The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, that are based on our management's beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled "Risk Factors" and this Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include information concerning our possible or assumed future cash flow, revenue, sources of revenue and results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts, "projects," "should," "will," "would" or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, "Risk Factors," elsewhere in this Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this Form 10-Q.

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

In this Form 10-Q, "we," "us" and "our" refer to Fluidigm Corporation and its subsidiaries.

Overview

We develop, manufacture and market microfluidic systems for growth markets in the life science and agricultural biotechnology, or Ag-Bio, industries. Our proprietary microfluidic systems consist of instruments and consumables, including chips, assays and other reagents. Our systems are designed to significantly simplify experimental workflow, increase throughput and reduce costs, while providing the excellent data quality demanded by our customers. In addition, our proprietary technology enables genetic analysis that in many instances was previously impractical. We actively market three microfluidic systems, including eight different commercial chips for nucleic acid research and three families of assays, to leading academic institutions, diagnostic laboratories, and pharmaceutical, biotechnology and Ag-Bio companies. We have sold over 525 systems to customers in over 25 countries worldwide.

We have launched several product lines, including our BioMark system for gene expression analysis, genotyping and digital PCR in 2006, our EP1 system for SNP genotyping and digital PCR in 2008, our Access Array system for target enrichment in 2009, and our BioMark HD real-time PCR system for high throughput gene expression analysis, single-cell analysis, SNP genotyping and digital PCR in 2011. In 2011, we also launched our assay and reagent products, including our DELTAgene assays for gene expression, including single-cell analysis, our SNPtype assays for SNP genotyping, and our Access Array Target-Specific primers for next generation DNA sequencing. Our systems utilize one or more chips designed for particular applications and include specialized instrumentation and software, as well as assays and other reagents for certain applications.

We distribute our microfluidic systems through our direct sales force and support organizations located in North America, Europe and Asia-Pacific, and through distributors or sales agents in several European, Latin American, Middle Eastern and Asia-Pacific countries. Our manufacturing operations are primarily located in Singapore. Our facility in Singapore manufactures our instruments and fabricates all of our chips for commercial sale and for our research and development purposes. Our South San Francisco facility fabricates chips for our own research and development purposes and manufactures our assays and produces other reagents for commercial sale.

Our total revenue grew from $25.4 million in 2009 to $42.9 million in 2011 and for the three months ended March 31, 2012, our total revenue was $10.9 million. We have incurred significant net losses since our inception in 1999 and, as of March 31, 2012, our accumulated deficit was $228.5 million.

Critical Accounting Policies, Significant Judgments and Estimates

Our consolidated financial statements and the related notes included elsewhere in this Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates may occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

There have been no material changes in our critical accounting policies and estimates in the preparation of our condensed consolidated financial statements during the three months ended March 31, 2012 as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 26, 2012.

Results of Operation

Revenue

We generate revenue from sales of our products, license and collaboration agreements and government grants. Our product revenue consists of sales of instruments and related services, and consumables, including chips, assays and other reagents. We have entered into license and collaboration agreements and research and development contracts, and have received government grants to conduct research and development activities.

The following table presents our revenue by source for each period presented (in thousands):

                                              Three Months Ended March 31,
                                                2012                 2011
       Revenue:
       Instruments                         $         5,900       $       4,958
       Consumables                                   4,856               3,454

       Product revenue                              10,756               8,412
       License and collaboration revenue                23                 167
       Grant revenue                                   166                 118

       Total revenue                       $        10,945       $       8,697

The following table presents our product revenue by geography and as a percentage of total product revenue by geography based on the billing address of our customers for each period presented (in thousands):

                                        Three Months Ended March 31,
                                         2012                   2011
                  United States   $  5,812        54 %    $ 4,142        49 %
                  Europe             2,568        24 %      2,147        26 %
                  Asia-Pacific       1,195        11 %        982        12 %
                  Japan                991         9 %        900        11 %
                  Other                190         2 %        241         2 %

                  Total           $ 10,756       100 %    $ 8,412       100 %

Our customers include academic research institutions, diagnostic laboratories, and pharmaceutical, biotechnology and Ag-Bio companies worldwide. Total revenue from our five largest customers in each of the periods presented comprised 21% and 20% of our total revenue in the three months ended March 31, 2012 and 2011, respectively. As we expand our business internationally, we expect our product revenue from outside of the United States to increase as a percentage of our total product revenue.

