Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NSTG > SEC Filings for NSTG > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for NANOSTRING TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for NANOSTRING TECHNOLOGIES INC


8-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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. This discussion contains certain 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 are identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may," "seek" and other similar expressions. 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 ability to successfully commercialize Prosigna, our first product for which we have obtained a CE mark in the European Union;

our ability to secure regulatory clearance or approval, domestically and internationally, for the clinical use of our products, including a version of Prosigna in the United States;

the implementation of our business model and strategic plans for our business;

the regulatory regime for our products, domestically and internationally;

our strategic relationships, including with patent holders of our technologies, manufacturers and distributors of our products, and third parties who conduct our clinical studies;

our intellectual property position;

our expectations regarding the market size and growth potential for our life sciences and diagnostic businesses;

any estimates regarding expenses, future revenues, capital requirements, and stock performance; and

our ability to sustain and manage growth, including our ability to develop new products and enter new markets.

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A - "Risk Factors," and elsewhere in this report. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. In this report, "we," "our," "us," "NanoString," and "the Company" refer to NanoString Technologies, Inc.

Overview

We develop, manufacture and sell robust, intuitive products that unlock scientifically valuable and clinically actionable genomic information from minute amounts of tissue. Our nCounter Analysis System directly profiles hundreds of molecules simultaneously using a novel barcoding technology that is powerful enough for use in research, yet simple enough for use in clinical laboratories worldwide. We market systems and related consumables to researchers in academic, government, and biopharmaceutical laboratories for use in understanding fundamental biology and the molecular basis of disease. As researchers discover how genomic information can be used to improve clinical decision-making, we seek to selectively translate their discoveries into molecular diagnostic products. In September 2012, we received European Union regulatory clearance for our first molecular diagnostic product, the Prosigna Breast Cancer Assay, or Prosigna, an assay providing an assessment of a patient's risk of recurrence for breast cancer and the intrinsic subtype of the patient's tumor. In February 2013, we commercially launched Prosigna in Europe and Israel. In December 2012, we submitted an application, known as a 510(k), to the FDA seeking clearance in the United States for a version of Prosigna providing an assessment of a patient's risk of recurrence for breast cancer.

We are organized as, and operate in, two reportable segments: our life sciences business and our diagnostics business. Until recently, we have sold products exclusively through our life sciences business, providing "research use only" tools to scientific researchers for efficiently profiling the activity of hundreds of genes simultaneously from a single tissue sample. We derive a substantial majority of our life sciences revenue from the sale of products, which consist of our nCounter instruments and related proprietary consumables. We also derive revenue from processing fees related to proof-of-principle studies we conduct for potential customers and extended service contracts for our nCounter Analysis Systems.

Our diagnostics business provides nCounter instruments and consumables in the form of molecular diagnostic kits, initially our Prosigna assay, to pathology labs enabling complex molecular testing on a decentralized basis. In September 2012, we obtained a CE mark for Prosigna and, in February 2013, we commercially launched Prosigna in Europe and Israel. In December 2012, we submitted an application, known as a 510(k), to the FDA seeking clearance in the United States for a version of Prosigna providing an assessment of a patient's risk of recurrence for breast cancer and have had a number of subsequent communications with the FDA. We


Table of Contents

are currently planning for United States commercial launch in the first quarter of 2014 and are establishing a dedicated oncology diagnostics sales force. As a result, we expect sales and marketing expenses and operating losses to increase as we market the product in Europe and other countries outside of the United States, and to increase further upon the launch in the United States following clearance from the FDA. We expect sales in Europe to grow gradually as more systems are installed and Prosigna gains market acceptance and reimbursement by third-party payors becomes more broadly available.

We use third-party contract manufacturers to produce the two instruments comprising the nCounter Analysis System. We manufacture consumables at our Seattle, Washington facility. This operating model is designed to be capital efficient and to scale efficiently as our product volumes grow. We focus a substantial portion of our resources on developing new products and solutions. We invested $6.7 million and $5.2 million for the six months ended June 30, 2013 and 2012, respectively, in research and development and intend to continue to make significant investments in research and development.

