Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the (i) unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and (ii) our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission, or the SEC, on February 28, 2024. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and you should not place undue reliance on our forward-looking statements. We do not assume any obligation to update any forward-looking statements. 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 into the following sections:
• Overview and Outlook
• Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Policies and Estimates
• Recent Accounting Pronouncements
• Off Balance Sheet Arrangements
Overview and Outlook
About PacBio
We are a premier life science technology company that is designing, developing, and manufacturing advanced sequencing solutions that enable scientists and clinical researchers to improve their understanding of the genome and ultimately, resolve genetically complex problems.
Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality, and completeness, which include our HiFi long-read sequencing technology and our Sequencing by Binding (SBB ® ) short-read sequencing technology. Our products address solutions across a broad set of applications including human genetics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Long-read sequencing was recognized by the journal Nature Methods as its “method of the year” for 2022 for its contributions to biological understanding and future potential.
Our focus is on creating some of the world`s most advanced sequencing systems to provide our customers the most complete and accurate view of genomes, transcriptomes, and epigenomes.
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.
Strategic Objectives
Our 2024 strategic objectives are to:
• Improve commercial execution to drive adoption of both the Revio and Onso platforms;
• Continue the development of our benchtop long read and high throughput short-read platforms;
• Implement projects to improve our gross margin and drive manufacturing efficiencies;
• Reduce certain annualized run-rate operating expenses (including the planned reduction of our annualized run-rate operating expenses by the end of 2024).
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We will continue to leverage our commercial organization and significantly improve our products' efficiency and usability to seek to reach a broader customer base. We believe the commercial investments we have recently made 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, increase the throughput, and improve the usability of our existing sequencing solutions. 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. We commenced commercial shipments of Revio, our new HiFi long-read sequencing system, in the first quarter of 2023. To address the oncology research markets with a highly differentiated alternative to existing third-party short-read sequencing products already on the market, we commenced customer shipments of the Onso short-read sequencing instrument in August 2023.
We continue to believe that with the capabilities of our HiFi chemistry and SMRT TM technology, we can be a market leader in whole-genome clinical sequencing. Leading institutions have adopted our products to study rare and inherited disease. We believe the market opportunity for clinical sequencing is significant and could drive substantial revenue growth for us. We plan to continue to pursue 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.
Recent Developments
During the second quarter of 2024, we announced plans to reduce certain annualized run-rate operating expenses by the end of 2024, with the intent of better aligning our organizational structure and resources with our strategic initiatives. Our planned expense reduction measures comprise, among other things, workforce reductions, facilities downsizing and a refined pipeline of development activities.
On an ongoing basis, we evaluate our significant estimates, including those related to the valuation of indefinite-lived and long-lived assets. However, these estimates could change in future periods based on events or changes in circumstances, which could result in material impairment charges. Refer to the Critical Accounting Policies and Estimates section of our Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion on the Company's asset impairment assessments.
Financial Overview
Key highlights of the three months ended March 31, 2024 consolidated financial results include the following:
• Revenue decreased slightly to $38.8 million for the three months ended March 31, 2024, as compared to $38.9 million for the three months ended March 31, 2023. Revenue was comprised of $19.0 million in instrument revenue, $16.0 million in consumables revenue and $3.8 million in service and other revenue for the three months ended March 31, 2024. The decrease was due to lower Revio unit sales which was partially offset by higher consumable sales.
• Gross profit as a percentage of revenue (gross margin) was 29% for the three months ended March 31, 2024, compared to 25% for the three months ended March 31, 2023. Gross margin increased primarily due to adjustments in the first quarter of 2023 that did not recur in the first quarter of 2024 of approximately $3.5 million relating to excess consumables inventory, partially offset by an increase in amortization of acquired intangible assets.
• Loss from operations decreased $9.9 million, or 11%, to $81.4 million for the three months ended March 31, 2024, as compared to $91.3 million for the three months ended March 31, 2023, driven primarily by a decrease of $8.4 million of operating expenses, including a $12.3 million decrease in the change in the fair value of the contingent consideration and a $5.5 million decrease in research and development expenses, partially offset by a $3.9 million increase in sales, general and administrative expenses and a $5.5 million increase in amortization of acquired intangible assets.
