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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-06 · 134 added, 76 removed, 127 unchanged (62% of the section changed)

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In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.

Our Management’s Discussion and Analysis (MD&A) is organized in the following sections:

Our Management’s Discussion and Analysis (MD&A) is organized into the following sections:

• Overview and Outlook

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Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations (CROs), pharmaceutical companies and agricultural companies.

As of March 31, 2022, our commercial team was comprised of over 188 employees, including 52 quota-carrying representatives, many with advanced degrees in biology and significant experience in the genomics industry.

As of June 30, 2022, our commercial team was comprised of over 189 employees, including 56 quota-carrying representatives, many with advanced degrees in biology and significant experience in the genomics industry.

Strategic Objectives

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We will continue to leverage our commercial organization and make significant improvements in efficiency and usability of our Sequel II/IIe to seek to reach a broader customer base.

We believe the commercial investments we made in 2021 and expect to continue to make during the remainder of 2022 will further help drive growth in our business.

We employed 52 quota-carrying field sales personnel as of March 31, 2022, and we expect to continue to invest in our sales, general and administrative departments to support future growth.

We believe the commercial investments we have already made and expect to continue to make during the remainder of 2022 will further help drive growth in our business.

To increase the adoption of HiFi sequencing, we have various development programs in progress to expand our product portfolio as well as increase the throughput and improve the usability of our existing sequencing technologies.

We continue to focus on programs to accelerate new platform launches in the near to mid-term as well as increase applications for our technologies.

To address the oncology markets with a highly differentiated alternative, we are also progressing our short read platform development with a goal of launching our SBB short read sequencing platform in the first half of 2023.

As a result, we expect our research and development expense to increase during 2022 as compared to 2021.

As a result, we expect our research and development expense to continue increasing during the remainder of 2022 as compared to 2021.

We continue to believe that with the capabilities of our HiFi chemistry and SMRT technology, we can be a market leader in whole-genome clinical sequencing.

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Financial Overview

Broader macroeconomic dynamics including rising inflation, global supply chain constraints, volatile capital markets, competition and lockdown restrictions associated with COVID-19 have adversely impacted our customers and lengthened customer sales cycles.

Additionally, lock downs in China have led to lower than previously anticipated revenue in the Asia-Pacific region as customers have difficulty accessing labs and lower sample volumes from which to sequence.

We expect some headwinds from a strengthening U.S.

dollar which impacts our revenue denominated in EUR and GBP but also impacts purchasing power of our customers in Asia as a stronger U.S.

dollar makes buying our products more expensive.

Ongoing global supply chain constraints and rising inflation are also increasing our costs;

therefore, we expect these costs to impact gross margins and cash flow.

Due to the rising costs from global supply chain constraints and rising inflation, we are moderating our hiring with the aim of reducing our operating expenses growth in 2022.

We will continue to prioritize investments in our next generation product launches and commercial expansion prioritizing opportunities that will generate a return over the near to mid-term.

The degree of further adverse impacts of COVID-19 on our business will depend on several factors, such as the duration and the extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.

The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide , including in the regions in which we sell our products and services and conduct our business operations.

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Due to the uncertain scope and duration of the pandemic, we cannot reasonably estimate the future impact to our operations and financial results.

The spread of COVID-19 has caused us to modify our business practices, including limiting certain of our commercial operations and limiting certain employees from working in the office.

The spread of COVID-19 has caused us to modify our business practices, including limiting some of our commercial operations and limiting certain employees from working in the office.

Starting in April 2022, we invited employees located near our reopened offices to return to the office.

We have and will continue to provide consumables, instruments, and support to scientists at government, academic, and commercial labs that have remained open or as they reopen.

We have experienced and expect to continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.

Specifically, difficult macroeconomic conditions, decreases in discretionary capital spending, increased and prolonged unemployment or a decline in consumer confidence as a result of the COVID-19 pandemic could have a continuing adverse effect on the demand for some of our products.

