UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2023 OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ____ to ____
Commission File: Number 001-35980
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(206 ) 378-6266
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| (The NASDAQ Global Market) | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| ý | Accelerated filer | ¨ | |||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of April 26, 2023 there were 47,333,751 shares of registrant’s common stock outstanding.
NANOSTRING TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED March 31, 2023
TABLE OF CONTENTS
| PAGE | ||||||||
Condensed Consolidated Balance Sheets at March 31, 2023 and December 31, 2022 | ||||||||
Condensed Consolidated Statements of Operations — Three months ended March 31, 2023 and 2022 | ||||||||
Condensed Consolidated Statements of Comprehensive Loss — Three months ended March 31, 2023 and 2022 | ||||||||
Condensed Consolidated Statements of Changes in Stockholders’ Equity — Three months ended March 31, 2023 and 2022 | ||||||||
Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2023 and 2022 | ||||||||
1
Risk Factor Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this report titled “Risk Factors.” The following is a summary of the principal risks we face:
•We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability.
•Our financial results may vary significantly from quarter to quarter which may adversely affect our stock price.
•If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects will be harmed.
•Our future success is dependent upon our ability to expand our customer base and introduce new applications and products.
•The life sciences research market is highly competitive. If we fail to compete effectively, our business and operating results will suffer.
•New product development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the products we develop.
•New market opportunities may not develop as quickly as we expect, limiting our ability to successfully market and sell our products.
•We face risks related to health epidemics and other outbreaks, such as COVID-19, which could significantly disrupt our operations and could have a material adverse impact on us.
•Our business depends on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.
•Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.
•Our reliance on distributors for sales of our products outside of the United States could limit or prevent us from selling our products and impact our revenue.
•Our future capital needs are uncertain and we may need to raise additional funds in the future.
•We may not be able to develop new products, enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business and operating results.
•We are dependent on third-party manufacturers, service providers and single source suppliers for some of the components and materials used in our products, and the loss of any of these suppliers, or difficulties or delays in securing components or materials, could harm our business.
•We may experience manufacturing problems or delays that could limit our growth or adversely affect our operating results.
•We expect to generate a substantial portion of our revenue internationally and are subject to various risks relating to our international activities, which could adversely affect our operating results.
•Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims.
•If we experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected.
•We are subject to ongoing and extensive regulatory requirements, and our failure to comply with these requirements could substantially harm our business.
•If we are unable to protect our intellectual property effectively, our business would be harmed.
•Involvement 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-party claims of intellectual property infringement, could be time-intensive and costly and may adversely impact our business or stock price.
•The price of our common stock may be volatile, and you could lose all or part of your investment.
•Macroeconomic conditions, inflationary pressures and the political climate could adversely affect our operating results and growth prospects.
•Complying with the laws and regulations affecting public companies increases our costs and the demands on management and could harm our operating results.
2
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
NanoString Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | (Unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and equivalents | |||||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory, net | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Accrued compensation and other employee benefits | |||||||||||
| Customer deposits | |||||||||||
| Deferred revenue, current portion | |||||||||||
| Operating lease liabilities, current portion | |||||||||||
| Total current liabilities | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
| Long-term debt, net | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Total liabilities | |||||||||||
| Commitment and contingencies (Note 10) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NanoString Technologies, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenue: | |||||||||||
| Product | $ | $ | |||||||||
| Service and other | |||||||||||
| Total revenue | |||||||||||
| Costs and expenses: | |||||||||||
| Cost of product revenue | |||||||||||
| Cost of service and other revenue | |||||||||||
| Total cost of revenue | |||||||||||
| Research and development | |||||||||||
| Selling, general and administrative | |||||||||||
| Total costs and expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income (expense): | |||||||||||
| Interest income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Other income (expense), net | ( | ( | |||||||||
| Total other expense, net | ( | ( | |||||||||
| Net loss before provision for income tax | ( | ( | |||||||||
| Provision for income tax | ( | ( | |||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Net loss per share — basic and diluted | $ | ( | $ | ( | |||||||
| Weighted average shares used in computing basic and diluted net loss per share | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NanoString Technologies, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income (loss): | |||||||||||
| Change in unrealized gain (loss) on available-for-sale debt securities | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NanoString Technologies, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | — | — | |||||||||||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlements of restricted stock units | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | — | — | |||||||||||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlements of restricted stock units | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive gain | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NanoString Technologies, Inc.
Condensed Consolidated Statements of Cash Flows (in thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Stock-based compensation expense | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Amortization of premium on short-term investments, net | |||||||||||
| Non-cash operating lease cost | |||||||||||
| Allowance for inventory obsolescence and accounts receivable credit loss | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | ( | ( | |||||||||
| Accrued compensation and other employee benefits | ( | ( | |||||||||
| Customer deposits | ( | ( | |||||||||
| Deferred revenue and other liabilities | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Purchase of internal-use software assets | ( | ( | |||||||||
| Purchase of intellectual property | ( | ||||||||||
| Proceeds from maturity of short-term investments | |||||||||||
| Purchases of short-term investments | ( | ||||||||||
| Net cash provided by investing activities | |||||||||||
| Financing activities | |||||||||||
| Tax withholdings related to net share settlements of restricted stock units | ( | ( | |||||||||
| Proceeds from issuance of common stock for employee stock purchase plan | |||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Repayment of finance lease obligations | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash, restricted cash and cash equivalents | ( | ||||||||||
| Net increase (decrease) in cash, restricted and cash equivalents | ( | ||||||||||
| Cash, restricted cash and cash equivalents | |||||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and cash equivalents | |||||||||||
| Total cash, restricted cash and cash equivalents shown in the statement of cash flows | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
NanoString Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of the Business
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries. The unaudited condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all information and disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for annual financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and U.S. GAAP for unaudited condensed consolidated financial information. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and results of its operations as of and for the periods presented.
Unless indicated otherwise, all amounts presented in financial tables are presented in thousands, except for per share and par value amounts.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Given the global economic climate, certain estimates are becoming more challenging, and actual results could differ materially from those estimates. The results of the Company’s operations for the three month period ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year or for any other period.
Revenue Recognition
8
Leases
Capitalized Internal Use Software Costs
The Company capitalizes certain development costs incurred in connection with software development for internal-use software platforms used in operations. Costs incurred in the preliminary stages of development are expensed as incurred. Once software has reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized internal use software development costs are included in property and equipment and are amortized on a straight-line basis over the estimated useful life of the software platforms and are included in depreciation and amortization within operating expenses in the consolidated statements of operations. Unamortized capitalized internal-use software development costs were $12.6 million and $11.8 million as of March 31, 2023 and December 31, 2022, respectively. Amortization of capitalized internal-use software costs was $1.1 million for the three months ended March 31, 2023.
Capitalized costs associated with the implementation of hosted third-party cloud computing arrangements are recorded as part of current and long-term other assets. Maintenance and training costs are expensed as incurred on a straight-line basis over the term of the related hosting arrangement. Costs are recorded within the consolidated statements of operations based on functional use of the software. Unamortized capitalized software implementation costs were $1.7 million and $1.9 million as of March 31, 2023 and December 31, 2022, respectively. Amortization of capitalized software implementation costs of hosted third-party cloud computing arrangements was $0.2
3. Revenue from Contracts with Customers
The Company operates as a single reportable segment. The Company has one sales force that sells the Company’s spatial biology and its nCounter Analysis systems and the consumables and services related to these platforms.
Disaggregated Revenues
The following table of total revenue is based on the geographic location of end users or distributors who purchase products and services. For sales to distributors, their geographic location may be different from the geographic location of the ultimate end customer. For collaboration agreements, revenues are derived from partners located primarily in the United States. Americas consists of the United States, Canada, Mexico, and South America; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia, India, and Australia.
9
The following table provides information about disaggregated revenue by major product line and primary geographic market (in thousands):
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||
| Americas | Europe and Middle East | Asia Pacific | Total | |||||||||||||||||||||||
| Product revenue: | ||||||||||||||||||||||||||
| Instruments | $ | $ | $ | $ | ||||||||||||||||||||||
| Consumables | ||||||||||||||||||||||||||
| Total product revenue | ||||||||||||||||||||||||||
| Service and other revenue | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||
| Americas | Europe and Middle East | Asia Pacific | Total | |||||||||||||||||||||||
| Product revenue: | ||||||||||||||||||||||||||
| Instruments | $ | $ | $ | $ | ||||||||||||||||||||||
| Consumables | ||||||||||||||||||||||||||
| Total product revenue | ||||||||||||||||||||||||||
| Service and other revenue | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Total revenue in the United States was $21.3 million and $20.4 million, for the three month periods ended March 31, 2023 and 2022, respectively. The Company’s assets are primarily located in the United States and therefore are not allocated to any specific geographic region.
Contract balances and remaining performance obligations
Contract liabilities are comprised of the current and long-term portions of deferred revenue of $16.0 million and $13.0 million as of March 31, 2023 and December 31, 2022, respectively, and customer deposits of $1.7 million and $1.8 million as of March 31, 2023 and December 31, 2022, respectively, included within the condensed consolidated balance sheets. Total contract liabilities increased by $3.0 million as of March 31, 2023 as a result of additional deferred revenue of $6.7 million associated primarily with new or extended service contracts partially offset by the recognition of previously deferred revenue and customer deposits of $3.7 million for the completion of certain performance obligations during the period. The Company recorded contract assets of $1.5 million and $1.1 million as of March 31, 2023 and December 31, 2022, related to revenues recognized, but not yet invoiced to customers. The Company’s contractual payment terms for its contracts with customers approximates 40 days on average.
As of March 31, 2023, unsatisfied or partially unsatisfied performance obligations related to undelivered products and service contracts were $17.7 million and are expected to be completed over the term of the related contract or as products are delivered.
4. Net Loss Per Share
10
The following shares were excluded from the computation of basic and diluted net loss per share for the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Options to purchase common stock | |||||||||||
| Restricted stock units | |||||||||||
| Common stock warrants | |||||||||||
5. Concentration of Risks
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, and accounts receivable. Cash is invested in accordance with the Company’s investment policy, which includes guidelines intended to minimize and diversify credit risk. Most of the Company’s investments are not federally insured and the Company holds cash deposits above the limits for federal insurance. The Company has credit risk related to the collectability of its accounts receivable. The Company performs initial and ongoing evaluations of its customers’ credit history or financial position and generally extends credit on account without collateral. Additionally, the Company evaluates collectability risk over the life of its receivables in order to establish an appropriate reserve for certain receivables that may become uncollectible in future periods. The Company has not experienced significant credit losses to date. During the three months ended March 31, 2023 and 2022, the Company had no customers that individually represented more than 10% of total revenue. The Company had no customers that represented more than 10% of total accounts receivable as of March 31, 2023 or December 31, 2022.
The Company is also subject to supply chain risks related to the outsourcing of the manufacturing and production of its instruments to sole suppliers. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. Similarly, the Company sources certain raw materials used in the manufacture of consumables from sole suppliers. A change in or loss of suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results.
6. Short-term Investments
Short-term investments consisted of available-for-sale and equity securities as follows (in thousands):
| Type of securities as of March 31, 2023 | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||||||||
| Corporate debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Government-related debt securities | ( | ||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Type of securities as of December 31, 2022 | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||||||||
| Corporate debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Government-related debt securities | ( | ||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
The fair values of available-for-sale debt securities by contractual maturity were as follows (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Maturing in one year or less | $ | $ | |||||||||
| Maturing in one to three years | |||||||||||
| Total available-for-sale debt securities | $ | $ | |||||||||
The Company has both the intent and ability to sell its available-for-sale debt securities maturing greater than one year within 12 months from the balance sheet date and, accordingly, has classified these securities as current in the condensed consolidated balance sheets.
