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Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-08-09 · 133 added, 108 removed, 179 unchanged (57% of the section changed)

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.

You should read the following discussion and analysis of our financial condition and results of operations together with (i) the 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.

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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 focus is on creating some of the world's most advanced sequencing systems to provide our customers with 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.

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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;

• Improve commercial execution to drive adoption of both the Revio ® and Onso TM platforms;

• Continue the development of our Vega TM benchtop long-read and high throughput short-read platforms;

• Improve our gross margin and drive manufacturing efficiencies;

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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.

In November 2024, we announced the Vega system, our first benchtop long-read sequencing platform.

We began taking orders in the fourth quarter of 2024 with shipments expected to commence in the first quarter of 2025.

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.

Leading institutions have adopted our products to study rare and inherited disease.

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During the second quarter of 2024, we announced plans to reduce 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 and ongoing expense reduction initiatives comprise, among other things, workforce reductions, facilities downsizing and a refined pipeline of development activities, with the majority of the expense reduction activities already initiated during the three months ended June 30, 2024.

For the three months ended June 30, 2024, we incurred approximately $18.0 million of restructuring charges primarily related to employee separation costs, accelerated amortization and depreciation for right-of-use assets, leasehold improvements, and furniture and fixtures relating to the planned abandonment of the San Diego office, as well as charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives.

We also anticipate incurring approximately $8.3 million in additional costs over the remainder of 2024.

Our expense reduction initiatives include workforce reductions, facilities downsizing and a refined pipeline of development programs.

For the nine months ended September 30, 2024, we incurred approximately $24.7 million of restructuring charges primarily related to employee separation costs, accelerated amortization and depreciation for right-of-use assets, leasehold improvements, and furniture and fixtures relating to the abandonment of the San Diego office, as well as charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives.

We also expect to incur approximately $2.1 million in additional costs through 2025.

Restructuring in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

Financial Overview

Key highlights of the six months ended June 30, 2024 consolidated financial results include the following:

• Revenue decreased to $74.8 million for the six months ended June 30, 2024, as compared to $86.5 million for the six months ended June 30, 2023.

Revenue was comprised of $33.7 million in instrument revenue, $33.0 million in consumables revenue and $8.1 million in service and other revenue for the six months ended June 30, 2024.

Revenue was comprised of $50.6 million in instrument revenue, $27.7 million in consumables revenue and $8.2 million in service and other revenue for the six months ended June 30, 2023.

Key highlights of the nine months ended September 30, 2024 consolidated financial results include the following:

• Revenue decreased to $114.8 million for the nine months ended September 30, 2024, as compared to $142.2 million for the nine months ended September 30, 2023.

Revenue was comprised of $50.5 million in instrument revenue, $51.6 million in consumables revenue and $12.7 million in service and other revenue for the nine months ended September 30, 2024.

Revenue was comprised of $85.3 million in instrument revenue, $44.6 million in consumables revenue and $12.3 million in service and other revenue for the nine months ended September 30, 2023.

The decrease was primarily due to lower Revio unit sales, which was partially offset by higher consumable sales.

• Gross profit as a percentage of revenue (gross margin) was 23% for the six months ended June 30, 2024, compared to 29% for the six months ended June 30, 2023.

Gross margin decreased for the six months ended June 30, 2024 primarily due to the decrease in revenue described above, $4.6 million of restructuring charges, and an increase of $3.6 million in amortization of acquired intangible assets, partially offset by adjustments in the first quarter of 2023 of approximately $3.5 million relating to excess consumables inventory.

• Loss from operations increased $92.8 million to $257.2 million for the six months ended June 30, 2024, as compared to $164.4 million for the six months ended June 30, 2023, primarily driven by an increase in operating expenses and the decrease in revenue described above, partially offset by a decrease in cost of revenue.

While we do not expect Vega to meaningfully impact Revio sales, we are mindful that there may be some cases where potential customers take more time to assess our new offerings, which may prolong some sales cycles.