• Cash, cash equivalents, and short-term investments were $561.9 million at March 31, 2024, which represents a 11% decrease compared to the balance at December 31, 2023.
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Macroeconomic dynamics impacting the Company may include rising inflation, geopolitical tensions, volatile capital markets, and fluctuating exchange rates.
The median sales cycle for Revio instrument purchases increased more than expected in the first quarter of 2024. We believe this has been caused by, among other reasons, the uncertainty surrounding the funding for new capital equipment, particularly in the U.S. and China; procurement delays; small-to-mid-size existing customers yet to increase their sample volumes to drive an upgrade to Revio; and an increasing proportion of the sales pipeline being comprised of new customers, which have shown they have longer sales cycles compared to existing PacBio customers.
We believe our consumables revenue was also impacted primarily by, among other reasons, slower-than-expected ramp-up in sequencing by our small- to mid-sized customers, many of whom are new to PacBio; sample delays impacting sequencing volume in the quarter at certain large customers; and some service providers in China operating at lower utilization as a result of the difficult funding environment.
These factors could continue to impact our revenues and results of operations in future periods; however, the magnitude and duration of these impacts is uncertain and inherently unpredictable.
See the Risk Factors section for further discussion.
Results of Operations
Comparison of the Three Months Ended March 31, 2024 and 2023
Three Months Ended March 31,
(in thousands, except percentages) 2024 2023 $ Change % Change
Revenue:
Product revenue $ 35,009 $ 34,654 $ 355 1 %
Service and other revenue 3,801 4,246 (445) (10) %
Total revenue 38,810 38,900 (90) — %
Cost of Revenue:
Cost of product revenue 22,447 25,164 (2,717) (11) %
Cost of service and other revenue 3,738 3,792 (54) (1 %)
Amortization of acquired intangible assets
1,343 183 1,160 634 %
Total cost of revenue 27,528 29,139 (1,611) (6 %)
Gross profit 11,282 9,761 1,521 16 %
Operating Expense:
Research and development 43,455 48,939 (5,484) (11) %
Sales, general and administrative 43,753 39,818 3,935 10 %
Amortization of acquired intangible assets 5,506 — 5,506 —
Change in fair value of contingent consideration (70) 12,256 (12,326) (101) %
Total operating expense 92,644 101,013 (8,369) (8 %)
Operating loss (81,362) (91,252) 9,890 (11) %
Interest expense (3,575) (3,630) 55 (2) %
Other income, net 6,759 6,867 (108) (2 %)
Net loss $ (78,178) $ (88,015) $ 9,837 (11 %)
Revenue
Revenue decreased slightly to $38.8 million for the three months ended March 31, 2024, as compared to $38.9 million for the three months ended March 31, 2023.
Instrument revenue decreased $1.7 million, or 8%, to $19.0 million for the three months ended March 31, 2024, as compared to $20.7 million for the three months ended March 31, 2023, primarily due to the sale of 28 Revio systems during the three months ended March 31, 2024 compared to 32 Revio systems during the three months ended March 31, 2023.
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Consumables revenue increased $2.0 million, or 15%, to $16.0 million for the three months ended March 31, 2024, as compared to $14.0 million for the three months ended March 31, 2023. The increase in consumable sales was primarily due to higher Revio consumables sales attributable to the growth in the Revio instrument installed base, partially offset by a decline in Sequel II and IIe consumables as customers transition to Revio. We expect Revio consumable sales to increase as the installed base grows. While we expect to see a decline in Sequel II and IIe consumable sales resulting from the product transition, there is uncertainty as to the rate at which these sales will decline.
Service and other revenue decreased $0.4 million, or 10%, to $3.8 million for the three months ended March 31, 2024, as compared to $4.2 million for the three months ended March 31, 2023, primarily due to customers transitioning to the Revio system, which includes a first-year warranty, and opting not to renew their Sequel II/IIe plans. We expect service revenue to begin to increase during the second half of the year as we anticipate customers transitioning their service contracts to Revio following the standard warranty period.
