UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission file number: 001-34180
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||
(Address of principal executive offices) | (Zip Code) | |||
(650 ) 266-6000
(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 | ||
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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | |||||
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 ☒
As of October 31, 2019, there were 69,564,909 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.
1
FLUIDIGM CORPORATION
TABLE OF CONTENTS
Page | ||
PART I. | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 1A. | ||
Item 5. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FLUIDIGM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
September 30, 2019 | December 31, 2018 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Short-term investments | |||||||
Accounts receivable (net of allowances of $104 at September 30, 2019 and $126 at December 31, 2018) | |||||||
Inventories | |||||||
Prepaid expenses and other current assets | |||||||
Total current assets | |||||||
Property and equipment, net | |||||||
Operating lease right-of-use asset, net | |||||||
Other non-current assets | |||||||
Developed technology, net | |||||||
Goodwill | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | $ | |||||
Accrued compensation and related benefits | |||||||
Operating lease liabilities, current | |||||||
Other accrued liabilities | |||||||
Deferred revenue, current | |||||||
Total current liabilities | |||||||
Convertible notes, net | |||||||
Deferred tax liability, net | |||||||
Operating lease liabilities, non-current | |||||||
Deferred revenue, non-current | |||||||
Other non-current liabilities | |||||||
Total liabilities | |||||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding at September 30, 2019 and December 31, 2018 | |||||||
Common stock, $0.001 par value, 200,000 shares authorized at September 30, 2019 and December 31, 2018; 69,550 and 49,338 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | |||||||
Additional paid-in capital | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Accumulated deficit | ( | ) | ( | ) | |||
Total stockholders’ equity | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
1
FLUIDIGM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue: | |||||||||||||||
Product revenue | $ | $ | $ | $ | |||||||||||
Service revenue | |||||||||||||||
Grant revenue | |||||||||||||||
Total revenue | |||||||||||||||
Cost of revenue: | |||||||||||||||
Cost of product revenue | |||||||||||||||
Cost of service revenue | |||||||||||||||
Total cost of revenue | |||||||||||||||
Gross profit | |||||||||||||||
Operating expenses: | |||||||||||||||
Research and development | |||||||||||||||
Selling, general and administrative | |||||||||||||||
Total operating expenses | |||||||||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss on extinguishment of debt | ( | ) | |||||||||||||
Other income, net | |||||||||||||||
Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Income tax benefit | |||||||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Shares used in computing net loss per share, basic and diluted | |||||||||||||||
See accompanying notes
2
FLUIDIGM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | |||||||||
Net change in unrealized gain (loss) on investments | ( | ) | ( | ) | |||||||||||
Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | |||||||||
Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
See accompanying notes
3
FLUIDIGM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (Unaudited) | |||||||||||||||||||||||
Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss)/Income | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||
Balance as of December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Issuance of common stock on bond conversion | — | — | |||||||||||||||||||||
Issuance of restricted stock, net of shares withheld for taxes, and other | ( | ) | — | — | ( | ) | |||||||||||||||||
Issuance of common stock from option exercises | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||
Balance as of March 31, 2019 | ( | ) | ( | ) | |||||||||||||||||||
Issuance of restricted stock, net of shares withheld for taxes, and other | — | ( | ) | — | — | ( | ) | ||||||||||||||||
Issuance of common stock from option exercises | — | — | — | ||||||||||||||||||||
Issuance of common stock under ESPP | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||
Balance as of June 30, 2019 | ( | ) | ( | ) | |||||||||||||||||||
Issuance of restricted stock, net of shares withheld for taxes, and other | ( | ) | — | — | ( | ) | |||||||||||||||||
Issuance of common stock from option exercises | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | ( | ) | — | ( | ) | |||||||||||||||
Balance as of September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
4
Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss)/Income | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||
Balance as of December 31, 2017 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Issuance of restricted stock, net of shares withheld for taxes, and other | — | ( | ) | — | — | ( | ) | ||||||||||||||||
Issuance of common stock from option exercises | — | — | — | ||||||||||||||||||||
Conversion option on convertible debt | — | — | — | — | |||||||||||||||||||
Closing cost related to conversion option | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
Cumulative-effect of new accounting standard for Topic 606 Revenue | — | — | — | — | |||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||
Balance as of March 31, 2018 | ( | ) | ( | ) | |||||||||||||||||||
Issuance of restricted stock, net of shares withheld for taxes, and other | — | ( | ) | — | — | ( | ) | ||||||||||||||||
Issuance of common stock from option exercises | — | — | — | ||||||||||||||||||||
Issuance of common stock under ESPP | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||
Balance as of June 30, 2018 | ( | ) | ( | ) | |||||||||||||||||||
Issuance of restricted stock, net of shares withheld for taxes, and other | — | — | — | ||||||||||||||||||||
Issuance of common stock from option exercises | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Net loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | (12 | ) | — | (12 | ) | |||||||||||||||
Balance as of September 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See accompanying notes
5
FLUIDIGM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
Operating activities | |||||||
Net loss | $ | ( | ) | $ | ( | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | |||||||
Stock-based compensation expense | |||||||
Amortization of developed technology | |||||||
Amortization of debt discounts, premium and issuance costs | |||||||
Loss on extinguishment of debt | |||||||
Loss on disposal of property and equipment | |||||||
Other non-cash items | ( | ) | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | ( | ) | |||||
Inventories | ( | ) | ( | ) | |||
Prepaid expenses and other current assets | ( | ) | ( | ) | |||
Other non-current assets | |||||||
Accounts payable | |||||||
Deferred revenue | |||||||
Other current liabilities | ( | ) | |||||
Other non-current liabilities | ( | ) | ( | ) | |||
Net cash used in operating activities | ( | ) | ( | ) | |||
Investing activities | |||||||
Purchases of investments | ( | ) | ( | ) | |||
Proceeds from maturities and sales of investments | |||||||
Purchases of property and equipment | ( | ) | ( | ) | |||
Net cash provided by (used in) investing activities | ( | ) | |||||
Financing activities | |||||||
Payment of debt issuance costs | ( | ) | ( | ) | |||
Proceeds from exercise of stock options | |||||||
Proceeds from stock issuance from ESPP | |||||||
Payments for taxes related to net share settlement of equity awards | ( | ) | ( | ) | |||
Net cash provided by (used in) financing activities | ( | ) | |||||
Effect of foreign exchange rate fluctuations on cash and cash equivalents | ( | ) | ( | ) | |||
Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | |||
Cash, cash equivalents and restricted cash at beginning of period | |||||||
Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||
See accompanying notes
6
FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Fluidigm Corporation (we, our, or us) was incorporated in the State of California in May 1999 to commercialize microfluidic technology initially developed at the California Institute of Technology. In July 2007, we were reincorporated in Delaware. Our headquarters are located in South San Francisco, California.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of our wholly owned subsidiaries. As of September 30, 2019, we had wholly owned subsidiaries in Singapore, Canada, the Netherlands, Japan, France, the United Kingdom, China, and Germany. All subsidiaries, except for Singapore, use their local currency as their functional currency. The Singapore subsidiary uses the U.S. dollar as its functional currency. All intercompany transactions and balances have been eliminated in consolidation.
Certain prior period amounts in the condensed consolidated statements of cash flows were reclassified to conform with the current period presentation. These reclassifications were immaterial and did not affect prior period total assets, total liabilities, stockholders' equity, total revenue, total costs and expenses, loss from operations or net loss.
Net Loss per Share
Our basic and diluted net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Restricted stock units, performance awards, options to purchase common stock, and shares associated with the potential conversion of our convertible notes are considered to be potentially dilutive common shares but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive for all periods presented.