• Gross profit decreased for the nine months ended September 30, 2024 primarily due to the decrease in revenue described above, $4.4 million of restructuring charges, and an increase of $6.6 million in amortization of acquired intangible assets, partially offset by lower inventory adjustments.

While we anticipate continued reduction in the production cost of the Revio platform, we expect to begin to realize these additional savings in 2025.

Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, and future product launches.

We expect Vega to be accretive to our gross margin as we scale the platform in 2025.

• Loss from operations increased $74.4 million to $321.3 million for the nine months ended September 30, 2024, as compared to $246.9 million for the nine months ended September 30, 2023.

Operating expenses increased $58.4 million primarily driven by a $93.2 million goodwill impairment charge, $20.3 million of restructuring charges, and a $12.6 million increase in amortization of acquired intangible assets, partially offset by a $12.9 million decrease in the change in the fair value of the contingent consideration and a decrease in research and development expenses.

We anticipate research and development expense and sales, general and administrative expense to continue to decrease for the remainder of 2024 as compared to the prior year driven by our expense reduction initiatives.

• Cash, cash equivalents, and short-term investments were $509.8 million at June 30, 2024, which represents a 19% decrease compared to the balance at December 31, 2023.

The median sales cycle for Revio instrument purchases continues to be longer than expected during 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.

• Cash, cash equivalents, and short-term investments were $471.1 million at September 30, 2024, which represents a 25% decrease compared to the balance at December 31, 2023.

The median sales cycle for Revio instrument purchases continues to be longer than expected.

We believe this has been caused by, among other reasons, the uncertainty surrounding the funding for new capital equipment;

procurement delays, particularly in the Asia-Pacific and Europe regions;

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and sample volumes materializing slower than expected for some potential Revio 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;

We believe our consumables revenue was also impacted primarily by 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 at certain large customers;

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However, these estimates could change in future periods based on events or changes in circumstances, which could result in material impairment charges.

We recorded a $93.2 million goodwill impairment charge for the three months ended June 30, 2024.

We recorded a $93.2 million goodwill impairment charge in the nine months ended September 30, 2024.

See additional discussion below in Results of Operations, as well as Note 4.

Bal ance Sheet Components in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

Balance Sheet Components in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

Additionally, 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.

See the Risk Factors section for further discussion.

Recent Developments

Product Announcements

On November 6, 2024, we announced a new sequencing platform, Vega.

Vega is a new benchtop long-read sequencing system that delivers the functionality of the Revio system, our high-throughput long-read sequencer, into a compact, lower-throughput benchtop platform that is designed for researchers adopting long-read sequencing across a variety of applications, including targeted sequencing, RNA sequencing, and small genome sequencing.

2028 Convertible Senior Notes Exchange

As discussed in Note 11.

Subsequent Events in Part I, Item 1 of this Quarterly Report on Form 10-Q, on November 7, 2024, we entered into an exchange agreement with SBN, pursuant to which we have agreed to exchange the remaining approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding for $200.0 million aggregate principal amount of 2029 Notes as well as the issuance of 20,451,570 shares of common stock and $50.0 million of cash.

The exchange and issuances are expected to close on or about November 21, 2024.

Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023

Three Months Ended June 30,

Comparison of the Three Months Ended September 30, 2024 and 2023

Three Months Ended September 30,

(in thousands, except percentages) 2024 2023 $ Change % Change

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3,201 184 3,017 1640 %

Loss on purchase commitment

Total cost of revenue 29,963 37,789 (7,826) (21 %)

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Sales, general and administrative 43,746 43,431 315 1 %

Goodwill impairment 93,200 — 93,200 —

Merger-related expenses — 8,979 (8,979) (100 %)

Amortization of acquired intangible assets 3,649 741 2,908 392 %

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Operating loss (64,077) (82,492) 18,415 (22) %

Loss on extinguishment of debt — (2,033) 2,033 (100) %

Interest expense (3,538) (3,588) 50 (1) %

Other income, net 6,890 8,505 (1,615) (19 %)

Loss before benefit from income taxes (60,725) (77,575) 16,850 (22 %)

Benefit from income taxes — (10,706) 10,706 (100 %)

Net loss $ (60,725) $ (66,869) $ 6,144 (9 %)

Revenue decreased $11.6 million, or 24% to $36.0 million for the three months ended June 30, 2024, as compared to $47.6 million for the three months ended June 30, 2023.