Such economic disruption could have a material adverse effect on our business, results of operations and liquidity.

The degree of impact of COVID-19 on our business will depend on several

factors, such as the duration and the extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.

See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business.

Key highlights of the three months ended March 31, 2022 consolidated financial results include the following:

• Revenue increased $4.2 million, or 14%, to $33.2 million for the three months ended March 31, 2022, as compared to $29.0 million for the three months ended March 31, 2021, driven primarily by an increase in instrument and consumable revenue.

We expect revenue to grow during the remainder of 2022 compared to 2021.

However, our future revenues largely depend on the rate of sales of our sequencing instruments, which are a leading indicator of future sales of consumables.

We expect instrument placements to continue to grow as we expand our sales globally through our expanded sales force, through application of technology in new markets and through offering new features and solutions.

However, we also expect a potential slower ramp in the sales of consumables due to lower utilization resulting from project delays due to the COVID-19 pandemic and prolonged lockdowns in China.

• Gross profit as a percentage of revenue (gross margin) was 42.7% for the three months ended March 31, 2022, compared to 44.8% for the three months ended March 31, 2021.

Despite higher sales volumes, gross margin declined due to a lower average selling price (ASP) of instruments, resulting primarily from an increase in instruments sold as multi-unit orders with volume discounts, leading to lower ASP, and an increase in our average product costs during the quarter.

Key highlights of the six months ended June 30, 2022 consolidated financial results include the following:

• Revenue increased $9.0 million, or 15%, to $68.6 million for the six months ended June 30, 2022, as compared to $59.6 million for the six months ended June 30, 2021, driven primarily by an increase in consumable and service revenue from the growth of our installed base of Sequel II/IIe instruments since June 30, 2021.

Future revenue growth is, in part, dependent on the sales of sequencing instruments, which are a leading indicator of consumables sales.

While we expect to sell additional instruments, sales cycles are lengthening due to the global macroeconomic factors mentioned above.

We also expect a potential slower ramp in the sales of consumables due to project delays, lower sample volumes and potential further lockdown restrictions, particularly in China.

• Gross profit as a percentage of revenue (gross margin) was 44.2% for the six months ended June 30, 2022, compared to 44.8% for the six months ended June 30, 2021.

G ross margin declined due primarily to an increase in our average product costs.

Our gross margin in future periods will depend on several factors, including strategic product pricing;

sales of higher-margin consumables;

supply chain constraints increasing costs of raw materials;

supply chain constraints and inflation increasing costs of raw materials;

manufacturing capacity and production volumes impacting the cost of inventory;

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and excess or obsolete inventories.

• Loss from operations increased $43.8 million or 130%, to a loss of $77.5 million for the three months ended March 31, 2022, as compared to a loss of $33.7 million for the three months ended March 31, 2021, driven primarily by an increase of $45.0 million in operating expenses, including a $32.4 million increase in research and development expenses primarily due to the Omniome acquisition and the establishment of an advanced research organization, $13.7 million increase in sales, general and administrative expenses, offset by a $1.1 million change in the fair value of contingent consideration.

• Loss from operations increased $74.2 million or 104%, to a loss of $145.5 million for the six months ended June 30, 2022, as compared to a loss of $71.3 million for the six months ended June 30, 2021, driven primarily by an increase of $77.8 million in operating expenses, including a $60.5 million increase in research and development expenses, primarily due to the Omniome acquisition and the establishment of an advanced research organization, $23.9 million increase in sales, general and administrative expenses, partially offset by a $6.5 million change in the fair value of contingent consideration.

Business Acquisitions in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details .

• Cash, cash equivalents and short-term investments were $962.8 million at March 31, 2022, which represents a 7.8% decrease compared to the balance at December 31, 2021.

• Cash, cash equivalents and short-term investments were $899.2 million at June 30, 2022, which represents a 13.9% decrease compared to the balance at December 31, 2021.

Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2022 and 2021

Three Months Ended June 30,

(in thousands, except percentages)

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Operating loss

Interest expense

Other income, net

Revenue increased $4.9 million, or 16%, to $35.5 million for the three months ended June 30, 2022, as compared to $30.6 million for the three months ended June 30, 2021, driven primarily by an increase in instrument and consumable revenue.

On January 12, 2021, we entered into the Development and Commercialization Agreement, as amended by Amendment No.

1 to Development and Commercialization Agreement, entered into on June 3, 2021 (together, the “Original Agreement”), by and between us and Invitae Corporation (“Invitae”).

On June 24, 2022, we entered into an Amended and Restated Development and Commercialization Agreement (the “Amended and Restated Agreement”).

In consideration of the non-refundable payments received from Invitae pursuant to the Original Agreement of $23.5 million, we will provide Invitae with credits in connection with Invitae’s anticipated purchase of certain currently available and in-development sequencing systems (instruments and consumables).

During the three months ended June 30, 2022, Invitae purchased certain currently available instruments, for which $3.7 million of revenue was recognized as Product Revenue on the Condensed Consolidated Statements of Operations and Comprehensive Loss under the terms of the Amended and Restated Agreement.

Instrument revenue increased $1.3 million, or 9%, to $15.6 million for the three months ended June 30, 2022, as compared to $14.3 million for the three months ended June 30, 2021, primarily due to a higher average selling price of instruments slightly offset by fewer instruments sold.

At June 30, 2022, our installed base was 460 Sequel II and Sequel IIe systems compared to the 282 systems at June 30, 2021.

We expect the number of Sequel II/IIe placements to continue to grow during the remainder of 2022, reflecting our increased commercial presence and customer demand.

Consumables revenue increased $2.4 million, or 19%, to $14.6 million for the three months ended June 30, 2022, as compared to $12.2 million for the three months ended June 30, 2021.

The increase in consumable sales was primarily attributable to higher Sequel II/IIe consumables sales from growth of the installed base.

Service and other revenue increased $1.2 million, or 30%, to $5.3 million for the three months ended June 30, 2022, as compared to $4.1 million for the three months ended June 30, 2021, primarily due to service contracts sold on the growing installed base.

Cost of Revenue, Gross Profit and Gross Margin

Cost of product revenue increased by $2.3 million, or 17%, to $15.5 million for the three months ended June 30, 2022, compared to $13.2 million for the three months ended June 30, 2021.

The increase in cost of product revenue was primarily due to higher manufacturing costs due to increased consumables sales and higher instrument warranty costs.

Gross profit increased $2.4 million, or 18%, to $16.2 million for the three months ended June 30, 2022, compared to $13.8 million for the three months ended June 30, 2021.

Gross margin was 45.7% for the three months ended June 30, 2022, compared to gross margin of 44.9% for the three months ended June 30, 2021.

The increase in gross margin percentage was partially driven by a multi-instrument order at higher average selling prices, as well as greater consumable and service revenue volume.

The global shortage of semiconductors and rising inflation continues to be a challenge in our supply chain and resulted in cost increases that have and may continue to adversely impact margins.

During these periods of shortages or delays, the price of components may increase, or the components may not be available at all.

We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed.

Accordingly, our revenue and gross margins could suffer until other sources can be developed.

Research and Development Expense

Research and development expense increased by $28.1 million, or 126%, to $50.3 million for the three months ended June 30, 2022, compared to the $22.3 million for three months ended June 30, 2021.

The increase was primarily driven by increased personnel expenses of $9.0 million due to an increase in headcount, including the acquired workforce from the Omniome acquisition, and an increase of $11.3 million of product development costs and other related costs, which also included incremental expenses related to the acquisition of Omniome.

In addition, facilities and information technology related expenses increased by $3.5 million during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to expenses related to our continuing operational expansion.

Research and development expense included stock-based compensation expense of $7.7 million and $4.3 million during the three months ended June 30, 2022 and 2021, respectively.