Our total revenue has increased to $12.9 million for the six months ended June 30, 2013 from $10.4 million for the first six months of 2012, which was driven by the sale of additional nCounter Analysis Systems and consumables for use on our growing installed base of instruments. Historically, we have generated a substantial majority of our revenue from sales to customers in North America; however, we expect sales in other regions to increase over time. We have never been profitable and had net losses of $12.8 million and $7.2 million for the six months ended June 30, 2013 and 2012, respectively, and as of June 30, 2013 our accumulated deficit was $110.3 million.

Recent Developments

On July 1, 2013, the Company completed its initial public offering of 5,400,000 shares of common stock, at $10.00 per share. The proceeds from the initial public offering were $50.2 million net of underwriting discounts and commissions, but before offering expenses.

Key Financial Metrics

Revenue

Our products consist of our nCounter Analysis System and related consumables. Our nCounter Analysis System typically consists of one nCounter Digital Analyzer and one nCounter Prep Station. Life sciences consumables include (1) custom CodeSets, which we manufacture to the specific requirements of an individual researcher, (2) panels, which are standard pre-manufactured CodeSets, and
(3) Master Kits, which are ancillary reagents, cartridges, tips and reagent plates required to setup and process samples in our instruments. Diagnostic consumables consist of in vitro diagnostic kits, initially for our Prosigna Breast Cancer Assay. Since 2010, our average consumable revenue per system has exceeded $100,000 per year. Product revenue also includes payments for instrument installation. Currently, our life sciences customer base is primarily composed of academic institutions, government laboratories, and biopharmaceutical companies that perform analyses using our nCounter Analysis System and purchase consumables for research use only.

Service revenue consists of fees associated with extended service contracts and conducting proof-of-principle studies. We include a one-year warranty with the sale of our instruments and offer extended service contracts, which are purchased by a majority of our customers. We selectively provide proof-of-principle studies to prospective life sciences customers in order to help them better understand the benefits of the nCounter Analysis System.

We sell our life sciences products through our own sales force in the United States, Canada, Singapore and certain European countries. We sell through distributors in other parts of the world. As we have expanded our European life sciences direct sales force and entered into agreements with distributors of our life sciences products in Europe, the Middle East, Asia Pacific and South America, the amount of revenue generated from geographies outside of North America has generally increased, although there have been significant quarter-to-quarter fluctuations. In the future, we intend to continue to expand our sales force and establish additional distributor relationships outside the United States to better access international markets. The following table reflects product revenue by geography based on the billing address of our customers. North America consists of the United States, Canada and Mexico; and Asia Pacific includes Japan, China, South Korea, Singapore and Australia.

                               Three Months Ended                        Six Months Ended
                                    June 30,                                 June 30,
                         2013        2012       % Change          2013         2012       % Change
 North America          $ 5,218     $ 3,898            34 %     $  9,695     $  7,060            37 %
 Europe & Middle East     1,494       1,006            49 %        2,110        1,998             6 %
 Asia Pacific               506       1,039           (51 )%       1,089        1,387           (21 )%

 Total                  $ 7,218     $ 5,943            21 %     $ 12,894     $ 10,445            23 %

Most of our revenue has historically been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. Changes in foreign currency exchange rates have not materially affected us to date; however, they may become material to us in the future as our operations outside of the United States expand.


Table of Contents

Cost of Revenue

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 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 on each nCounter Analysis System and establish a reserve for warranty repairs based on historical warranty repair costs incurred.

We expect the average unit costs of our instruments to decline in future periods as a result of our ongoing efforts to develop a lower-cost nCounter Analysis System to expand our market opportunity among smaller laboratories. We expect the unit costs of consumable products to decline as a result of our ongoing efforts to improve our manufacturing processes and expected increases in production volume and yields. Although the unit costs of our custom CodeSets vary, they are generally higher as a percentage of the related revenue than our panels and in vitro diagnostic kits.