Cost of Revenue, Gross Profit and Gross Margin
Cost of product revenue decreased $2.7 million, or 11%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The cost of product revenue decreased primarily due to lower instrument sales and adjustments of approximately $3.5 million recognized in the first quarter of 2023 primarily relating to excess consumables inventory due to the product transition to Revio, partially offset by higher consumable sales and for the three months ended March 31, 2024. Cost of revenue included share-based compensation expense of $2.1 million and $1.9 million during the three months ended March 31, 2024 and 2023, respectively.
Gross profit increased $1.5 million, or 16%, to $11.3 million for the three months ended March 31, 2024, compared to $9.8 million for the three months ended March 31, 2023. Gross margin was 29% for the three months ended March 31, 2024, compared to gross margin of 25% for the three months ended March 31, 2023. We anticipate gross margin to increase as we implement projects designed to improve our product costs and drive manufacturing efficiencies. However, gross margins could fluctuate depending on the timing of the reduction of Revio instrument product costs and changes in Revio consumable volume. Additionally gross margins may be impacted by manufacturing efficiencies, improvement of warranty costs, and fluctuations in average selling prices.
Research and Development Expense
Research and development expense decreased by $5.5 million, or 11%, to $43.5 million for the three months ended March 31, 2024, compared to $48.9 million for the three months ended March 31, 2023. The decrease was primarily driven by a decrease in personnel expenses due to restructuring activities in the fourth quarter of 2023 and the transition of recently launched products from development to commercialization. Research and development expense included share-based compensation expense of $5.8 million and $6.7 million during the three months ended March 31, 2024 and 2023, respectively. We anticipate research and development expense to further decrease during 2024 in connection with our recently announced expense reduction initiatives, primarily due to headcount reductions.
Sales, General and Administrative Expense
Sales, general and administrative expense increased by $3.9 million, or 10%, to $43.8 million for the three months ended March 31, 2024, compared to $39.8 million for the three months ended March 31, 2023. The increase was primarily driven by an increase in personnel expenses as we expanded our commercial organization. Sales, general, and administrative expense included share-based compensation expense of $11.6 million and $9.3 million during the three months ended March 31, 2024 and 2023, respectively.
Change in Fair Value of Contingent Consideration
The change in fair value of contingent consideration during the three months ended March 31, 2024, represents the remeasurement impact of the Apton contingent consideration due upon the achievement of the milestone, while the change in fair value of contingent consideration during the three months ended March 31, 2023, represents the remeasurement impact of the Omniome contingent consideration, which was achieved in the third quarter of 2023. The decrease in the change in fair value of contingent consideration was primarily due to the change in the milestone in the first quarter of 2024 as compared to the first quarter of 2023.
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The contingent consideration milestone for the Omniome acquisition was defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology. As a result of the milestone achievement in September 2023, former Omniome securityholders received as milestone consideration, among other things, an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock.
In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay former holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, provided that the milestone event occurs prior to the 5-year anniversary of the closing date of the acquisition, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets included in operating expenses of $5.5 million during the three months ended March 31, 2024 consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities.
Interest Expense
Interest expense for the three months ended March 31, 2024, was $3.6 million compared to $3.6 million for the three months ended March 31, 2023 and was primarily comprised of interest on the convertible senior notes.
Other Income, Net
Other income, net for the three months ended March 31, 2024, was $6.8 million compared to $6.9 million for the three months ended March 31, 2023.
Liquidity and Capital Resources
As of March 31, 2024, we had cash, cash equivalents and investments of $561.9 million compared to $631.4 million as of December 31, 2023. 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 March 31, 2024.
Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, have primarily been through the issuance of debt or equity securities, together with cash flow from operating activities. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business.
We approved and began implementing certain efficiency and expense reduction initiatives in the second quarter of 2024. These expense reduction initiatives include workforce reductions, facilities downsizing and a refined pipeline of development activities. The cost-savings initiatives are expected to reduce certain annualized run-rate operating expenses by the end of 2024.