The following potentially dilutive common shares were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2019, and 2018 because including them would have been anti-dilutive (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Stock options, restricted stock units and performance awards | |||||||||||
2018 Convertible Notes | |||||||||||
2018 Convertible Notes potential make-whole shares | |||||||||||
2014 Convertible Notes | |||||||||||
Total | |||||||||||
7
FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, for the three and nine months ended September 30, 2019, are as follows (in thousands):
Foreign Currency Translation Adjustment | Net Unrealized Gain on Securities | Accumulated Other Comprehensive Loss | ||||||||||
Balance at December 31, 2018 | $ | ( | ) | $ | $ | ( | ) | |||||
Other comprehensive income | — | |||||||||||
Balance at March 31, 2019 | ( | ) | ( | ) | ||||||||
Other comprehensive income (loss) | ( | ) | — | |||||||||
Balance at June 30, 2019 | ( | ) | ( | ) | ||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||
Balance at September 30, 2019 | $ | ( | ) | $ | $ | ( | ) | |||||
Revenue Recognition
We generate revenue primarily from the sale of our products and services. Product revenue is derived from the sale of instruments and consumables, including IFCs, assays and reagents. Service revenue is derived from the sale of instrument service contracts, repairs, installation, training and other specialized product support services. We receive grants from various governmental entities to perform research and development activities over contractually defined periods. Revenue is generally recognized provided that the conditions under which the grants were provided have been met and any remaining performance obligations are perfunctory. Revenue is reported net of any sales, use and value-added taxes we collect from customers as required by government authorities.
We recognize revenue based on the amount of consideration we expect to receive in exchange for the goods and services we transfer to the customer. Our commercial arrangements typically include multiple distinct products and services, and we allocate revenue to these performance obligations based on their relative standalone selling prices. Standalone selling prices (SSP) are generally determined using observable data from recent transactions. In cases where sufficient data is not available, we estimate a product’s SSP using a cost plus a margin approach or by applying a discount to the product’s list price.
Product Revenue
We recognize product revenue at the point in time when control of the goods passes to the customer and we have an enforceable right to payment. This generally occurs either when the product is shipped from one of our facilities or when it arrives at the customer’s facility, based on the contractual terms. Customers generally do not have a unilateral right to return products after delivery. Invoices are generally issued at shipment and generally become due in 30 to 60 days.
We sometimes perform shipping and handling activities after control of the product passes to the customer. We have made an accounting policy election to account for these activities as product fulfillment activities rather than as separate performance obligations.
Service Revenue
We recognize revenue from repairs, installation, training and other specialized product support services at the point in time the work is completed. Installation and training services are generally billed in advance of service. Repairs and other services are generally billed at the point the work is completed.
Revenue associated with instrument service contracts is recognized on a straight-line basis over the life of the agreement, which is generally one to three years. We believe this time-elapsed approach is appropriate for service contracts because we provide services on demand throughout the term of the agreement. Invoices are generally issued in advance of service on a monthly, quarterly, annual or multi-year basis. Payments made in advance of service are reported on our consolidated balance sheet as deferred revenue.
8
FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Contract Costs
Incremental sales commission costs incurred to obtain instrument service contracts are capitalized and amortized to selling, general and administrative expense over the life of the contract, which is generally one to three years. As a practical expedient, we expense sales commissions associated with product support services that are delivered in less than one year as they are incurred. Sales commissions associated with the sale of products are expensed as they are incurred.
Product Warranties
We generally provide a one-year warranty on our instruments. We accrue for estimated warranty obligations at the time of product shipment. We periodically review our warranty liability and record adjustments based on the terms of warranties provided to customers, and historical and anticipated warranty claim experience. This expense is recorded as a component of cost of product revenue in the condensed consolidated statements of operations.
Significant Judgments
Applying the revenue recognition practices discussed above often requires significant judgment. Judgment is required when identifying performance obligations, estimating SSP and allocating purchasing consideration in multi-element arrangements and estimating the future amount of our warranty obligations. Moreover, significant judgment is required when interpreting commercial terms and determining when control of goods and services passes to the customer. Any material changes created by errors in judgment could have a material effect on our operating results and overall financial condition.
Goodwill, Intangible Assets, and Other Long-lived Assets
Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Our intangible assets include developed technology, patents and licenses. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives.