Instrument revenue decreased $15.2 million, or 51%, to $14.7 million for the three months ended June 30, 2024, as compared to $29.9 million for the three months ended June 30, 2023, primarily due to the sale of 24 Revio systems during the three months ended June 30, 2024 compared to 45 Revio systems during the three months ended June 30, 2023.

Consumables revenue increased $3.3 million, or 24%, to $17.0 million for the three months ended June 30, 2024, as compared to $13.7 million for the three months ended June 30, 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.

Revenue decreased $15.7 million, or 28% to $40.0 million for the three months ended September 30, 2024, as compared to $55.7 million for the three months ended September 30, 2023.

Instrument revenue decreased $17.9 million, or 52%, to $16.8 million for the three months ended September 30, 2024, as compared to $34.7 million for the three months ended September 30, 2023, primarily due to the sale of 22 Revio systems during the three months ended September 30, 2024 compared to 52 Revio systems during the three months ended September 30, 2023.

Consumables revenue increased $1.6 million, or 10%, to $18.5 million for the three months ended September 30, 2024, as compared to $16.9 million for the three months ended September 30, 2023.

The increase 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 increased $0.3 million, or 9%, to $4.3 million for the three months ended June 30, 2024, as compared to $3.9 million for the three months ended June 30, 2023.

Service and other revenue increased $0.5 million, or 13%, to $4.7 million for the three months ended September 30, 2024, as compared to $4.1 million for the three months ended September 30, 2023.

Cost of Revenue, Gross Profit and Gross Margin

Cost of product revenue decreased $5.3 million, or 19%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023 primarily driven by the decrease in revenue described above, partially offset by restructuring charges of $4.6 million, including charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives during the three months ended June 30, 2024.

Cost of product revenue decreased $10.3 million, or 31%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023 primarily driven by the decrease in revenue described above.

Cost of revenue included amortization attributable to acquired intangible assets of $3.2 million that are related to sales generating activities.

Cost of revenue included share-based compensation expense of $1.1 million and $1.2 million during the three months ended June 30, 2024 and 2023, respectively.

Gross profit decreased $9.6 million, or 62%, to $5.9 million for the three months ended June 30, 2024, compared to $15.5 million for the three months ended June 30, 2023.

Gross margin was 16% for the three months ended June 30, 2024, compared to gross margin of 33% for the three months ended June 30, 2023.

The decrease was primarily due to the decrease in revenue described above, restructuring charges, and an increase of $2.4 million in amortization of acquired intangible assets.

We anticipate higher gross margins from ongoing cost reductions on the Revio instrument and consumable yield improvements, but fluctuations may occur based on implementation timing and consumable volume changes.

Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, and average selling price fluctuations.

Cost of revenue included share-based compensation expense of $1.2 million and $1.1 million during the three months ended September 30, 2024 and 2023, respectively.

Gross profit decreased $7.9 million, or 44%, to $10.0 million for the three months ended September 30, 2024, compared to $17.9 million for the three months ended September 30, 2023.

Gross margin was 25% for the three months ended September 30, 2024, compared to gross margin of 32% for the three months ended September 30, 2023.

The decrease was primarily due to the decrease in revenue described above and an increase in amortization of acquired intangible assets.

We anticipate continued reduction in the production cost of the Revio platform, which we expect to realize in 2025.

Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, and future product launches.

Research and Development Expense

Research and development expense decreased by $7.7 million, or 17%, to $38.5 million for the three months ended June 30, 2024, compared to $46.2 million for the three months ended June 30, 2023.

The decrease was primarily driven by a decrease in personnel expenses due to restructuring activities and the transition of recently launched products from development to commercialization.

We incurred restructuring charges of $5.9 million, primarily related to employee separation benefits during the three months ended June 30, 2024.

Research and development expense included share-based compensation expense of $4.6 million and $5.4 million during the three months ended June 30, 2024 and 2023, respectively.

