What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-08 · 115 added, 97 removed, 164 unchanged (56% of the section changed)

20 unchanged sentences

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 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.

As of September 30, 2022, our commercial team was comprised of over 192 employees, including 54 quota-carrying representatives, many with advanced degrees in biology and significant experience in the genomics industry.

Strategic Objectives

Our 2022 strategic objectives include:

 Execution - leveraging commercial investment to drive continued HiFi and Sequel II/IIe adoption;

 Execution - leveraging commercial investment to drive continued HiFi, Sequel II/IIe, and new product adoption;

 Progress our product pipeline - continuing the development of our future higher throughput HiFi sequencing platform and differentiated short-read technology;

 Delight our customers - deepening our customer relationships and expanding customer collaborations across existing and rapidly expanding new applications for our technology.

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 will continue to leverage our commercial organization and make significant improvements in efficiency and usability of our products to seek to reach a broader customer base.

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.

1 unchanged sentence

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 2023.

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

In October 2022, we announced Revio TM , our new HiFi long-read sequencing system.

We will begin taking orders in the fourth quarter of 2022 with shipments expected to commence in the first quarter of 2023.

To address the oncology research markets with a highly differentiated alternative to our long-read technology and existing third party short-read sequencing products already on the market, we are also progressing development of Onso TM , our SBB short-read platform, with shipments expected to commence in the first half of 2023.

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.

1 unchanged sentence

We believe the market opportunity for clinical sequencing is significant and could drive substantial revenue growth for the company.

We plan to continue to pursue customer collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing.

We plan to continue to pursue partner collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing.

Collaborative arrangements add to the awareness of our products and service offerings and may drive new applications for use of our technology.

8 unchanged sentences

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.

We will continue to prioritize investments to develop and commercialize our new products, 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.

5 unchanged sentences

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

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.

Key highlights of the nine months ended September 30, 2022 consolidated financial results include the following:

 Revenue increased $6.5 million, or 7%, to $101.0 million for the nine months ended September 30, 2022, as compared to $94.5 million for the nine months ended September 30, 2021, driven primarily by an increase in consumable and service revenue from the growth of our installed base of Sequel II/IIe instruments.

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;

While we expect to continue to sell Sequel II/IIe instruments during the remainder of 2022 and beyond, we anticipate the launch of our new long-read instrument, Revio TM , will impact sales of our Sequel IIe platform.

Further, we may continue to experience an impact from lengthening sales cycles due to global macroeconomic factors.

 Gross profit as a percentage of revenue (gross margin) was 43.5% for the nine months ended September 30, 2022, compared to 44.5% for the nine months ended September 30, 2021.

G ross margin declined due primarily to a decrease in instrument volume and average selling price as well as higher overall product costs.

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

sales of higher-margin consumables;

3 unchanged sentences

and excess or obsolete inventories.

• 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.

 Loss from operations increased $74.4 million or 51%, to a loss of $220.1 million for the nine months ended September 30, 2022, as compared to a loss of $145.8 million for the nine months ended September 30, 2021, driven primarily by an increase of $76.2 million in operating expenses, including a $80.1 million increase in research and development expenses, primarily due to the Omniome acquisition and the establishment of an advanced research organization, and a $29.0 million increase in sales, general, and administrative expenses, partially offset by a $30.7 million decrease in non-recurring merger-related costs incurred in 2021 and a $2.2 million gain related to the 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 $899.2 million at June 30, 2022, which represents a 13.9% decrease compared to the balance at December 31, 2021.

 Cash, cash equivalents, and short-term investments were $834.3 million at September 30, 2022, which represents a 20.1% decrease compared to the balance at December 31, 2021.

Results of Operations

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

Three Months Ended June 30,

Comparison of the Three months ended September 30, 2022 and 2021

Three Months Ended September 30,

(in thousands, except percentages)

10 unchanged sentences

Sales, general and administrative

Merger-related expenses

Change in fair value of contingent consideration

2 unchanged sentences

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.

Other income (loss), net

Loss before benefit from income taxes

Benefit from income taxes

Net (loss) income

Revenue decreased $2.6 million, or 7%, to $32.3 million for the three months ended September 30, 2022, as compared to $34.9 million for the three months ended September 30, 2021.