We will continue to focus a significant portion of our resources on developing new products and solutions, including improving the efficiency and usability of existing products, developing new solutions, software, workflows and applications leveraging our core technologies.

We expect research and development expenses to continue increasing during the remainder of 2022, when compared to 2021, due to continued product development, a full year of expenses associated with the acquisition of Omniome and our intent to continue to hire additional personnel in research and development.

We have collaborated and expect to continue to collaborate with strategic partners to develop sequencing solutions and expand the application of our technology.

Sales, General and Administrative Expense

Sales, general and administrative expense increased by $10.2 million, or 35%, to $39.3 million for the three months ended June 30, 2022, compared to $29.1 million for the three months ended June 30, 2021.

The increase was primarily driven by a $2.6 million increase in personnel expenses, which included expenses for quota-carrying sales representatives, $2.0 million in travel expenses, $1.7 million increase in marketing expenses related to conferences and seminars and $1.6 million increase in consulting and professional fees.

Sales, general and administrative expense included stock-based compensation expense of $10.3 million and $9.6 million during the three months ended June 30, 2022 and 2021, respectively.

Sales, general and administrative expense is planned to increase in 2022, when compared to 2021, as we incur a full year of expenses associated with the acquisition of Omniome and our prior year headcount growth.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration of $5.4 million during the three months ended June 30, 2022, represents the remeasurement impact of the contingent consideration of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) that is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology.

The decrease in contingent consideration liability was primarily due to the increase in discount rates.

Interest Expense

Interest expense for the three months ended June 30, 2022, was $3.7 million compared to $3.6 million for the three months ended June 30, 2021 which was primarily comprised of interest on the Convertible Senior Notes.

Comparison of the Six Months Ended June 30, 2022 and 2021

Six Months Ended June 30,

(in thousands, except percentages)

Product revenue

Service and other revenue

Total revenue

Cost of revenue:

Cost of product revenue

Cost of service and other revenue

Amortization of intangible assets

Total cost of revenue

Operating expense:

Research and development

Sales, general and administrative

Change in fair value of contingent consideration

Total operating expense

Operating loss

Loss from continuation advances from Illumina

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Other (expense) income, net

Revenue increased $4.2 million, or 14%, to $33.2 million for the three months ended March 31, 2022, as compared to $29.0 million for the three months ended March 31, 2021, driven primarily by an increase in instrument and consumable revenue.

Instrument revenue increased $0.6 million, or 4%, to $15.6 million for the three months ended March 31, 2022, as compared to $14.9 million for the three months ended March 31, 2021, primarily due to an increase in instruments sold offset by a lower average selling price of instruments attributed to volume-based discounts.

At March 31, 2022, our installed base was 424 Sequel II and Sequel IIe systems compared to the 244 systems in the three months ended March 31, 2021.

Revenue increased $9.0 million, or 15%, to $68.6 million for the six months ended June 30, 2022, as compared to $59.6 million for the six months ended June 30, 2021, driven primarily by an increase in consumable and service revenue from the growth in the installed base of Sequel II/IIe instruments.

During the six months ended June 30, 2022, Invitae purchased certain currently available instruments, for which $3.7 million of revenue was recognized as Product Revenue on the Condensed Consolidated Statements of Operations and Comprehensive Loss under the terms of the Amended and Restated Agreement.

Instrument revenue increased $1.9 million, or 7%, to $31.2 million for the six months ended June 30, 2022, as compared to $29.2 million for the six months ended June 30, 2021, primarily due to an increase in instruments sold.

At June 30, 2022, our installed base was 460 Sequel II and Sequel IIe systems compared to the 282 systems at June 30, 2021.

We expect the number of Sequel II/IIe placements to continue to grow during the remainder of 2022, reflecting our increased commercial presence and customer demand.

