, and financial results.
We rely on our information technology systems for the effective operation of our business and for the secure maintenance and storage of confidential data relating to our business and third party businesses. Although we have implemented security controls to protect our information technology systems, experienced programmers or hackers may be able to penetrate our security controls, and develop and deploy viruses, worms, and other malicious software programs that compromise our confidential information or that of third parties and cause a disruption or failure of our information technology systems. Any such compromise of our information technology systems could result in the unauthorized publication of our confidential business or proprietary information, result in the unauthorized release of customer, supplier or employee data, result in a violation of privacy or other laws, expose us to a risk of litigation, or damage our reputation. The cost and operational consequences of implementing further data protection measures either as a response to specific breaches or as a result of evolving risks, could be significant. In addition, our inability to use or access our information systems at critical points in time could adversely affect the timely and efficient operation of our business. Any delayed sales, significant costs or lost customers resulting from these technology failures could adversely affect our business, operations, and financial results.
Third parties with which we conduct business have access to certain portions of our sensitive data. In the event that these third parties do not properly safeguard our data that they hold, security breaches could result and negatively impact our business, operations, and financial results.
We are subject to certain obligations and restrictions relating to technologies developed in cooperation with Canadian government agencies.
Some of our Canadian research and development is funded in part through government grants and by government agencies. The intellectual property developed through these projects is subject to rights and restrictions in favor of government agencies and Canadians generally. In most cases the government agency retains the right to use intellectual property developed through the project for non-commercial purposes and to publish the results of research conducted in connection with the project. This may increase the risk of public disclosure of information relating to our intellectual property, including confidential information, and may reduce its competitive advantage in commercializing intellectual property developed through these projects. In certain projects, we have also agreed to use commercially reasonable efforts to commercialize intellectual property in Canada, or more specifically in the province of Ontario, for the economic benefit of Canada and the province of Ontario.
These restrictions will limit our choice of business and manufacturing locations, business partners and corporate structure and may, in certain circumstances, restrict our ability to achieve maximum profitability and cost efficiency from the intellectual property generated by these projects. In one instance, a dispute with the applicable government funded entity may require mediation, which could lead to unanticipated delays in our commercialization efforts to that project. One of our Canadian government funded projects is also subject to certain limited “march-in” rights in favor of the government of the Province of Ontario, under which we may be required to grant a license to our intellectual property, including background intellectual property developed outside the scope of the project, to a responsible applicant on reasonable terms in circumstances where the government determines that such a license is necessary in order to alleviate emergency or extraordinary health or safety needs or for public use. In addition, we must provide reasonable assistance to the government in obtaining similar licenses from third parties required in connection with the use of its intellectual property. Instances in which the government of the Province of Ontario has exercised similar “march-in” rights are rare; however, the exercise of such rights could materially adversely affect our business, operations and financial condition.
RISKS RELATED TO OUR COMMON STOCK
Risks Related to Our Common Stock
Our stock price may fluctuate significantly, particularly if holders of substantial amounts of our stock attempt to sell, and holders may have difficulty selling their shares based on current trading volumes of our stock. In addition, numerous other factors could result in substantial volatility in the trading price of our stock.
is volatile.
Our stock is currently traded on NASDAQ,the Nasdaq Global Select Market (Nasdaq), but we can provide no assurance that we will be able to maintain an active trading market on NASDAQNasdaq or any other exchange in the future. The trading volume of our stock tends to be low relative to our total outstanding shares, and we have several stockholders who hold substantial blocks of our stock. As of September 30, 2017,December 31, 2021, we had 38,622,22676,919,287 shares of common stock outstanding, and stockholders holding at least 5% of our stock, individually or with affiliated persons or entities, collectively beneficially owned or controlled approximately 58.2%51% of such shares and one stockholder beneficially owned 29.7% of our outstanding common stock.shares. Sales of large numbers of shares by any of our large stockholders could adversely affect our trading price, particularly given our relatively small historic trading volumes. If stockholders holding shares of our common stock sell, indicate an intention to sell, or if it is perceived that they will sell, substantial amounts of their common stock in the public market, the trading price of our common stock could decline. Moreover, if there is no active trading market or if the volume of trading is limited, holders of our common stock may have difficulty selling their shares. In addition, the concentration of ownership of our outstanding common stock (approximately 58.2%51% held by our top three stockholders)seven stockholders as of December 31, 2021) means that a relatively small number of stockholders have significant control over the outcomes of stockholder voting.