Operating Expenses

Research and Development

Research and development expenses consist primarily of salaries and benefits, occupancy, laboratory supplies, consulting fees and related costs, costs associated with licensing molecular diagnostics rights and clinical study expenses (including the cost of tissue samples) to support the regulatory approval or clearance of diagnostic products. We have made substantial investments in research and development since our inception. Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products and applications for both our life sciences and diagnostics businesses. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to increase in future periods.

Given the relatively small size of our research and development staff and the limited number of active projects at any given time, we have found that, to date, it has been effective for us to manage our research and development activities on a departmental basis. Accordingly, we do not require employees to report their time by project nor do we allocate our research and development costs to individual projects. The following table shows the composition of total research and development expense by functional area for the periods indicated.

                                                 Three Months Ended                       Six Months Ended
                                                      June 30,                                June 30,
                                           2013        2012       % Change         2013        2012       % Change
Core nCounter platform technology         $   817     $   302           171 %     $ 1,429     $   616           132 %
Manufacturing process development             358         274            31 %         736         570            29 %
Life sciences products and applications       665         473            41 %       1,401         936            50 %
Diagnostic product development              1,375       1,453            (5 )%      2,313       2,101            10 %
Facility allocation                           411         469           (12 )%        806         945           (15 )%

Total                                     $ 3,626     $ 2,971            22 %     $ 6,685     $ 5,168            29 %

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of costs for our sales and marketing, finance, human resources, information technology, business development and general management functions, as well as professional services, such as legal, consulting and accounting services. We expect selling, general and administrative expenses to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows and we continue to introduce new products, broaden our customer base and grow our business. In particular, the commercial launch of Prosigna requires us to establish a dedicated oncology diagnostics sales force which will increase selling and marketing expenses significantly. We also expect legal, accounting and compliance costs to increase after becoming a public company.


Table of Contents

Results of Operations

Revenue; Cost of Revenue; Gross Profit




                                            Three Months Ended                             Six Months Ended
                                                 June 30,                                      June 30,
                                    2013           2012         % Change          2013           2012         % Change
Product revenue:
Instruments
Life sciences                     $   2,320      $   2,579            (10 )%    $   3,959      $   4,079             (3 )%
Diagnostics                             203             -                             203             -

Total instrument revenue              2,523          2,579             (2 )%        4,162          4,079              2 %
Consumables                           4,305          3,054             41 %         8,004          5,757             39 %
Service revenue                         390            310             26 %           728            609             20 %

Total revenue                         7,218          5,943             21 %        12,894         10,445             23 %
Cost of revenue                       3,522          3,334              6 %         6,404          5,990              7 %

Gross profit                      $   3,696      $   2,609             42 %     $   6,490      $   4,455             46 %

Gross margin 51 % 44 % 50 % 43 %

Instrument revenue was relatively consistent from year to year for both the three and six month periods ended June 30, 2013. Instrument revenue included approximately $200,000 from our diagnostics segment; all other revenue was from our life sciences segment. The increase in consumable revenue for both periods was driven by growth in our installed base of instruments. The increase in service revenue for both the three month and six month periods was primarily related to an increase in the number of instruments covered by service contracts.

The increase in cost of revenue was largely related to the increased volume of consumables sold. Gross margin increased primarily due to a shift in product mix towards consumables, which on average have higher margins than instruments. Increased production volume also lowered costs as a percentage of revenue.

Research and Development Expense




                                                           Three Months Ended                                      Six Months Ended
                                                                June 30,                                               June 30,
                                                2013              2012            % Change             2013              2012            % Change
Research and development expense            $       3,626     $       2,971                22 %    $       6,685     $       5,168                29 %

The increases reflected $0.8 million and $1.5 million increases in personnel-related expenses, for the three and six month periods, respectively, to support the advancement of our nCounter technology and clinical development of Prosigna. The increase for the three month period was partially offset by a $0.4 million decrease in Prosigna clinical study costs after completion of the ABCSG8 study in late 2012.

Selling, General and Administrative Expense




                                                             Three Months Ended                                      Six Months Ended
                                                                  June 30,                                               June 30,
                                                  2013              2012            % Change             2013              2012            % Change
Selling, general and administrative expense   $       6,708     $       3,251               106 %    $      12,834     $       6,418               100 %

The increase for the three-month period was primarily attributable to $1.2 million of increased staffing and personnel-related costs to support sales and marketing and administration; $1.0 million of increased external marketing and other consulting costs related to the commercial launch of Prosigna; and $0.9 million of increased corporate professional fees.