Research and development expense decreased by $22.0 million, or 46%, to $25.5 million for the three months ended September 30, 2024, compared to $47.5 million for the three months ended September 30, 2023.

The decrease was primarily driven by a decrease in personnel and related expenses due to restructuring activities, as well as the transition of launched products from development to commercialization.

Research and development expense included share-based compensation expense of $4.7 million and $6.2 million during the three months ended September 30, 2024 and 2023, respectively.

Sales, General and Administrative Expense

Sales, general and administrative expense increased by $5.3 million, or 13%, to $45.9 million for the three months ended June 30, 2024, compared to $40.6 million for the three months ended June 30, 2023.

The increase was primarily driven by restructuring charges partially offset by lower personnel expense.

We incurred restructuring charges of $7.5 million, primarily related to employee separation benefits and lease-related costs during the three months ended June 30, 2024.

Sales, general, and administrative expense included share-based compensation expense of $11.5 million and $11.3 million during the three months ended June 30, 2024 and 2023, respectively.

We expect to incur an additional $8.3 million of remaining estimated restructuring costs during the remainder of 2024.

Goodwill Impairment

Based primarily on the sustained decrease in our stock price during the second quarter and overall market capitalization as of the end of the second quarter of 2024, as well as other factors, we concluded that there was an indication that the fair value of the reporting unit might be less than it’s carrying amount and performed an interim impairment test on goodwill.

The interim impairment test showed the reporting unit's carrying amount exceeded fair value.

As a result, we recorded a $93.2 million goodwill impairment charge for the three months ended June 30, 2024, mainly due to the decline in the stock price and changes in the timing of expected future cash flows as compared to our initial long-term plan due to continued impact of longer than expected median sales cycles resulting from various factors.

Sales, general and administrative expense increased by $0.3 million, or 1%, to $43.7 million for the three months ended September 30, 2024, compared to $43.4 million for the three months ended September 30, 2023.

Restructuring charges of approximately $6.9 million were primarily offset by a decrease in personnel expenses.

We expect to incur an additional $2.1 million of remaining estimated restructuring costs through 2025.

Sales, general, and administrative expense included share-based compensation expense of $12.3 million and $12.4 million during the three months ended September 30, 2024 and 2023, respectively.

Merger-Related Expenses

Merger-related expenses of $9.0 million during the three months ended September 30, 2023 consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition.

We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration of $2.0 million during the three months ended June 30, 2023, represents the remeasurement impact of the Omniome contingent consideration liability of approximately $200 million that was due upon the achievement of a milestone.

Change in fair value of contingent consideration during the three months ended September 30, 2024, represents the remeasurement impact of the Apton contingent consideration due upon the achievement of the milestone.

Change in fair value of contingent consideration during the three months ended September 30, 2023, represents the remeasurement impact of the Omniome contingent consideration liability of approximately $200 million that was due upon the achievement of a milestone.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets included in operating expenses of $4.2 million during the three months ended June 30, 2024 consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $2.0 million during the three months ended June 30, 2023, represents the loss resulting from the difference in the fair value of the 2030 Notes and the principal, in addition to the write-off of the unamortized debt issuance costs on the portion of the 2028 Notes that were exchanged as part of the debt modification during the three months ended June 30, 2023.

Amortization of acquired intangible assets included in operating expenses of $3.6 million during the three months ended September 30, 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 June 30, 2024, was $3.5 million compared to $3.6 million for the three months ended June 30, 2023 and was primarily comprised of interest on the convertible senior notes.

Interest expense for the three months ended September 30, 2024, was $3.5 million compared to $3.6 million for the three months ended September 30, 2023 and was primarily comprised of interest on the convertible senior notes.

Other Income, Net

Other income, net for the three months ended June 30, 2024, was $6.1 million compared to $8.9 million for the three months ended June 30, 2023.

Other income, net for the three months ended September 30, 2024, was $6.9 million compared to $8.5 million for the three months ended September 30, 2023.

The decrease was primarily driven by lower investment income due to lower cash and investment balances.