Instrument revenue decreased $4.5 million, or 28%, to $11.4 million for the three months ended September 30, 2022, as compared to $15.9 million for the three months ended September 30, 2021, primarily due to fewer instruments sold and a lower average selling price of instruments.

We believe some of this decrease was driven by customer delays in instrument purchases as customers anticipated the launch of our new long-read platform, the Revio TM .

At September 30, 2022, our installed base was 494 Sequel II and Sequel IIe systems compared to the 326 systems at September 30, 2021.

We expect the installed base of Sequel II/IIe instruments to continue to grow, reflecting our increased commercial presence and customer demand;

however, we anticipate that sales volumes of Sequel II/IIe may decline as compared to recent quarters as a result of the announcement of Revio TM and its anticipated availability for shipment in the first quarter of 2023.

Consumables revenue increased $1.5 million, or 10%, to $16.1 million for the three months ended September 30, 2022, as compared to $14.6 million for the three months ended September 30, 2021.

The increase in consumable sales was primarily due to higher Sequel II/IIe consumables sales attributable to the growth in the instrument installed base d espite annualized pull-through declining for the three months ended September 30, 2022 as compared to the same period in the prior year .

Service and other revenue increased $0.4 million, or 10%, to $4.8 million for the three months ended September 30, 2022, as compared to $4.4 million for the three months ended September 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.

Cost of product revenue increased slightly for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

Cost of services and other revenue decreased primarily due to lower service personnel costs.

Gross profit decreased $1.8 million, or 12%, to $13.5 million for the three months ended September 30, 2022, compared to $15.4 million for the three months ended September 30, 2021.

Gross margin was 41.9% for the three months ended September 30, 2022, compared to gross margin of 44.0% for the three months ended September 30, 2021.

The decrease in gross margin was primarily driven by lower sales volume and average selling price as well as higher overall product costs, which was partially offset by consumables volumes and lower service revenue costs.

We expect our gross margin will trend slightly lower during the remainder of the year due in part to new product transitions, the impacts of inflation, and increased supply chain costs.

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.

3 unchanged sentences

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.

Research and development expense increased by $19.6 million, or 71%, to $47.1 million for the three months ended September 30, 2022, compared to the $27.5 million for three months ended September 30, 2021.

The increase was primarily driven by an increase of $9.0 million in product development costs and an increase of $6.8 million in personnel expenses due to an increase in headcount, including the acquired workforce from the Omniome acquisition.

In addition, facilities and information technology related expenses increased by $3.2 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to expenses related to our operational expansion.

Research and development expense included stock-based compensation expense of $7.5 million and $5.2 million during the three months ended September 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.

Sales, general and administrative expense increased by $5.2 million, or 16%, to $36.8 million for the three months ended September 30, 2022, compared to $31.6 million for the three months ended September 30, 2021.

The increase was primarily driven by an increase of $1.5 million in travel expenses, an increase of $1.5 million in personnel expenses, and an increase of $0.7 million in facilities and information technology related expenses.

Sales, general, and administrative expense included stock-based compensation expense of $10.5 million and $9.9 million during the three months ended September 30, 2022 and 2021, respectively.

We anticipate sales, general, and administrative expense to continue to increase primarily as a result of the new product commercialization efforts.

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.

Change in fair value of contingent consideration of $4.3 million during the three months ended September 30, 2022, represents the remeasurement impact of the contingent consideration liability 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 increase in contingent consideration liability was primarily due to changes in the probability of achieving the milestone, as well as the passage of time.

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,

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

Benefit from Income Taxes

A deferred income tax benefit of $94.8 million for the three months ended September 30, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions.

We maintain a full valuation allowance on the net deferred tax assets of our U.S.

entities as we have concluded that it is more likely than not that we will not realize our

deferred tax assets.

Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2021.

Comparison of the Nine months ended September 30, 2022 and 2021

Nine Months Ended September 30,

(in thousands, except percentages)

10 unchanged sentences

Sales, general and administrative

Merger-related expenses

Change in fair value of contingent consideration

3 unchanged sentences

Interest expense

Other (expense) income, net

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.

Other income, net

Loss before benefit from income taxes

Benefit from income taxes

Revenue increased $6.5 million, or 7%, to $101.0 million for the nine months ended September 30, 2022, as compared to $94.5 million for the nine months ended September 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 $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.