Comparison of the Three Months Ended March 31, 2012 and March 31, 2011

Total Revenue

Total revenue increased by $2.2 million, or 26%, to $10.9 million for the three months ended March 31, 2012 as compared to $8.7 million for the three months ended March 31, 2011.

Product Revenue

Product revenue increased by $2.3 million, or 28%, to $10.8 million for the three months ended March 31, 2012 as compared to $8.4 million for the three months ended March 31, 2011. Consumables revenue increased by $1.4 million, or 41%, resulting primarily from our higher instrument system installed base, and higher assays sales. Instrument revenue increased by $0.9 million, or 19%, primarily driven by increased average unit selling prices resulting from higher sales of our BioMark HD system, which has a higher average selling price compared to our other systems; increased service revenue; and increased sales of aftermarket instruments. Unit sales volume of instrument systems declined by 7%, primarily driven by lower unit sales of our Access Array system, partially offset by higher unit sales of our BioMark system.

We expect unit sales of both instruments and consumables to increase over time as we continue our efforts to grow our customer base, expand our geographic market coverage and launch new products. However, we expect the average selling prices of our products to fluctuate over time based on market conditions, product mix and currency fluctuations.

License and Collaboration Revenue

License and collaboration revenue was $23,000 for the three months ended March 31, 2012 compared to $0.2 million for the three months ended March 31, 2011. In May 2010, we entered into a collaboration agreement with Novartis Vaccines & Diagnostics, Inc., which provided us with milestone payments for the design and development of product prototypes. All of our performance obligations in the first phase of the collaboration were completed as of December 31, 2011, which resulted in the decrease in license and collaboration revenue in the three months ended March 31, 2012 as compared to the same period in 2011.

Pursuant to the collaboration agreement, we granted an option to exclusively license our technology in specific areas of prenatal health and diagnostics. The collaboration agreement specifically provided that it would automatically terminate if the option was not exercised on or before April 30, 2012. The option expired unexercised on April 30, 2012 and the collaboration agreement terminated in accordance with its terms, effective May 1, 2012.

Grant Revenue

Grant revenue consists of a grant from California Institute for Regenerative Medicine, or CIRM and an incentive grant from Singapore Economic Development Board, or EDB. Our first CIRM grant was awarded in 2009 in the amount of $0.8 million to be earned over a two-year period. Our second CIRM grant was awarded in 2011 in the amount of $1.9 million to be earned over a three-year period. The CIRM grant revenue is recognized as the related research and development services are performed and costs associated with the grants are recognized as research and development expense during the period incurred.

Grant revenue increased $48,000, or 42%, to $166,000 for the three months ended March 31, 2012 compared to $118,000 for the three months ended March 31, 2011. The increase is due to the revenue earned under the second CIRM grant. We did not have any revenue from the EDB grants in the three months ended March 31, 2012 as we reached the end of the grant periods in 2011. In October 2010, we received confirmation from EDB that all of our obligations under the first grant had been met and, in October 2010, we received our final grant payment relating thereto. Our second grant agreement with the EDB was completed in May 2011. Based on correspondence with EDB, we believe we have satisfied our obligations applicable to our EDB grant revenue through March 31, 2012.

Cost of Product Revenue

The following table presents our cost of product revenue and product margin for
each period presented (in thousands, other than percentages):



                                         Three Months Ended March 31,
                                          2012                  2011
            Cost of product revenue   $       3,546         $       2,913
            Product margin                       67 %                  65 %

Cost of product revenue includes manufacturing costs incurred in the production process, including component materials, assembly labor and overhead, and installation, warranty, service, packaging and delivery costs. In addition, cost of product revenue includes royalty costs for licensed technologies included in our products, provisions for slow-moving and obsolete inventory and stock-based compensation expense. Costs related to license and collaboration and grant revenue are included in research and development expense.

Cost of product revenue increased $0.6 million, or 22%, to $3.5 million for the three months ended March 31, 2012 from $2.9 million for the three months ended March 31, 2011 due to increased product sales. Cost of product revenue as a percentage of related revenue decreased to 33% for the three months ended March 31, 2012 compared to 35% for the three months ended March 31, 2011. This decrease was primarily due to lower chip replacement costs, lower instrument component costs and higher mix of consumables revenue, which have higher margins compared to instrument revenue. These cost improvements were partially offset by higher instrument warranty and freight costs.