Comparison of the Six Months Ended June 30, 2024 and 2023

Six Months Ended June 30,

Benefit from Income Taxes

A deferred income tax benefit of $10.7 million for the three months ended September 30, 2023 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 Apton acquisition.

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 Loss for the three months ended September 30, 2023.

Comparison of the Nine Months Ended September 30, 2024 and 2023

Nine Months Ended September 30,

(in thousands, except percentages) 2024 2023 $ Change % Change

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Goodwill impairment 93,200 — 93,200 —

Merger-related expenses — 8,979 (8,979) (100) %

Amortization of acquired intangible assets 13,377 741 12,636 1705 %

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Other income, net 19,718 24,301 (4,583) (19) %

Loss before benefit from income taxes (312,222) (235,423) (76,799) 33 %

Benefit from income taxes — (10,706) 10,706 (100) %

Net loss $ (312,222) $ (224,717) $ (87,505) 39 %

Revenue decreased $11.7 million, or 13%, to $74.8 million for the six months ended June 30, 2024, as compared to $86.5 million for the six months ended June 30, 2023.

Instrument revenue decreased $16.9 million, or 33%, to $33.7 million for the six months ended June 30, 2024, as compared to $50.6 million for the six months ended June 30, 2023, primarily due to the sale of 52 Revio systems during the six months ended June 30, 2024 compared to 77 Revio systems during the six months ended June 30, 2023.

Consumables revenue increased $5.4 million, or 19%, to $33.0 million for the six months ended June 30, 2024, as compared to $27.7 million for the six months ended June 30, 2023.

Revenue decreased $27.4 million, or 19%, to $114.8 million for the nine months ended September 30, 2024, as compared to $142.2 million for the nine months ended September 30, 2023.

Instrument revenue decreased $34.8 million, or 41%, to $50.5 million for the nine months ended September 30, 2024, as compared to $85.3 million for the nine months ended September 30, 2023, primarily due to the sale of 74 Revio systems during the nine months ended September 30, 2024 compared to 129 Revio systems during the nine months ended September 30, 2023.

Consumables revenue increased $7.0 million, or 16%, to $51.6 million for the nine months ended September 30, 2024, as compared to $44.6 million for the nine months ended September 30, 2023.

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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 of $8.1 million for the six months ended June 30, 2024 was relatively flat as compared the six months ended June 30, 2023.

Service and other revenue increased $0.4 million, or 4% to $12.7 million for the nine months ended September 30, 2024 as compared to $12.3 million for the nine months ended September 30, 2023.

Cost of Revenue, Gross Profit and Gross Margin

Cost of product revenue decreased $8.1 million, or 15%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 primarily driven by the decrease in revenue described above, partially offset by restructuring charges of $4.6 million, including charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives during the six months ended June 30, 2024.

Cost of product revenue for the six months ended June 30, 2023 included adjustments of approximately $3.5 million primarily relating to excess consumables inventory due to the product transition to Revio we recognized during the first quarter of 2023.

Cost of revenue included amortization attributable to acquired intangible assets of $4.0 million that are related to sales generating activities.

Cost of revenue included share-based compensation expense of $3.2 million and $3.1 million during the six months ended June 30, 2024 and 2023, respectively.

Gross profit decreased $8.1 million, or 32%, to $17.2 million for the six months ended June 30, 2024, compared to $25.3 million for the six months ended June 30, 2023.

Gross margin was 23% for the six months ended June 30, 2024, compared to gross margin of 29% for the six months ended June 30, 2023.

The decrease was primarily due to the decrease in revenue described above, restructuring charges, and an increase of $3.6 million in amortization of acquired intangible assets.

Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, and average selling price fluctuations.

Cost of product revenue decreased $18.3 million, or 21%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 primarily driven by the decrease in revenue described above and lower inventory adjustments, partially offset by restructuring charges of $4.4 million, including charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives during the nine months ended September 30, 2024.

Cost of revenue included amortization attributable to acquired intangible assets of $7.2 million and $0.6 million that are related to sales generating activities during the nine months ended September 30, 2024 and 2023, respectively.

