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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________
Form 10-Q
_____________________________________________________________________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
Or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-34899
_____________________________________________________________________________________________
Pacific Biosciences of California, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________________________________________________________
| | | | | |
Delaware | 16-1590339 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
1305 O’Brien Drive Menlo Park, CA | 94025 |
(Address of principal executive offices) | (Zip Code) |
(650) 521-8000
(Registrant’s telephone number, including area code)
_____________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | PACB | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | x | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
Emerging growth company | o | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares outstanding of the issuer’s common stock as of July 31, 2024: 272,528,950.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | | | | | | |
(in thousands, except per share amounts) | June 30, 2024 | | December 31, 2023 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 99,526 | | | $ | 179,911 | |
Investments | 410,276 | | | 451,505 | |
Accounts receivable, net | 32,433 | | | 36,615 | |
Inventory, net | 68,594 | | | 56,676 | |
Prepaid expenses and other current assets | 16,968 | | | 17,040 | |
Short-term restricted cash | 342 | | | 300 | |
Total current assets | 628,139 | | | 742,047 | |
Property and equipment, net | 34,910 | | | 36,432 | |
Operating lease right-of-use assets, net | 22,391 | | | 32,593 | |
Long-term restricted cash | 1,922 | | | 2,422 | |
Intangible assets, net | 443,278 | | | 456,984 | |
Goodwill | 369,061 | | | 462,261 | |
Other long-term assets | 9,790 | | | 13,274 | |
Total assets | $ | 1,509,491 | | | $ | 1,746,013 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities | | | |
Accounts payable | $ | 17,488 | | | $ | 15,062 | |
Accrued expenses | 22,456 | | | 45,708 | |
Deferred revenue, current | 19,212 | | | 16,342 | |
Operating lease liabilities, current | 12,487 | | | 9,591 | |
Other liabilities, current | 6,747 | | | 8,326 | |
| | | |
Total current liabilities | 78,390 | | | 95,029 | |
Deferred revenue, non-current | 5,706 | | | 5,530 | |
Contingent consideration liability, non-current | 19,480 | | | 19,550 | |
Operating lease liabilities, non-current | 19,620 | | | 31,606 | |
Convertible senior notes, net, non-current | 892,844 | | | 892,243 | |
Other liabilities, non-current | 751 | | | 751 | |
Total liabilities | 1,016,791 | | | 1,044,709 | |
| | | |
Commitments and contingencies | | | |
| | | |
Stockholders’ equity | | | |
Preferred stock, $0.001 par value: | | | |
Authorized 50,000 shares; No shares issued or outstanding | — | | | — | |
Common stock, $0.001 par value: | | | |
Authorized 1,000,000 shares; issued and outstanding 272,491 and 267,744 shares at June 30, 2024 and December 31, 2023, respectively | 272 | | | 268 | |
Additional paid-in capital | 2,583,523 | | | 2,539,892 | |
Accumulated other comprehensive (loss) income | (523) | | | 219 | |
Accumulated deficit | (2,090,572) | | | (1,839,075) | |
Total stockholders’ equity | 492,700 | | | 701,304 | |
Total liabilities and stockholders’ equity | $ | 1,509,491 | | | $ | 1,746,013 | |
See accompanying notes to the condensed consolidated financial statements.
PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except per share amounts) | 2024 | | 2023 | | 2024 | | 2023 |
Revenue: | | | | | | | |
Product revenue | $ | 31,746 | | | $ | 43,655 | | | $ | 66,755 | | | $ | 78,309 | |
Service and other revenue | 4,267 | | | 3,918 | | | 8,068 | | | 8,164 | |
Total revenue | 36,013 | | | 47,573 | | | 74,823 | | | 86,473 | |
Cost of Revenue: | | | | | | | |
Cost of product revenue | 23,083 | | | 28,432 | | | 45,530 | | | 53,596 | |
Cost of service and other revenue | 3,366 | | | 3,412 | | | 7,104 | | | 7,204 | |
Amortization of acquired intangible assets | 2,628 | | | 183 | | | 3,971 | | | 366 | |
Loss on purchase commitment | 998 | | | — | | | 998 | | | — | |
Total cost of revenue | 30,075 | | | 32,027 | | | 57,603 | | | 61,166 | |
Gross profit | 5,938 | | | 15,546 | | | 17,220 | | | 25,307 | |
Operating Expense: | | | | | | | |
Research and development | 38,485 | | | 46,173 | | | 81,940 | | | 95,112 | |
Sales, general and administrative | 45,877 | | | 40,573 | | | 89,630 | | | 80,391 | |
Goodwill impairment | 93,200 | | | — | | | 93,200 | | | — | |
| | | | | | | |
Amortization of acquired intangible assets | 4,222 | | | — | | | 9,728 | | | — | |
Change in fair value of contingent consideration | — | | | 1,975 | | | (70) | | | 14,231 | |
Total operating expense | 181,784 | | | 88,721 | | | 274,428 | | | 189,734 | |
Operating loss | (175,846) | | | (73,175) | | | (257,208) | | | (164,427) | |
| | | | | | | |
Loss on extinguishment of debt | — | | | (2,033) | | | — | | | (2,033) | |
Interest expense | (3,542) | | | (3,554) | | | (7,117) | | | (7,184) | |
Other income, net | 6,069 | | | 8,929 | | | 12,828 | | | 15,796 | |
Loss before benefit from income taxes | (173,319) | | | (69,833) | | | (251,497) | | | (157,848) | |
Benefit from income taxes | — | | | — | | | — | | | — | |
Net loss | (173,319) | | | (69,833) | | | (251,497) | | | (157,848) | |
Other comprehensive (loss) income: | | | | | | | |
Unrealized (loss) gain on investments | (217) | | | (762) | | | (742) | | | 2,079 | |
Comprehensive loss | $ | (173,536) | | | $ | (70,595) | | | $ | (252,239) | | | $ | (155,769) | |
Net loss per share: | | | | | | | |
Basic | $ | (0.64) | | | $ | (0.28) | | | $ | (0.93) | | | $ | (0.64) | |
Diluted | $ | (0.64) | | | $ | (0.28) | | | $ | (0.93) | | | $ | (0.64) | |
Weighted average shares outstanding used in calculating net loss per share: | | | | | | | |
Basic | 272,385 | | 250,070 | | 270,982 | | 246,074 |
Diluted | 272,385 | | 250,070 | | 270,982 | | 246,074 |
See accompanying notes to the condensed consolidated financial statements.
PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2024 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Equity |
(in thousands) | Shares | | Amount | | | | |
Balance at March 31, 2024 | 272,280 | | $ | 272 | | | $ | 2,566,304 | | | $ | (306) | | | $ | (1,917,253) | | | $ | 649,017 | |
Net loss | — | | — | | | — | | | — | | | (173,319) | | | (173,319) | |
Other comprehensive loss | — | | — | | | — | | | (217) | | | — | | | (217) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Issuance of common stock in conjunction with equity plans | 211 | | — | | | — | | | — | | | — | | | — | |
Share-based compensation expense | — | | — | | | 17,219 | | | — | | | — | | | 17,219 | |
Balance at June 30, 2024 | 272,491 | | $ | 272 | | | $ | 2,583,523 | | | $ | (523) | | | $ | (2,090,572) | | | $ | 492,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2024 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders' Equity |
(in thousands) | Shares | | Amount | | | | |
Balance at December 31, 2023 | 267,744 | | $ | 268 | | | $ | 2,539,892 | | | $ | 219 | | | $ | (1,839,075) | | | $ | 701,304 | |
Net loss | — | | — | | | — | | | — | | | (251,497) | | | (251,497) | |
Other comprehensive loss | — | | — | | | — | | | (742) | | | — | | | (742) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Issuance of common stock in conjunction with equity plans | 4,747 | | 4 | | | 6,887 | | | — | | | — | | | 6,891 | |
Share-based compensation expense | — | | — | | | 36,744 | | | — | | | — | | | 36,744 | |
Balance at June 30, 2024 | 272,491 | | $ | 272 | | | $ | 2,583,523 | | | $ | (523) | | | $ | (2,090,572) | | | $ | 492,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Equity |
(in thousands) | Shares | | Amount | | | | |
Balance at March 31, 2023 | 249,803 | | $ | 250 | | | $ | 2,314,146 | | | $ | (1,924) | | | $ | (1,620,355) | | | $ | 692,117 | |
Net loss | — | | — | | | — | | | — | | | (69,833) | | | (69,833) | |
Other comprehensive loss | — | | — | | | — | | | (762) | | | — | | | (762) | |
| | | | | | | | | | | |
Issuance of common stock in conjunction with equity plans | 670 | | — | | | 2,586 | | | — | | | — | | | 2,586 | |
Share-based compensation expense | — | | — | | | 17,891 | | | — | | | — | | | 17,891 | |
Balance at June 30, 2023 | 250,473 | | $ | 250 | | | $ | 2,334,623 | | | $ | (2,686) | | | $ | (1,690,188) | | | $ | 641,999 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2023 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Equity |
(in thousands) | Shares | | Amount | | | | |
Balance at December 31, 2022 | 226,505 | | $ | 227 | | | $ | 2,099,782 | | | $ | (4,765) | | | $ | (1,532,340) | | | $ | 562,904 | |
Net loss | — | | — | | | — | | | — | | | (157,848) | | | (157,848) | |
Other comprehensive income | — | | — | | | — | | | 2,079 | | | — | | | 2,079 | |
Issuance of common stock from Underwritten Public Equity Offering, net of issuance costs | 20,125 | | 20 | | | 189,180 | | | — | | | — | | | 189,200 | |
Issuance of common stock in conjunction with equity plans | 3,843 | | 3 | | | 9,818 | | | — | | | — | | | 9,821 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Share-based compensation expense | — | | — | | | 35,843 | | | — | | | — | | | 35,843 | |
Balance at June 30, 2023 | 250,473 | | $ | 250 | | | $ | 2,334,623 | | | $ | (2,686) | | | $ | (1,690,188) | | | $ | 641,999 | |
See accompanying notes to the condensed consolidated financial statements.
PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2024 | | 2023 |
Cash flows from operating activities | | | |
Net loss | $ | (251,497) | | | $ | (157,848) | |
Adjustments to reconcile net loss to net cash used in operating activities | | | |
Depreciation | 6,739 | | | 5,584 | |
Amortization of acquired intangible assets | 13,706 | | | 466 | |
Amortization of right-of-use assets | 5,858 | | | 3,330 | |
| | | |
Share-based compensation expense | 36,744 | | | 35,843 | |
Goodwill impairment | 93,200 | | | — | |
| | | |
Accretion of discount and amortization of premium on marketable securities, net | (7,572) | | | (6,113) | |
Change in the estimated fair value of contingent consideration | (70) | | | 14,231 | |
Loss on extinguishment of debt | — | | | 2,033 | |
Inventory provision | 3,922 | | | 4,295 | |
| | | |
| | | |
| | | |
Other | 702 | | | 369 | |
Changes in assets and liabilities | | | |
Accounts receivable, net | 4,182 | | | (5,248) | |
Inventory, net | (16,767) | | | (19,703) | |
Prepaid expenses and other assets | 3,559 | | | (6,085) | |
Accounts payable | 3,390 | | | 4,262 | |
Accrued expenses | (23,250) | | | (5,956) | |
| | | |
Deferred revenue | 3,046 | | | (2,317) | |
Operating lease liabilities | (4,748) | | | (4,114) | |
| | | |
Other liabilities | (1,089) | | | 539 | |
Net cash used in operating activities | (129,945) | | | (136,432) | |
Cash flows from investing activities | | | |
Purchase of property and equipment | (5,358) | | | (5,989) | |
| | | |
Purchases of investments | (303,564) | | | (476,879) | |
Sales of investments | — | | | 595 | |
Maturities of investments | 351,623 | | | 311,129 | |
Net cash provided by (used in) investing activities | 42,701 | | | (171,144) | |
Cash flows from financing activities | | | |
Proceeds from issuance of common stock under equity offerings, net of issuance costs | — | | | 189,200 | |
Proceeds from issuance of common stock from equity plans | 6,891 | | | 9,821 | |
Payment of debt issuance costs | — | | | (6,836) | |
| | | |
Notes payable principal payoff | (490) | | | (911) | |
Net cash provided by financing activities | 6,401 | | | 191,274 | |
Net decrease in cash, cash equivalents, and restricted cash | (80,843) | | | (116,302) | |
Cash, cash equivalents, and restricted cash at beginning of period | 182,633 | | | 328,311 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 101,790 | | | $ | 212,009 | |
Cash and cash equivalents at end of period | 99,526 | | | 209,287 | |
Restricted cash at end of period | 2,264 | | | 2,722 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 101,790 | | | $ | 212,009 | |
See accompanying notes to the condensed consolidated financial statements.
PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
We are a 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 (SBBTM) 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. 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.
References in this report to “PacBio,” “we,” “us,” the “Company,” and “our” refer to Pacific Biosciences of California, Inc. and its consolidated subsidiaries.
Basis of Presentation and Consolidation
Our unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, as set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. The unaudited condensed consolidated financial statements include the accounts of Pacific Biosciences and our wholly owned subsidiaries. Certain information and footnote disclosures typically included in our audited financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on a consistent basis with the December 31, 2023 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state our financial position, results of operations, comprehensive loss, and cash flows for the period, but are not necessarily indicative of the results to be expected for the entire year or any future periods. All intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
The financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. On an ongoing basis, we evaluate our significant estimates, including those relating to the valuation of inventory, fair value of contingent consideration, valuation of acquired intangible assets, useful lives assigned to finite-lived assets, asset impairment assessments, computation of provisions for income taxes, and valuations related to our convertible senior notes. While the extent of the potential impact of current macroeconomic conditions on our business is highly uncertain, we considered information available related to assumptions and estimates used to determine the results reported and asset valuations as of June 30, 2024. Actual results could differ materially from these estimates.
Cash, Cash Equivalents, Restricted Cash and Investments
We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash equivalents may be comprised of money market funds, certificates of deposit, commercial paper, corporate bonds and notes, and government agencies’ securities.
We classify our investments in debt securities as available-for sale and report the investments at fair value in current assets. We evaluate our available-for-sale investments in unrealized loss positions and assess whether the unrealized loss is credit-related. Unrealized gains and losses that are not credit-related are recognized in accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses, expected credit losses, as well as interest income, on available-for-sale securities are also reported in other income (expense), net. The cost used in the determination of gains and losses of securities sold is based on the specific identification method. The cost of marketable securities is adjusted for the amortization of premiums and discounts to expected maturity. Premium and discount amortization is recorded in other income (expense), net. We have the ability to hold, and do not intend to sell investments in unrealized loss positions before the recovery of their amortized cost bases.
Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and U.S. government and agency securities with high credit ratings. We have established guidelines regarding diversification and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield.
Restricted cash includes cash that is not readily available for use in the Company’s operating activities. Restricted cash is primarily comprised of cash pledged under letters of credit.
Concentration and Other Risks
For the three months ended June 30, 2024, no customer exceeded 10% of total revenue during the period. For the three months ended June 30, 2023, one customer accounted for approximately 10% of total revenue during the period. For the six months ended June 30, 2024 and June 30, 2023, no customer exceeded 10% of total revenue during the respective periods.
As of June 30, 2024, 49% of our accounts receivable were from domestic customers, compared to 49% as of December 31, 2023. As of June 30, 2024, one customer represented approximately 11% of our net accounts receivable, while one customer represented approximately 10% of our net accounts receivable as of December 31, 2023.
Recent Accounting Pronouncements
Accounting Pronouncements Pending Adoption
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires entities to expand its existing income tax disclosures, specifically related to the rate reconciliation and income taxes paid. This authoritative guidance will be effective for us in fiscal year 2025, with early adoption permitted. The Company is currently evaluating the impact of the ASU but does not expect any material impact upon adoption.
Significant Accounting Policies
There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
NOTE 2. BUSINESS ACQUISITIONS
Apton Biosystems
On August 2, 2023, we acquired Apton Biosystems, Inc. (“Apton”), a California-based genomics company focused on developing a high throughput short-read sequencer using highly differentiated optics and image processing, paired with novel clustering and chemistry (the “Apton acquisition”).
In connection with the Apton acquisition, all outstanding equity securities of Apton were cancelled in exchange for shares of our common stock with a fair value of $76.6 million, cash of $0.2 million, and contingent consideration with an estimated fair value of $18.5 million. Excluded from consideration transferred was $1.3 million attributable to accelerated share-based compensation expense. The fair value of the 6,121,571 common shares issued was determined based on the closing market price of our common stock on the acquisition date.
In connection with the Apton acquisition, contingent consideration of $25.0 million, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock, is due upon the achievement of a milestone, defined as the achievement of $50.0 million in revenue associated with Apton's technology, provided that the milestone event occurs prior to the five-year anniversary of the closing date of the acquisition. At this time, the number of shares, if any, to be issued in connection with the achievement of the specified milestone is not known and will be calculated based on the daily volume-weighted average price of our common stock for the twenty trading days ending on and including the fifth trading day immediately prior to the occurrence of the specified milestone. Upon achievement of the milestone, we may pay cash in lieu of our common stock to ensure that the issuance of our common stock does not exceed 19.9% of our outstanding shares of common stock then outstanding.
The contingent consideration is accounted for as a liability at fair value, with changes during each reporting period recognized in our Consolidated Statements of Operations and Comprehensive Loss. The fair value of the contingent consideration liability is calculated, with the assistance from a third-party valuation firm, using a Monte Carlo Simulation to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate.
The acquisition was accounted for as a business combination and, accordingly, the total fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. As of December 31, 2023, the major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands):
| | | | | |
Cash and cash equivalents | $ | 97 | |
In-process research and development | 55,000 | |
Goodwill | 52,287 | |
Other assets, current | 153 | |
Deferred income tax liability | (11,338) | |
Liabilities assumed | (2,191) | |
Total consideration transferred | $ | 94,008 | |
We have finalized the purchase price allocation for the Apton acquisition. There were no material adjustments from those amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
We incurred costs related to the Apton acquisition of approximately $9.0 million during the year ended December 31, 2023. Merger-related expenses include $2.8 million relating to a liquidity event bonus plan that was treated as a separate transaction and included the issuance of 168,621 shares of common stock that were issued with a fair value of $2.1 million based on the closing market price of our common stock on the acquisition date. As a result, the total shares issued in connection with the Apton acquisition were 6.3 million shares of common stock.
The excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill. We recognized goodwill of $52.3 million, which is primarily attributable to the synergies expected to occur from the integration of Apton and is not deductible for income tax purposes. We allocated $55.0 million of the purchase price to acquired in-process research and development ("IPR&D"). The fair value of the IPR&D was determined, with the assistance of a third-party valuation firm, using an income approach based on a forecast of expected future cash flows. Expected future cash flows utilize significant assumptions such as assumed revenue growth, discount rate and obsolescence factors.
NOTE 3. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy established under GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
•Level 1: quoted prices in active markets for identical assets or liabilities;
•Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.
We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.
The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 63,173 | | | $ | 36,353 | | | $ | — | | | $ | 99,526 | | | $ | 70,172 | | | $ | 109,739 | | | $ | — | | | $ | 179,911 | |
Investments: | | | | | | | | | | | | | | | |
Commercial paper | — | | | — | | | — | | | — | | | — | | | 9,947 | | | — | | | 9,947 | |
Corporate debt securities | — | | | 84,239 | | | — | | | 84,239 | | | — | | | 88,579 | | | — | | | 88,579 | |
U.S. government & agency securities | — | | | 326,037 | | | — | | | 326,037 | | | — | | | 352,979 | | | — | | | 352,979 | |
Total investments | — | | | 410,276 | | | — | | | 410,276 | | | — | | | 451,505 | | | — | | | 451,505 | |
| | | | | | | | | | | | | | | |
Short-term restricted cash | 342 | | | — | | | — | | | 342 | | | 300 | | | — | | | — | | | 300 | |
Long-term restricted cash | 1,922 | | | — | | | — | | | 1,922 | | | 2,422 | | | — | | | — | | | 2,422 | |
Total assets measured at fair value | $ | 65,437 | | | $ | 446,629 | | | $ | — | | | $ | 512,066 | | | $ | 72,894 | | | $ | 561,244 | | | $ | — | | | $ | 634,138 | |
| | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 19,480 | | | $ | 19,480 | | | $ | — | | | $ | — | | | $ | 19,550 | | | $ | 19,550 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 19,480 | | | $ | 19,480 | | | $ | — | | | $ | — | | | $ | 19,550 | | | $ | 19,550 | |
We classify contingent consideration, which was incurred in connection with the acquisition of Apton, within Level 3, as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value. Estimates and assumptions used in the Monte Carlo simulation include risk-adjusted forecasted revenues for products and services leveraging Apton's technology and an estimated credit spread.
We estimate the fair value of the contingent consideration liability based on the simulated revenue of the Company through the five-year anniversary of the closing date of the acquisition. As of June 30, 2024, the key input used in the determination of the fair value included projected revenues of the high-throughput short-read products and services leveraging Apton's technology. A decrease in the projected revenues would result in a decrease in the fair value of the liability. The discount rates used are the sum of the U.S. risk-free rate and the estimated subordinated credit spread for B- credit rating, which ranges from 7.5% to 8.1%. Changes in our estimated subordinated credit spread can result in changes in the fair value of the contingent consideration liability, where a lower credit spread may result in an increased liability valuation.
Changes in the estimated fair value of the contingent consideration liability for the six months ended June 30, 2024 were as follows:
| | | | | |
(in thousands) | Level 3 |
Beginning balance as of December 31, 2023 | $ | 19,550 | |
| |
Change in estimated fair value | (70) | |
| |
Ending balance as of June 30, 2024 | $ | 19,480 | |
Changes to the fair value are recorded as change in fair value of contingent consideration in the Condensed Consolidated Statement of Operations and Comprehensive Loss.
For the six months ended June 30, 2024, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis, and our valuation techniques did not change compared to the prior year.
The following tables summarize our cash, cash equivalents, restricted cash, and investments:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
(in thousands) | Amortized Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair Value |
Cash and cash equivalents | $ | 99,531 | | | $ | — | | | $ | (5) | | | $ | 99,526 | |
Investments: | | | | | | | |
| | | | | | | |
Corporate debt securities | 84,326 | | | 59 | | | (146) | | | 84,239 | |
U.S. government & agency securities | 326,468 | | | 15 | | | (446) | | | 326,037 | |
Total investments | 410,794 | | | 74 | | | (592) | | | 410,276 | |
Total cash, cash equivalents and investments | $ | 510,325 | | | $ | 74 | | | $ | (597) | | | $ | 509,802 | |
| | | | | | | |
Short-term restricted cash | $ | 342 | | | $ | — | | | $ | — | | | $ | 342 | |
Long-term restricted cash | $ | 1,922 | | | $ | — | | | $ | — | | | $ | 1,922 | |
| | | | | | | |
| | | | | | | |
| As of December 31, 2023 |
(in thousands) | Amortized Cost | | Gross unrealized gains | | Gross unrealized losses | | Fair Value |
Cash and cash equivalents | $ | 179,958 | | | $ | 13 | | | $ | (60) | | | $ | 179,911 | |
Investments: | | | | | | | |
Commercial paper | 9,947 | | | — | | | — | | | 9,947 | |
Corporate debt securities | 88,263 | | | 373 | | | (57) | | | 88,579 | |
U.S. government & agency securities | 353,029 | | | 478 | | | (528) | | | 352,979 | |
Total investments | 451,239 | | | 851 | | | (585) | | | 451,505 | |
Total cash, cash equivalents and investments | $ | 631,197 | | | $ | 864 | | | $ | (645) | | | $ | 631,416 | |
| | | | | | | |
Short-term restricted cash | $ | 300 | | | $ | — | | | $ | — | | | $ | 300 | |
Long-term restricted cash | $ | 2,422 | | | $ | — | | | $ | — | | | $ | 2,422 | |
The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of June 30, 2024:
| | | | | |
(in thousands) | Fair Value |
Due in one year or less | $ | 347,533 | |
Due after one year through five years | 99,096 | |
Total | $ | 446,629 | |
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
Investment income included in other income, net on the Condensed Consolidated Statement of Operations and Comprehensive Loss was $6.5 million and $13.8 million for the three and six months ended June 30, 2024, respectively, and $9.0 million and $15.8 million for the three and six months ended June 30, 2023, respectively.
NOTE 4. BALANCE SHEET COMPONENTS
Inventory, net
Our inventory, net, consisted of the following components:
| | | | | | | | | | | |
(in thousands) | June 30, 2024 | | December 31, 2023 |
Purchased materials | $ | 29,918 | | | $ | 20,168 | |
Work in process | 21,695 | | | 23,436 | |
Finished goods | 16,981 | | | 13,072 | |
Inventory, net | $ | 68,594 | | | $ | 56,676 | |
Goodwill and Intangible Assets
Goodwill
Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in the second quarter of 2024, as of the beginning of April 2024, noting no 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 indicator that it was more likely than not that the fair value of the reporting unit was less than its carrying amount that required an interim impairment test be performed on goodwill. As a result of the interim impairment test, we concluded that the carrying amount of the entity-level reporting unit exceeded fair value and recorded a $93.2 million goodwill impairment charge for the three months ended June 30, 2024 in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
The decline in the fair value of the reporting unit below its carrying value resulted primarily from the decline in our 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. We performed our impairment test using a combination of an income and a market approach to determine the fair value of goodwill. The income approach utilized estimated discounted cash flows, while the market approach utilized comparable company information. Significant assumptions used in the income approach include revenue growth expectations and a selected discount rate of 12.0%. The discount rate is based on the weighted average cost of capital, determined using market, industry data, and related risk factors. The assessment is a level 3 measurement due to its reliance on certain unobservable inputs and significant management judgment. The assumptions used are inherently subject to uncertainty and small changes in these assumptions could have a significant impact on the concluded value. An increase of 100 basis points to the discount rate used in our assessment would have resulted in additional goodwill impairment of approximately $85 million. The assessed fair value was deemed reasonable based on a market capitalization reconciliation and a supportable control premium.
As a result of the impairment, the carrying value of goodwill now approximates fair value. Changes in our future operating results, cash flows, share price, market capitalization or discount rates used when conducting future goodwill impairment tests could affect the estimated fair value of goodwill and may result in additional impairment charges in the future.
Changes to goodwill during six months ended June 30, 2024 were as follows:
| | | | | | | | |
(in thousands) | | |
Balance as of December 31, 2023 | | $ | 462,261 | |
Impairment | | (93,200) | |
Balance as of June 30, 2024 | | $ | 369,061 | |
Intangible Assets
Intangible assets include acquired IPR&D of $55.0 million as a result of the Apton acquisition in August 2023. The IPR&D will remain on our Consolidated Balance Sheet as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development activities. During the development
period following the acquisition, IPR&D is not amortized, but instead is tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Upon completion of the development, we will amortize the asset over the life of the product or record an impairment charge if the asset is determined to be impaired. We performed our annual assessment of IPR&D in the third quarter of 2023 in connection with the completion of the IPR&D acquired through the acquisition of Omniome, noting no impairment.
In addition to IPR&D, finite-lived intangible assets included the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of June 30, 2024 | | As of December 31, 2023 |
(in thousands, except years) | Estimated Useful Life (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Developed technology | 15 | | $ | 411,179 | | | $ | (22,901) | | | $ | 388,278 | | | $ | 411,179 | | | $ | (9,195) | | | $ | 401,984 | |
Customer relationships | 2 | | 360 | | | (360) | | | — | | | 360 | | | (360) | | | — | |
Total | | | $ | 411,539 | | | $ | (23,261) | | | $ | 388,278 | | | $ | 411,539 | | | $ | (9,555) | | | $ | 401,984 | |
The estimated future amortization expense of intangible assets with definite lives is as follows:
| | | | | |
(in thousands) | |
Remainder of 2024 | $ | 13,706 | |
2025 | 27,412 | |
2026 | 27,412 | |
2027 | 27,412 | |
2028 | 27,412 | |
2029 and thereafter | 264,924 | |
Total | $ | 388,278 | |
Amortization of acquired intangible assets is included within our cost of revenue if the costs and expenses related to the intangible assets are attributable to revenue generating activities. Amortization expense for intangible assets that are not directly related to sales generating activities are amortized to operating expenses. For developed technology intangible assets that are utilized in both revenue generating activities and in research and development activities, we allocate the amortization expense between cost of revenue and operating expenses. The finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives.
We review finite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.
Deferred Revenue
As of June 30, 2024, we had a total of $24.9 million of deferred revenue, $19.2 million of which was recorded as deferred revenue, current, and primarily relates to deferred service contract revenues and future performance obligations under the Amended and Restated Agreement with Invitae Corporation ("Invitae"). Refer to Note 3 – Invitae Collaboration, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2023 for more information. The deferred revenue, non-current balance of $5.7 million primarily relates to deferred service contract revenues and is scheduled to be recognized in the next five years. Revenue recorded in the three and six months ended June 30, 2024 includes $2.3 million and $5.5 million, respectively, that was included in deferred revenue as of December 31, 2023.
Product Warranties
We generally provide a one-year warranty on instruments. In addition, we provide a limited warranty on consumables. At the time revenue is recognized, an accrual is established for estimated warranty costs based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranties are recorded as part of accrued expenses on the Condensed Consolidated
Balance Sheets and warranty expense is recorded as a component of cost of product revenue in the Condensed Consolidated Statements of Operations and Comprehensive Loss. There were no material changes in estimates for the periods presented below.
Changes in the reserve for product warranties were as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Balance at beginning of period | $ | 4,120 | | | $ | 1,624 | | | $ | 4,681 | | | $ | 1,651 | |
Additions charged to cost of product revenue | 1,773 | | | 2,247 | | | 3,373 | | | 2,851 | |
Repairs and replacements | (2,431) | | | (1,009) | | | (4,592) | | | (1,640) | |
Balance at end of period | $ | 3,462 | | | $ | 2,862 | | | $ | 3,462 | | | $ | 2,862 | |
Term loans
In connection with the acquisition of Omniome, we acquired $1.3 million in short-term debt and $3.0 million in long-term debt relating to a term loan facility that Omniome obtained in April 2020. As of June 30, 2024, no amounts were outstanding on the term loans. Interest expense was not material for the three and six months ended June 30, 2024, and was included as part of interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss.
NOTE 5. CONVERTIBLE SENIOR NOTES
2030 Convertible Senior Notes
In June 2023, we entered into a privately negotiated exchange agreement with a holder of our outstanding 1.50% Convertible Senior Notes due 2028 (the “2028 Notes”), pursuant to which we issued $441.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due 2030 (the “2030 Notes”) in exchange for $441.0 million principal amount of the 2028 Notes (the “Exchange Transaction”), pursuant to exemptions from registration under the Securities Act of 1933, as amended, and the rules and regulations thereunder. The 2030 Notes were issued on June 30, 2023.
The 2030 Notes are governed by an indenture (the “2030 Indenture”) between the Company and U.S. Bank Trust Company, National Association, as trustee. The 2030 Notes bear interest at a rate of 1.375% per annum. Interest on the 2030 Notes is payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 2023. The 2030 Notes will mature on December 15, 2030, subject to earlier conversion, redemption or repurchase.
The 2030 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2030 Notes are convertible into shares of our common stock based on an initial conversion rate of 46.5116 shares of common stock per $1,000 principal amount of the 2030 Notes (which is equal to an initial conversion price of $21.50 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2030 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.
On or after June 20, 2028, the 2030 Notes will be redeemable by the Company in the event that the closing sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the redemption notice at a redemption price of 100% of the principal amount of such 2030 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.
Upon the occurrence of a Fundamental Change (as defined in the 2030 Indenture), the holders of the 2030 Notes may require that we repurchase all or part of the principal amount of the 2030 Notes at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date, and all unpaid interest from the fundamental change repurchase date thereon, but excluding, the maturity date.
The 2030 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2030 Notes under the 2030 Indenture. The 2030 Indenture also includes customary covenants for convertible notes of this type.
To the extent we elect, the sole remedy for an event of default relating to our failure to comply with certain of our reporting obligations shall, for the first 360 calendar days after the occurrence of such an event of default, consist exclusively of the right to receive additional interest on the 2030 Notes at a rate equal to (i) 0.25% per annum of the principal amount of the 2030 Notes outstanding for each day during the first 180 calendar days of the 360-day period after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived) and (ii) 0.50% per annum of the principal amount of the 2030 Notes outstanding for each day from, and including, the 181st calendar day to, and including, the 360th calendar day after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived as provided for in the 2030 Indenture). On the 361st day after such event of default (if the event of default relating to our failure to comply with its obligations is not cured or waived prior to such 361st day), the 2030 Notes shall be subject to acceleration as provided for in the 2030 Indenture.
The 2030 Notes are accounted for in accordance with the authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. Under ASU 2020-06, the guidance requires that debt with an embedded conversion feature is accounted for in its entirety as a liability and no portion of the proceeds from the issuance of the convertible debt instrument is accounted for as attributable to the conversion feature unless the conversion feature is required to be accounted for separately as an embedded derivative or the conversion feature results in a substantial premium. The conversion feature of the 2030 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2030 Notes were not issued at a substantial premium; therefore, the 2030 Notes are accounted for in their entirety as a liability. Because we may elect to settle any conversions entirely in shares, and because settlement in shares is the default settlement method, the liability is classified as non-current.
The requirement to repurchase the 2030 Notes, including unpaid interest to the maturity date in the event of a Fundamental Change, is considered a put option for certain periods requiring bifurcation under ASC 815 – Derivatives and Hedging. However, given the low probability of such a Fundamental Change occurring during the applicable periods, the value of the embedded derivative is immaterial.
The additional interest feature in the event of our failure to comply with certain reporting obligations is also considered an embedded derivative requiring bifurcation under ASC 815. However, due to the nature and terms of the reporting obligations, the value of the embedded derivative is immaterial.
The Exchange Transaction was accounted for as an extinguishment driven by the change in fair value of the embedded conversion option. We recorded a loss on extinguishment of debt of approximately $2.0 million in connection with the Exchange Transaction during the year ended December 31, 2023, which represents the difference between the fair value and the principal amount of the 2030 Notes of the debt at the modification date, plus unamortized debt issuance costs of $1.5 million related to the respective portion of the 2028 Notes.
We incurred issuance costs related to the 2030 Notes of approximately $7.3 million, which were recorded as debt issuance costs and are presented as a reduction to the 2030 Notes on our Consolidated Balance Sheets. The debt issuance costs are amortized to interest expense using the effective interest method over the term of the 2030 Notes, resulting in an effective interest rate of 1.6%. We also paid accrued but unpaid interest of $2.5 million on the 2028 Notes in connection with the Exchange Transaction on June 30, 2023.
We did not receive any cash proceeds from the Exchange Transaction. In exchange for issuing the 2030 Notes pursuant to the Exchange Transaction, we received and cancelled the exchanged 2028 Notes. Following the closing of the Exchange Transaction, $459.0 million in aggregate principal amount of 2028 Notes remained outstanding with terms unchanged.
The net carrying amount of the liability for the 2030 Notes is included as convertible senior notes, net, non-current in the Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | |
(in thousands) | June 30, 2024 | | December 31, 2023 |
Principal amount | $ | 441,000 | | | $ | 441,000 | |
Unamortized debt premium | 489 | | | 524 | |
Unamortized debt issuance costs | (6,434) | | | (6,907) | |
Net carrying amount | $ | 435,055 | | | $ | 434,617 | |
Interest expense for the 2030 Notes was not material for the three and six months ended June 30, 2023. Interest expense for the 2030 Notes for the three and six months ended June 30, 2024 was as follows:
| | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended June 30, 2024 | | Six Months Ended June 30, 2024 |
Contractual interest expense | $ | 1,516 | | | | | $ | 3,049 | | | |
Amortization of debt issuance costs | 236 | | | | | 475 | | | |
Total interest expense | $ | 1,752 | | | | | $ | 3,524 | | | |
As of June 30, 2024, the estimated fair value (Level 2) of the 2030 Notes was $326.4 million. The fair value of the 2030 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.
2028 Convertible Senior Notes
On February 9, 2021, we entered into an investment agreement (the “Investment Agreement”) with SB Northstar LP (the “Purchaser”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to the Purchaser of $900.0 million in aggregate principal amount of the 2028 Notes. The 2028 Notes were issued on February 16, 2021. As discussed above, in June 2023 we completed an exchange of $441.0 million in aggregate principal amount of our 2028 Notes for $441.0 million aggregate principal amount of the 2030 Notes, leaving approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding.
The 2028 Notes are governed by an indenture (the “2028 Indenture”) between the Company and U.S. Bank National Association, as trustee. The 2028 Notes bear interest at a rate of 1.50% per annum. Interest on the 2028 Notes is payable semi-annually in arrears on February 15 and August 15 and commenced on August 15, 2021. The 2028 Notes will mature on February 15, 2028, subject to earlier conversion, redemption or repurchase.
The 2028 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2028 Notes are convertible into shares of our common stock based on an initial conversion rate of 22.9885 shares of common stock per $1,000 principal amount of the 2028 Notes (which is equal to an initial conversion price of $43.50 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2028 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.
On or after February 20, 2026, the 2028 Notes will be redeemable by the Company in the event that the closing sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the redemption notice at a redemption price of 100% of the principal amount of such 2028 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.
Upon the occurrence of a Fundamental Change (as defined in the 2028 Indenture), the holders of the 2028 Notes may require that we repurchase all or part of the principal amount of the 2028 Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date.
The 2028 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2028 Notes under the 2028 Indenture. The 2028 Indenture also includes customary covenants for convertible notes of this type.
To the extent we elect, the sole remedy for an event of default relating to our failure to comply with certain of our reporting obligations shall, for the first 360 calendar days after the occurrence of such an event of default, consist exclusively of the right to receive additional interest on the 2028 Notes at a rate equal to (i) 0.25% per annum of the principal amount of the 2028 Notes outstanding for each day during the first 180 calendar days of the 360-day period after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived) and (ii) 0.50% per annum of the principal amount of the 2028 Notes outstanding for each day from, and including, the 181st calendar day to, and including, the 360th calendar day after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived as provided for in the 2028 Indenture). On the 361st day after such event of default (if the event of default relating to our failure to comply with its obligations is not cured or waived prior to such 361st day), the 2028 Notes shall be subject to acceleration as provided for in the 2028 Indenture.
The 2028 Notes are accounted for in accordance with the authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. Under ASU 2020-06, the guidance requires that debt with an embedded conversion feature is accounted for in its entirety as a liability and no portion of the proceeds from the issuance of the convertible debt instrument is accounted for as attributable to the conversion feature unless the conversion feature is required to be accounted for separately as an embedded derivative or the conversion feature results in a substantial premium. The conversion feature of the 2028 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2028 Notes were not issued at a premium; therefore, the 2028 Notes are accounted for in their entirety as a liability. Because we may elect to settle any conversions entirely in shares, and because settlement in shares is the default settlement method, the liability is classified as non-current.
The requirement to repurchase the 2028 Notes, including unpaid interest to the maturity date in the event of a Fundamental Change, is considered a put option for certain periods requiring bifurcation under ASC 815 – Derivatives and Hedging. However, given the low probability of such a Fundamental Change occurring during the applicable periods, the value of the embedded derivative is immaterial.
The additional interest feature in the event of our failure to comply with certain reporting obligations is also considered an embedded derivative requiring bifurcation under ASC 815. However, due to the nature and terms of the reporting obligations, the value of the embedded derivative is immaterial.
We incurred issuance costs related to the 2028 Notes of approximately $4.5 million, which were recorded as debt issuance costs and are presented as a reduction to the 2028 Notes on our Consolidated Balance Sheets. The debt issuance costs are amortized to interest expense using the effective interest method over the term of the 2028 Notes, resulting in an effective interest rate of 1.6%.
The net carrying amount of the liability for the 2028 Notes is included as convertible senior notes, net, non-current in the Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | |
(in thousands) | June 30, 2024 | | December 31, 2023 |
Principal amount | $ | 459,000 | | | $ | 459,000 | |
Unamortized debt issuance costs | (1,211) | | | (1,374) | |
Net carrying amount | $ | 457,789 | | | $ | 457,626 | |
Interest expense for the 2028 Notes was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Contractual interest expense | $ | 1,721 | | | $ | 3,319 | | | $ | 3,442 | | | $ | 6,694 | |
Amortization of debt issuance costs | 81 | | | 155 | | | 162 | | | 311 | |
Total interest expense | $ | 1,802 | | | $ | 3,474 | | | $ | 3,604 | | | $ | 7,005 | |
As of June 30, 2024, the estimated fair value (Level 2) of the 2028 Notes was $384.8 million. The fair value of the 2028 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.
NOTE 6. RESTRUCTURING
During the three months ended June 30, 2024, we initiated expense reduction initiatives that include workforce reductions, the closing of our San Diego office, and other actions to reduce annualized run-rate operating expenses.
A summary of the pre-tax restructuring charges are as follows:
| | | | | | | | | | | |
(in thousands) | Three Months Ended June 30, 2024 | | Cumulative charges recorded since inception |
Employee separation costs | $ | 10,051 | | | $ | 10,051 | |
Other costs | 7,977 | | | 7,977 | |
Total restructuring charges(1) | $ | 18,028 | | | $ | 18,028 | |
(1) $7.5 million was recorded in sales, general and administrative expense; $5.9 million in research and development expense; and $4.6 million in cost of revenue.
Charges included in employee separation costs include approximately $5.5 million related to salaries, wages and other employee benefits paid to terminated employees pursuant to the Worker Adjustment and Retraining Notification (WARN) Act and approximately $4.5 million of severance costs.
Charges included in other costs are primarily related to accelerated amortization and depreciation of $3.0 million for the right-of-use asset, leasehold improvements, and furniture and fixtures relating to the planned abandonment of the San Diego office, as well as charges for excess inventory of $3.8 million primarily relating to a decrease in internal demand resulting from the expense reduction initiatives which were recognized in cost of product revenues. The accelerated amortization and depreciation, which was recognized in sales, general and administrative expense, was determined as a result of the Company's change in estimate pertaining to its remaining useful life of the San Diego office utilizing the estimated date on which it plans to abandon the San Diego office. The lease liability pertaining to the San Diego office was also remeasured during the three months ended June 30, 2024 resulting in a reduction in the operating lease liability balance of $4.4 million, which was offset against the right-of-use asset on the Condensed Consolidated Balance Sheets. As of June 30, 2024, we had approximately $5.1 million assets related to our San Diego office, consisting primarily of unamortized right-of-use assets and leasehold improvements, the balance of which will be recognized over the remaining estimated useful life.
A summary of the liabilities related to the restructuring is as follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Employee Separation Costs | | Other Costs | | Total |
Expense recorded in Q2 2024 | | $ | 10,051 | | | $ | 1,143 | | | $ | 11,194 | |
Cash paid during Q2 2024 | | (6,088) | | | (709) | | | (6,797) | |
Amount recorded in current liabilities as of June 30, 2024 | | $ | 3,963 | | | $ | 434 | | | $ | 4,397 | |
| | | | | | |
Estimated total restructuring costs to still be incurred | | $ | — | | | $ | 8,332 | | | $ | 8,332 | |
The table above excludes noncash activities and amounts incurred relating to the San Diego office lease liability. The ending balance of the San Diego office lease liability as of June 30, 2024 is $6.3 million, and is included in operating lease liabilities, current on the Condensed Consolidated Balance Sheets.
Most employee separation costs are expected to be incurred and paid by the end of 2024. We also plan to exit our San Diego office by September 2024.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements, primarily relating to our corporate offices. See Note 8 – Commitments and Contingencies, subsection titled “Leases”, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the Company’s maturity of lease liabilities under its lease agreements.
Contingencies
We may become involved in legal proceedings, claims and assessments from time to time in the ordinary course of business. We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
We do not believe that the ultimate outcome of any such pending matters is probable or reasonably estimable, or that these matters will have a material adverse effect on our business; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of litigation and settlement costs, diversion of management resources, and other factors.
Indemnification
Pursuant to Delaware law and agreements entered into with each of our directors and officers, we may have obligations, under certain circumstances, to hold harmless and indemnify each of our directors and officers against losses suffered or incurred by the indemnified party in connection with their service to us, and judgements, fines, settlements and expenses related to claims arising against such directors and officers to the fullest extent permitted under Delaware law, our bylaws and our certificate of incorporation. 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 such third parties and us in connection with such fundraising efforts. To the extent that any such indemnification obligations apply to the lawsuits described above, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification obligations has been recorded as of June 30, 2024 and December 31, 2023.
NOTE 8. STOCKHOLDERS’ EQUITY
Equity Plans
As of June 30, 2024, the Company had share-based compensation awards outstanding under the 2020 Equity Incentive Plan (the “2020 Plan”), the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”), the 2021 adopted Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”) and the 2010 Employee Stock Purchase Plan, from which we issued equity awards and employee stock.
On June 18, 2024, stockholders approved an amendment to the 2020 Plan, and we reserved an additional 20 million shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan.
As of June 30, 2024, we had 24.9 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan. Shares remaining and available for future issuance reflect shares that may become eligible to vest upon the achievement of maximum targets for certain equity awards.
Refer to Note 10 – Stockholders' Equity, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2023 for more information on the Company's equity plans.
Stock Options
The following table summarizes stock option activity for time-based awards:
| | | | | | | | | | | | | |
(shares in thousands) | Number of shares | | | | Weighted average exercise price |
Outstanding at December 31, 2023 | 13,011 | | | | $ | 10.63 | |
Granted | 393 | | | | 2.06 | |
Exercised | (515) | | | | 3.15 | |
Canceled | (582) | | | | 11.36 | |
Expired | (150) | | | | 6.18 | |
Outstanding at June 30, 2024 | 12,157 | | | | $ | 10.69 | |
Restricted Stock Units (“RSU”) and Performance Stock Units ("PSU")
We issue RSUs for which the respective shares vest when the requisite service period is achieved. We issue PSUs for which the number of shares issuable is based on performance relative to specified revenue targets and continued employment through the vesting period. These PSU shares are issuable following the third year of the performance period. Maximum achievement of the revenue goal under the PSUs will result in up to 200% of the target number of shares subject to the PSUs to become eligible to vest, while not meeting the minimum achievement of the revenue goal under the PSUs will result in no shares subject to the PSUs becoming eligible to vest. The following table summarizes the time-based RSUs and PSUs activity:
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| Restricted Stock Units (RSU) | | Performance Stock Units (PSU) | | Weighted average grant date fair value |
(shares in thousands) | | | RSU | | PSU |
Outstanding at December 31, 2023 | 11,308 | | | 541 | | | $ | 12.06 | | | $ | 9.43 | |
Granted | 12,501 | | | — | | | 5.07 | | | — | |
Vested | (3,038) | | | — | | | 12.98 | | | — | |
Forfeited | (4,118) | | | (39) | | | 8.39 | | | 9.43 | |
Outstanding at June 30, 2024 | 16,653 | | | 502 | | | $ | 7.55 | | | $ | 9.43 | |
Employee Stock Purchase Plan (“ESPP”)
Shares issued under our ESPP were 1,194,436 and 1,052,908 during the six months ended June 30, 2024 and 2023, respectively. In the first quarter of 2024, an additional 4.0 million shares were reserved under the ESPP. As of June 30, 2024, 15.0 million shares of our common stock remain available for issuance under our ESPP.
Share-Based Compensation
The following table summarizes share-based compensation expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Cost of revenue | $ | 1,131 | | | $ | 1,177 | | | $ | 3,237 | | | $ | 3,126 | |
Research and development | 4,591 | | | 5,423 | | | 10,379 | | | 12,128 | |
Sales, general and administrative | 11,497 | | | 11,291 | | | 23,128 | | | 20,589 | |
Total share-based compensation expense | $ | 17,219 | | | $ | 17,891 | | | $ | 36,744 | | | $ | 35,843 | |
Determining Fair Value
We estimate the fair value of stock options granted using the Black-Scholes valuation method and a single option award approach. When determining the current share prices underlying the stock options for calculating the grant-date fair value, we reference the observable market prices of our stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair market value of RSUs and PSUs granted is the closing price of our shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting period. For shares purchased under our ESPP, we estimate the grant-date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. We estimate forfeitures of stock options, RSUs and shares purchased under our ESPP which is utilized to determine the compensation expense to be recorded over the requisite service period.
•Expected Term - The expected term used in the Black-Scholes valuation method represents the period that the stock options are expected to be outstanding and is determined based on historical experience of similar awards, considering the contractual terms of the stock options and vesting schedules.
•Expected Volatility - The expected volatility used in the Black-Scholes valuation method is derived from the implied volatility related to our share price over the expected term.
•Expected Dividend - We have never paid dividends on our shares and, accordingly, the dividend yield percentage is zero for all periods.
•Risk-Free Interest Rate - The risk-free interest rate used in the Black-Scholes valuation method is the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected terms.
The fair value of employee stock options was estimated using the following assumptions:
| | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | | | 2024 | | 2023 |
Expected term in years | | | | | 4.9 | | 4.9 |
Expected volatility | | | | | 81% - 89% | | 78% |
Risk-free interest rate | | | | | 4.20% - 4.32% | | 3.73% |
Dividend yield | | | | | — | | — |
Weighted average grant date fair value per share | | | | | $1.43 | | $7.76 |
The fair value of shares to be issued under the ESPP was estimated using the following assumptions:
| | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | | | 2024 | | 2023 |
Expected term in years | | | | | 0.5 — 2.0 | | 0.5 — 2.0 |
Expected volatility | | | | | 81% | | 97% |
Risk-free interest rate | | | | | 4.54% — 5.27% | | 4.89% — 5.20% |
Dividend yield | | | | | — | | — |
Weighted average grant date fair value per share | | | | | $2.78 | | $5.00 |
NOTE 9. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and potential shares assuming the dilutive effect of the convertible senior notes, using the if-converted method, and outstanding equity awards using the treasury stock method.
The following table presents the calculation of the basic and diluted net loss per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except per share amounts) | 2024 | | 2023 | | 2024 | | 2023 |
Numerator: | | | | | | | |
Net loss | $ | (173,319) | | | $ | (69,833) | | | $ | (251,497) | | | $ | (157,848) | |
| | | | | | | |
Denominator: | | | | | | | |
Basic | | | | | | | |
Weighted average shares used in computing basic net loss per share | 272,385 | | 250,070 | | 270,982 | | 246,074 |
Basic net loss per share | $ | (0.64) | | | $ | (0.28) | | | $ | (0.93) | | | $ | (0.64) | |
| | | | | | | |
Diluted | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average shares used in computing diluted net loss per share | 272,385 | | 250,070 | | 270,982 | | 246,074 |
Diluted net loss per share | $ | (0.64) | | | $ | (0.28) | | | $ | (0.93) | | | $ | (0.64) | |
The following shares issuable upon conversion of the convertible senior notes and outstanding equity awards were excluded from the computation of diluted net loss per share for the periods presented because the effect of including such shares would have been antidilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Shares issuable upon conversion of convertible senior notes | 31,063 | | 31,063 | | 31,063 | | 31,063 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Equity Awards | 33,370 | | 29,773 | | 33,370 | | 29,773 |
NOTE 10. REVENUE
A summary of our revenue by geographic location is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Americas | $ | 20,757 | | | $ | 23,960 | | | $ | 38,435 | | | $ | 43,031 | |
Europe, Middle East and Africa | 7,022 | | | 10,730 | | | 15,378 | | | 18,600 | |
Asia-Pacific | 8,234 | | | 12,883 | | | 21,010 | | | 24,842 | |
Total | $ | 36,013 | | | $ | 47,573 | | | $ | 74,823 | | | $ | 86,473 | |
A summary of our revenue by category is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Instrument revenue | $ | 14,678 | | | $ | 29,923 | | | $ | 33,703 | | | $ | 50,623 | |
Consumable revenue | 17,068 | | | 13,732 | | | 33,052 | | | 27,686 | |
Product revenue | 31,746 | | | 43,655 | | | 66,755 | | | 78,309 | |
Service and other revenue | 4,267 | | | 3,918 | | | 8,068 | | | 8,164 | |
Total revenue | $ | 36,013 | | | $ | 47,573 | | | $ | 74,823 | | | $ | 86,473 | |
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;
•Improve our gross margin and drive manufacturing efficiencies;
•Reduce annualized run-rate operating expenses.
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 SMRTTM 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.
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. See Note 6. 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. 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. Operating expenses increased $84.7 million primarily driven by a $93.2 million goodwill impairment charge, $13.4 million of restructuring charges, and a $9.7 million increase in amortization of acquired intangible assets, partially offset by a $14.3 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. and China; procurement delays, particularly in the Asia-Pacific and Europe regions; small-to-mid-size existing customers yet to increase their sample volumes to drive an upgrade to Revio; new customers, which have shown they have longer sales cycles compared to existing PacBio customers; 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; sample delays impacting sequencing volume at certain large customers; and some service providers in China operating at lower utilization as a result of the difficult funding environment.
Macroeconomic dynamics impacting the Company in the future may include rising inflation, geopolitical tensions, volatile capital markets, and fluctuating exchange rates. 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.
On an ongoing basis, we evaluate our significant estimates, including those related to the valuation of indefinite-lived and finite-lived assets. 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. See additional discussion below in Results of Operations, as well as Note 4. 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.
Results of Operations
Comparison of the Three Months Ended June 30, 2024 and 2023
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
(in thousands, except percentages) | 2024 | | 2023 | | $ Change | | % Change |
Revenue: | | | | | | | |
Product revenue | $ | 31,746 | | | $ | 43,655 | | | $ | (11,909) | | | (27 | %) |
Service and other revenue | 4,267 | | | 3,918 | | | 349 | | | 9 | % |
Total revenue | 36,013 | | | 47,573 | | | (11,560) | | | (24 | %) |
Cost of Revenue: | | | | | | | |
Cost of product revenue | 23,083 | | | 28,432 | | | (5,349) | | | (19) | % |
Cost of service and other revenue | 3,366 | | | 3,412 | | | (46) | | | (1 | %) |
Amortization of acquired intangible assets | 2,628 | | | 183 | | | 2,445 | | | 1336 | % |
Loss on purchase commitment | 998 | | | — | | | 998 | | | — | |
Total cost of revenue | 30,075 | | | 32,027 | | | (1,952) | | | (6 | %) |
Gross profit | 5,938 | | | 15,546 | | | (9,608) | | | (62 | %) |
Operating Expense: | | | | | | | |
Research and development | 38,485 | | | 46,173 | | | (7,688) | | | (17) | % |
Sales, general and administrative | 45,877 | | | 40,573 | | | 5,304 | | | 13 | % |
Goodwill impairment | 93,200 | | | — | | | 93,200 | | | — | |
| | | | | | | |
Amortization of acquired intangible assets | 4,222 | | | — | | | 4,222 | | | — | |
Change in fair value of contingent consideration | — | | | 1,975 | | | (1,975) | | | (100) | % |
Total operating expense | 181,784 | | | 88,721 | | | 93,063 | | | 105 | % |
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