11
The following table summarizes investments that have been in a continuous unrealized loss position as of March 31, 2023 (in thousands).
| Less than 12 months | 12 months or greater | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Gross unrealized losses | Fair Value | Gross unrealized losses | Fair Value | Gross unrealized losses | ||||||||||||||||||||||||||||||
| Corporate debt securities | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| Government-related debt securities | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
The Company invests in securities that are rated investment grade or better. The unrealized losses on available-for-sale debt securities as of March 31, 2023 were caused primarily by interest rate increases.
The Company reviews the individual securities in its portfolio for impairment when events indicate the fair value of the investments may be below the carrying value. The Company reviews the individual securities in its portfolio for indications that unrealized losses are credit related and require an allowance to be recorded at the present value of the future expected cash flows. The Company determined unrealized losses were not for credit losses and therefore did not record an allowance related to its available-for-sale debt investments for the three month period ended March 31, 2023. The Company did not record any impairment charges related to its available-for-sale debt investments for the three month period ended March 31, 2023.
7. Fair Value Measurements
The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to measure fair value. The three levels of the fair value hierarchy are as follows:
•Level 1 — Quoted prices in active markets for identical assets and liabilities.
•Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The recorded amounts of certain financial instruments, including cash, accounts receivable, prepaid expenses and other, accounts payable and accrued liabilities, approximate fair value due to their relatively short-term maturities. The recorded amount of the Company’s long-term debt can be determined based on the estimated or actual bid prices of the Convertible Senior Notes in an over-the-counter market, which are classified as a Level 2 financial instrument.
12
The Company’s investments by level within the fair value hierarchy were as follows (in thousands):
| Fair value measurement using: | |||||||||||||||||||||||
| Type of securities as of March 31, 2023 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market fund | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| U.S. Government-related debt securities | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Fair value measurement using: | |||||||||||||||||||||||
| Type of securities as of December 31, 2022 | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market fund | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| U.S. Government-related debt securities | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
In March 2020, the Company issued $230.0 million of Convertible Notes as described in more detail in Note 9. Long-term Debt, Net. As of March 31, 2023, the fair value of the Convertible Notes was $184.0 million.
8. Inventory
Inventory, net of related reserves, consisted of the following as of the date indicated (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Intermediate manufactured components | |||||||||||
| Finished goods | |||||||||||
| Total inventory, net | $ | $ | |||||||||
9. Long-term Debt, Net
In March 2020, the Company issued $230.0 million in aggregate principal amount of its Convertible Notes in a private offering. The Convertible Notes are governed by an indenture dated March 9, 2020 between the Company and U.S. Bank, National Association, as trustee. The Company received net proceeds from the offering of $222.6 million.
The Convertible Notes bear interest at a rate of 2.625 % per year, payable semi-annually in arrears on March 1st and September 1st. The Convertible Notes may bear additional interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under, or if the Convertible Notes are not freely tradeable as required by, the indenture governing the Convertible Notes. Upon conversion, the Convertible Notes will be convertible into cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election.
The Convertible Notes are general unsecured senior obligations and will mature on March 1, 2025, unless earlier repurchased, redeemed or converted, subject to satisfaction of certain conditions and during the periods described below. The initial conversion rate for the Convertible Notes is 20.9161 shares of common stock, par value $0.0001 per share, per $1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately $47.81 per share). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that may occur prior to the maturity date or if the Company issues a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or in connection with such redemption, as the case may be, in certain circumstances.
The Company was not allowed to redeem the Convertible Notes prior to March 5, 2023, and no sinking fund is provided for the Convertible Notes. On or after March 5, 2023, the Company may redeem for cash all or any portion of the Convertible Notes, at its option, if the last reported sale price of the common stock has been at least 130% of the conversion
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price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
The Convertible Notes do not contain any financial or operating covenants or any restrictions on the issuance of other indebtedness or the issuance or repurchase of securities by the Company. The Convertible Notes indenture contains customary events of default, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the Convertible Notes will automatically become due and payable. The debt issuance costs of $7.4 million are amortized to interest expense using the effective interest method over five years , the contractual term of the Convertible Notes, with an effective interest rate of 3.3 %.
The Company monitors the provision of the Convertible Notes that allow for certain conversion rights at each quarterly reporting date in order to determine whether the Convertible Notes are convertible or subject to an event triggering potential redemption during the prescribed measurement periods. As of the date of this report, none of the outstanding convertible notes had been redeemed by the Company. Based on the closing price of our common stock of $9.90 on the last trading day of the quarter, the if-converted values of the Convertible Notes did not exceed the remaining principal balance as of March 31, 2023.
All future principal payments related to the Convertible Notes are due in March 2025. The outstanding balances of the Company’s Convertible Notes and previously outstanding term loan consisted of the following (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Outstanding principal of Convertible Note | $ | $ | |||||||||
| Less: unamortized issuance costs | ( | ( | |||||||||
| Long-term debt, net | $ | $ | |||||||||
The following table sets forth total interest expense recognized related to the Convertible Notes (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Contractual interest expense | $ | $ | |||||||||
| Amortization of issuance costs | |||||||||||
| Total interest expense | $ | $ | |||||||||
10. Commitments and Contingencies
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
10x Genomics
On May 6, 2021, 10x Genomics, Inc. and Prognosys Biosciences, Inc. (“Prognosys”) filed a complaint, and on May 19, 2021, an amended complaint, and on May 4, 2022, a second amended complaint, against the Company in the U.S. District Court for the District of Delaware. The complaint, as amended, alleges that certain of the Company’s products, services and components sold by the Company for use in connection with its GeoMx DSP system (the “Identified GeoMx Products”) infringe seven patents owned by Prognosys: (a) U.S. Patent No. 10,472,669, “Spatially encoded biological assays,” (b) U.S. Patent No. 10,961,566, “Spatially encoded biological assays,” (c) U.S. Patent No. 10,983,113, “Spatially encoded biological assays,” (d) U.S. Patent No. 10,996,219, “Spatially encoded biological assays,” (e) U.S. Patent No. 11,001,878, “Spatially encoded biological assays,” (f) U.S. Patent No. 11,008,607, “Spatially encoded biological assays,” and (g) U.S. Patent No. 11,293,917, “Systems for analyzing target biological molecules via sample imaging and delivery of probes to substrate well” (the “Asserted Prognosys Patents”). The complaint seeks, among other relief, injunctive relief and unspecified damages (including treble damages and attorneys’ fees) in relation to the Company’s making, using, selling, offering to sell, exporting and/or importing in the United States the Identified GeoMx Products, as well as the alleged infringement by others of the Asserted Prognosys Patents through their use of the Identified GeoMx Products. The Company has evaluated the plaintiffs’ claims and does not believe that its activities infringe any patent rights held by the plaintiffs. On November 17, 2021, the Court granted the Company’s motion to dismiss the plaintiffs’ claims of pre-suit indirect infringement and willful infringement with leave to amend the complaint. Discovery is in progress. A claim construction hearing was held on February 17, 2023. A trial is
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scheduled for November 2023. The Company intends to vigorously defend itself in this litigation. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this case.
On February 28, 2022, 10x Genomics, Inc. and President and Fellows of Harvard College (“Harvard”) filed a complaint, on May 12, 2022, an amended complaint, and on March 1, 2023, a second amended complaint, against the Company in the U.S. District Court for the District of Delaware (the “U.S. 10x CosMx Case”). The complaint, as amended, alleges that certain of the Company’s products, services and components sold by it for use in connection with its CosMx SMI system (the “Identified CosMx Products”) infringe six patents owned by Harvard: (a) U.S. Patent No. 10,227,639, “Compositions and Methods for Analyte Detection,” (b) U.S. Patent No. 11,021,737, “Compositions and Methods for Analyte Detection,” (c) U.S. Patent No. 11,293,051, “Compositions and Methods for Analyte Detection”, (d) U.S. Patent No. 11,293,052, “Compositions and Methods for Analyte Detection,” (e) U.S. Patent No. 11,293,054, “Compositions and Methods for Analyte Detection,” and (f) U.S. Patent No. 11,542,554, “Method and Apparatus for Volumetric Imaging”. The complaint seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to the Company’s making, using, selling, offering to sell, exporting and/or importing in the United States the Identified CosMx Products. The Company has evaluated the plaintiffs’ claims and does not believe that its activities infringe any patent rights held by the plaintiffs. On May 1, 2023, the Company filed a motion to amend its answer, affirmative defenses, and counterclaims to the plaintiffs’ second amended complaint to assert the affirmative defense of unclean hands and new counterclaims for an antitrust violation under Section 2 of the Sherman Act, various state law violations, and breach of contract. Discovery is in progress. A claim construction hearing is scheduled for December 2023 and a trial is scheduled for September 2024. The Company intends to vigorously defend itself in this litigation. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this case. On August 16, 2022, the Company filed counterclaims in this action alleging that 10x Genomics’ Visium Spatial Gene Expression system and related products and services infringe the Company’s U.S. Patent No. 11,377,689, “Chemical Compositions and Uses Thereof.” On January 24, 2023, these counterclaims were consolidated with the claims of a separate patent infringement case that the Company filed against 10x Genomics on October 20, 2022, as discussed below.
On May 9, 2022, the Company was notified of a complaint, dated March 4, 2022, naming the Company and its wholly-owned subsidiary, NanoString Technologies Germany GmbH, which 10x Genomics, Inc. filed in the Munich Regional Court I in Germany, alleging that the Company’s CosMx SMI system and associated products and services infringe European Patent No. 2794928B1 (“EP 2794928B1”), which is owned by Harvard. The complaint seeks, among other relief, injunctive relief and damages in relation to the Company’s selling and offering to sell its CosMx SMI system and associated products and services in Germany. The Company has evaluated the claims and does not believe that its activities infringe any patent rights held by 10x or Harvard. A hearing in this proceeding took place in Munich on March 23, 2023 and a ruling is expected in May 2023. The Company intends to vigorously defend itself in this litigation. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this case. On July 29, 2022, the Company, through its German subsidiary, filed a nullity action with the German Federal Patent Court in Munich requesting a judgment that EP 2794928B1, as in effect for Germany, be declared invalid and be revoked in its entirety. On February 10, 2023, the German Federal Patent Court issued a preliminary and non-binding opinion in this nullity action finding that the subject matter of the asserted independent claim 1 of EP 2794928B1 potentially lacked novelty and potentially lacked an inventive step over prior art. The preliminary opinion further addressed Harvard’s seven patent claim limitation requests, referred to as auxiliary requests, which 10x and Harvard seek to have applied in the event that claim 1 of EP 2794928B1, as granted, proves not to be protectable. The preliminary opinion stated that the claim limitations in Auxiliary Request 1 could potentially be used to defend EP 2794928B1 over the cited prior art. The preliminary opinion further stated that Harvard would potentially not be able to use Auxiliary Requests 2 through 7 to establish patentability over the prior art. A hearing before the German Federal Patent Court is scheduled for May 2024 and a decision in the nullity action is expected following the hearing.
On October 20, 2022, the Company filed suit against 10x Genomics, Inc. in the U.S. District Court for the District of Delaware alleging that 10x Genomics’ Visium Spatial Gene Expression system and related products and services infringe the Company’s U.S. Patent No. 11,473,142, “Chemical Compositions and Uses Thereof.” On January 24, 2023, the Company’s counterclaims from the U.S. 10x CosMx Case with respect to U.S. Patent No. 11,377,689 were consolidated with the claims in this action. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to 10x Genomics’ making, using, selling, offering to sell, exporting and/or importing in the United States the Visium Spatial Gene Expression system and related products and services. Discovery is in progress. A trial in this consolidated case is scheduled for December 2024.