Cost of revenue included share-based compensation expense of $4.5 million and $4.3 million during the nine months ended September 30, 2024 and 2023, respectively.

Gross profit decreased $16.0 million, or 37%, to $27.2 million for the nine months ended September 30, 2024, compared to $43.2 million for the nine months ended September 30, 2023.

Gross margin was 24% for the nine months ended September 30, 2024, compared to gross margin of 30% for the nine months ended September 30, 2023.

The decrease was primarily due to the decrease in revenue described above, restructuring charges, and an increase of $6.6 million in amortization of acquired intangible assets, partially offset by lower inventory adjustments.

We anticipate continued reduction in the production cost of the Revio platform, which we expect to realize in 2025.

Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, and future product launches.

Research and Development Expense

Research and development expense decreased by $13.2 million, or 14%, to $81.9 million for the six months ended June 30, 2024, compared to $95.1 million for the six months ended June 30, 2023.

The decrease was primarily driven by a decrease in personnel expenses due to restructuring activities and the transition of recently launched products from development to commercialization.

We incurred restructuring charges of $5.9 million, primarily related to employee separation benefits during the six months ended June 30, 2024.

Research and development expense included share-based compensation expense of $10.4 million and $12.1 million during the six months ended June 30, 2024 and 2023, respectively.

Research and development expense decreased by $35.2 million, or 25%, to $107.5 million for the nine months ended September 30, 2024, compared to $142.6 million for the nine months ended September 30, 2023.

The decrease was primarily driven by a decrease in personnel and related expenses due to restructuring activities, as well as the transition of products from development to commercialization.

We incurred restructuring charges of $5.9 million, primarily related to employee separation benefits during the nine months ended September 30, 2024.

Research and development expense included share-based compensation expense of $15.1 million and $18.3 million during the nine months ended September 30, 2024 and 2023, respectively.

Sales, General and Administrative Expense

Sales, general and administrative expense increased by $9.2 million, or 11%, to $89.6 million for the six months ended June 30, 2024, compared to $80.4 million for the six months ended June 30, 2023.

The increase was primarily driven by restructuring charges and higher personnel costs.

We incurred restructuring charges of $7.5 million, primarily related to employee separation benefits and lease-related costs during the six months ended June 30, 2024.

Sales, general, and administrative expense included share-based compensation expense of $23.1 million and $20.6 million during the six months ended June 30, 2024 and 2023, respectively.

We expect to incur an additional $8.3 million of remaining estimated restructuring costs during the remainder of 2024.

Sales, general and administrative expense increased by $9.6 million, or 8%, to $133.4 million for the nine months ended September 30, 2024, compared to $123.8 million for the nine months ended September 30, 2023.

The increase was primarily driven by restructuring charges of $14.4 million, primarily related to employee separation benefits and lease-related costs during the nine months ended September 30, 2024, partially offset by a decrease in personnel expenses.

We expect to incur an additional $2.1 million of remaining estimated restructuring costs through 2025.

Sales, general, and administrative expense included share-based compensation expense of $35.4 million and $33.0 million during the nine months ended September 30, 2024 and 2023, respectively.

Merger-Related Expenses

Merger-related expenses of $9.0 million during the nine months ended September 30, 2023 consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition.

We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services.

Goodwill Impairment

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The interim impairment test showed the reporting unit's carrying amount exceeded fair value.

As a result, we recorded a $93.2 million goodwill impairment charge for the nine months ended September 30, 2024, mainly due to the decline in the stock price and changes in the timing of expected future cash flows as compared to our initial long-term plan due to continued impact of longer than expected median sales cycles resulting from various factors.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets included in operating expenses of $9.7 million during the six months ended June 30, 2024 consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities.

Amortization of acquired intangible assets included in operating expenses of $13.4 million and $0.7 million during the nine months ended September 30, 2024 and 2023, respectively consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration during the six months ended June 30, 2024, represents the remeasurement impact of the Apton contingent consideration due upon the achievement of the milestone.