In addition, theThe trading price of our common stock may beis highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:
•the impact of public health crises, including the COVID-19 pandemic, on global financial markets;
•actual or anticipated quarterly variation in our results of operations or the results of our competitors;
•our failure to achieve performance consistent with our financial guidance and/or market expectations;
•announcements or communications by us or our competitors relating to, among other things, new commercial products, technological advances, significant contracts, commercial relationships, capital commitments, acquisitions or sales of businesses, and/or misperceptions in or speculation by the market regarding such announcements or communications;
•issuance of new or changed securities analysts’ reports or recommendations for our stock;
•developments or disputes concerning our intellectual property or other proprietary rights;
•commencement of, or our involvement in, litigation;
•market conditions in the life science, Ag-Bio,plant and CROanimal research, and contract research organization sectors;
•failure to complete significant sales;
•manufacturing disruptions that could occur if we wereare unable to successfully expand our production in our current or an alternative facility;
•supply chain disruptions;
•any future sales of our common stock or other securities in connection with raising additional capital or otherwise;
•any major change to the composition of our board of directors or management;
•general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors, including deteriorating market conditions due to investor concerns regarding inflation and hostilities between Russia and Ukraine; and
•general economic conditions, including current macroeconomic trends and geopolitical events, and slow or negative growth of our markets.
The stock market in general, and market prices for the securities of technology-based companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock regardless of our operating performance.
In several recent situations where the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If anyAs discussed in the Legal Proceedings section of our stockholders were to bringthis quarterly report on Form 10-Q, a class action securities lawsuit against us is currently pending. While we are continuing to defend such action vigorously, the defense of this action and disposition of the lawsuit couldany additional actions can be costly, and divert the time and attention of our management, and harm our operating results.results, and any judgment against us or any future stockholder litigation could result in substantial costs.
Future sales of our common stock in the public market could cause our stock price to fall.
Our stock price could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such future issuance could result in substantial dilution to our existing stockholders and could cause our stock price to decline.
If securities or industry analysts publish unfavorable research about our businessus or cease to cover our business, our stock price and/or trading volume could decline.
The trading market for our common stock may rely, in part, on the research and reports that equity research analysts publish about us and our business. We do not have any control of the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management, including provisions that:
•authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock;
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
•specify that special meetings of our stockholders can be called only by our board of directors, the chairman of the board, the chief executive officer or the president;
•establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;
•establish that our board of directors is divided into three classes, Class I, Class II, and Class III, with each class serving staggered three yearthree-year terms;
•provide that our directors may be removed only for cause;
•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
•specify that no stockholder is permitted to cumulate votes at any election of directors; and
•require a super-majority of votes to amend certain of the above-mentioned provisions.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law (DGCL), which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.
We have never paid cash dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have paid no cash dividends on any of our classes of capital stock to date and currently intend to retain our future earnings to fund the development and growth of our business. In addition, we may become subject to covenants under future debt arrangements that place restrictions on our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be stockholders’ sole source of gain for the foreseeable future.
Risks Related to Our Outstanding 2.75% Senior Convertible Notes due 2034
Our outstanding 2.75% senior convertible notes due 2034 are effectively subordinated to our secured debt and any liabilities of our subsidiaries.
Our outstanding 2.75% senior convertible notes due 2034, which we refer to as our “notes”, rank:
senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the notes;
equal in right of payment to all of our liabilities that are not so subordinated;
effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and
structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In February 2014, we completed our offering of notes with an aggregate outstanding principal amount of $201.3 million. In the event of our bankruptcy, liquidation, reorganization, or other winding up, our assets that secure debt ranking senior in right of payment to the notes will be available to pay obligations on the notes only after the secured debt has been repaid in full from these assets, and the assets of our subsidiaries will be available to pay obligations on the notes only after all claims senior to the notes have been repaid in full. There may not be sufficient assets remaining to pay amounts due on any or all of the notes then outstanding. The indenture governing the notes does not prohibit us from incurring additional senior debt or secured debt, nor does it prohibit our subsidiaries from incurring additional liabilities.