Contingencies
Other than the pending litigations with 10x Genomics and its co-plaintiffs, the Company is not engaged in any material legal proceedings. The Company is involved in other legal proceedings from time to time arising in the normal course of business. Additionally, the Company operates in various states and local jurisdictions for which sales, occupation, or franchise taxes may be payable to certain taxing authorities. Management believes that the outcome of these proceedings and any
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available. This section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements can be identified by words such as “believe,” “anticipate,” “could,” “continue,” “depends,” “expect,” “expand,” “forecast,” “intend,” “predict,” “plan,” “rely,” “should,” “will,” “may,” “seek,” or the negative of these terms and other similar expressions, although not all forward-looking statements contain these words. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:
•our expectations regarding our future operating results and capital needs, including our expectations regarding revenue, operating expenses, sufficiency of cash on hand and net loss;
•our expectations regarding the commercial trajectory of our spatial biology products, including our ability to maintain and grow sales of our GeoMx Digital Spatial Profiler and CosMx Spatial Molecular Imager platforms and to develop our AtoMx Spatial Informatics Platform;
•our expectations regarding future sales and profitability of our nCounter platform;
•statements regarding our profitability and cash flow, including our ability to realize expected cost savings and related benefits from our previous reorganization and restructuring initiatives;
•our expectations that our existing cash, cash equivalents, and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months;
•our expectations regarding the competitive position, market size and growth potential for our business;
•our expectations regarding management of growth, including our ability to expand our customer base, develop new products, enter new markets, and hire and retain key personnel;
•our expectations regarding the success, costs and timing of implementation of our business model, strategic plans and future product development plans;
•our ability to secure and sustain certain strategic relationships, including with patent holders of our technologies, manufacturers and distributors of our products, and collaboration partners;
•our intellectual property position and the risk or results of litigation alleging that our products infringe upon the intellectual property rights of third parties;
•our ability to attract and retain key scientific or management personnel; and
•the regulatory regime and our ability to secure and maintain regulatory clearance or approval or reimbursement for the clinical use of our products, domestically and internationally.
All forward-looking statements are based on information available to us on the date of this Quarterly Report on Form 10-Q and we will not update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q, except as required by law. Our actual results could differ materially from those discussed in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q, and other written and oral forward-looking statements made by us from time to time, are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements, and you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Factors that might cause such a difference include, but are not limited to, those discussed in the following discussion and within Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Our Risk Factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part. In this report, “we,” “our,” “us,” “NanoString,” and “the Company” refer to NanoString Technologies, Inc. and its subsidiaries.
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In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
Overview
We develop, manufacture and market technologies that unlock scientifically valuable and clinically actionable information from minute amounts of biological material, primarily for life science researchers in the fields of genomics and proteomics. Our mission is to offer an ecosystem of innovative discovery and translational research solutions that enable our customers to map the universe of biology, enabling scientific exploration that may lead to new therapies that can improve the human condition.
Our technologies include proprietary chemistries that enable the labeling and counting of single molecules. Our product platforms are used for scientific discovery and clinical research applications, often in connection with pharmaceutical product development and human clinical trials of potential new therapies. Our proprietary chemistries may reduce the number of steps required to conduct certain types of scientific experiments, enable the collection of multiple data points in a single experiment and allow for multiple experiments to be conducted at once. Our chemistries and instruments are also able to extract information from multiple types of biological samples, including those that are often challenging to work with using other scientific methods or platforms. As a result, we are able to develop tools that are easier for researchers to use and that may generate larger amounts of data and faster, more consistent scientific results.
Our ecosystem of solutions consists of (i) our spatial biology platforms, including our GeoMx Digital Spatial Profiler, or “GeoMx DSP” or “GeoMx”, our CosMx Spatial Molecular Imager, or “CosMx SMI” or “CosMx”, and our AtoMx Spatial Informatics Platform, or “AtoMx SIP” or “AtoMx”, a cloud-based, open source and fully integrated informatics solution for use with GeoMx and CosMx, and (ii) our nCounter Analysis System, our original product platform for multi-plex bulk gene expression analysis. All our product platforms include instruments, related consumables, software and services, have the versatility to detect both RNA and protein expression and are able to generate reliable and reproduceable data in a variety of biological sample types, including formalin fixed paraffin embedded, or FFPE, sample types. Our product platforms allow our customers to progress their research in areas such as oncology, immunology and neurology. We market and sell our instruments and related consumables to researchers in academic, government and biopharmaceutical laboratories for research use, both through our direct sales force and through selected distributors in certain markets.
Spatial Biology Platforms
GeoMx DSP, which was commercially launched in 2019, is a pioneering product platform in the emerging field of spatial biology. While nCounter and other common gene expression analysis technologies use bulk analysis approaches, GeoMx is used to analyze selected regions of an intact biological sample without the need to reduce or destroy the sample, enabling researchers to see how gene expression might vary across those regions. CosMx SMI, which was commercially launched in December 2022, is a new product platform in the field of spatial biology and complements our GeoMx DSP platform. While GeoMx offers researchers the ability to profile gene expression activity in a selected region of interest that may contain multiple cells or cell types, CosMx is designed to enable multiplexed spatial profiling of RNA and protein targets at a single and sub-cellular resolution level. While GeoMx allows for more rapid, higher throughput analysis of gene expression activity in selected regions of interest, CosMx is designed to allow researchers to “drill down” into a specific single cell or sub-cellular area in a region of interest to gather more information as desired or required. As of March 31, 2023, we had installed approximately 385 spatial biology platforms, which customers have used to publish approximately 232 peer-reviewed papers featuring our spatial biology platforms.
AtoMx SIP, which was commercially launched in December 2022, is a new cloud-based, open source spatial biology informatics platform, initially for use with CosMx, and eventually also with GeoMx. Researchers’ desire for ever larger amounts of data in their spatial biology experiments has led to significant “big data” management issues, including the ability to store, access and efficiently analyze experimental data at a reasonable cost. AtoMx is designed to enable researchers to perform image analysis and data visualization, as well as sharing of data and analysis with collaborators, using scalable and on-demand cloud images generated by spatial biology experiments, while avoiding the large computing infrastructure and security costs associated with operating in-house data centers. AtoMx is currently available to researchers using CosMx, and is expected to be made available for GeoMx users by the end of 2023.
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In advance of and subsequent to our commercial launch of GeoMx, CosMx and AtoMx, we have provided selected customers in-house sample testing services whereby customers send biological samples to our Seattle facilities to be analyzed using our product platforms and selected consumables under our technology access program, or TAP. Upon completion of each project, the raw data and analysis report is provided to the customer.
nCounter Platform
nCounter, which was commercially launched in 2008, is used to conduct what is known as “bulk” gene expression analysis, whereby biological samples are first reduced, and then gene expression, specifically quantities of selected RNA or proteins, are measured at their average levels throughout the totality of the sample. nCounter can be used to analyze the activity of up to 800 genes in a single experiment. As of March 31, 2023, we had an installed base of approximately 1,130 nCounter systems, which our customers have used to publish more than 6,820 peer-reviewed and research papers featuring our nCounter platform.
Our total revenue increased $4.7 million to $35.8 million for the three months ended March 31, 2023, compared to $31.1 million for the first three months of 2022. We derive a substantial majority of our revenue from the sale of our products, which consist of our GeoMx, CosMx, and nCounter instruments and related proprietary consumables. Our instruments are designed to work only with our consumables products. Accordingly, as the installed base of instruments grows, we expect recurring revenue from consumables sales to become an increasingly important driver of our operating results. Our consumables include our standardized GeoMx and nCounter panel products, nCounter custom codeset products that contain a specific set of targets for scientific analysis as requested by a customer, and the Prosigna breast cancer assay which is manufactured for our partner Veracyte Inc, or Veracyte. We also derive revenue from processing fees related to proof-of-principle studies, including from our GeoMx DSP and CosMx TAP which we conduct for potential customers. For GeoMx, CosMx and nCounter, we offer extended service contracts and generate service revenue. We also expect to generate revenue in future periods from AtoMx in the form of software subscription fees which include license, cloud computing, and data storage.
We use third-party contract manufacturers to produce our instruments and certain raw materials for our consumables. We build our consumables, including our panels, custom code sets and reagent packages, at our greater Seattle, Washington area facilities.
We focus a substantial portion of our resources on developing new technologies, products, and solutions. Research and development expense totaled $16.1 million and $17.4 million for the three months ended March 31, 2023 and 2022, respectively. We intend to continue to make significant investments in research and development to support our existing instrument platforms and related consumables offerings, as well as research and development of new technologies.
We have never been profitable and had net losses of $41.2 million and $39.5 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, our accumulated deficit was $850.5 million.
Results of Operations
Revenue
Our product revenue is derived from sales of our spatial biology and nCounter platform instruments and related consumables. There may be fluctuations in sales mix between instruments and consumables from period to period.
Service revenue consists of fees associated with service contracts and revenue from our Technology Access Program, or TAP, in which we offer customers trial or early access to our product platforms and generate data and perform analysis services on their behalf. Our customer base is primarily comprised of academic institutions, government laboratories, biopharmaceutical companies, and clinical laboratories.
The following table reflects total revenue by geography based on the geographic location of our customers, distributors, and collaborators. For sales to distributors, their geographic location may be different from the geographic locations of the ultimate end customer.
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Americas | $ | 22,012 | 62 | % | $ | 21,261 | 68 | % | 4 | % | |||||||||||||||||||
| Europe & Middle East | 10,516 | 29 | % | 6,750 | 22 | % | 56 | % | |||||||||||||||||||||
| Asia Pacific | 3,277 | 9 | % | 3,069 | 10 | % | 7 | % | |||||||||||||||||||||
| Total revenue | $ | 35,805 | 100 | % | $ | 31,080 | 100 | % | 15 | % | |||||||||||||||||||
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The following table reflects the breakdown of our revenue into the primary components of instruments, consumables and service and other.
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Instruments | $ | 11,370 | $ | 9,103 | 25 | % | |||||||||||
| Consumables | 19,776 | 17,468 | 13 | % | |||||||||||||
| Service and other revenue | 4,659 | 4,509 | 3 | % | |||||||||||||
| Total revenue | $ | 35,805 | $ | 31,080 | 15 | % | |||||||||||
Instrument revenue during the three month period ended March 31, 2023 increased as compared to the same period in 2022, primarily as a result of increased shipments of our spatial biology systems, in particular of our CosMx systems. The increase was partially offset by lower instrument shipments for our nCounter platform, which is in a more mature phase of its product life cycle.
Consumables revenue currently includes sales of consumables for our spatial biology systems and for nCounter, and sales of Prosigna in vitro diagnostic kits to our partner Veracyte. Consumables revenue increased for the three month period ended March 31, 2023 as compared to the same period in 2022. The increase in consumables revenue for the three month period ended March 31, 2023 was driven by higher spatial biology consumables sales, as our installed base of spatial biology instruments increased significantly as compared to the same period in 2022.
Service and other revenue for the three month period ended March 31, 2023 was approximately flat as compared to the same period of 2022, due primarily to growth in our instrument installed bases and the corresponding service contract revenue, offset by decreased revenue from our TAP program.
We expect our product and service revenue may increase in future periods, primarily as a result of increased shipments of spatial biology systems and the sale of related spatial biology consumables and services.