The increase for the six-month period was primarily attributable to $2.5 million of increased staffing and personnel-related costs to support sales and marketing and administration; $1.7 million of increased external marketing and other consulting costs related to the commercial launch of Prosigna; and $1.0 million of increased corporate professional fees.


Table of Contents

Other Income (Expense), Net



                                             Three Months Ended                         Six Months Ended
                                                  June 30,                                  June 30,
                                      2013         2012        % Change         2013         2012        % Change
Interest income                      $     3      $    6             (50 )%    $     6      $   13             (54 )%
Interest expense                        (489 )      (220 )           122 %        (874 )      (332 )           163 %
Other income (expense)                    (9 )       185            (105 )%        (13 )       172            (108 )%
Revaluation of preferred stock
warrant liability                      1,638          71           2,207 %       1,156          97           1,092 %

Total other income (expense), net    $ 1,143      $   42           2,621 %     $   275      $  (50 )          (650 )%

The increases in interest expense for both periods were driven by increased borrowing under our existing credit facility during 2012 and 2013, from $7.5 million in March 2012 to $18.0 million as of June 30, 2013.

The increase in other income from the revaluation of the preferred stock warrant liability for both the three and six month periods resulted from a re-measurement of the fair value of preferred stock warrants using the Black-Scholes option pricing model, which was primarily impacted by a decrease in the valuation of the underlying stock.

Liquidity and Capital Resources

As of June 30, 2013, we had cash and cash equivalents of $10.8 million, which consisted of highly-liquid investments with an original maturity of three months or less. We received $50.2 million of proceeds, net underwriting discounts and commissions but before offering expenses, from our initial public offering. The initial public offering closed on July 1, 2013 and, accordingly, such proceeds are not reflected on our cash and cash equivalents at June 30, 2013.

Sources of Funds

Since inception, we have financed our operations primarily through the sale of equity securities and, to a lesser extent, from borrowings. In April 2013, we incurred $5.0 million of term loan borrowings, increasing our aggregate term loan borrowings to $18.0 million, and amended our credit facility to allow for the incurrence of the remaining $5.0 million in term loan borrowings on or before June 30, 2013. In consideration of the completion of our initial public offering in June, no further term loan borrowings were incurred.

We believe our existing cash and cash equivalents including the net proceeds from our initial public offering, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, we may need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities. 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; the effect of competing technological and market developments; and the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

We may require additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. 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.

Credit Facility

In March 2012, we entered into a loan and security agreement, which we refer to as our credit facility, pursuant to which we have incurred $18.0 million in term loan borrowings, all of which accrue interest at a rate of 8.89%. Through January 2014, we are required to pay interest only on our term loan borrowing. Following the expiration of the interest only payment period, we are required to pay principal and interest in 30 equal monthly installments, plus an end of term payment equal to 5.5% of the amount borrowed, or $990,000, at maturity in July 2016. We may at our option prepay all of the term loan borrowings by paying the lender, among other things, all principal and accrued interest, the end of term payment plus a premium of up to 3% of the amount borrowed. Pursuant to the credit facility, from time to time we can also incur revolver borrowings of up to the lesser of $2.0 million or a borrowing base tied to the amount of eligible accounts receivable. Interest on revolver borrowings accrues at a floating rate equal to the prime rate plus 3.70% (subject to a floor of 6.95%) and is payable monthly. We are also required to pay a fee of 0.075% per month on the unused portion of the revolver borrowings.


Table of Contents

The credit facility contains customary conditions to borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness, incur encumbrances, make distributions to holders of our capital stock, make investments or engage in transactions with our affiliates. In addition, we must comply with a financial covenant based on life sciences revenue. This financial covenant is measured monthly on a trailing three month basis. We were in compliance with all covenants as of June 30, 2013. Our obligations under the . . .

  Add NSTG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NSTG - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.