Goodwill and intangible assets with indefinite lives are not subject to amortization but are tested for impairment on an annual basis during the fourth quarter or whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Events or changes in circumstances that could affect the likelihood that we will be required to recognize an impairment charge include, but are not limited to, declines in our stock price or market capitalization, declines in our market share or revenues, and an increase in our losses. Any impairment charges could have a material adverse effect on our operating results and net asset value in the quarter in which we recognize the impairment charge.
In evaluating our goodwill and intangible assets with indefinite lives for indications of impairment, we first conduct an assessment of qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we then conduct a two-step test for impairment of goodwill. In the first step, we compare the fair value of our reporting unit to its carrying value. If the fair value of our reporting unit exceeds its carrying value, goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds its fair value, then the second step of the impairment test must be performed in order to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds its implied fair value, then an impairment loss equal to the difference would be recorded.
Convertible Notes
In February 2014, we closed an underwritten public offering of $201.3 million aggregate principal amount of our 2.75 % Senior Convertible Notes due 2034 (2014 Notes). In March 2018, we entered into separate privately negotiated transactions with certain holders of our 2014 Notes to exchange $150.0 million in aggregate principal amount of the 2014 Notes for our new 2.75 % Exchange Convertible Senior Notes due 2034 (2018 Notes). Following the exchange, approximately $51.3 million in aggregate principal amount of the 2014 Notes was outstanding in addition to $150.0 million in aggregate principal amount of the
9
FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
2018 Notes. In the first quarter of 2019, the 2018 Notes were converted into 19.5 million shares of common stock and the 2018 Notes were retired. We recorded a loss of $9.0 million on the retirement of the 2018 Notes.
See Note 6 Convertible Notes and Credit Facility for the accounting treatment of the transactions and additional information about the exchange.
Recent Accounting Changes and Accounting Pronouncements
Adoption of New Accounting Guidance
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize operating leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating; the classification will impact the expense recognition in the income statement.
Modified Retrospective Transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective date of the standard as our date of initial application. Consequently, previously presented financial information has not been updated, and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019. For dates and periods prior to January 1, 2019, the original disclosures under ASC 840 are disclosed.
The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients,’ which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
On adoption, we recognized $9.2 million of lease liabilities, based on the present value of the current minimum lease payments over the lease term, discounted using our collateralized incremental borrowing rate, with corresponding ROU assets of $7.4 million. The difference between the initial lease liability and ROU asset is attributable to deferred rent. There was no impact to retained earnings from the adoption of ASC 842.
The new standard also provides certain accounting elections for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities for leases with an initial lease term of one year or less. We have also elected to not separate lease and nonlease components for our building leases. The nonlease components are generally variable in nature and are expected to represent most of our variable lease costs. Variable costs are expensed as incurred. We have taken a portfolio approach for our vehicle leases by country.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15 Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) which establishes new guidance on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the capitalization of such costs, aligning it with the accounting for costs associated with developing or obtaining internal-use software. The new guidance is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of adoption on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU eliminates the requirement for an entity to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, an entity performs its annual, or interim, goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recording an impairment charge for the amount by which the carrying amount exceeds the fair value. The ASU will be effective for annual and interim goodwill impairment testing performed for our fiscal year beginning January 1, 2020, with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements.
10
FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The FASB issued two ASUs related to financial instruments – credit losses. The ASUs issued were: (1) in June 2016, ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and (2) in November 2018, ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2016-13 is intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leasing standard. These ASUs are effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2016‑13 and ASU 2018-19 will have on our consolidated financial statements and related disclosures.
3. Revenue
Disaggregation of Revenues
The following table disaggregates our revenue for the three and nine months ended September 30, 2019, and 2018, respectively, by geographic area and by product, service and grant (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Geographic Markets: | |||||||||||||||
Americas | $ | $ | $ | $ | |||||||||||
Europe | |||||||||||||||
Asia-Pacific | |||||||||||||||
Total revenue | $ | $ | $ | $ | |||||||||||
Product, Service and Grant: | |||||||||||||||
Instruments | $ | $ | $ | $ | |||||||||||
Consumables | |||||||||||||||
Product revenue | |||||||||||||||
Service | |||||||||||||||
Grant | |||||||||||||||
Total revenue | $ | $ | $ | $ | |||||||||||
Performance Obligations
We reported $17.8 million of deferred revenue on our December 31, 2018 consolidated balance sheet. During the nine months ended September 30, 2019, $9.0 million of the opening balance was recognized as revenue and $10.6 million of net additional advance payments were received from customers, primarily associated with instrument service contracts. At September 30, 2019, we reported $19.4 million of deferred revenue.