Consumables revenue increased $2.3 million, or 21%, to $12.7 million for the three months ended March 31, 2022, as compared to $10.4 million for the three months ended March 31, 2021.

The increase in consumable sales was primarily attributable to higher Sequel II/IIe consumables sales from growth of the installed base.

Service and other revenue increased $1.2 million, or 33%, to $4.9 million for the three months ended March 31, 2022, as compared to $3.7 million for the three months ended March 31, 2021, primarily due to product services contracts sold on the growing installed base.

Consumables revenue increased $4.6 million, or 20%, to $27.3 million for the six months ended June 30, 2022, as compared to $22.6 million for the six months ended June 30, 2021.

The increase in consumable sales was primarily attribut able to higher Sequel II/IIe consumables sales from growth of the installed base.

Service and other revenue increased $2.5 million, or 32%, to $10.2 million for the six months ended June 30, 2022, a s compared to $7.8 million for the six months ended June 30, 2021, primarily due to service contracts sold on the growing installed base.

Cost of Revenue, Gross Profit and Gross Margin

Cost of product revenue increased by $2.1 million, or 17%, to $14.8 million for the three months ended March 31, 2022, compared to $12.7 million for the three months ended March 31, 2021.

Cost of product revenue increased by $4.4 million, or 17%, to $30.3 million for the six months ended June 30, 2022, compared to $25.9 million for the six months ended June 30, 2021.

The increase in cost of product revenue was primarily due to the increase in instrument sales and higher average product costs.

Cost of service and other revenue increased by $0.7 million, or 21%, to $4.0 million for the three months ended March 31, 2022, compared to $3.3 million for the three months ended March 31, 2021, primarily due to higher service volumes from our growing installed base.

Gross profit increased $1.2 million, or 9%, to $14.2 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

Gross margin was 42.7% for the three months ended March 31, 2022, compared to gross margin of 44.8% for the three months ended March 31, 2021.

The decrease in gross margin percentage was primarily due to higher sales volumes offset by lower average selling price and increased product costs during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The global shortage of semiconductors, which has been reported since early 2021, continues to be a challenge for us in our supply chain and resulted in cost increases that have and may continue to adversely impact margins.

Cost of service and other revenue increased by $0.6 million, or 9%, to $7.6 million for the six months ended June 30, 2022, compared to $7.0 million for the six months ended June 30, 2021, primarily due to higher service volumes from our growing installed base.

Gross profit increased $3.6 million, or 14%, to $30.3 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Gross margin was 44.2% for the six months ended June 30, 2022, compared to gross margin of 44.8% for the six months ended June 30, 2021.

The slight decrease in gross margin percentage was primarily due to increased product costs during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

The global shortage of semiconductors continues to be a challenge for us in our supply chain and resulted in cost increases that have and may continue to adversely impact margins.

During these periods of shortages or delays, the price of components may increase, or the components may not be available at all.

Additionally, in response to the rising COVID-19 infections, China has imposed lockdowns in certain parts of the country, which has had, and may continue to have, a negative impact on manufacturing and/or supply chains, as well as customer demand for our products and demand through certain distributors.

Additionally, in response to the surge in COVID-19 infections in the first half of 2022, the Chinese government imposed lockdowns in certain parts of the country, which has had, and may continue to have, a negative impact on manufacturing and/or supply chains, as well as customer demand for our products and demand through certain distributors.

We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed.

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Research and Development Expense

Research and development expense increased by $32.4 million, or 158%, to $52.9 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

This change was primarily driven by an increase of $10.4 million in personnel expenses due to an increase in headcount, including the acquired workforce from the Omniome acquisition and an increase of $11.9 million of product development costs and other related costs.

Research and development expense included stock-based compensation expense of $9.0 million and $3.0 million during the three months ended March 31, 2022 and 2021, respectively.

Research and development expense increased by $60.5 million, or 141%, to $103.3 million for the six months ended June 30, 2022, compared to $42.8 million for the six months ended June 30, 2021.