Change in fair value of contingent consideration of $14.3 million during the six months ended June 30, 2023, represents the remeasurement impact of the Omniome contingent consideration liability of approximately $200 million that was due upon the achievement of a milestone.

Change in fair value of contingent consideration during the nine months ended September 30, 2024, represents the remeasurement impact of the Apton contingent consideration due upon the achievement of the milestone.

Change in fair value of contingent consideration during the nine months ended September 30, 2023, represents the remeasurement impact of the Omniome contingent consideration liability of approximately $200 million that was due upon the achievement of a milestone.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $2.0 million during the six months ended June 30, 2023, represents the loss resulting from the difference in the fair value of the 2030 Notes and the principal, in addition to the write-off of the unamortized debt issuance costs on the portion of the 2028 Notes that were exchanged as part of the debt modification during the six months ended June 30, 2023.

Loss on extinguishment of debt of $2.0 million during the nine months ended September 30, 2023, represents the loss resulting from the difference in the fair value of the 2030 Notes and the principal, in addition to the write-off of the unamortized debt issuance costs on the portion of the 2028 Notes that were exchanged as part of the debt modification during the nine months ended September 30, 2023.

Interest Expense

Interest expense for the six months ended June 30, 2024, was $7.1 million compared to $7.2 million for the six months ended June 30, 2023 and was primarily comprised of interest on the convertible senior notes.

Interest expense for the nine months ended September 30, 2024, was $10.7 million compared to $10.8 million for the nine months ended September 30, 2023 and was primarily comprised of interest on the convertible senior notes.

Other Income, Net

Other income, net for the six months ended June 30, 2024, was $12.8 million compared to $15.8 million for the six months ended June 30, 2023.

Other income, net for the nine months ended September 30, 2024, was $19.7 million compared to $24.3 million for the nine months ended September 30, 2023.

The decrease was primarily driven by lower investment income due to lower cash and investment balances.

Benefit from Income Taxes

A deferred income tax benefit of $10.7 million for the nine months ended September 30, 2023 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 Apton acquisition.

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 Loss for the nine months ended September 30, 2023.

Liquidity and Capital Resources

As of June 30, 2024, we had cash, cash equivalents and investments of $509.8 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 June 30, 2024.

As of September 30, 2024, we had cash, cash equivalents and investments of $471.1 million compared to $631.4 million as of December 31, 2023.

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.

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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 and are expected to reduce annualized run-rate operating expenses by the end of 2024.

These expense reduction initiatives include workforce reductions, facilities downsizing and a refined pipeline of development programs and are expected to reduce 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;

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

2028 Convertible Senior Notes Exchange

As discussed above under Recent Developments , on November 7, 2024, we entered into an exchange agreement with SBN, pursuant to which we have agreed to exchange the remaining approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding for $200.0 million aggregate principal amount of 2029 Notes as well as the issuance of 20,451,570 shares of common stock and $50.0 million of cash.

The exchange and issuances are expected to close on or about November 21, 2024.

Summary of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2024 2023

Cash used in operating activities $ (175,408) $ (201,613)

Cash provided by (used in) investing activities 42,701 (171,144)

Cash provided by investing activities 65,766 71,179

Cash provided by financing activities 7,213 190,493

Net decrease in cash, cash equivalents and restricted cash $ (80,843) $ (116,302)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (102,429) $ 60,059

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 six months ended June 30, 2024 of $129.9 million was due primarily to a $251.5 million net loss that included non-cash items such as a goodwill impairment charge of $93.2 million, share-based compensation of $36.7 million, amortization of acquired intangible assets of $13.7 million, depreciation expense of $6.7 million and amortization of right-of-use assets of $5.9 million.

Cash used in operating activities for the nine months ended September 30, 2024 of $175.4 million was due primarily to a $312.2 million net loss that included non-cash items such as a goodwill impairment charge of $93.2 million, share-based compensation of $55.0 million, amortization of acquired intangible assets of $20.6 million, depreciation expense of $10.9 million and amortization of right-of-use assets of $10.9 million.