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FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table summarizes the expected timing of revenue recognition for unfulfilled performance obligations associated with instrument service contracts that were partially completed at September 30, 2019 (in thousands):
Expected Revenue (1) | ||||
2019 (remainder of the year) | $ | |||
2020 | ||||
2021 | ||||
Thereafter | ||||
$ | ||||
_______
(1) Expected revenue includes both billed amounts included in deferred revenue and unbilled amounts that are not reflected in our consolidated financial statements and are subject to change if our customers decide to cancel or modify their contracts. Purchase orders for instrument service contracts can generally be canceled before the service period begins without penalty.
We apply the practical expedient that permits us to not disclose information about unsatisfied performance obligations that are expected to be delivered within one year.
Contract Costs
We reported $0.4 million of capitalized commission costs from instrument service contracts at September 30, 2019 and December 31, 2018 in the condensed consolidated balance sheets.
4. Goodwill and Intangible Assets, net
In connection with our acquisition of DVS Sciences, Inc. (DVS) in February 2014, we recognized goodwill of $104.1 million. Intangible assets include developed technology related to the DVS acquisition and other intangible assets and are included in other non-current assets.
Intangible assets, net, were as follows (in thousands):
September 30, 2019 | |||||||||||||
Gross Amount | Accumulated Amortization | Net | Weighted-Average Amortization Period | ||||||||||
Developed technology | $ | $ | ( | ) | $ | ||||||||
Patents and licenses | $ | $ | ( | ) | $ | ||||||||
December 31, 2018 | |||||||||||||
Gross Amount | Accumulated Amortization | Net | Weighted-Average Amortization Period | ||||||||||
Developed technology | $ | $ | ( | ) | $ | ||||||||
Patents and licenses | $ | $ | ( | ) | $ | ||||||||
Amortization of intangibles was $3.0 million and $3.1 million for the three months ended September 30, 2019, and 2018, respectively. Amortization of intangibles was $9.2 million and $9.3 million for the nine months ended September 30, 2019, and 2018, respectively.
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FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Based on the carrying value of intangible assets, net, as of September 30, 2019, the annual amortization expense is expected to be as follows (in thousands):
Fiscal Year | Developed Technology Amortization Expense | Patents and Licenses Amortization Expense | Total | |||||||||
2019 (remainder of the year) | $ | $ | $ | |||||||||
2020 | ||||||||||||
2021 | ||||||||||||
2022 | ||||||||||||
2023 | ||||||||||||
Thereafter | ||||||||||||
Total | $ | $ | $ | |||||||||
5. Balance Sheet Details
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consisted of the following (in thousands):
September 30, 2019 | December 31, 2018 | ||||||
Cash and cash equivalents | $ | $ | |||||
Restricted cash | |||||||
Cash, cash equivalents and restricted cash | $ | $ | |||||
Short-term restricted cash of approximately $1.1 million is included in prepaid expenses and other current assets, and $1.0 million of non-current restricted cash is included in other non-current assets in the condensed consolidated balance sheet.