Operating Expenses

The following table presents our operating expenses for each period presented
(in thousands):



                                                    Three Months Ended
                                                         March 31,
                                                     2012          2011
            Research and development              $    4,279     $  3,220
            Selling, general and administrative        9,403        7,442

            Total operating expenses              $   13,682     $ 10,662

Research and Development

Research and development expense consists primarily of personnel costs, independent contractor costs, prototype and material expenses and other allocated facilities and information technology expenses. 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 services.

Research and development expense was $4.3.million for the three months ended March 31, 2012, an increase of 33% as compared to $3.2 million for the three months ended March 31, 2011. The increase in research and development expense was primarily due to an increase in lab supplies and equipment costs of $0.6 million, an increase in compensation costs and related expenses, including stock-based compensation, of $0.3 million, resulting from increased headcount to support our research and development, and an increase in consulting and professional fees of $0.2 million, as compared to the three months ended March 31, 2011.

We believe that our continued investment in research and development is essential to our long-term competitive position and these expenses may increase in future periods.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of personnel costs for our sales and marketing, business development, finance, legal, human resources and general management, as well as professional services, such as legal and accounting services.

Selling, general and administrative expense increased $2.0 million, or 26%, to $9.4 million for the three months ended March 31, 2012, compared to $7.4 million for the three months ended March 31, 2011. The increase was primarily due to an increase in compensation costs and related expenses, including stock-based compensation, of $1.8 million, resulting from increased headcount to support our business and revenue growth, and an increase in other costs of $0.2 million, as compared to the three months ended March 31, 2011.

We expect selling, general and administrative expense to increase in future periods as we continue to grow our sales, technical support, marketing and administrative headcount, support increased product sales, broaden our customer base and incur additional costs to support our expanded global footprint and the overall growth in our business.

Interest Expense, Interest Income and Other Income and Expense, Net

We receive interest income from our cash, cash equivalents and investments. Conversely, we incur, or have incurred, interest expense from our long-term debt, bank line of credit and convertible promissory notes, and the amortization of debt discounts related to these items. Until the completion of the initial public offering of our common stock, or IPO, in early 2011, we also recognized income or expense as a result of changes in the fair value of outstanding warrants to purchase shares of our convertible preferred stock. The following table presents these items for each period presented (in thousands).

                                                                 Three Months Ended
                                                                      March 31,
                                                                2012             2011
Interest expense                                              $   (307 )       $ (1,760 )
Loss from changes in the fair value of convertible
preferred stock warrants                                            -            (1,483 )
Gain from extinguishment of convertible preferred stock
warrants                                                            -               765
Other income (expense), net                                        (61 )             66
Deemed dividend related to the change in conversion rate
of Series E convertible preferred stock                             -            (9,900 )

Interest expense decreased $1.5 million, or 83%, to $0.3 million for the three months ended March 31, 2012 compared to $1.8 million for the three months ended March 31, 2011. The decrease is primarily due to $1.2 million of non-cash interest expense in connection with a $5.0 million note and warrant agreement entered into in January 2011. We repaid all principal and interest outstanding under this note in February 2011 upon the completion of our IPO. There was no similar transaction or recognition of expense in the three months ended March 31, 2012. The decrease also resulted from a reduction in the principal amount of our long-term debt beginning in March 2011, when we began making principal and interest payments totaling $0.6 million per month. We expect interest expense to decrease in 2012 compared to 2011 as we repay our outstanding debt.

Prior to our IPO, the convertible preferred stock warrant liability fair value increased resulting in a loss of $1.5 million for the three months ended March 31, 2011. We did not have any outstanding convertible preferred stock warrants during the three months ended March 31, 2012 as all convertible preferred stock warrants were converted into warrants to purchase common stock, expired unexercised, or were exercised for shares of our common stock upon our IPO in February 2011. Liabilities related to the expired warrants upon our IPO were reversed, resulting in a gain of $0.8 million during the three months ended March 31, 2011. Liabilities related to the warrants that were converted into warrants to purchase common stock and warrants that were exercised upon our IPO were reclassified to additional paid-in-capital.

During the three months ended March 31, 2012, we had other expense of $61,000, net, compared to other income, net, of $66,000 during the three months ended March 31, 2011, primarily due to unfavorable changes in foreign currency exchange rates.

Deemed Dividend

In January 2011, we amended and restated our certificate of incorporation to decrease the conversion price of our Series E convertible preferred stock from $24.22 to $18.63 per share. As a result, we recognized a deemed dividend of $9.9 million, reflecting the fair value of the additional shares of common stock to be issued as a result of the change in conversion price of the Series E convertible preferred stock. The deemed dividend increased the net loss attributed to common stockholders in the calculation of basic and diluted net loss per share. There was no similar transaction or deemed dividend in the three months ended March 31, 2012.

Liquidity and Capital Resources

Sources of Liquidity

As of March 31, 2012, we had $8.5 million of cash and cash equivalents and $36.4 million of investments. As of March 31, 2012, our working capital totaled $38.9 million. In February 2011, we completed our IPO which resulted in proceeds to us of approximately $77.0 million, net of underwriting discounts, commissions and offering expenses. Following the completion of our IPO, we paid the balance on our bank line of credit of $3.1 million, which is collateralized by our accounts receivable and provides us the ability to borrow up to $7.0 million, subject to certain covenants and other restrictions, and paid $5.0 million to satisfy all outstanding principal and interest on the notes we issued in January 2011. At March 31, 2012, we had not drawn down on the line of credit and, therefore, up to $7.0 million of the line of credit was available to us.

As of March 31, 2012, the outstanding balance under our loan and security agreement was $6.3 million, all of which is classified as current on our condensed consolidated balance sheet. In March 2011, we began making principal and interest payments totaling $0.6 million per month and we made an additional payment of $2.3 million in March 2012 as required under our loan agreement. The loan and security agreement has a maturity date of February 2013 and bears interest of 13.5% per annum. As of March 31, 2012, we were in compliance with our loan covenants.

The following table presents our cash flow summary for each period presented (in thousands):

                                                             Three Months Ended March 31,
                                                             2012                    2011
Cash flow summary
Net cash used in operating activities                    $      (6,643 )        $       (1,229 )
Net cash provided by (used in) investing activities              4,570                 (22,089 )
Net cash (used in) provided by financing activities             (3,038 )                73,440
Net (decrease) increase in cash and cash equivalents            (5,057 )                50,108

Net Cash Used in Operating Activities

We derive cash flows from operations primarily from cash collected from the sale of our products, collaboration and license agreements and grants from certain government entities. Our cash flows from operating activities are also significantly influenced by our use of cash for operating expenses to support the growth of our business. We have historically experienced negative cash flows from operating activities as we have expanded our business and built our infrastructure domestically and internationally and this may continue in the future.

Net cash used in operating activities was $6.6 million during the three months ended March 31, 2012. Net cash used in operating activities primarily consisted of our net loss of $6.7 million, changes in our operating assets and liabilities in the amount of $1.2 million, and non-cash expense items such as stock-based compensation of $0.9 million, depreciation and amortization of our property and equipment of $0.3 million, and amortization of debt discount and issuance costs and loss on disposal of property and equipment of $0.1 million.

Net cash used in operating activities was $1.2 million during the three months ended March 31, 2011. Net cash used in operating activities primarily consisted of our net loss of $7.3 million, changes in our operating assets and liabilities in the amount of $3.0 million, and non-cash expense items such as stock-based compensation of $0.8 million, depreciation and amortization of our property and equipment of $0.3 million, loss from changes in the fair value of convertible stock warrants of $1.5 million, gain from extinguishment of convertible preferred stock warrants of $0.8 million, and write off of debt discounts upon note repayment of $1.2 million.

Net Cash Provided by (Used in) Investing Activities

Historically, our primary investing activities have consisted of capital expenditures for laboratory, manufacturing and computer equipment and software to support our expanding infrastructure and work force; and purchases, sales and maturities of our investments. We expect to continue to expand our manufacturing capability, which is located primarily in Singapore, including improvements in manufacturing productivity, and expect to incur additional costs for capital expenditures related to these efforts in future periods. In addition, we expect to incur costs for capital expenditures for demonstration units and loaner equipment to support our sales and service efforts.

Net cash provided by investing activities was $4.6 million during the three months ended March 31, 2012. Net cash provided by investing activities primarily related to proceeds from sales and maturities of investment of $24.4 million, partially offset by purchases of investments of $19.4 million and purchases of capital equipment to support our infrastructure and manufacturing operations of $0.4 million.

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