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; our ability to efficiently manage our operations; the effectiveness of our expense reduction measures; our ability to obtain new collaboration and customer arrangements and maintain existing collaborations and arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the purchase of patent licenses; the impact of product quality; litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; costs of developing new and enhanced products; acquisitions of complementary businesses, technologies or assets; achievement of milestones in connection with acquisitions; and other factors. There can be no assurance that funds will be available on favorable terms, or at all.
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Contingent Consideration
In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay former holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, provided that the milestone event occurs prior to the 5-year anniversary of the closing date of the acquisition, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock. See Note 2. Business Acquisitions in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
Summary of Cash Flows
Three Months Ended March 31,
(in thousands) 2024 2023
Cash used in operating activities $ (75,682) $ (94,691)
Cash used in investing activities (34,136) (72,553)
Cash provided by financing activities 6,553 195,989
Net (decrease) increase in cash, cash equivalents and restricted cash $ (103,265) $ 28,745
Operating Activities
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.
Cash used in operating activities for the three months ended March 31, 2024 of $75.7 million was due primarily to a $78.2 million net loss that included non-cash items such as share-based compensation of $19.5 million, amortization of intangible assets of $6.9 million, depreciation expense of $3.2 million, and amortization of right-of-use assets of $1.9 million. This was offset by the accretion of discount and amortization of premium on marketable securities, net of $4.0 million, and $25.3 million in net changes to operating assets and liabilities. Cash flow impact from changes in net operating assets and liabilities was primarily driven by an increase in inventory, as well as decreases in accrued expenses, other liabilities, and operating lease liabilities. These uses of cash were partially offset by decreases in accounts receivable and prepaid expenses and other assets and increases in accounts payable and deferred revenue.
Cash used in operating activities for the three months ended March 31, 2023, of $94.7 million was due primarily to a $88.0 million net loss that included non-cash items such as share-based compensation of $18.0 million, change in estimated fair value of contingent consideration of $12.3 million, depreciation expense of $2.8 million, amortization of right-of-use assets of $1.5 million. This was offset by the accretion of discount and amortization of premium on marketable securities, net of $2.2 million and $43.1 million in net changes to operating assets and liabilities. Cash flow impact from changes in net operating assets and liabilities were primarily driven by increases in inventory, accounts receivable and prepaid and other assets, as well as decreases in accrued expenses, other liabilities and operating lease liabilities. These uses of cash were partially offset by an increase in accounts payable.
Investing Activities
Our investing activities consist primarily of capital expenditures and investment purchases, sales, and maturities.
Cash used in investing activities for the three months ended March 31, 2024, was primarily due to $191.9 million in purchases of investments and $3.9 million in purchases of property and equipment partially offset by $161.7 million of maturities of investments.
Cash used in investing activities for the three months ended March 31, 2023, was due to $233.3 million in purchases of investments and $3.7 million in purchases of property and equipment offset by $164.5 million of maturities and sales of investments.
Financing Activities
Cash provided by financing activities during the three months ended March 31, 2024 resulted primarily from $6.9 million from the issuance of common stock through our equity compensation plans.
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Cash provided by financing activities during the three months ended March 31, 2023 primarily resulted from $189.2 million in net proceeds related to the issuance of common stock from the underwritten public equity offering and $7.2 million from the issuance of common stock through our equity compensation plans.
Contractual Obligations
We presented our contractual obligations at December 31, 2023 in our Annual Report on Form 10-K for the year then ended. There were no material changes outside the ordinary course of business to our contractual obligations during the three months ended March 31, 2024.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our critical accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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, 2023.
Recent Accounting Pronouncements
Please see Note 1. 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 March 31, 2024, we did not have any off-balance sheet arrangements.
In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract, any defective products supplied by us, or any acts or omissions, or willful misconduct, committed by us or any of our employees, agents or representatives. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements.
We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between us and such third parties in connection with such fundraising efforts. To the extent that such indemnification obligations apply to the lawsuits described in Note 6. 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, 2024.
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