Cost of Revenue; Gross Profit; and Gross Margin
Cost of revenue consists primarily of costs incurred in the production process including costs of purchasing instruments from third-party contract manufacturers, consumable component materials and assembly labor and overhead, installation, warranty, service and packaging, and delivery costs. In addition, cost of product and service revenue includes royalty costs for licensed technologies included in our products, provisions for slow-moving and obsolete inventory, and stock-based compensation expense. We provide a one-year warranty for our GeoMx, CosMx and nCounter systems and establish a reserve for warranty repairs based on historical warranty repair costs incurred.
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Cost of revenue | $ | 22,871 | $ | 14,778 | 55 | % | |||||||||||
| Gross profit | 12,934 | 16,302 | (21) | % | |||||||||||||
| Gross margin | 36% | 52% | |||||||||||||||
For the three month period ended March 31, 2023, cost of revenue increased as compared to the same period of 2022, due primarily to a higher volume of instruments sold, a higher volume of consumables sales and increased costs associated with providing service for our growing installed base of systems. In addition to volume driven cost of revenue increases, during the period we continued to make increased investments to support our manufacturing capabilities across all of our platforms, and incurred increased development amortization costs associated with our AtoMx platform. In accordance with internal policies, during the current period we recorded an increase to our inventory reserves resulting primarily from the shifting mix of spatial biology consumables sales away from our more targeted consumable panels toward our GeoMx whole transcriptome assay and other newer spatial biology consumables products.
Our gross margins on revenue for the three month period ended March 31, 2023 decreased as compared to the same period of 2022 due to a shift in instrument sales mix toward CosMx SMI instruments, which are currently selling at lower gross margins due to lower manufacturing yields and higher unit production costs than are expected to be incurred in future periods as we scale CosMx production. In addition, our gross margins were negatively impacted by the increase in inventory reserves recorded during the period.
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We expect our cost of revenue will increase in future periods with the anticipated growth in sales of our spatial biology platforms. We also expect to continue to make investments in our operations to support the growth of our business and that may improve our manufacturing efficiency and reduce production costs. We expect these investments and potential cost increases may be partially offset by the expected reduction in unit costs for CosMx as we scale production and more moderate expense growth in future periods as we continue to realize the benefits of certain reductions in employee and other operating costs associated with our previously announced reorganization and restructuring initiatives.
We expect our gross margin may fluctuate in future periods. Variability will depend in part on the level of our consumables revenue, for which we typically record higher gross margins and operate the manufacturing process directly, as compared to our instrument sales or service revenue, for which we typically record lower gross margins. Our gross margins may also vary depending on potential expenses we may incur for regulatory compliance, quality assurance or activities and investments related to the expansion of our manufacturing capacity or improvements in our manufacturing efficiency. In addition, as business activity has recovered through the pandemic, the cost and global availability of certain raw materials and other supplies have been impacted. While to date our operations and supply chain costs have not been materially impacted, our gross margins could be affected in the future by changes in the cost or availability of certain raw materials or supplies. Notwithstanding the foregoing, we expect our gross margins may increase in the longer term as consumables sales become a larger percentage of our total revenue and as we continue to realize improved gross margins on our CosMx instrument at greater production scale and manufacturing efficiency.
Research and Development Expense
Research and development expenses consist primarily of salaries and benefits, occupancy, laboratory supplies, engineering services, consulting fees, costs associated with licensing molecular diagnostics rights, and certain expenses related to research activities with customers and collaborators for which we have undertaken joint research projects. We have made substantial investments in research and development since our inception. Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products and applications.
Given the size of our research and development staff and the number of active projects at any given time, we believe it is most effective to manage our research and development activities on a departmental basis. Accordingly, other than for collaborations and certain major technology development programs, we have neither required employees to report their time by project nor allocated our research and development costs to individual projects. Research and development expense by functional area was as follows:
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Research and discovery | $ | 4,175 | $ | 4,263 | (2) | % | |||||||||||
| Manufacturing, support and service | 1,848 | 1,627 | 14 | % | |||||||||||||
| Product and process engineering | 7,263 | 8,244 | (12) | % | |||||||||||||
| Regulatory and medical affairs | 64 | 368 | (83) | % | |||||||||||||
| Facilities and overhead | 2,768 | 2,915 | (5) | % | |||||||||||||
| Total research and development expense | $ | 16,118 | $ | 17,417 | (7) | % | |||||||||||
Research and development expenses for the three month period ended March 31, 2023 decreased as compared to the same period in 2022, due primarily to lower personnel related costs resulting largely from our previously announced reorganization and restructuring activities, as well as the conclusion of certain product development activities relating to CosMx and AtoMx. These decreases were partially offset by higher personnel and supply costs and professional fees related to the development of future versions of our AtoMx platform and new consumables products for our spatial biology platforms.
We continue to invest in product development activities associated with our spatial biology platforms and our AtoMx SIP. We expect research and development expense may increase modestly in future periods, reflecting the impact of increasing investments in our spatial biology and other future projects and technologies, offset by certain reductions in employee and other expenses related to our previously announced reorganization and restructuring initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of costs for our sales and marketing, finance, human resources, information technology, business development, legal, and general management functions, as well as professional fees for legal, insurance, consulting, and accounting services.
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Selling, general, and administrative expense was as follows:
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Selling, general and administrative expense | $ | 37,366 | $ | 36,355 | 3 | % | |||||||||||
Selling, general, and administrative expense for the three month period ended March 31, 2023 increased slightly as compared to the same period in 2022, with increased travel and trade show related activities and higher costs associated with ongoing legal proceedings, offset by lower personnel related costs resulting from our previously announced reorganization and restructuring initiatives as well as decreases in professional fees.
We expect selling, general and administrative expenses may increase modestly in future periods as the number of technical support and administrative personnel grows to support the expected growth of our spatial biology installed base and as we incur expenses related to ongoing legal proceedings, with growth in those expenses offset by certain reductions in employee and other expenses related to our previously announced reorganization and restructuring initiatives.
Other Income (Expense)
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Interest income | $ | 1,285 | $ | 151 | 751 | % | |||||||||||
| Interest expense | (1,891) | (1,883) | — | % | |||||||||||||
| Other income (expense), net | (7) | (217) | (97) | % | |||||||||||||
| Total other expense, net | $ | (613) | $ | (1,949) | (69) | % | |||||||||||
Other income and expense items are comprised primarily of interest income earned on our cash equivalents and short term investments and interest paid on our outstanding convertible debt. Our total other expense, net for the three month period ended March 31, 2023 decreased as compared with the same period in the prior year, due primarily to increased interest income associated with higher yields on our short term investments, partially offset by increased losses on the remeasurement of foreign currency transactions into our functional currency of U.S. dollars, as a result of volatility in foreign exchange conversion rates associated primarily with the Euro and British pound sterling.
We continue to maintain a cash preservation investment strategy and, as a result, held the majority of our cash and cash equivalents in money market or other short duration fixed income positions for which yields have historically been very low. While we have seen improvement in interest rates available for investments resulting from the Federal Reserve responding to increasing inflation and other macroeconomic factors, at this time, we do not expect to see material increases in our interest income.
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Liquidity and Capital Resources
| March 31, 2023 | December 31, 2022 | Change | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cash and cash equivalents | $ | 121,408 | $ | 112,250 | $ | 9,158 | |||||||||||
| Short-term investments | 33,236 | 84,282 | (51,046) | ||||||||||||||
| Total cash and cash equivalents and short-term investments | $ | 154,644 | $ | 196,532 | $ | (41,888) | |||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cash used in operating activities | $ | (35,749) | $ | (30,253) | $ | (5,496) | |||||||||||
| Cash provided by investing activities | 43,798 | 20,705 | 23,093 | ||||||||||||||
| Cash provided by financing activities | 814 | 960 | (146) | ||||||||||||||
| Effect of foreign exchange on cash and cash equivalents | 22 | (23) | 45 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 8,885 | $ | (8,611) | $ | 17,496 | |||||||||||
Changes in Cash Flow
Operating Activities
For the three months ended March 31, 2023, net cash used in operating activities consisted of our net loss of $41.2 million and net increases in our operating assets and liabilities of $9.4 million, partially offset by approximately $14.9 million of net non-cash income and expense items, such as stock-based compensation, depreciation and amortization, increased provisions for inventory obsolescence and bad debts and amortization of right-of-use assets.
For the three months ended March 31, 2022, net cash used in operating activities consisted of our net loss of $39.5 million, partially offset by $11.7 million of net non-cash income and expense items, such as stock-based compensation, depreciation and amortization, increased provisions for inventory obsolescence and bad debts and amortization of right-of-use assets.
Investing Activities
Our most significant investing activities for the three months ended March 31, 2023 and 2022, respectively, were related to the purchase, maturity and sale of short-term investments. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider cash flows related to management of our short-term investments to be important to an understanding of our liquidity and capital resources.
For the three months ended March 31, 2023 and 2022, we purchased property and equipment totaling $5.0 million and $3.0 million, respectively, which we believe will be required to support the growth and expansion of our operations. In addition, for the three months ended March 31, 2023 and 2022, we have invested $2.7 million and $2.2 million, respectively, related to the development of software and technology to support AtoMx.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2023 and 2022 consisted primarily of $1.4 million and $2.5 million, respectively, of net proceeds from the exercise of stock options and other equity awards including our Employee Stock Purchase Plan. These proceeds were partially offset by tax withholdings related to the net settlement of restricted stock units of $0.5 million and $1.5 million for the three months ended March 31, 2023 and 2022, respectively.
Short-term Investments
Our cash, cash equivalents, and short-term investments are held in a variety of non-interest bearing bank accounts and interest-bearing instruments subject to investment guidelines allowing for holdings in U.S. government and agency securities, corporate securities, taxable municipal bonds, commercial paper and money market accounts. Our investment portfolio is structured to provide for investment maturities and access to cash to fund our anticipated working capital needs. However, if our liquidity needs should be accelerated for any reason in the near term, or investments do not pay at maturity, we may be required to sell investment securities in our portfolio prior to their scheduled maturities, which may result in a loss.
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Financial Condition
Since inception, we have financed our operations primarily through the sale of equity securities, borrowings under term loan agreements and convertible notes, licensing of intellectual property and, to a lesser extent, sales of certain assets. As of March 31, 2023, we had cash, cash equivalents and short-term investments of $154.6 million, compared to $196.5 million as of December 31, 2022.
We believe our existing cash, cash equivalents and short-term investments, and cash generated from operations will be sufficient to meet these material cash requirements and fund our operating requirements for the next 12 months and beyond, including working capital requirements, capital expenditures and other operational investments.
Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Any future funding requirements will depend on many factors, including: market acceptance and the level of sales of our existing products and new products; the effect of competing technological and market developments; the effectiveness of our commercial sales and field service organizations; the nature and timing of any additional research, product development or other partnerships or collaborations we may establish; the cost and timing of establishing additional sales, marketing, and distribution capabilities; the cost of our research and development activities; the impact of, and anticipated cost savings resulting from, our previously announced reorganization and restructuring initiatives; and the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. We may require additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through partnership, collaboration or licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets; delay or reduce the scope of or eliminate some or all of our research and development programs, launch activities, or commercialization of our products; license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize; reduce marketing, customer support or other resources devoted to our products; or cease operations.
Material Cash Requirements
Our principal uses of cash are funding our operations, capital expenditures, working capital requirements and satisfaction of any outstanding obligations under our debt agreements.
Our material cash requirements for fiscal 2023 include non-cancelable purchase commitments for long-lead time inventory, research and development items, software development for internal-use projects and property and equipment and lease payments for office, laboratory and manufacturing spaces; and interest payments related to our convertible notes. We expect capital expenditures to increase in fiscal year 2023 as compared to fiscal 2022, due primarily to planned investments in manufacturing capacity and efficiency, and in software development for internal-use projects. As of March 31, 2023, we had future long-term interest payment obligations of $12.1 million, of which $6.0 million is payable within 12 months, and total operating and financing lease obligations of $27.5 million, of which $7.0 million is payable within 12 months. See Note 9. Long-term Debt, Net of the Notes to the Consolidated Financial Statements of this report. In addition, our purchase commitments as of March 31, 2023 are $61.1 million, of which $59.9 million is payable within 12 months.