During the nine months ended September 30, 2022, Invitae purchased certain currently available instruments, for which $3.7 million of revenue was recognized as product revenue under the terms of the Amended and Restated Agreement.

Instrument revenue decreased $2.5 million, or 6%, to $42.6 million for the nine months ended September 30, 2022, as compared to $45.1 million for the nine months ended September 30, 2021, primarily due to fewer instruments sold and a lower average selling price of instruments.

We believe some of this decrease was driven by customer delays in instrument purchases as customers anticipated the launch of our new long-read platform, the Revio TM .

At September 30, 2022, our installed base was 494 Sequel II and Sequel Ile systems compared to the 326 systems at September 30, 2021.

We expect the installed base of Sequel II/IIe instruments to continue to grow, reflecting our increased commercial presence and customer demand;

however, we anticipate that sales volumes may decline as compared to recent quarters as a result of the announcement of Revio TM and its anticipated availability for shipment in the first quarter of 2023.

Consumables revenue increased $6.1 million, or 16%, to $43.3 million for the nine months ended September 30, 2022, as compared to $37.2 million for the nine months ended September 30, 2021.

The increase in consumable sales was primarily due to higher Sequel II/IIe consumables sales attributable to the growth in the instrument installed base d espite annualized pull-through declining for the nine months ended September 30, 2022 as compared to the same period in the prior year .

Service and other revenue increased $2.9 million, or 24%, to $15.0 million for the nine months ended September 30, 2022, a s compared to $12.2 million for the nine months ended September 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 $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 $0.6 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.

Cost of product revenue increased by $4.4 million, or 11%, to $45.9 million for the nine months ended September 30, 2022, compared to $41.4 million for the nine months ended September 30, 2021.

The increase in cost of product revenue was primarily due to higher overall product costs.

Cost of service and other revenue decreased by $0.2 million, or 2%, to $10.6 million for the nine months ended September 30, 2022, compared to $10.8 million for the nine months ended September 30, 2021.

Gross profit increased $1.8 million, or 4%, to $43.9 million for the nine months ended September 30, 2022, compared to $42.1 million the nine months ended September 30, 2021.

Gross margin was 43.5% for the nine months ended September 30, 2022, compared to gross margin of 44.5% for the nine months ended September 30, 2021.

The decrease in gross margin percentage was primarily due to a decrease in instrument sales volume and average selling price as well as higher product costs, which was partially offset by consumables volumes and higher service and other revenues during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

We expect our gross margin will trend slightly lower during the remainder of the year due in part to new product transitions and the impacts of inflation and increased supply chain costs.

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 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.

Additionally, in response to the surge in COVID-19 infections in 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.

1 unchanged sentence

Research and Development Expense

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.

Research and development expense increased by $80.1 million, or 114%, to $150.4 million for the nine months ended September 30, 2022, compared to $70.3 million for the nine months ended September 30, 2021.

This change was primarily driven by an increase of $35.6 million in personnel expenses, including the acquired workforce from the Omniome acquisition, and an increase of $32.2 million of product development costs.

In addition, facilities and information technology related expenses increased $10.2 million to support our operational expansion during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Research and development expense included stock-based compensation expense of $24.2 million and $12.5 million during the nine months ended September 30, 2022 and 2021, respectively.

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

We anticipate that our spend during the remainder of 2022 will decline due to new product transitions.

Additionally, 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 $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.

Sales, general and administrative expense increased by $29.0 million, or 33%, to $115.9 million for the nine months ended September 30, 2022, compared to $86.8 million for the nine months ended September 30, 2021.

The increase was primarily driven by an increase of $12.4 million in personnel costs, an increase of $5.0 million related to consulting and professional services, an increase of $4.1 million in travel related expenses, an increase of $3.8 million in marketing and business expenses, and an increase of $2.9 million in facilities expenses and information technology related expenses.

Sales, general and administrative expense included stock-based compensation expense of $32.7 million and $25.6 million during the nine months ended September 30, 2022 and 2021, respectively.

W e anticipate sales, general, and administrative expense to continue to increase primarily as a result of the new product commercialization efforts.

Change in Fair Value of Contingent Consideration

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.

Change in fair value of contingent consideration of $2.2 million during the nine months ended September 30, 2022, represents the remeasurement impact of the contingent consideration liability 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.

1 unchanged sentence

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 six months ended June 30, 2021.

Interest Expense

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.

Interest expense for the nine months ended September 30, 2022 was $11.0 million compared to $9.1 million for the nine months ended September 30, 2021.

The increase was primarily due to the nine 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 nine months ended September 30, 2022 compared to only seven months of interest during the nine months ended September 30, 2021.

Benefit from Income Taxes

A deferred income tax benefit of $94.8 million for the nine months ended September 30, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions.

We maintain a full valuation allowance on the net deferred tax assets of our U.S.

entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets.

Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021.

Liquidity and Capital Resources

1 unchanged sentence

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 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.

As of September 30, 2022, we had cash, cash equivalents and investments of $834.3 million compared to $1.04 billion as of December 31, 2021.

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;

3 unchanged sentences

the purchase of patent licenses;

future acquisitions;

manufacturing costs;

7 unchanged sentences

Summary of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

Cash used in operating activities

Cash used in investing activities

Cash provided by (used in) investing activities

Cash provided by financing activities

2 unchanged sentences

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 $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.

Cash used in operating activities for the nine months ended September 30, 2022, of $202.6 million was due primarily to a $229.9 million net loss that included non-cash items such as stock-based compensation of $60.7 million, depreciation expense of $6.9 million, amortization of right-of-use assets of $5.2 million, amortization of premium and accretion of discount on marketable securities, net of $1.1 million, partially offset by a $2.2 million decrease in liability due to the change in estimated fair value of contingent consideration, and a net cash outflow due to $45.6 million in net changes to operating assets and liabilities.

The change in net operating assets and liabilities was primarily attributable to a $20.7 million increase in inventory, a $11.1 million increase in accrued expenses, a $5.9 million increase in operating lease liabilities, a $5.7 million increase in prepaid expenses and other assets, and a $3.6 million increase in deferred revenue, partially offset by a $1.5 million decrease in accounts receivable a $1.5 million increase in accounts payable.

Cash used in operating activities for the nine months ended September 30, 2021 was due primarily to a $111.9 million net loss, which includes a $94.8 million deferred income tax benefit, that was 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 $54.4 million and depreciation expense of $4.9 million and a net cash inflow from changes in operating assets and liabilities of $9.8 million.

The change in net operating assets and liabilities was primarily attributable to increases of $17.9 million in deferred revenue and $10.3 million in accrued expenses, partially offset by an increase of $5.5 million in inventory, an increase of $6.9 million in accounts receivable, a decrease of $3.2 million in operating lease liabilities, and a decrease of $3.0 million in other liabilities.

Investing Activities

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

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.

Cash provided by investing activities for the nine months ended September 30, 2022, was due to $355.4 million of maturities and sales of investments offset by $307.9 million in purchases of investments, and $11.8 million in purchases of property and equipment.

Cash used in investing activities for the nine months ended September 30, 2021 was due primarily to net purchases of investments of $421.4 million, cash paid, net of cash acquired, of $319.8 million for the acquisitions of Omniome and Circulomics and purchases of property and equipment of $3.1 million.

Financing Activities

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.

Cash provided by financing activities during the nine months ended September 30, 2022 primarily resulted from proceeds of $10.0 million from the issuance of common stock through our equity compensation plans partially offset by $1.2 million of principal payoff of notes.

Cash provided by financing activities during the nine months ended September 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, net proceeds of $294.8 million from our September 2021 private placement of common stock after deducting issuance costs and proceeds of $30.1 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

13 unchanged sentences

Please see Note 1.

Organization and Significant Accounting Policies , subsection titled “Recent Accounting Pronouncements”, in Part II, Item 8 of the Annual Report on Form 10-K for information regarding applicable recent accounting pronouncements

Organization and Significant Accounting Policies , subsection titled “Recent Accounting Pronouncements”, in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding applicable recent accounting pronouncements

Off-Balance Sheet Arrangements

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

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

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

7 unchanged sentences

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 June 30, 2022.

No additional liability associated with such indemnification agreements has been recorded as of September 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