This was offset by the accretion of discount and amortization of premium on marketable securities, net of $10.7 million and $48.9 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 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 six months ended June 30, 2023 of $136.4 million was due primarily to a $157.8 million net loss that included non-cash items such as share-based compensation of $35.8 million, change in estimated fair value of contingent consideration of $14.2 million, depreciation expense of $5.6 million, inventory provisions of $4.3 million, amortization of right-of-use assets of $3.3 million, and loss on extinguishment of debt of $2.0 million.

This was offset by the accretion of discount and amortization of premium on marketable securities, net of $6.1 million and $38.6 million in net changes to operating assets and liabilities.

Cash flow impact from changes in net operating assets and liabilities was primarily driven by increases in inventory, accounts receivable and prepaid and other assets, as well as decreases in accrued expenses, operating lease liabilities and deferred revenue.

These uses of cash were partially offset by an increase in accounts payable.

These uses of cash were partially offset by a decrease in accounts receivable.

Cash used in operating activities for the nine months ended September 30, 2023 of $201.6 million was due primarily to a $224.7 million net loss that included non-cash items such as share-based compensation of $55.5 million, change in estimated fair value of contingent consideration of $14.0 million, depreciation expense of $8.5 million, amortization of right-of-use assets of $4.9 million, inventory provisions of $4.7 million, merger-related compensation expense of $3.4 million, and loss on extinguishment of debt of $2.0 million.

This was offset by deferred income taxes of $10.7 million, the accretion of discount and amortization of premium on marketable securities, net of $10.1 million, and $51.2 million in net changes to operating assets and liabilities.

Cash flow impact from changes in net operating assets and liabilities was primarily driven by increases in inventory, accounts receivable and prepaid and other assets, as well as decreases in operating lease liabilities, deferred revenue, other liabilities and the contingent consideration liability.

These uses of cash were partially offset by an increase in accrued expenses and accounts payable.

Investing Activities

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

Cash provided by investing activities for the six months ended June 30, 2024, was primarily from $351.6 million of maturities of investments partially offset by $303.6 million in purchases of investments and $5.4 million in purchases of property and equipment.

Cash used in investing activities for the six months ended June 30, 2023, was due to $311.7 million of maturities and sales of investments offset by $476.9 million in purchases of investments, and $6.0 million in purchases of property and equipment.

Cash provided by investing activities for the nine months ended September 30, 2024, was primarily from $488.5 million of maturities and sales of investments partially offset by $418.2 million in purchases of investments and $4.6 million in purchases of property and equipment.

Cash provided by investing activities for the nine months ended September 30, 2023, was due to $631.8 million of maturities and sales of investments offset by $553.7 million in purchases of investments, $6.8 million in purchases of property and equipment, and $0.1 million of cash paid for the Apton acquisition, net of cash acquired.

Financing Activities

Cash provided by financing activities during the six months ended June 30, 2024 resulted primarily from $6.9 million of proceeds from the issuance of common stock through our equity compensation plans.

Cash provided by financing activities during the six months ended June 30, 2023 primarily resulted from $189.2 million in net proceeds related to the issuance of common stock from the underwritten public equity offering and $9.8 million from the issuance of common stock through our equity compensation plans offset by $6.8 million from the payment of debt issuance costs.

Cash provided by financing activities during the nine months ended September 30, 2024 resulted primarily from $7.7 million of proceeds from the issuance of common stock through our equity compensation plans.

Cash provided by financing activities during the nine months ended September 30, 2023 primarily resulted from $189.2 million in net proceeds related to the issuance of common stock from the underwritten public equity offering and $14.4 million from the issuance of common stock through our equity compensation plans partially offset by $7.3 million from the payment of debt issuance costs and $4.4 million from the payment of contingent consideration.

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 six months ended June 30, 2024.

There were no material changes outside the ordinary course of business to our contractual obligations during the nine months ended September 30, 2024.

Critical Accounting Policies and Estimates

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Off-Balance Sheet Arrangements

As of June 30, 2024, we did not have any off-balance sheet arrangements.

As of September 30, 2024, 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 June 30, 2024.

No additional liability associated with such indemnification agreements has been recorded as of September 30, 2024.

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