The notes areforum selection provision in our obligations only and some of our operations are conducted through, and a portion of our consolidated assets are held by, our subsidiaries.
The notes are our obligations exclusively and are not guaranteed by any of our operating subsidiaries. A portion of our consolidated assets is held by our subsidiaries. Accordingly, our ability to service our debt, including the notes, depends in part on the results of operations of our subsidiaries and uponbylaws could limit the ability of such subsidiariesour stockholders to providebring a claim in a judicial forum viewed by the stockholders as more favorable for disputes with us with cash, whether in the form of dividends, loans, or otherwise, to pay amounts due on our obligations, including the notes. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make payments on the notes or to make any funds available for that purpose. In addition, dividends, loans,directors, officers or other distributions to us from such subsidiaries may be subject to contractual and other restrictions and are subject to other business and tax considerations.employees.
Recent and future regulatory actions and other events may adversely affectOur bylaws provide that the trading price and liquidityCourt of Chancery of the notes.
We expect that many investorsState of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in and potential purchasers of, the notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors would typically implement such a strategy by selling short the common stock underlying the notes and dynamically adjusting their short position while continuing to hold the notes. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock. As a result, any specific rules regulating equity swaps or short selling of securities or other governmental action that interferes with the ability of market participants to effect short sales or equity swaps with respect to our common stock could adversely affect the ability of investors in, or potential purchasers of, the notes to conduct the convertible arbitrage strategy that we believe they will employ, or seek to employ, with respect to the notes. This could, in turn, adversely affect the trading price and liquidity of the notes.
The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Although the direction and magnitude of the effect that Regulation SHO, FINRA, securities exchange rule changes, and implementation of the Dodd-Frank Act may have on the trading price and the liquidity of the notes will depend on a variety of factors, many of which cannot be determined at the date of this report, past regulatory actions (such as certain emergency orders issued by the SEC in 2008 prohibiting short sales of stock of certain financial services companies) have had a significant impact
on the trading prices and liquidity of convertible debt instruments. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the notes to effect short sales of our common stock, borrow our common stock, or enter into swaps on our common stock or increases the costs of implementing an arbitrage strategy could adversely affect the trading price and the liquidity of the notes.
Volatility in the market price and trading volume of our common stock could adversely impact the trading price of the notes.
The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this report, or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability. The market price of our common stock could also decline as a result of sales of a large number of shares of our common stock in the market, particularly sales by our directors, executive officers, employees, and significant stockholders, and the perception that these sales could occur may also depress the market price of our common stock. A decrease in the market price of our common stock would likely adversely impact the trading price of the notes. The market price of our common stock could also be affected by possible sales of our common stock by investors who view the notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to develop involving our common stock. This trading activity could, in turn, affect the trading price of the notes.
We may still incur substantially more debt or take other actions which would intensify the risks discussed above.
We are not restricted under the terms of the indenture governing the notes from incurring additional debt, securing existing or future debt, recapitalizing our debt, or taking a number of other actions that are not limited by the terms of the indenture governing the notes that could have the effect of diminishing our ability to make payments on the notes when due. Any failure by us or any of our significant subsidiaries to make any payment at maturity of indebtedness for borrowed money in excess of $15 millionDelaware or the accelerationfederal district court for the District of Delaware) is the exclusive forum for the following (except for any claim as to which such indebtedness in excess of $15 million would,court determines that there is an indispensable party not subject to the termsjurisdiction of such court (and the indenture governingindispensable party does not consent to the notes, constitutepersonal jurisdiction of such court within 10 days following such determination), which is vested in the exclusive jurisdiction of a defaultcourt or forum other than such court or for which such court does not have subject matter jurisdiction):
•any derivative action or proceeding brought on our behalf;
•any action asserting a claim of breach of fiduciary duty;
•any action asserting a claim against us arising under the indenture. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the notes when required.
We may not have the ability to raise the funds necessary to repurchase the notes upon specified dates or upon a fundamental change, and our future debt may contain limitations on our ability to repurchase the notes.