Our material cash requirements may increase in the future as we invest in working capital to support the growth of our spatial biology platforms, research and development related to existing or new product platforms, and manufacturing capacity, sales and marketing and administrative activities. We cannot be certain our revenue will grow sufficiently to offset our operating expense increases. As a result, we may need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.
Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
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Critical accounting policies and significant estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:
•revenue recognition;
•stock-based compensation;
•inventory valuation; and
•income taxes.
For additional information, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 28, 2023 and Note 2 of the Notes to the Condensed Consolidated Financial Statements under Item 1 of this report.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 of the Notes to the Condensed Consolidated Financial Statements under Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to various market risks, including changes in commodity prices and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Prices for our products are largely denominated in U.S. dollars and, as a result, we do not face significant risk with respect to foreign currency exchange rates.
Interest Rate Risk
Generally, our exposure to market risk has been primarily limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our portfolio of cash, cash equivalents and short-term investments in a variety of interest-bearing instruments, which have included U.S. government and agency securities, high-grade U.S. corporate bonds, asset-backed securities, and money market funds. Declines in interest rates, however, would reduce future investment income. A 10% decline in interest rates, occurring on April 1, 2023 and sustained throughout the period ended March 31, 2024, would not be material.
Our Convertible Notes are based on a fixed rate; accordingly, we do not have economic interest rate exposure on the Convertible Notes. However, changes in interest rates could impact the fair market value of the Convertible Notes. Generally, the fair market value of the fixed interest rate of the Convertible Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair market value of the Convertible Notes fluctuates when the market price of our common stock fluctuates. As of March 31, 2023, the fair market value of the Convertible Notes was $184.0 million and was determined based on the estimated or actual bid prices of the Convertible Notes in an over-the-counter market.
Foreign Currency Exchange Risk
As we continue to expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, a majority of our revenue has been denominated in U.S. dollars, although we sell our products and services directly in certain markets outside of the United States denominated in local currency, principally the Euro and the British pound sterling. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables would not have been material for the periods presented. As our operations in countries outside of the United States grow, our results of operations and cash flows are and will be subject to potentially greater fluctuations due to foreign currency exchange rate fluctuations. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.
Inflation Risk
While we have experienced increased operating costs in recent periods, which we believe are due in part to the recent growth in inflation, we do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such
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higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this quarterly report, our disclosure controls and procedures were, in design and operation, effective.
(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent limitation on the effectiveness of internal control over financial reporting.
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgement in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 6, 2021, 10x Genomics, Inc. and Prognosys Biosciences, Inc. (“Prognosys”) filed a complaint, and on May 19, 2021, an amended complaint, and on May 4, 2022, a second amended complaint, against us in the U.S. District Court for the District of Delaware. The complaint, as amended, alleges that certain of our products, services and components sold by us for use in connection with our GeoMx DSP system (the “Identified GeoMx Products”) infringe seven patents owned by Prognosys: (a) U.S. Patent No. 10,472,669, “Spatially encoded biological assays”, (b) U.S. Patent No. 10,961,566, “Spatially encoded biological assays,”(c) U.S. Patent No. 10,983,113,“Spatially encoded biological assays,” (d) U.S. Patent No. 10,996,219, “Spatially encoded biological assays,” (e) U.S. Patent No. 11,001,878, “Spatially encoded biological assays,” (f) U.S. Patent No. 11,008,607, “Spatially encoded biological assays,” and (g) U.S. Patent No. 11,293,917, “Systems for analyzing target biological molecules via sample imaging and delivery of probes to substrate well” (the “Asserted Prognosys Patents”). The complaint seeks, among other relief, injunctive relief and unspecified damages (including treble damages and attorneys’ fees) in relation to our making, using, selling, offering to sell, exporting and/or importing in the United States the Identified GeoMx Products, as well as the alleged infringement by others of the Asserted Prognosys Patents through their use of the Identified GeoMx Products. We have evaluated the plaintiffs’ claims and do not believe that our activities infringe any patent rights held by the plaintiffs. On November 17, 2021, the Court granted our motion to dismiss the plaintiffs’ claims of pre-suit indirect infringement and willful infringement with leave to amend the complaint. Discovery is in progress. A claim construction hearing was held on February 17, 2023. A trial is scheduled for November 2023. We intend to vigorously defend ourselves in this litigation.
On February 28, 2022, 10x Genomics, Inc. and President and Fellows of Harvard College (“Harvard”) filed a complaint, and on May 12, 2022, an amended complaint, and on March 1, 2023, a second amended complaint, against us in the U.S. District Court for the District of Delaware (the “U.S. 10x CosMx Case”). The complaint, as amended, alleges that certain of our products, services and components sold by us for use in connection with our CosMx SMI system (the “Identified CosMx Products”) infringe six patents owned by Harvard: (a) U.S. Patent No. 10,227,639, “Compositions and Methods for Analyte Detection,” and (b) U.S. Patent No. 11,021,737, “Compositions and Methods for Analyte Detection,” (c) U.S. Patent No. 11,293,051, “Compositions and Methods for Analyte Detection”, (d) U.S. Patent No. 11,293,052, “Compositions and Methods for Analyte Detection,” and (e) U.S. Patent No. 11,293,054, “Compositions and Methods for Analyte Detection,” and (f) U.S. Patent No. 11,542,554, “Method and Apparatus for Volumetric Imaging”. The complaint seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to our making, using, selling, offering to sell, exporting and/or importing in the United States the Identified CosMx Products. We have evaluated the plaintiffs’ claims and do not believe that our activities infringe any patent rights held by the plaintiffs. On May 1, 2023, we filed a motion to amend our answer, affirmative defenses, and counterclaims to the plaintiffs’ second amended complaint to assert the affirmative defense of
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unclean hands and new counterclaims for an antitrust violation under Section 2 of the Sherman Act, various state law violations, and breach of contract. Discovery is in progress. A claim construction hearing is scheduled for December 2023 and a trial is scheduled for September 2024. We intended to vigorously defend ourselves in in this litigation. On August 16, 2022, we filed counterclaims in this action alleging that 10x Genomics’ Visium Spatial Gene Expression system and related products and services infringe our U.S. Patent No. 11,377,689, “Chemical Compositions and Uses Thereof.” On January 24, 2023 these counterclaims were consolidated with the claims of a separate patent infringement case that we filed against 10x Genomics on October 20, 2022, as discussed below.
On May 9, 2022, we were notified of a complaint, dated March 4, 2022, naming us and our wholly-owned subsidiary, NanoString Technologies Germany GmbH, which 10x Genomics, Inc. filed in the Munich Regional Court I in Germany, alleging that our CosMx SMI system and associated products and services infringe European Patent No. 2794928B1 (“EP 2794928B1”), which is owned by Harvard. The complaint seeks, among other relief, injunctive relief and damages in relation to our selling and offering to sell our CosMx SMI system and associated products and services in Germany. We have evaluated the claims and do not believe that our activities infringe any patent rights held by 10x or Harvard. A hearing in this proceeding took place in Munich on March 23, 2023 and a ruling is expected in May 2023. We intend to vigorously defend ourselves in this litigation. On July 29, 2022, we, through our German subsidiary, filed a nullity action with the German Federal Patent Court in Munich requesting a judgment that EP 2794928B1, as in effect for Germany, be declared invalid and be revoked in its entirety. On February 10, 2023, the German Federal Patent Court issued a preliminary and non-binding opinion in this nullity action finding that the subject matter of the asserted independent claim 1 of EP 2794928B1 potentially lacked novelty and potentially lacked an inventive step over prior art. The preliminary opinion further addressed Harvard’s seven patent claim limitation requests, referred to as auxiliary requests, which 10x and Harvard seek to have applied in the event that claim 1 of EP 2794928B1, as granted, proves not to be protectable. The preliminary opinion stated that the claim limitations in Auxiliary Request 1 could potentially be used to defend EP 2794928B1 over the cited prior art. The preliminary opinion further stated that Harvard would potentially not be able to use Auxiliary Requests 2 through 7 to establish patentability over the prior art. A hearing before the German Federal Patent Court is scheduled for May 2024 and a decision in the nullity action is expected following the hearing.
On October 20, 2022, we filed suit against 10x Genomics, Inc. in the U.S. District Court for the District of Delaware alleging that 10x Genomics’ Visium Spatial Gene Expression system and related products and services infringe our U.S. Patent No. 11,473,142, “Chemical Compositions and Uses Thereof.” On January 24, 2023, our counterclaims from the U.S. 10x CosMx Case with respect to U.S. Patent No. 11,377,689 were consolidated with the claims in this action. We seek, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to 10x Genomics’ making, using, selling, offering to sell, exporting and/or importing in the United States the Visium Spatial Gene Expression system and related products and services. Discovery is in progress. A trial in this consolidated case is scheduled for December 2024.
Other than the pending litigations with 10x Genomics and its co-plaintiffs, we are not engaged in any material legal proceedings. From time to time, we may become involved in litigation relating to claims arising from the ordinary course of business. Other than the pending litigations with 10x Genomics and its co-plaintiffs, we believe that there are no claims or actions pending against us currently, the ultimate disposition of which would have a material adverse effect on our consolidated results of operations, financial condition or cash flows.
Item 1A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information contained in this report, including the sections of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. Our risk factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part. This report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
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Risks Related to Our Business and Strategy
We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability.
We have incurred losses since we were formed and expect to incur losses in the future. We incurred net losses of $41.2 million and $39.5 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $850.5 million. We expect that our losses will continue for at least the next several years as we will be required to invest significant additional funds toward ongoing development and commercialization of our technology. We also expect that our operating expenses may continue to increase as we grow our business, and there can be no assurance that our revenue and gross profit will increase sufficiently such that our net losses decline, or we attain profitability, in the future. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, market development and the size of our addressable markets, competition and market share captured by our products, future product development, and the profit margins achieved on our products and service offerings. In addition, inflationary pressure, rising interest rates, potential economic recession and other deteriorating factors in the macroeconomic environment could adversely impact our financial results. Our operating costs have increased, and may continue to increase, due to the recent rise 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. We previously announced certain reorganization and restructuring initiatives, under which we reduced certain employee-related expenses and other operating expenses. While we expect our operating costs will be reduced in future periods as a result of these actions, we may not fully realize all of the anticipated cost savings. As a result of these and other factors, we may never be able to generate sufficient revenue to achieve or sustain profitability.
Our financial results may vary significantly from quarter to quarter which may adversely affect our stock price.
Investors should consider our business and prospects in light of the risks and difficulties we expect to encounter in the uncertain and rapidly evolving markets in which we compete. Because these markets are evolving, predicting their future growth and size, and our competitive position in those markets, is difficult. We expect that our visibility into future sales of our products, including volumes, prices and product mix between instruments and consumables will continue to be limited and could result in unexpected fluctuations in our quarterly and annual operating results.