Inventories
Inventories consisted of the following (in thousands):
September 30, 2019 | December 31, 2018 | ||||||
Raw materials | $ | $ | |||||
Work-in-process | |||||||
Finished goods | |||||||
Total inventories, net | $ | $ | |||||
Property and Equipment, net
Property and equipment, net, consisted of the following (in thousands):
September 30, 2019 | December 31, 2018 | ||||||
Computer equipment and software | $ | $ | |||||
Laboratory and manufacturing equipment | |||||||
Leasehold improvements | |||||||
Office furniture and fixtures | |||||||
Property and equipment, gross | |||||||
Less accumulated depreciation and amortization | ( | ) | ( | ) | |||
Construction-in-progress | |||||||
Property and equipment, net | $ | $ | |||||
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FLUIDIGM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Warranty
We accrue for estimated warranty obligations once revenue is recognized. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, as well as historical and anticipated warranty claim experience. Activity for our warranty accrual for the three and nine months ended September 30, 2019, and 2018, which is included in other accrued liabilities, is summarized below (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Beginning balance | $ | $ | $ | $ | |||||||||||
Accrual for warranties | |||||||||||||||
Warranty costs incurred | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Ending balance | $ | $ | $ | $ | |||||||||||
6. Convertible Notes and Credit Facility
2014 Senior Convertible Notes (2014 Notes)
In February 2014, we closed an underwritten public offering of $201.3 million aggregate principal amount of our 2.75 % Senior Convertible Notes due 2034 (2014 Notes), pursuant to an underwriting agreement dated January 29, 2014. The 2014 Notes accrue interest at a rate of 2.75 % per year, payable semi-annually in arrears on February 1 and August 1 of each year. Interest on the 2014 Notes accrued from February 4, 2014. The 2014 Notes will mature on February 1, 2034, unless earlier converted, redeemed, or repurchased in accordance with the terms of the 2014 Notes.
The initial conversion rate of the 2014 Notes is 17.8750 shares of our common stock, par value $0.001 per share, per $1,000 principal amount of 2014 Notes (which is equivalent to an initial conversion price of approximately $55.94 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including upon a conversion in connection with a fundamental change, as defined in the indenture governing the 2014 Notes or, subject to certain conditions, redemption of the 2014 Notes by the Company.
Holders may surrender their 2014 Notes for conversion at any time prior to the stated maturity date. On or after February 6, 2018, and prior to February 6, 2021, we may redeem any or all of the 2014 Notes in cash if the closing price of our common stock exceeds 130 % of the conversion price for a specified number of days, and on or after February 6, 2021, we may redeem any or all of the 2014 Notes in cash without any such condition. The redemption price of the 2014 Notes will equal 100 % of the principal amount of the 2014 Notes plus accrued and unpaid interest. Holders may require us to repurchase all or a portion of their 2014 Notes on each of February 6, 2021, February 6, 2024, and February 6, 2029, at a repurchase price in cash equal to 100 % of the principal amount of the 2014 Notes plus accrued and unpaid interest. If we undergo a fundamental change, as defined in the indenture governing the 2014 Notes, holders may require us to repurchase the 2014 Notes in whole or in part for cash at a repurchase price equal to 100 % of the principal amount of the 2014 Notes plus accrued and unpaid interest.
In February 2014, we received $195.2 million, net of underwriting discounts, from the issuance of the 2014 Notes and incurred approximately $1.1 million in offering-related expenses. The underwriting discount of $6.0 million and the debt issuance costs of $1.1 million were recorded as offsets to the proceeds.
2018 Senior Convertible Notes (2018 Notes)
In March 2018, we entered into separate privately negotiated transactions with certain holders of our 2014 Notes to exchange $150.0 million in aggregate principal amount of the 2014 Notes for new convertible notes (2018 Notes). The 2018 Notes were subsequently retired in the first quarter of 2019 as discussed below.
As of the closing of the 2018 Notes on March 12, 2018, the estimated fair value was $145.5 million. The difference between the $150.0 million aggregate principal amount of the 2018 Notes and its fair value was amortized over the expected term of the 2018 Notes using the effective interest method through the first note holder put date of February 6, 2023.
We accounted for the exchange transaction as an extinguishment of debt due to the significance of the change in value of the embedded conversion option, resulting in a $0.1 million gain. The gain on extinguishment of the 2014 Notes exchanged was calculated as the difference between the reacquisition price (i.e., the fair value of the principal amount of 2018 Notes) and the net carrying value of the 2014 Notes exchanged, net of unamortized debt discount and debt issuance cost write-offs.
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FLUIDIGM CORPORATION