This change was primarily driven by a $19.4 million increase in personnel expenses due to an increase in headcount, including the acquired workforce from the Omniome acquisition, and an increase of $23.2 million of product development costs and other related costs.

In addition, facilities and information technology related expenses increased $7.0 million to support our operational expansion during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Research and development expense included stock-based compensation expense of $16.7 million and $7.4 million during the six months ended June 30, 2022 and 2021, respectively.

We have collaborated and expect to continue to collaborate with strategic partners to develop sequencing solutions and expand the application of our technology.

On January 12, 2021, we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae Corporation (“Invitae”).

We are currently renegotiating the terms of the Development Agreement.

While we expect to continue to develop next generation high throughput sequencing platforms and products, we do not anticipate that Invitae will continue to provide funding support for future development under the Development Agreement.

We expect to continue discussions with Invitae in connection with the Development Agreement to receive feedback and operational assistance and expertise which we will incorporate in the continued development of our high throughput sequencing platforms and products.

We expect research and development expenses to increase in 2022, when compared to 2021, due to continued product development, a full year of expenses associated with the acquisition of Omniome and our intent to continue to hire additional personnel in research and development.

Sales, General and Administrative Expense

Sales, general and administrative expense increased by $13.7 million, or 52%, to $39.8 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

This change was primarily driven by an increase of $5.9 million in stock-based compensation expense and an increase of $2.9 million in salaries and related expense due to increased headcount, which included quota-carrying sales representatives.

Sales, general and administrative expense increased by $23.9 million, or 43%, to $79.1 million for the six months ended June 30, 2022, compared to $55.2 million for the six months ended June 30, 2021.

This increase was primarily driven by $4.6 million increase in personnel expenses due to an increase in headcount, $4.0 million increase in consulting and professional fees, $2.6 million increase in travel expenses, $2.2 million increase in marketing expenses related to conferences and seminars.

Sales, general and administrative expense included stock-based compensation expense of $22.3 million and $15.7 million during the six months ended June 30, 2022 and 2021, respectively.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration of $1.1 million during the three months ended March 31, 2022, represents the remeasurement impact of the contingent consideration of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) that is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology.

Change in fair value of contingent consideration of $6.5 million during the six months ended June 30, 2022, represents the remeasurement impact of the contingent consideration of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) that is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology.

The decrease in contingent consideration liability was primarily due to the increase in discount rates.

Loss from Continuation Advances from Illumina

As part of the Termination Agreement, Illumina paid us Continuation Advances totaling $52.0 million, which was repayable without interest to Illumina if, within two years of March 31, 2020, we entered into, or consummated a Change of Control Transaction or raised at least $100 million in a single equity or debt financing (that may have multiple closings), with the amount repayable dependent on the amount raised by us.

Resulting from the issuance and sale of $900 million of 1.50% Convertible Senior Notes due February 15, 2028, $52.0 million of Continuation Advances were paid without interest to Illumina in February 2021 and recorded as other expense in the three months ended March 31, 2021.

Interest Expense

Interest expense for the three months ended March 31, 2022, was $3.7 million compared to $1.8 million for the three months ended March 31, 2021.

The increase was primarily due to the full quarter interest incurred on the $900 million of 1.50% Convertible Senior Notes due February 15, 2028 that we issued on February 16, 2021.

Other (Expense) Income, Net

The increase in Other (expense) income, net was primarily driven by greater foreign exchange loss for the three months ended March 31, 2022.

Interest expense for the six months ended June 30, 2022 was $7.4 million compared to $5.4 million for the six months ended June 30, 2021.

The increase was primarily due to the six months of interest incurred on the $900 million of 1.50% Convertible Senior Notes due February 15, 2028 that we issued on February 16, 2021 during the six months ended June 30, 2022 compared to only four months of interest during the six months ended June 30, 2021.

Liquidity and Capital Resources

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We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis due to the investments we intend to make as described in Results of Operations above, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business.