Numerous other factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results, including the ongoing impact on our business operations and financial results of higher inflation and rising interest rates, potential economic recession and other deteriorating factors in the macroeconomic environment. These fluctuations may make financial planning and forecasting difficult. For example, in the first and third quarters of 2022, revenue did not meet expectations which adversely affected our stock price. In addition, these fluctuations may result in unanticipated changes in our available cash, which could negatively affect our business and prospects. Factors that may contribute to fluctuations in our operating results include many of the risks described in this section. Also, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. Furthermore, our instruments involve a significant capital commitment by our customers and accordingly involve a lengthy sales cycle. We may expend significant effort in attempting to make a particular sale, which may be deferred by the customer or never occur. Accordingly, comparing our operating results on a period-to-period basis may not be meaningful, and investors should not rely on our past results as an indication of our future performance. If such fluctuations occur or if our operating results deviate from our expectations or the expectations of securities analysts, our stock price may be adversely affected.
If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects will be harmed.
We have experienced significant revenue growth in recent periods and we may not achieve similar growth rates in the future. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline. Furthermore, growth will place significant strains on our management and our operational and financial systems and processes. For example, the commercial launches of our GeoMx DSP and CosMx SMI platforms are a key element of our growth strategy and have required and will require us to hire and retain additional sales and marketing personnel and resources. If we do not successfully generate demand for GeoMx DSP, CosMx SMI or other new product offerings, or manage our anticipated expenses accordingly, our operating results will be harmed.
Additionally, we implemented a Company-wide reduction in workforce starting in November 2022 to help achieve a more cost-efficient organization. The reduction in workforce impacted approximately 10% of our employees and we are still assessing the full impact of the reductions, which may yield unintended consequences and costs such as the loss of institutional
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knowledge and expertise, attrition beyond our intended reduction in workforce, lower morale among our remaining employees, and the risk that we may not achieve the anticipated benefits of such cost-saving measures, all of which may have an adverse effect on our results of operations or financial condition.
Our future success is dependent upon our ability to expand our customer base and introduce new applications and products.
Our current customer base is primarily composed of academic and government research laboratories, biopharmaceutical companies and clinical laboratories (including physician-owned laboratories) that perform or will conduct experiments using our GeoMx DSP, CosMx SMI and nCounter systems. Our success will depend, in part, upon our ability to increase our market penetration among all of these customers and to expand our market by developing and marketing new research applications and product platforms. We expect that increasing the installed base of our GeoMx, CosMx and nCounter, systems will drive demand for our relatively higher margin consumables products. If we are not able to successfully increase our installed base of GeoMx, CosMx or nCounter systems, sales of our consumables products and our margins may not meet expectations.
The life sciences research market is highly competitive. If we fail to compete effectively, our business and operating results will suffer.
We face significant competition in the life sciences research market. We currently compete with both established and early stage life sciences research companies that design, manufacture and market instruments and consumables for gene expression analysis, single-cell analysis, polymerase chain reaction, or PCR, digital PCR, other nucleic acid detection and additional applications. These companies use well-established laboratory techniques such as microarrays or quantitative PCR as well as newer technologies such as next generation sequencing, including RNA-sequencing. We believe our principal competitors in the life sciences research market are Agilent Technologies, Akoya Biosciences, Bio-Rad, Bio-Techne, Fluidigm, Illumina, Qiagen, Thermo Fisher Scientific, Vizgen and 10x Genomics. In addition, there are a number of new market entrants in the process of developing novel technologies for the life sciences market, including those that may compete with GeoMx DSP.
Many of our current competitors are large publicly traded companies, or are divisions of large publicly-traded companies, and may enjoy a number of competitive advantages over us, including:
•greater name and brand recognition, financial and human resources;
•broader product lines;
•larger sales forces and more established distributor networks;
•substantial intellectual property portfolios;
•larger and more established customer bases and relationships; and
•better established, larger scale, and lower cost manufacturing capabilities.
We believe that the principal competitive factors in all of our target markets include:
•cost of capital equipment;
•cost of consumables and supplies;
•reputation among customers;
•innovation in product offerings;
•flexibility and ease-of-use;
•accuracy and reproducibility of results; and
•compatibility with existing laboratory processes, tools and methods.
We cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing competition from new products and technologies introduced by our existing competitors or new companies entering our markets. In addition, we cannot assure investors that our competitors do not have or will not develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results.
New product development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the products we develop.
Few research and development projects result in successful commercial products. At any point, we may abandon development of a product candidate, which would adversely impact potential revenue and our expenses. In addition, any delay in product development would provide others with additional time to commercialize competing products before we do, which in turn may adversely affect our growth prospects and operating results. For example, our inability to successfully develop new
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consumables or capabilities for GeoMx or CosMx, or improved versions of AtoMx, would negatively impact our prospects for future revenue growth. AtoMx, which is a cloud-based informatics platform that has required complex software development, and which will require future development, was developed based on capabilities which are different than our historical research and development competencies. Our inability to attract and build the capabilities necessary to develop and operate cloud-based software would negatively impact our ability to market and sell GeoMx and CosMx instruments and consumables.
New market opportunities may not develop as quickly as we expect, limiting our ability to successfully market and sell our products.
The markets for our products are new and evolving. Accordingly, we expect the application of our technologies to emerging opportunities will take several years to develop and mature and we cannot be certain that these market opportunities will develop as we expect. For example, in 2019, we commercially launched our GeoMx DSP system, in 2021 we launched new assays to analyze GeoMx DSP data on next generation sequencing systems, and in December 2022 we made our newest product platform, CosMx SMI and our AtoMx SIP available to customers.
GeoMx and CosMx target spatial genomics, a novel market opportunity and research application for which existing research experience and applications are limited. Prior to the launches of GeoMx and CosMx, we had not previously targeted this market and, as a result, we have limited marketing and selling experience. Our limited marketing and selling experience targeting these new markets and customers may hinder the successful commercialization of GeoMx, CosMx, AtoMx and related consumables.
The future growth of the market for these new products depends on many factors beyond our control, including recognition and acceptance of our applications by the scientific community and the growth, prevalence and costs of competing methods. For example, the COVID-19 pandemic disrupted our operations and the operations of the customers we service in our targeted markets, which impacted our growth and our ability to serve these markets. Our customers may be further affected by rising interest rates, inflation, potential economic recession and other deteriorating factors in the macroeconomic environment. If the markets for our new products do not develop as we expect, our business may be adversely affected. 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.
We face risks related to health epidemics and other outbreaks, such as COVID-19, which could significantly disrupt our operations and could have a material adverse impact on us.
Our business could be adversely impacted by the effects of possible health epidemics and other outbreaks. Such effects may include, for example:
•the temporary closure of our manufacturing facilities and/or those used in our supply chain processes;
•restrictions on the export or shipment of our products;
•unavailability of components and material used in our products;
•significant cutback of ocean container delivery;
•business closures in impacted areas;
•reduced demand, research grants, and business activities of our customers;
•limitations in employee resources, including because of stay-at-home orders, sickness of employees or their families or the desire of employees to avoid contact with large groups of people; and
•restrictions on our employees’ and other service providers’ ability to travel, to meet with customers and install and train customers on our systems.
The extent to which health epidemics and other outbreaks, such as COVID-19, including any variants that have emerged or may emerge in the future, may impact our operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of a particular virus and its variants and the actions to contain it or treat its impact, among others. We cannot at this time quantify or forecast the potential business impact of COVID-19, and there can be no assurance that the COVID-19 or another future pandemic will not have a material and adverse effect on our business, operating results and financial condition. In addition, the pandemics increase the likelihood and potential severity of other risks described in the “Risk Factors” section.
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Our business depends on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.
In the near term, we expect that a large portion of our revenue will be derived from sales of our GeoMx DSP, CosMx SMI and nCounter Analysis Systems, as well as related consumables, to academic and government research laboratories and biopharmaceutical companies worldwide for research and development applications. The demand for our products will depend in part upon the research and development budgets of these customers, which are impacted by factors beyond our control, such as:
•changes in government programs (such as the National Institutes of Health) that provide funding to research institutions and companies;
•macroeconomic conditions, the political climate and the impact of health epidemics and other outbreaks;
•changes in the regulatory environment;
•differences in budgetary cycles;
•competitor product offerings or pricing;
•inflationary pressures, rising interest rates, potential economic recession and other deteriorating factors in the macroeconomic environment;
•market-driven pressures to consolidate operations and reduce costs; and
•market acceptance of relatively new technologies, such as our GeoMx, CosMx and AtoMx platforms.
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, many of our customers reduced their activities in response to the COVID-19 pandemic, resulting in delays in instrument orders and lower consumables purchases. 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 business, operating results and financial condition.
Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.
Our instruments require a significant investment and, accordingly, our sales process involves numerous interactions with multiple individuals within an organization, and often includes in-depth analysis by potential customers of our products, performance of proof-of-principle studies, preparation of extensive documentation and a lengthy review process. As a result of these factors, the significant capital investment required in purchasing our instruments and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly, and may be up to 12 months or longer. Given the length and uncertainty of our sales cycle we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales will occur on a period-to-period basis. These factors also make it difficult to forecast revenue on a quarterly basis. For example, in the first and third quarters of 2022, our actual revenue was lower than our forecast for reasons we did not predict, including uneven sales execution and the impact of changes made to re-align our expanded commercial team early in 2022, and a significantly different instrument order mix among our GeoMx and CosMx spatial biology platforms. In addition, any failure to meet customer expectations could result in customers choosing to continue to use their existing systems or to purchase systems other than ours.
Our reliance on distributors for sales of our products outside of the United States could limit or prevent us from selling our products and impact our revenue.
We have established distribution agreements for our instruments and related consumables products in many countries where we do not sell directly. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth.
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Our future capital needs are uncertain and we may need to raise additional funds in the future.
We believe that our existing cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, we may need or choose to raise substantial additional capital to:
•expand the commercialization of our products;
•fund our operations; and
•further our research and development.
Our future funding requirements will depend on many factors, including:
•market acceptance of our products;
•the cost and timing of establishing additional sales, marketing and distribution capabilities;
•the cost of our research and development activities;
•the cost and timing of regulatory clearances or approvals;
•our ability to achieve the anticipated cost reductions from the reduction in workforce announced in November 2022;
•the effect of competing technological and market developments; and
•the extent to which we engage in strategic transactions, such as the acquisition of, investment in or disposal of businesses, assets, products and technologies, including inbound or outbound licensing arrangements.
We cannot assure you that we will be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, or convertible debt, our stockholders may experience dilution. For example, in March 2020, we sold $230.0 million aggregate principal amount of our 2.625% Convertible Senior Notes due 2025, or the notes, in a private placement to qualified institutional buyers for net proceeds of $222.6 million and in October 2020, we sold an aggregate of 5,750,000 shares of common stock in an underwritten public offering for net proceeds of $215.8 million. Future debt financing, if available, may involve additional covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through strategic transactions with third parties, such as collaborations, asset sales and licensing arrangements, 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. We have in the past pursued these types of transactions, such as the License and Asset Purchase Agreement, or LAPA, with Veracyte, Inc., or Veracyte, which we completed in December 2019, and may in the future pursue similar transactions or other strategic transactions, on our own or with other advisors, that may impact our business and prospects and the value of our common stock. 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 or other resources devoted to our products or cease operations, and we may not achieve the anticipated cost reductions from the reduction in workforce announced in November 2022. Any of these factors could harm our operating results.
Adverse events or perceptions affecting the financial services industry could adversely affect our operating results, liquidity, financial condition and prospects.
Limited liquidity, defaults, non-performance or other adverse developments affecting financial institutions or parties with which we do business, or perceptions regarding these or similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank, or SVB, was closed and placed in receivership and, subsequently, additional financial institutions have been placed into receivership. We have a banking relationship with SVB. While we do not believe our exposure to a potential loss of cash, cash equivalents and investments as a result of SVB’s receivership was material compared to our total cash, cash equivalents and investments, we faced delayed access to deposits and other financial assets, and a potential loss of uninsured deposits and other financial assets. Other risks faced by companies that have a business relationship with SVB included:
•loss of access to revolving existing credit facilities or other working capital sources or the inability to refund, roll over or extend the maturity of, or enter into new credit facilities or other working capital resources;
•potential or actual breach of obligations, including U.S. federal and state wage laws and contracts that required them to maintain letters or credit or other credit support arrangements; and
•termination of cash management arrangements or delays in accessing or actual loss of funds subject to cash management arrangements.
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As a result of U.S. government intervention, account holders subsequently regained access to their accounts, including the uninsured portion of deposit accounts; however, there is no guarantee that the U.S. government will intervene to provide access to uninsured funds in the future in the event of the failure of other financial institutions, or that the U.S. government would do so in a timely fashion. In such an event, we and parties with which we have commercial agreements may be unable to satisfy applicable obligations to, or enter into new commercial arrangements with, counterparties.
Concerns regarding the U.S. or international financial systems could impact the availability and cost of financing, thereby making it more difficult for us to acquire financing on acceptable terms or at all.
The value of our investments is subject to significant capital markets risk related to changes in interest rates and credit spreads as well as other investment risks, which may adversely affect our business, financial condition, operating results and prospects.
Our financial condition and operating results are affected by the performance of our investment portfolio. Our excess cash is invested by an external investment management service provider, under the direction of our management in accordance with our investment policy. The investment policy defines constraints and guidelines that restrict the asset classes that we may invest in by type, duration, including minimum liquidity requirements, quality and value. Our investments are subject to market-wide risks, and fluctuations, as well as to risks inherent in particular securities. The failure of any of the investment risk strategies that we employ could have a material adverse effect on our business, financial condition, operating results and prospects.
The value of our investments is exposed to capital market risks, and our results of operations, liquidity, financial condition or cash flows could be adversely affected by realized losses, impairments and changes in unrealized positions as a result of: significant market volatility, changes in interest rates, changes in credit spreads and defaults, a lack of pricing transparency, a reduction in market liquidity, declines in equity prices, changes in national, state/provincial or local laws and the strengthening or weakening of foreign currencies against the U.S. dollar. Levels of write-down or impairment are impacted by our assessment of the intent to sell securities that have declined in value as well as actual losses as a result of defaults or deterioration in estimates of cash flows. If we reposition or realign portions of the investment portfolio and are required to sell securities in an unrealized loss position, we will incur an other-than-temporary impairment charge or realized losses. Any such charge may have a material adverse effect on our business, financial condition, operating results and prospects.
We may not be able to develop new products, enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business 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 products and systems. Existing markets for our products, including gene expression analysis, gene fusions and copy number variation, as well as new markets, such as protein expression and gene mutations, and potential markets for our research product candidates, are characterized by rapid technological change and innovation. Competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will 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. It is critical to our success that we anticipate changes in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. If we do not successfully innovate and introduce new technology into our product lines, our business and operating results will be adversely impacted.
The development and manufacture of new products typically requires new scientific discoveries or advancements and complex technology and engineering, including the design of sophisticated software. Such developments may involve external suppliers and service providers, making the management of development projects complex and subject to risks and uncertainties regarding timing, timely delivery of required components, software or services and satisfactory technical performance of such components, software or assembled products. If we do not achieve the required technical specifications or successfully manage new product development processes, or if development work and manufacturing is not performed according to schedule, then such new technologies or products may be adversely impacted and our business and operating results may be harmed. Any delays in bringing new products to market may lead our customers to purchase our competitors’ products or cancel outstanding purchase orders.
Additionally, we must carefully manage the introduction of new products. If customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. If customers conclude that such new products offer better value as compared to our existing products, we may suffer from reduced
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sales of our existing products and our overall revenue may decline. We may also have excess or obsolete inventory of older products as we transition to new products and our experience in managing product transitions is limited. If we do not effectively manage the transitions to new product offerings, our revenue, results of operations and business will be adversely affected.
We are dependent on third-party manufacturers, service providers and single source suppliers for some of the components and materials used in our products, and the loss of any of these suppliers, or difficulties or delays in securing components or materials, could harm our business.
We rely on third-party manufacturers, service providers and single source suppliers for some of the components and materials used in our instruments, such as Precision System Science, Co., Ltd of Chiba, Japan, to build our nCounter Prep Station; Korvis LLC of Corvallis, Oregon, to build our nCounter Digital Analyzer and GeoMx DSP, D&K Engineering, Inc. of San Diego, California, to build our CosMx SMI. We also rely on HCL Technologies Limited of India, Seattle BioSoftware Inc. of Seattle, Washington and Amazon Web Services of Seattle, Washington for software application development, cloud storage and computing services for AtoMx SIP.
Since our contracts with instrument suppliers do not commit them to carry inventory or make available any particular quantities, they may give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supplies in a timely manner or on commercially reasonable terms. We also rely on sole suppliers for various components we use to manufacture our consumables products. We periodically forecast our needs for such components and enter into standard purchase orders with suppliers. If we were to lose such suppliers, or if the products provided by such suppliers or third-party manufacturers are unable to meet our performance specifications, there can be no assurance that we will be able to identify or enter into agreements with alternative suppliers or manufacturers on a timely basis on acceptable terms, if at all. In addition, if as a result of global economic or political instability, such as the ongoing geopolitical tensions related to Russia’s actions in Ukraine, disease outbreaks such as the COVID-19 pandemic, rising interest rates, potential economic recession and other deteriorating factors in the macroeconomic environment, or other factors impacting the global supply chain, our suppliers or third-party manufacturers 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. For example, in December 2022, we made our newest product platform, CosMx, available to customers. Delays or shortages in the global supply chain for certain components of the CosMx instrument may require that we source certain components from alternative suppliers that may be less experienced making components at the volumes that we may require, which may increase our costs or lead to delays in shipping instruments to our customers. From time to time, certain components of our systems and reagents reach the end of their life cycles or are obsoleted by our suppliers, and we have to procure alternative sources for these end-of-life products. If we should encounter delays or difficulties in securing the quality and quantity of materials we require for our products, our supply chain would be interrupted which would adversely affect sales. If any of these events occur, our business and operating results could be harmed.
Our agreements with third party software application developers and cloud computing service providers provide for the delivery of applications that include certain attributes or performance features, including cybersecurity measures. If we should encounter delays or difficulties in securing the delivery of applications, or updates to applications, with functionality and features as designed, the delivery of our products could be delayed, consumables sales and the pace of experimentation may be negatively impacted and the cost of delivering AtoMx to customers could be higher which may impact our gross profit margins. In addition, we, together with third party service providers, provide cybersecurity monitoring and other features designed to protect customer data that may be stored in the cloud through use of AtoMx. In the event of a data breach or other cybersecurity incident whereby customer data were, or believed or reported to be, compromised or otherwise impacted, we could face legal claims, investigations or proceedings by governmental entities or private parties, adverse publicity and harm to our reputation, loss of business, and significant fines, penalties, and other damages and liabilities. Any such event could result in material harm to our business and operating results.
We may experience manufacturing problems or delays that could limit our growth or adversely affect our operating results.
Our consumables products are manufactured at our facilities located in the greater Seattle, Washington area using complex processes, sophisticated equipment and strict adherence to specifications and quality systems procedures. Any unforeseen manufacturing problems, such as contamination of our facilities, equipment malfunction, quality issues with components and materials sourced from third-party suppliers, failure to strictly follow procedures or meet specifications, or reduced or blocked access to our facilities as a result of health epidemics and other outbreaks, could result in delays or shortfalls in production or require us to voluntarily recall our consumable products. Identifying and resolving the cause of any such manufacturing or supplier issues could require substantial time and resources. If we are unable to keep up with demand for our products by successfully manufacturing 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 or cancel outstanding purchase orders.
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In addition, the introduction of new products may require the development of new manufacturing processes and procedures as well as new suppliers. For example, our GeoMx DSP systems require that we establish supply relationships with antibody providers. While all of our CodeSets are produced using the same basic processes, significant variations may be required to meet new product specifications. Developing new processes and negotiating supply agreements can be very time consuming, and any unexpected difficulty in doing so could delay the introduction of a product.
If our greater Seattle area facilities become unavailable or inoperable, we will be unable to continue our research and development, manufacturing our consumables or processing sales orders, and our business will be harmed.
We manufacture our consumables products in our facilities located in the greater Seattle, Washington area. These facilities are the center for research and development, order processing, receipt of our instruments manufactured by third-party contract manufacturers and shipping products to customers. Our facilities and the equipment we use to manufacture our consumables products would be costly, and would require substantial lead time, to repair or replace. The Seattle area is situated near active earthquake fault lines. These facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes and power outages, which may render it difficult or impossible for us to produce our products for some period of time. The inability to manufacture consumables or to ship products to customers for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we possess insurance for damage to our property and the disruption of our business, this insurance, and in particular earthquake insurance, which is limited, may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.
We expect to generate a substantial portion of our revenue internationally and are subject to various risks relating to our international activities, which could adversely affect our operating results.
Our revenue generated from sales to customers located outside of North America was approximately 39% and 32% for the three months ended March 31, 2023 and 2022, respectively. We believe that a significant percentage of our future revenue will come from international sources as we expand our overseas operations and develop opportunities in additional areas. Engaging in international business involves a number of difficulties and risks, including:
•required compliance with existing and changing foreign regulatory requirements and laws;
•required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act, privacy and data protection requirements, labor laws and anti-competition regulations;
•export or import restrictions;
•various reimbursement and insurance regimes;
•laws and business practices favoring local companies;
•longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
•political and economic instability, such as the ongoing geopolitical tensions related to Russia’s actions in Ukraine, resulting sanctions imposed by the U.S. and other countries, and retaliatory actions taken by Russia in response to such sanctions;
•global health pandemics;
•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.
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. Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the Euro. Our expenses are generally denominated in the currencies of the countries in which our operations are located, which is primarily in the United States. As our operations in countries outside of the United States grow, our results of operations and cash flows will increasingly be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. Similarly, a strong U.S. dollar relative to the local currencies of our international customers can potentially reduce demand for our products, which may compound the adverse effect of foreign exchange translation on our revenue. If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results and prospects will suffer.
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We could be subject to additional income tax liabilities.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our worldwide provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable and we have established any required reserves in respect of such estimates in accordance with Generally Accepted Accounting Principles, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, the legislation commonly known as the Tax Cuts & Jobs Act, or the TCJA, which was signed into law on December 22, 2017, as modified by the Coronavirus Aid, Relief, and Economic Security Act of 2020, or CARES Act, significantly revised the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, contains significant changes to corporate taxation, including a reduction of the federal statutory rates from a top marginal rate of 35% to a flat rate of 21%, the transition of U.S. international taxation from a worldwide tax system to a territorial system, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, and modifying or repealing many business deductions and credits. Also, beginning in 2022, the TCJA eliminates the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years pursuant to Code Section 174. Although there is proposed legislation that would defer the capitalization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. We have accounted for such changes in accordance with our understanding of the TCJA, as modified by the CARES Act, and guidance available as of the date of this filing as described in more detail in our financial statements. Further, the Inflation Reduction Act of 2022, or the IRA, will become effective beginning in fiscal year 2023. We do not currently expect that the IRA will have a material impact on our income tax liability. We will continue to monitor and assess the impact of the federal legislation on our business and the extent to which various states conform to the federal tax law. Any further changes in tax laws or regulations that are applied adversely to us or our customers could have a material adverse effect on our business, cash flow, financial condition or results of operations.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
As of December 31, 2022, we had federal net operating loss carryforwards, or NOLs, to offset future taxable income of approximately $623.2 million. The federal NOLs generated during and after fiscal 2018 totaling $389.3 million are carried forward indefinitely, while all others, if not utilized, will expire in various years beginning in 2025. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We may have already experienced one or more ownership changes. Depending on the timing of any future utilization of our carryforwards, we may be limited as to the amount that can be utilized each year as a result of such previous ownership changes. However, we do not believe such limitations will cause our NOLs and tax credit carryforwards to expire unutilized. In addition, future changes in our stock ownership as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law or limited pursuant to provisions of the TCJA amendments to the Code, as modified by the CARES Act. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
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Provisions of debt instruments we may enter into may restrict our ability to pursue our business strategies.
From time to time, we have used debt financing to provide capital for our business. Debt instruments we may enter into in the future may require us to comply with various covenants that limit our ability to, among other things:
•dispose of assets;
•complete mergers or acquisitions;
•incur indebtedness;
•encumber assets;
•pay dividends or make other distributions to holders of our capital stock;
•make specified investments;
•engage in any new line of business; and
•engage in certain transactions with our affiliates.
These restrictions could inhibit our ability to pursue our business strategies and may also impose certain financial covenants that require us to achieve certain revenue targets and/or maintain certain minimum cash balances. If we default under any such debt instruments, the lenders could terminate commitments to lend and cause all amounts outstanding with respect to such debt to be due and payable immediately, which in turn could result in cross defaults under other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under all of our then outstanding debt instruments if some or all of these instruments are accelerated upon a default. If we are unable to repay, refinance or restructure indebtedness when payment is due, the lenders could also proceed against any collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.
Acquisitions or joint ventures could disrupt our business, cause dilution to our stockholders and otherwise harm our business.
We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in complementary businesses. We have not made any acquisitions to date, and our ability to do so successfully is unproven. Any of these transactions could be material to our financial condition and operating results and expose us to many risks, including:
•disruption in our relationships with customers, distributors or suppliers as a result of such a transaction;
•unanticipated liabilities related to acquired companies;
•difficulties integrating acquired personnel, technologies and operations into our existing business;
•diversion of management time and focus from operating our business;
•increases in our expenses and reductions in our cash available for operations and other uses; and
•possible write-offs or impairment charges relating to acquired businesses.
Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Also, the anticipated benefit of any strategic transaction may not materialize. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, distractions of management, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.
We may fail to achieve the expected cost savings and related benefits from our reduction in workforce initiated in November 2022.
In November 2022, we announced a plan to reduce our workforce in order to enable a more cost-efficient organization. The reduction in workforce reduced employee headcount by approximately 10% by the end of 2022.
We may fail to execute on, or achieve the stated goals of, the reduction in workforce. Our plans may also change as we continue to refocus on certain key goals and priorities. These actions may take more time than we currently estimate and we may not be able to achieve the cost-efficiencies sought. In addition, the reduction in workforce may negatively impact employee morale for those who are not directly impacted, which may increase employee attrition and impact future recruiting efforts, hindering our ability to achieve our key priorities. Any failure to achieve the expected benefits from the reduction in
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workforce could adversely affect our stock price, financial condition and ability to achieve our key priorities, as well as lead to stockholder complaints and litigation.
If we are unable to recruit, train and retain key personnel, we may not achieve our goals.
Our future success depends on our ability to recruit, train, retain and motivate key personnel, including our senior management, research and development, manufacturing and sales and marketing personnel. Competition for qualified personnel may at times be significant, particularly in the Seattle, Washington area. Our growth depends, in particular, on attracting, retaining and motivating highly-trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. We do not maintain fixed term employment contracts or key man life insurance with any of our employees. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, train, retain and motivate qualified personnel could materially harm our operating results and growth prospects. Further, the reduction in workforce we announced in November 2022 may negatively impact our ability to recruit key personnel and makes retention of our current personnel more challenging.
Undetected errors or defects in our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims.
Our products have in the past and may in the future contain undetected errors or defects when first introduced or as new versions are released. Disruptions or other performance problems with our products may damage our customers’ businesses, harm our reputation and result in reduced revenues. If that occurs, we may also incur significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors or defects in our products. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our products could adversely impact our business and operating results.
The sale and use of products or services based on our technologies, or activities related to our research, could lead to the filing of product liability claims if someone were to allege that one of our products contained a design or manufacturing defect which resulted in the failure to adequately perform the analysis for which it was designed. A product liability claim could result in substantial damages and be costly and time consuming to defend, either of which could materially harm our business or financial condition. We cannot assure investors that our product liability insurance would adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future.
We face risks related to handling of hazardous materials and other regulations governing environmental safety.
Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous materials in manufacturing and in our products, and the generation, transportation and storage of waste. We could discover that we, an acquired business or our suppliers are not in material compliance with these regulations. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, which could adversely affect our business.
If we experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected.
We rely on information technology systems to keep financial records, manage our manufacturing operations, fulfill customer orders, capture laboratory data, maintain corporate records, communicate with staff and external parties and operate other critical functions. Our information technology systems, and those of our vendors, are potentially vulnerable to disruption due to breakdown, malicious intrusion and computer viruses, ransomware or other malicious code, or other disruptive events including but not limited to terrorism, war or other military activity, power loss, flooding, fire, earthquake, or other natural disasters. Additionally, geopolitical tensions related to Russia's actions in Ukraine may increase cybersecurity risks, and attackers have used artificial intelligence and machine learning to launch more automated, targeted and coordinated attacks against targets. We are increasingly dependent upon our and our vendors’ technology systems to operate our business and our ability to effectively manage our business depends on the security, reliability and adequacy of our technology systems and data, which includes use of cloud technologies, including Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). If we were to experience a prolonged system disruption in our information technology
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systems or those of certain of our vendors, it could negatively impact our ability to serve our customers, which could adversely impact our business. Although we maintain offsite back-ups of our data, if operations at our facilities were disrupted, it may cause a material disruption in our business if we are not capable of restoring function on an acceptable timeframe. In addition, our information technology systems, and those of our vendors, are potentially vulnerable to data security breaches and other security incidents — whether by employees or others — which may expose sensitive data to unauthorized persons. Such data security breaches and incidents, whether resulting from hacking, social engineering, phishing, or other causes could lead to the loss of confidential information, financial assets, trade secrets or other intellectual property, unauthorized access to, or disruptions to or other interruptions of, our platforms and products, or could lead to unauthorized access to or use, modification, unavailability, disclosure, loss or acquisition of, or the public exposure of, personal information (including sensitive personal information) of our employees, customers and others, or confidential information of ourselves, our customers or of other third parties that we maintain or otherwise process, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations. In addition, any such access, disclosure or other loss of information could result in legal claims, investigations or proceedings by governmental entities or private parties, adverse publicity and harm to our reputation, loss of business, and significant fines, penalties, and other damages and liabilities. In addition, these breaches and incidents and other inappropriate access, and security vulnerabilities in our software, platforms, and products can be difficult to detect. Any delay in identifying them and responding to or otherwise remediating them may lead to security breaches, incidents, and unauthorized access occurring, and increased harms of the type described above. We expect to continue to expend significant resources to protect against security breaches and incidents, and could be required to expend significant amounts to remediate and otherwise respond to security breaches and incidents, including in connection with making notifications to customers or other persons or implementing additional security measures. With the increase in personnel working remotely, we and our vendors have experienced and are at increased risk for security breaches and incidents. We are taking steps in an effort to monitor and enhance the security of our technology systems and data; however, the unprecedented scale of remote work may require additional personnel and resources, which nevertheless cannot be guaranteed to fully safeguard our technology systems or data or other data or information that we maintain or that otherwise is processed in our business.
Although we maintain insurance that may cover certain liabilities in connection with a security breach or other security incident, we cannot be certain our insurance coverage will be adequate for liabilities actually incurred, that insurance will continue to be available to us on commercially reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, results of operations and reputation.
Any interruptions or delays in services from third parties, including cloud computing platform providers, and other software and hardware vendors, or from our inability to adequately plan for and manage service interruptions or infrastructure capacity requirements, could impair the delivery of our services and harm our business.
We rely on software developed by or licensed from, cloud computing platforms provided by, and computer hardware purchased or leased from, third parties in order to offer our services, including HCL Technologies Limited of India, Seattle BioSoftware Inc. of Seattle, Washington and Amazon Web Services of Seattle, Washington, which provide software application development, cloud storage and computing services for our AtoMx solution. AtoMx involves the storage and transmission of our customers’ and our customers’ customers’ proprietary and other sensitive data. We or our customers may allow these third parties to access customer data to help deliver customer benefits, to host certain of our and our customers’ data, which could include sensitive or personal data, or to perform other services. In addition, we share sensitive, nonpublic business information with other vendors in the ordinary course of business. A data breach or other cybersecurity incident involving third parties we rely on may have serious negative consequences for our businesses, including damage to, loss or unavailability of, or unauthorized use of, alteration, disclosure, acquisition, or other unauthorized processing or exploitation of sensitive customer data, or confidential or competitively sensitive information regarding our business, including intellectual property and other proprietary data, make our products more vulnerable to fraudulent activity, and cause temporary or sustained unavailability of our software and systems. Further, any such event, or the belief or perception it has occurred, may result in possible claims, demands, and litigation by private parties, demands, investigations, and proceedings by regulatory authorities, fines, penalties and damages and other liabilities; result in loss of customer confidence; cause material harm to our reputation and brands; lead to further regulation and oversight by federal or state agencies, and cause adverse financial conditions.
As we increase our reliance on these third-parties, particularly with respect to third-party software, hardware, data and cloud computing platforms, our exposure to damage from service interruptions and disruptions may increase. Any changes in third-party service levels or product features, or any errors, defects, infection by ransomware, viruses, or other malicious code, disruptions, or other performance problems with third-party software, hardware, data or cloud computing platforms on which our applications run, including performance problems related to cybersecurity threats or attacks, could adversely affect our reputation and may damage our customers’ or other users’ stored files, or their confidentiality, integrity, and availability, or
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result in lengthy interruptions in our services. Interruptions in and other disruptions to our services might adversely affect our reputation and operating results, cause us to issue refunds or service credits to customers for prepaid and unused subscription services, subject us to potential liabilities, result in contract terminations, or adversely affect our renewal rates.
These software, hardware, data and cloud computing platforms may not continue to be available at reasonable prices, or on commercially reasonable terms or at all. Any loss of ability to use any of these software, hardware, data or cloud computing platforms could significantly increase our expenses and otherwise result in delays in providing our services until equivalent technology is either developed by us, or, if available, is identified, obtained through purchase or license and integrated into our services.
If we do not accurately plan for our infrastructure capacity or other requirements and we experience significant strain on our cloud computing infrastructure, our customers could experience performance degradation or service outages that may subject us to financial liabilities, result in customer losses and harm our reputation and business. As we add capacity and continue to utilize cloud computing platform providers, we may be required to move or transfer our data or our customers’ data. Despite precautions taken during this process, any unsuccessful data transfer may impair the delivery of our services, which may damage our business.
Significant United Kingdom or European developments stemming from the United Kingdom’s withdrawal from the European Union could have a material adverse effect on us.
In June 2020, the United Kingdom officially left the European Union. The full effect of Brexit remains uncertain, but Brexit creates economic and legal uncertainty in the region and could adversely affect the tax, currency, operational, legal and regulatory regimes to which our business is subject. Complying with changes in regulations in the United Kingdom in addition to European Union regulations has increased our costs of compliance and result in greater legal risks. There are many ways in which our business could be affected, some of which include additional volatility in global financial markets, new or modified trade agreements or data transfer agreements between the United Kingdom and other countries, including the United States, and the possible imposition of trade or other regulatory and immigration barriers