Holders of the notes have the right to require us to repurchase all or a portion of their notes on certain dates or upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor.
In addition, our ability to repurchase the notes may be limited by law, regulatory authority, or agreements governing our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes when required.
Holders of notes are not entitled to any rights with respect to our common stock, but they are subject to all changes made with respect to them to the extent our conversion obligation includes shares of our common stock.
Holders of notes are not entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock) prior to the conversion date with respect to any notes they surrender for conversion, but they are subject to all changes affecting our common stock. For example, if an amendment is proposed toDGCL, our certificate of incorporation or bylaws requiring stockholder approvalour bylaws; and
•any action asserting a claim against us that is governed by the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the conversion date with respect to any notes surrendered for conversion, then the holder surrendering such notes will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting our common stock.internal-affairs doctrine.
We have made only limited covenants in the indenture governing the notes, and these limited covenants may not protect a noteholder's investment.
The indenture governing the notes does not:
require us to maintain any financial ratios or specific levels of net worth, revenues, income, cash flows, or liquidity and, accordingly,This provision does not protect holdersapply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.
Our bylaws further provide that the federal district courts of the notes inUnited States of America will be the event that we experience adverse changes in our financial condition or resultsexclusive forum for resolving any complaint asserting a cause of operations;action arising under the Securities Act.
These exclusive-forum provisions may limit our subsidiaries’a stockholder’s ability to guaranteebring a claim in a judicial forum that it finds favorable for disputes with us or incur indebtedness that would rank structurally senior to the notes;
limit our ability to incur additional indebtedness, including secured indebtedness;
restrictdirectors, officers or other employees, which may discourage lawsuits against us and our subsidiaries’ ability to issue securities that would be senior to our equity interestsdirectors, officers and other employees. Any person or entity purchasing or otherwise acquiring any interest in our subsidiaries and therefore would be structurally senior to the notes;
restrict our ability to repurchase our securities;
restrict our ability to pledge our assets or thoseany of our subsidiaries; or
restrict our ability to make investments or pay dividends or make other payments in respect of our common stock or our other indebtedness.
Furthermore, the indenture governing the notes contains only limited protections in the event of a change of control. We could engage in many types of transactions, such as acquisitions, refinancings, or certain recapitalizations, that could substantially affect our capital structure and the value of the notes and our common stock but may not constitute a “fundamental change” that permits holders to require us to repurchase their notes or a “make-whole fundamental change” that permits holders to convert their notes at an increased conversion rate. For these reasons, the limited covenants in the indenture governing the notes may not protect a noteholder's investment in the notes.
The increase in the conversion rate for notes converted in connection with a make-whole fundamental change or provisional redemption may not adequately compensate noteholders for any lost value of the notes as a result of such transaction or redemption.
If a make-whole fundamental change occurs prior to February 6, 2021 or upon our issuance of a notice of provisional redemption, under certain circumstances, we will increase the conversion rate by a number of additional shares of our common stock for notes converted in connection with such events. The increase in the conversion rate for notes converted in connection with such events may not adequately compensate noteholders for any lost value of the notes as a result of such transaction or redemption. In addition, if the price of our common stock in the transaction is greater than $180.00 per share or less than $39.96 per share (in each case, subject to adjustment), no additional shares will be added to the conversion rate. Moreover, in no event will the conversion rate per $1,000 principal amount of notes as a result of this adjustment exceed 25.0250 shares of common stock, subject to adjustment.
Our obligation to increase the conversion rate for notes converted in connection with such events could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.
The conversion rate of the notes may not be adjusted for all dilutive events.
The conversion rate of the notes is subject to adjustment for certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers. However, the conversion rate will not be adjusted for other events, such as a third-party tender or exchange offer or an issuance of common stock for cash, that may adversely affect the trading price of the notes or our common stock. An event that adversely affects the value of the notes may occur, and that event may not result in an adjustment to the conversion rate.
Some significant restructuring transactions may not constitute a fundamental change, in which case we would not be obligated to offer to repurchase the notes.
Upon the occurrence of a fundamental change, a holder of notes has the right to require us to repurchase the notes. However, the fundamental change provisions will not afford protection to holders of notes in the event of other transactions that could adversely affect the notes. For example, transactions such as leveraged recapitalizations, refinancings, restructurings, or acquisitions initiated by us may not constitute a fundamental change requiring us to repurchase the notes. In the event of any such transaction, the holders would not have the right to require us to repurchase the notes, even though each of these transactions could increase the amount of our indebtedness, or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting the holders of notes.
In addition, absent the occurrence of a fundamental change or a make-whole fundamental change as described under changes in the composition of our board of directors will not provide holders with the right to require us to repurchase the notes or to an increase in the conversion rate upon conversion.
We cannot assure noteholders that an active trading market will develop or be maintained for the notes.
We do not intend to apply to list our outstanding convertible notes on any securities exchange or to arrange for quotation on any automated dealer quotation system. In addition, the liquidity of the trading market in the notes and the market price quoted for the notes may be adversely affected by changes in the overall market for this type of security and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a result, we cannot assure noteholders that an active trading market will develop or be maintained for the notes. If an active trading market does not develop or is not maintained, the market price and liquidity of the notes may be adversely affected. In that case, noteholders may not be able to sell the notes at a particular time or at a favorable price.
Any adverse rating of the notes may cause their trading price to fall.
We do not intend to seek a rating on the notes. However, if a rating service were to rate the notes and if such rating service were to lower its rating on the notes below the rating initially assigned to the notes or otherwise announces its intention to put the notes on credit watch, the trading price of the notes could decline.
Holders of notes may be subject to tax if we make or fail to make certain adjustments to the conversion rate of the notes even though they do not receive a corresponding cash distribution.
The conversion rate of the notes is subject to adjustment in certain circumstances, including the payment of cash dividends. If the conversion rate is adjusted as a result of a distribution that is taxable to our common stockholders, such as a cash dividend, a noteholder mayshall be deemed to have received a dividend subject to U.S. federal income tax without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the conversion rate after an event that increases a noteholder's proportionate interest in us could be treated as a deemed taxable dividend to you. If a make-whole fundamental change occurs prior to February 6, 2021 or we provide notice of and consented to these provisions. There is uncertainty as to whether a provisional redemption, under some circumstances,court would enforce such provisions, and the enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings.
It is possible that a court could find these types of provisions to be inapplicable or unenforceable, and if a court were to find either exclusive-forum provision in our bylaws to be inapplicable or unenforceable in an action, we will increasemay incur additional costs associated with resolving the conversion rate for notes converteddispute in connection with the make-whole fundamental change or provisional redemption. Such increase may also be treated as a distribution subject to U.S. federal income tax as a dividend. For a non-U.S. holder, any deemed dividend would be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable treaty,other jurisdictions, which may be set off against subsequent payments on the notes.could seriously harm our business.
Any conversions of the notes2014 Notes or 2019 Notes will dilute the ownership interest of our existing stockholders including holders who had previously converted their notes.
and may otherwise depress the price of our common stock.
Any conversion of some or all of the notes2014 Notes or 2019 Notes will dilute the ownership interests of our existing stockholders. Any sales in the public market of our common stock issuable upon such conversion could also adversely affect prevailing market prices of our common stock. In addition, the existenceholders of the notes2014 Notes or 2019 Notes may encouragehedge their position in such Convertible Notes by entering into short selling by market participants becausepositions with respect to the underlying common stock. As a result, any anticipated conversion of the notes2014 Notes or 2019 Notes could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
RISKS RELATED TO OUR CAPITAL STRUCTURE
As a result of the Private Placement Issuance, the Purchasers own a significant portion of our total outstanding voting securities and may prevent other stockholders from influencing material corporate decisions, and the Purchasers’ interests may conflict with those of our other stockholders.
The Series B Preferred Stock is initially convertible into up to approximately 75,164,397 shares of our common stock (without giving effect to limitations associated with any conversion cap). On an as-converted basis, this collectively represents approximately 48.8% of our issued and outstanding common stock (equating to approximately 24.4% per Purchaser) based on the number of shares of common stock outstanding as of June 30, 2022, but assuming full conversion of all Series B Preferred Stock (without giving effect to limitations associated with any conversion cap). As a result, the Purchasers are our largest stockholders. This concentration of ownership, together with the voting rights, director designation rights and consent rights granted to the Purchasers as part of the Private Placement Issuance, may be perceived negatively by other investors and, as a result, may adversely affect the market price of our common stock. The Purchasers, if they acted together, could significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or
other business combination transactions. The interests of the Purchasers may not always coincide with our interests or the interests of other stockholders.
The market value of our common stock could decline if the Purchasers sell their Series B Preferred Stock or common stock after certain transfer restrictions expire.
Pursuant to the Registration Rights Agreement that we entered into on January 23, 2022 with the Purchasers, we registered the resale of the shares of common stock issuable upon conversion of the Series B Preferred Stock with the SEC, which means that such shares would become eligible for resale in the public markets following the expiration of any applicable transfer restrictions. Any sale of such shares, or the anticipation of the possibility of such sales, could create downward pressure on the market price of our common stock.
Our Series B Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders, which could adversely affect our liquidity and financial condition, result in the interests of holders of our Series B Preferred Stock differing from those of our common stockholders and make an acquisition of us more difficult. Holders of our Series B preferred stock have (i) a liquidation preference (ii) rights to dividends, which are senior to all of our other equity securities, (iii) the right to require us to repurchase any or all of their Series B Preferred Stock in connection with certain change of control events, and (iv) conversion price adjustments upon the occurrence of certain events, each subject to the terms, conditions and exceptions contained in the Certificate of Designations for the Series B-1 and Series B-2 Preferred Stock. These dividend and other rights and obligations could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes.
The terms of our Series B Preferred Stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights could also result in divergent interests between the Purchasers and holders of our common stock. Furthermore, a sale of our Company, as a change of control event, may require us to repurchase Series B Preferred Stock, which could have the effect of making an acquisition of our Company more expensive and potentially deterring proposed transactions that may otherwise be beneficial to our stockholders.
The holders of Series B Preferred Stock are entitled to vote with the holders of common stock with voting power measured in a manner related to the conversion ratio of the shares of Series B Preferred Stock and the holders of Series B Preferred Stock have rights to approve certain actions.The holders of Series B Preferred Stock may exercise influence over us, including through the ability of each of the holders of the Series B-1 Preferred Stock and the holders of the Series B-2 Preferred Stock to designate a member of our board of directors.
The holders of Series B Preferred Stock are generally entitled to vote with the holders of the shares of common stock on all matters submitted for a vote of holders of shares of common stock (voting together with the holders of shares of common stock as one class) with voting power measured in a manner related to the conversion ratio of the shares of Series B Preferred Stock, subject to certain voting limitations as described in the Series B Certificates of Designations. Additionally, the consent of the holders of at least 60% of the shares of Series B Preferred Stock is required for, among other things, (i) amendments to our Certificate of Incorporation or Bylaws that have an adverse effect on the rights, preferences, privileges or voting powers of the Series B Preferred Stock and (ii) issuances by us of securities that are senior to, or equal in priority with, the Series B Preferred Stock.
Additionally, pursuant to the Series B Certificates of Designations, the Purchasers each have the right to nominate and elect one member to our board of directors at each annual meeting of the stockholders of the Company or at any special meeting called for the purpose of electing directors, for so long as the Casdin Preferred Percentage or Viking Preferred Percentage, as applicable, is equal to or greater than 7.5%. The director designated by each of the Purchasers is entitled to serve on committees of our board of directors, subject to applicable law and Nasdaq rules. Notwithstanding the fact that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the directors designated by the Purchasers may differ from the interests of our security holders as a whole or of our other directors.
These significant stockholders may be able to determine or significantly influence matters requiring stockholder approval. The interests of significant stockholders may not always coincide with our interests or the interests of other stockholders. The Series B-1 Director and the Series B-2 Director are not subject to the classified board of directors provisions of our Charter. The director designated by the holders of the Series B -1 Preferred Stock and Series B-2 Preferred Stock will also be entitled to serve on committees of our board of directors, subject to applicable law and stock exchange rules. In addition, the Series B Certificates of Designations also provide that for so long as the Casdin Ownership Percentage and the Viking Ownership
Percentage (each as defined in the applicable Certificate of Designations) continue to be met or exceeded for such series of Series B Preferred Stock, the Series B-1 Director and Series B-2 Director will have certain consent rights over, among other things: (i) any increase in the number of directors on the Board beyond seven; (ii) the hiring, promotion, demotion, or termination of the Company’s Chief Executive Officer; (iii) entering into or modifying (including by waiver) any transaction, agreement or arrangement with any Related Person (as such term is defined in the Series B Certificates of Designations), subject to certain exceptions; (iv) any voluntary petition under any applicable federal or state bankruptcy or insolvency law effected by the Company; (v) any change in the principal business of the Company or entry by the Company into any material new line of business; and (vi) for a period of three years after the Closing, (A) any acquisition (including by merger, consolidation or acquisition of stock or assets) of any assets, securities or property of any other person or (B) any sale, lease, license, transfer or other disposition of any assets of the Company or any of its subsidiaries, in each case, other than acquisitions or disposition of inventory or equipment in the ordinary course of business consistent with past practice, for consideration in excess of $50,000,000 in the aggregate in any six month period.
As a result, the holders of Series B Preferred Stock have the ability to influence the outcome of certain matters affecting our governance and capitalization. Our obligations to the holders of Series B Preferred Stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ending June 30, 2022, the registrant did not make any sales of unregistered equity securities that were not previously reported in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information.
Information
None.
Item 6. Exhibits.Exhibits
The documents listed in the Exhibit List, which follows below, are incorporated by reference or are filed with this quarterly report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). |
| | | | | | | | |
Exhibit Number | | Description | | Incorporated by Reference From Form | | Incorporated by Reference From Exhibit Number | | Date Filed |
| | | | | |
| 1.1 | | Sales Agreement, dated as of August 3, 2017, between Fluidigm Corporation and Cowen and Company, LLC. | | 8-K | | 1.1 | | 8/3/2017 |
| | | | | | | | | |
| 3.1 | | Eighth Amended and Restated Certificate of Incorporation of Fluidigm Corporation filed on February 15, 2011. | | 10-K | | 3.1 | | 3/28/2011 |
| | | | | | | | | |
| 3.2 | | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock. | | 8-K | | 3.1 | | 11/22/2016 |
| | | | | | | | | |
| 3.3 | | Certificate of Elimination. | | 8-K | | 3.1 | | 8/2/2017 |
| | | | | | | | | |
| 4.1 | | Specimen Common Stock Certificate of Fluidigm Corporation. | | S-8 | | 4.1 | | 8/3/2017 |
| | | | | | | | | |
10.1* | | Fluidigm Corporation 2017 Employee Stock Purchase Plan. | | 8-K | | 10.1 | | 8/2/2017 |
| | | | | | | | | |
10.2* | | Amendments to the Fluidigm Corporation 2011 Equity Incentive Plan, 2009 Equity Incentive Plan, and 1999 Stock Option Plan and the DVS Sciences, Inc. 2010 Equity Incentive Plan. | | 8-K | | 10.2 | | 8/2/2017 |
| | | | | | | | | |
| 10.3 | | Eighth Amendment to Lease Agreement between ARE-San Francisco No. 17, LLC and Fluidigm Corporation, dated August 2, 2017. | | 8-K | | 10.1 | | 8/3/2017 |
| | | | | | | | | |
| 10.4* | | Fluidigm Corporation Change of Control and Severance Plan | | 8-K | | 10.1 | | 8/23/2017 |
| | | | | | | | | |
| 10.5* | | Endorsement Split-Dollar Life Insurance Agreement | | Filed herewith | | | | |
| | | | | | | | | |
| 31.1 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer | | Filed herewith | | | | |
| | | | | |
| 31.2 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer | | Filed herewith | | | | |
| | | | | |
| 32.1(1) | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer | | Furnished herewith | | | | |
| | | | | |
| 32.2(1) | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer | | Furnished herewith | | | | |
| | | | | |
| 101.INS | | XBRL Instance Document | | Filed herewith | | | | |
| | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith | | | | |
| | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith | | | | |
| | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith | | | | |
| | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith | | | | |
| | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith | | | | |
* | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit
Number | | Description | | Incorporated
by Reference
From Form | | Incorporated
by Reference
From Exhibit
Number | | Date Filed |
| | | | | | | | |
| 3.1 | | | | 10-K | | 3.1 | | 3/28/2011 |
| 3.2 | | | | S-8 | | 4.8 | | 4/1/2022 |
| 3.3 | | | | S-8 | | 4.3 | | 4/1/2022 |
| 3.4 | | | | 8-K | | 3.1 | | 11/22/2016 |
| 3.5 | | | | 8-K | | 3.1 | | 8/2/2017 |
| 3.6 | | | | 8-K | | 3.6 | | 4/5/2022 |
| 3.7 | | | | 8-K | | 3.7 | | 4/5/2022 |
| 10.1+ | | | | S-8 | | 4.9 | | 4/1/2022 |
| 10.2+ | | | | S-8 | | 99.1 | | 4/1/2022 |
| 10.3+ | | | | S-8 | | 99.2 | | 4/1/2022 |
| 31.1 | | | | Filed herewith | | | | |
| 31.2 | | | | Filed herewith | | | | |
32.1(1) | | | | Filed herewith | | | | |
32.2(1) | | | | Filed herewith | | | | |
| 101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | Filed herewith | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | Filed herewith | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Document | | Filed herewith | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Document | | Filed herewith | | | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.) | | Filed herewith | | | | |
+ Indicates a management contract or compensatory plan.plan, contract, or arrangement.
(1) In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
|
| | |
(1) | | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | STANDARD BIOTOOLS INC. |
| | | | |
| Dated: August 9, 2022 | | By: | | /s/ Michael Egholm |
| | | | Michael Egholm |
| | | | Chief Executive Officer and President |
| | | | (Principal Executive Officer) |
| | | | |
| | | |
| | FLUIDIGM CORPORATION |
| Dated: August 9, 2022 | | By: | |
Dated: | November 7, 2017 | | |
| | By: | /s/ Stephen Christopher Linthwaite |
| | | Stephen Christopher Linthwaite |
| | | President and Chief Executive Officer |
| | | |
Dated: | November 7, 2017 | | |
| | By: | /s/ Vikram Jog |
| | | Vikram Jog |
| | | Chief Financial Officer |
EXHIBIT LIST
|
| | | | | | | | |
Exhibit Number | | Description | | Incorporated by Reference From Form | | Incorporated by Reference From Exhibit Number | | Date Filed |
| | | | | |
| 1.1 | | | | 8-K | | 1.1 | | 8/3/2017 |
| | | | | | | | | |
| 3.1 | | | | 10-K | | 3.1 | | 3/28/2011 |
| | | | | | | | | |
| 3.2 | | | | 8-K | | 3.1 | | 11/22/2016 |
| | | | | | | | | |
| 3.3 | | | | 8-K | | 3.1 | | 8/2/2017 |
| | | | | | | | | |
| 4.1 | | | | S-8 | | 4.1 | | 8/3/2017 |
| | | | | | | | | |
10.1* | | | | 8-K | | 10.1 | | 8/2/2017 |
| | | | | | | | | |
10.2* | | | | 8-K | | 10.2 | | 8/2/2017 |
| | | | | | | | | |
| 10.3 | | | | 8-K | | 10.1 | | 8/3/2017 |
| | | | | | | | | |
| 10.4* | | | | 8-K | | 10.1 | | 8/23/2017 |
| | | | | | | | | |
| 10.5* | | | | Filed herewith | | | | |
| | | | | | | | | |
| 31.1 | | | | Filed herewith | | | | |
| | | | | |
| 31.2 | | | | Filed herewith | | | | |
| | | | | |
| 32.1(1) | | | | Furnished herewith | | | | |
| | | | | |
| 32.2(1) | | | | Furnished herewith | | | | |
| | | | | |
| 101.INS | | XBRL Instance Document | | Filed herewith | | | | |
| | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith | | | | |
| | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith | | | | |
| | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith | | | | |
| | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith | | | | |
| | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith | | | | |
*Indicates a management contract or compensatory plan.
|
| | | | Vikram Jog |
(1) | | In accordance with Item 601(b)(32)(ii) of Regulation S-K
| | Chief Financial Officer |
| | | | (Principal Accounting and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.Officer) |