As of March 31, 2022, we had cash, cash equivalents and investments of $962.8 million compared to $1.04 billion as of December 31, 2021.

We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis due to the investments we intend to make as described in “—Results of Operations” above, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business.

We believe that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements for at least the next 12 months from the date of filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.

As of June 30, 2022, we had cash, cash equivalents and investments of $899.2 million compared to $1.04 billion as of December 31, 2021.

We believe that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements beyond the next 12 months from the date of filing of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.

Factors that may affect our capital needs include, but are not limited to, the pace of adoption of our products, which affects the sales of our products and services;

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Summary of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

Cash used in operating activities

Cash provided by investing activities

Cash used in investing activities

Cash provided by financing activities

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Our primary uses of cash in operating activities include the development of future products and product enhancements, manufacturing, and support functions related to our sales, general and administrative activities.

We used $79.0 million of cash in operating activities for the three months ended March 31, 2022, compared to cash used in operating activities of $23.1 million for the three months ended March 31, 2021.

Cash used in operating activities for the three months ended March 31, 2022, of $79.0 million was due primarily to a $81.5 million net loss that included non-cash items such as stock-based compensation of $22.7 million, depreciation expense of $2.3 million, amortization of right-of-use assets of $1.7 million, a $1.1 million decrease in liability due to the change in estimated fair value of contingent consideration, and a net cash outflow due to $24.4 million in net changes to operating assets and liabilities.

The change in net operating assets and liabilities was primarily attributable to a decrease of $17.2 million in accrued expenses, $6.3 million increase in inventory, $3.6 million increase in accounts receivable, $2.5 million decrease in other liabilities, $1.9 million decrease in operating lease liabilities, $1.2 million increase in prepaid and other assets partially offset by an increase of $6.4 million in accounts payable and $1.9 million increase in deferred revenue.

Cash used in operating activities for the three months ended March 31, 2021, was due primarily to $87.4 million net loss, partially offset by a loss of $52.0 million from Continuation Advances repaid to Illumina that is considered a financing activity and non-cash items such as stock-based compensation of $10.2 million and depreciation of $1.6 million.

The change in net operating assets and liabilities was primarily attributable to decreases of $3.0 million in other liabilities and $2.7 million in accrued expenses and an increase of $2.6 million in inventory, partially offset by a decrease of $3.9 million in accounts receivable and an increase of $5.0 million in deferred revenue.

We used $139.6 million of cash in operating activities for the six months ended June 30, 2022, compared to cash used in operating activities of $38.8 million for the six months ended June 30, 2021.

Cash used in operating activities for the six months ended June 30, 2022, of $139.6 million was due primarily to a $152.9 million net loss that included non-cash items such as stock-based compensation of $41.7 million, depreciation expense of $4.6 million, amortization of right-of-use assets of $3.4 million, amortization of investment premium of $1.1 million, partially offset by a $6.5 million decrease in liability due to the change in estimated fair value of contingent consideration, and a net cash outflow due to $31.9 million in net changes to operating assets and liabilities.

The change in net operating assets and liabilities was primarily attributable to a $13.2 million increase in inventory, a $11.4 million decrease in accrued expenses, a $3.8 million decrease in operating lease liabilities, a $2.8 million increase in accounts receivable, a $2.1 million decrease in deferred revenue, partially offset by a $1.3 million increase in accounts payable.

Cash used in operating activities for the six months ended June 30, 2021 was due primarily to a $128.4 million net loss, partially offset by a loss of $52.0 million from Continuation Advances repaid to Illumina that is considered a financing activity, non-cash items such as stock-based compensation of $26.0 million and depreciation of $3.2 million and a net change in operating assets and liabilities of $4.9 million.

The change in net operating assets and liabilities was primarily attributable to increases of $9.4 million in deferred revenue and $5.6 million in accrued expenses, partially offset by increases of $5.0 million in inventory and $3.1 million in accounts receivable and a decrease of $2.1 million in operating lease liabilities.

Investing Activities

Our investing activities consist primarily of capital expenditures and investment purchases, sales and maturities.

Cash provided by investing activities for the three months ended March 31, 2022, was due primarily to $122.1 million in maturities of investments offset by net purchases of investments of $76.4 million, and partially offset by purchases of property and equipment of $3.6 million.

Cash provided by investing activities for the three months ended March 31, 2021, was due primarily to net sales and maturities of investments of $8.6 million, partially offset by purchases of property and equipment of $0.4 million.

Cash used in investing activities for the six months ended June 30, 2022, was due to $241.1 million in purchases of investments offset by $230.5 million in maturities of investments, and $7.7 million in purchases of property and equipment.

Cash used in investing activities for the six months ended June 30, 2021 was due primarily to net purchases of investments of $450.7 million and purchases of property and equipment of $2.0 million.

Financing Activities

Cash provided by financing activities was $5.2 million and $865.7 million for the three months ended March 31, 2022 and 2021, respectively.

Cash provided by financing activities during the three months ended March 31, 2022, resulted from proceeds of $5.6 million from the issuance of common stock through our equity compensation plans.

Cash provided by financing activities during the three months ended March 31, 2021, resulted from the net proceeds of $895.6 million from our February 2021 issuance of $900 million of 1.50% Convertible Senior Notes after deducting debt issuance costs and proceeds of $22.3 million from the issuance of common stock through our equity compensation plans, partially offset by $52.0 million of Continuation Advances repaid to Illumina.

Cash provided by financing activities was $5.7 million and $868.6 million for the six months ended June 30, 2022 and 2021, respectively.

Cash provided by financing activities during the six months ended June 30, 2022 primarily resulted from proceeds of $6.4 million from the issuance of common stock through our equity compensation plans.

Cash provided by financing activities during the six months ended June 30, 2021 resulted from the net proceeds of $895.5 million from our February 2021 issuance of $900 million of 1.50% Convertible Senior Notes after deducting debt issuance costs and proceeds of $25.3 million from the issuance of common stock through our equity compensation plans, partially offset by $52.0 million of Continuation Advances repaid to Illumina.

Critical Accounting Policies and Estimates

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Actual results may differ from these estimates under different assumptions or conditions.

There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, however, as a result of certain changes to the standard contractual terms and conditions with customers implemented during the quarter ended March 31, 2022, we concluded a change in the application of our accounting policy, in accordance with ASC 606, was appropriate.

Specifically, we modified the standard contractual terms with customers during the current quarter, to reflect transfer of title and risk of loss and right to invoice upon delivery.

There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021;

however, as a result of certain changes to the standard contractual terms and conditions with customers implemented during the quarter ended March 31, 2022, we concluded that a change in the application of our accounting policy, in accordance with ASC 606, was appropriate.

Specifically, we modified the standard contractual terms with customers during the first quarter of 2022, to reflect transfer of title and risk of loss and right to invoice upon delivery.

We also updated the terms of the warranty provided with the instrument to remove the service component.

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In addition, because of technical enhancements associated with our more recent instrument releases, including the Sequel IIe systems, installation services are now distinct from the instrument itself.

instrument revenue is now recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers.

Therefore, instrument revenue is now recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers.

Recent Accounting Pronouncements

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Off-Balance Sheet Arrangements

As of March 31, 2022, we did not have any off-balance sheet arrangements.

As of June 30, 2022, we did not have any off-balance sheet arrangements.

In the ordinary course of business, we enter into standard indemnification arrangements.

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Commitments and Contingencies in Part I, Item 1 of this Quarterly Report on Form 10-Q, any associated expenses incurred are included within the related accrued litigation expense amounts.

No additional liability associated with such indemnification agreements has been recorded as of March 31, 2022.

No additional liability associated with such indemnification agreements has been recorded as of June 30, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis