PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-Q

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 unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission, or the SEC, on February 28, 2023, or our Annual Report on Form 10-K. 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 existing HiFi long-read sequencing solutions and our emerging Sequencing by Binding ("SBB") short-read sequencing solution. Our products address solutions across a broad set of research applications including human genomics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Our focus is on providing our customers with advanced sequencing solutions with higher throughput and improved workflows that we believe will enable dramatic advancements in routine healthcare. Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations ("CROs"), pharmaceutical companies and agricultural companies. As of June 30, 2023, our commercial team consisted of approximately 206 employees, including 62 quota-carrying representatives, many with advanced degrees in biology and significant experience in the genomics industry. Strategic Objectives Our 2023 strategic objectives are to: • Drive rapid adoption of Revio TM by converting existing Sequel ® II/IIe customers and attracting new PacBio customers • Demonstrate Onso’s extraordinary level of accuracy in the field and show how it can transform research in needle-in-haystack applications 23 Table of Contents • Progress development of ultra-high-throughput and benchtop long-read sequencers and next generation SBB TM short-read sequencer • Leverage current infrastructure to drive toward positive cash flow • Expand partnerships across ecosystem and workflow to drive customer adoption of SBB short-read sequencing and HiFi long-read sequencing We will continue to leverage our commercial organization and make significant improvements in the efficiency and usability of our products 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 as well as 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. In October 2022, we announced Revio, our new HiFi long-read sequencing system. We began taking orders in the fourth quarter of 2022 and commenced commercial Revio shipments 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 also progressed development of and, subsequent to the quarter ended June 30, 2023, commercialized Onso TM , our SBB short-read platform. We began taking orders in the first quarter of 2023, and in August 2023, we commenced customer shipments of the Onso short-read sequencing instrument, with shipments of related consumables expected to occur later in August 2023. The milestone payment associated with PacBio’s acquisition of Omniome will be triggered once both the Onso instrument and related consumables have shipped to one customer. We continue to believe that with the capabilities of our HiFi chemistry and SMRT TM technology, we can be a market leader in whole-genome clinical sequencing. Leading institutions have adopted our products to study rare and inherited disease. We believe the market opportunity for clinical sequencing is significant and could drive substantial revenue growth for the company. We plan to continue to pursue partner collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing. Collaborative arrangements add to the awareness of our products and service offerings and may drive new applications for use of our technology. Financial Overview Key highlights of the six months ended June 30, 2023 consolidated financial results include the following: • Revenue increased $17.8 million, or 26%, to $86.5 million for the six months ended June 30, 2023, as compared to $68.6 million for the six months ended June 30, 2022. 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 increase was primarily driven by the launch of Revio in the first quarter of 2023, which is sold at a higher average selling price than our previous Sequel II and IIe platform. We ended the quarter with an installed base of 77 Revio systems, and we shipped 8 Sequel IIe systems during the six months ended June 30, 2023. • Gross profit as a percentage of revenue (gross margin) was 29% for the six months ended June 30, 2023, compared to 44% for the six months ended June 30, 2022. Gross margin declined due in part to instrument mix, as Revio instruments sold during the six months ended June 30, 2023 had a lower margin primarily due to loyalty discounts provided and higher initial manufacturing costs, as well as adjustments of approximately $3.5 million recognized in the first quarter of 2023 primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due to the product transition to Revio. Our gross margin in future periods will depend on several factors, including new product transitions and offerings, strategic product pricing; product mix as a result of higher-margin consumables; supply chain constraints and inflation increasing costs of raw materials; manufacturing capacity and production volumes impacting the cost of inventory; freight costs; and excess or obsolete inventories. 24 Table of Contents • Loss from operations increased $18.9 million, or 13%, to $164.4 million for the six months ended June 30, 2023, as compared to $145.5 million for the six months ended June 30, 2022, driven primarily by an increase of $13.9 million of operating expenses, including a $8.2 million decrease in research and development expenses and a $20.7 million increase in the change in the fair value of the contingent consideration, and a decline in gross profit of $5.0 million. We anticipate operating expenses to increase slightly during the remainder of the year as compared to the prior year, primarily driven by changes in the fair value of the contingent consideration relating to the Omniome acquisition and merger related costs attributable to Apton. • Cash, cash equivalents, and short-term investments were $829.9 million at June 30, 2023, which represents a 7% increase compared to the balance at December 31, 2022. Macroeconomic dynamics including rising inflation, global supply chain constraints, volatile capital markets, competition, and fluctuating exchange rates have adversely impacted our customers and lengthened customer sales cycles. These factors could impact our revenues and results of operations throughout 2023; however, the size and duration of these impacts is uncertain, and as a result, we cannot reasonably estimate the future impact to our operations and financial results. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic and other macroeconomic factors on our business. Recent Developments Note Exchange Transaction 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" and, together with the 2028 Notes, the "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. Following the Exchange Transaction, approximately $459.0 million in aggregate principal amount of the 2028 Notes remained outstanding. Apton Merger Agreement On August 2, 2023, we entered into an agreement and plan of reorganization (the “Merger Agreement”), pursuant to which we acquired Apton Biosystems, Inc., a privately held genomics company (“Apton”). The transaction closed on August 2, 2023. Pursuant to the Merger Agreement, upon the closing of the acquisition, we will, among other things, issue to holders of Apton’s outstanding equity interests (“Apton Securityholders”) approximately 6.3 million shares of the Company’s common stock, par value $0.001 per share (“Common Stock”). Additionally, subject to the terms and conditions of the Merger Agreement and the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, Apton Securityholders will also be entitled to receive $25.0 million, which we may elect to pay in cash, shares of Common Stock or a combination of cash and shares of Common Stock. 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 the Common Stock for the twenty trading days ending on and including the fifth trading day immediately prior to the occurrence of the specified milestone. Under the terms of the Merger Agreement, we may pay cash in lieu of Common Stock to ensure that the issuance of Common Stock as contemplated by the Merger Agreement does not exceed 19.9% of the shares of Common Stock then outstanding. 25 Table of Contents Results of Operations Comparison of the Three Months Ended June 30, 2023 and 2022 (in thousands, except percentages) Three Months Ended June 30, 2023 2022 $ Change % Change Revenue: Product revenue $ 43,655 $ 30,175 $ 13,480 45 % Service and other revenue 3,918 5,292 (1,374) (26) % Total revenue 47,573 35,467 12,106 34 % Cost of Revenue: Cost of product revenue 28,432 15,499 12,933 83 % Cost of service and other revenue 3,412 3,592 (180) (5 %) Amortization of intangible assets 183 183 — — % Total cost of revenue 32,027 19,274 12,753 66 % Gross profit 15,546 16,193 (647) (4 %) Operating Expense: Research and development 46,173 50,348 (4,175) (8) % Sales, general and administrative 40,573 39,252 1,321 3 % Change in fair value of contingent consideration 1,975 (5,438) 7,413 (136) % Total operating expense 88,721 84,162 4,559 5 % Operating loss (73,175) (67,969) (5,206) 8 % Loss on extinguishment of debt (2,033) — (2,033) 100 % Interest expense (3,554) (3,681) 127 (3) % Other income (expense), net 8,929 256 8,673 3388 % Net loss $ (69,833) $ (71,394) $ 1,561 (2 %) Revenue Revenue increased $12.1 million, or 34%, to $47.6 million for the three months ended June 30, 2023, as compared to $35.5 million for the three months ended June 30, 2022. Instrument revenue increased $14.3 million, or 92%, to $29.9 million for the three months ended June 30, 2023, as compared to $15.6 million for the three months ended June 30, 2022, primarily due to the sale of 45 Revio systems that have a higher average selling price as compared to the Sequel IIe platform. We continue to expect the installed base of Revio instruments to grow, reflecting customer demand for the new product. As a result of this new product launch, we anticipate installed base and sales volumes of Sequel II/IIe to continue to decline compared to prior periods. Consumables revenue decreased $0.8 million, or 6%, to $13.7 million for the three months ended June 30, 2023, as compared to $14.6 million for the three months ended June 30, 2022. The decrease in consumable sales was primarily due to lower Sequel consumable sales attributable to the product transition to Revio. We expect Revio consumable sales to increase as the installed base grows. While we expect to see a decline in Sequel consumable sales resulting from the product transition, there is uncertainty as to the rate at which these sales will decline. Service and other revenue decreased $1.4 million, or 26%, to $3.9 million for the three months ended June 30, 2023, as compared to $5.3 million for the three months ended June 30, 2022, primarily due to the change in our terms of the warranty provided with the instrument during the first quarter of 2022 to remove the service component. As a result, the warranty is no longer a separate performance obligation and, accordingly, we accrue for the cost of the assurance warranty when revenue of the instrument is recognized, and no longer recognize a component of the instrument revenue in service and other revenue over the warranty period. We expect service revenue to continue to decline during the remainder of the year as we anticipate customers transitioning their service contracts to Revio following the standard warranty period, with fewer customers renewing Sequel and Sequel II/IIe service contracts. 26 Table of Contents Cost of Revenue, Gross Profit and Gross Margin Cost of product revenue increased $12.9 million, or 83%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The cost of product revenue increased primarily due to an increase in system placements and higher overall product costs on the Revio platform. Cost of revenue included share-based compensation expense of $1.2 million and $1.0 million during the three months ended June 30, 2023 and 2022, respectively. Gross profit decreased $0.6 million, or 4%, to $15.5 million for the three months ended June 30, 2023, compared to $16.2 million for the three months ended June 30, 2022. Gross margin was 33% for the three months ended June 30, 2023, compared to gross margin of 46% for the three months ended June 30, 2022. The decrease in gross margin was due in part to instrument mix, as Revio instruments sold during the quarter had a lower margin primarily due to loyalty discounts provided and higher initial manufacturing costs on the Revio platform. While we expect gross margin to expand during the remainder of the year, gross margin could fluctuate depending on the pace at which Sequel II/IIe consumable revenue declines, Revio consumable revenue ramps, and manufacturing efficiencies improve, as well as fluctuations in average selling prices. Research and Development Expense Research and development expense decreased by $4.2 million, or 8%, to $46.2 million for the three months ended June 30, 2023, compared to $50.3 million for the three months ended June 30, 2022. The decrease was primarily driven by the transition of Revio from development to commercialization, in addition to lower headcount. Research and development expense included share-based compensation expense of $5.4 million and $7.7 million during the three months ended June 30, 2023 and 2022, respectively. Sales, General and Administrative Expense Sales, general and administrative expense increased by $1.3 million, or 3%, to $40.6 million for the three months ended June 30, 2023, compared to $39.3 million for the three months ended June 30, 2022. Sales, general, and administrative expense included share-based compensation expense of $11.3 million and $10.3 million during the three months ended June 30, 2023 and 2022, respectively. 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 contingent consideration liability of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) that is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology. The increase in contingent consideration liability was due to the passage of time and changes in the discount rates and probabilities of milestone achievement. 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. Interest Expense Interest expense for the three months ended June 30, 2023, was $3.6 million compared to $3.7 million for the three months ended June 30, 2022 and was primarily comprised of interest on the convertible senior notes. Other Income (Expense), net Other income (expense), net for the three months ended June 30, 2023, was $8.9 million compared to $0.3 million for the three months ended June 30, 2022. The $8.7 million increase was primarily due to investment income. 27 Table of Contents Comparison of the Six Months Ended June 30, 2023 and 2022 (in thousands, except percentages) Six Months Ended June 30, 2023 2022 $ Change % Change Revenue: Product revenue $ 78,309 $ 58,419 $ 19,890 34 % Service and other revenue 8,164 10,221 (2,057) (20) % Total revenue 86,473 68,640 17,833 26 % Cost of Revenue: Cost of product revenue 53,596 30,319 23,277 77 % Cost of service and other revenue 7,204 7,607 (403) (5 %) Amortization of intangible assets 366 366 — — % Total cost of revenue 61,166 38,292 22,874 60 % Gross profit 25,307 30,348 (5,041) (17 %) Operating Expense: Research and development 95,112 103,285 (8,173) (8) % Sales, general and administrative 80,391 79,056 1,335 2 % Change in fair value of contingent consideration 14,231 (6,501) 20,732 (319) % Total operating expense 189,734 175,840 13,894 8 % Operating loss (164,427) (145,492) (18,935) 13 % Loss on extinguishment of debt (2,033) — (2,033) 100 % Interest expense (7,184) (7,378) 194 (3) % Other income (expense), net 15,796 (23) 15,819 (68778 %) Net loss $ (157,848) $ (152,893) $ (4,955) 3 % Revenue Revenue increased $17.8 million, or 26%, to $86.5 million for the six months ended June 30, 2023, as compared to $68.6 million for the six months ended June 30, 2022. Instrument revenue increased $19.5 million, or 62%, to $50.6 million for the six months ended June 30, 2023, as compared to $31.2 million for the six months ended June 30, 2022, primarily due to the sale of 77 Revio systems that have a higher average selling price as compared to the Sequel IIe platform. We expect the installed base of Revio instruments to grow, reflecting customer demand for the new product. As a result of this new product launch, we anticipate installed base and sales volumes of Sequel II/IIe to continue to decline compared to recent quarters. Consumables revenue increased $0.4 million, or 2%, to $27.7 million for the six months ended June 30, 2023, as compared to $27.3 million for the six months ended June 30, 2022. 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 consumables as customers transition to the new platform. Service and other revenue decreased $2.1 million, or 20%, to $8.2 million for the six months ended June 30, 2023, as compared to $10.2 million for the six months ended June 30, 2022, primarily due to the change in our terms of the warranty provided with the instrument during the first quarter of 2022 to remove the service component. As a result, the warranty is no longer a separate performance obligation and, accordingly, we accrue for the cost of the assurance warranty when revenue of the instrument is recognized, and no longer recognize a component of the instrument revenue in service and other revenue over the warranty period. We expect service revenue to continue to decline during the remainder of the year as we anticipate customers transitioning their service contracts to Revio following the standard warranty period, with fewer customers renewing Sequel and Sequel II/IIe service contracts. 28 Table of Contents Cost of Revenue, Gross Profit and Gross Margin Cost of product revenue increased $22.9 million, or 60%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The cost of product revenue increased primarily due to higher overall product costs on the Revio platform, as well as adjustments of approximately $3.5 million recognized during the first quarter of 2023 primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due to the product transition to Revio. Cost of revenue included share-based compensation expense of $3.1 million and $2.7 million during the six months ended June 30, 2023 and 2022, respectively. Gross profit decreased $5.0 million, or 17%, to $25.3 million for the six months ended June 30, 2023, compared to $30.3 million for the six months ended June 30, 2022. Gross margin was 29% for the six months ended June 30, 2023, compared to gross margin of 44% for the six months ended June 30, 2022. The decrease in gross margin was due in part to instrument mix, as Revio instruments sold during the quarter had a lower margin primarily due to loyalty discounts provided and higher initial manufacturing costs, as well as adjustments of approximately $3.5 million recognized during the first quarter of 2023 primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due to the product transition to Revio. While we expect gross margin to expand during the remainder of the year, gross margin could fluctuate depending on the pace at which Sequel II/IIe consumable revenue declines, Revio consumable revenue ramps, and manufacturing efficiencies improve, as well as fluctuations in average selling prices. Research and Development Expense Research and development expense decreased by $8.2 million, or 8%, to $95.1 million for the six months ended June 30, 2023, compared to $103.3 million for the six months ended June 30, 2022. The decrease was primarily driven by the transition of Revio from development to commercialization, in addition to lower headcount. Research and development expense included share-based compensation expense of $12.1 million and $16.7 million during the six months ended June 30, 2023 and 2022, respectively. Sales, General and Administrative Expense Sales, general and administrative expense increased by $1.3 million, or 2%, to $80.4 million for the six months ended June 30, 2023, compared to $79.1 million for the six months ended June 30, 2022. The increase in sales, general, and administrative expense was primarily driven by an increase in marketing expenses in connection with the Revio launch and increased sales and marketing headcount as we continue to grow our commercial footprint. Sales, general, and administrative expense included share-based compensation expense of $20.6 million and $22.3 million during the six months ended June 30, 2023 and 2022, respectively. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration of $14.2 million during the six months ended June 30, 2023, represents the remeasurement impact of the contingent consideration liability of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) that is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology. The increase in contingent consideration liability was primarily due to the passage of time and changes in the discount rates and probabilities of milestone achievement. 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. Interest Expense Interest expense for the six months ended June 30, 2023, was $7.2 million compared to $7.4 million for the six months ended June 30, 2022 and was primarily comprised of interest on the convertible senior notes. 29 Table of Contents Other Income (Expense), net Other income (expense), net for the six months ended June 30, 2023, was $15.8 million compared to $23.0 thousand for the six months ended June 30, 2022. The $15.8 million increase was primarily due to investment income. Liquidity and Capital Resources Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, has primarily been through the issuance of debt or equity securities, together with cash flow from operating activities. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business. January 2023 Public Offering On January 27, 2023, we issued and sold an aggregate of 20,125,000 shares of our common stock at a purchase price of $10.00 per share pursuant to an automatic shelf registration statement filed on Form S-3 with the Securities and Exchange Commission, resulting in aggregate gross proceeds of approximately $201.3 million. After deducting underwriting discounts and commissions and offering costs paid or payable by us of approximately $12.1 million, the net proceeds from the offering were approximately $189.2 million. June 2023 Note Exchange As discussed above under Recent Developments , in June 2023, we entered into a privately negotiated exchange with a holder of our 2028 Notes, pursuant to which we issued $441.0 million in aggregate principal amount of our 2030 Notes. Following the Exchange Transaction, approximately $459.0 million in aggregate principal amount of the 2028 Notes remained outstanding. Contingent Consideration In connection with the acquisition of Omniome in the third quarter of 2021, we entered into an arrangement where we are obligated to pay approximately $200.0 million in cash and equity dependent upon the achievement of a milestone event upon the first commercial shipment of products developed from our acquired sequencing solution. See Note 2 – Business Acquisitions in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for further information. In August 2023, we commenced customer shipments of the Onso short-read sequencing instrument, with shipments of related consumables expected to occur later in August 2023. The milestone payment associated with PacBio’s acquisition of Omniome will be triggered once both the Onso instrument and related consumables have shipped to one customer. In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, which the Company may elect to pay in cash, shares of Company common stock or a combination of cash and shares of Company common stock. See Note 9 . S ubsequent Events in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. As of June 30, 2023, we had cash, cash equivalents and investments of $829.9 million compared to $772.3 million as of December 31, 2022. 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, 2023. Factors that may affect our capital needs include, but are not limited to, the pace of adoption of our products, which affects the sales of our products and services; our ability to obtain new collaboration and customer arrangements and maintain existing collaborations and arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the purchase of patent licenses; manufacturing costs; service costs; the impact of product quality; litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; costs of developing new and enhanced products; acquisitions of complementary businesses, technologies or assets; achievement of milestones in connection with acquisitions; and other factors. There can be no assurance that funds will be available on favorable terms, or at all. 30 Table of Contents Summary of Cash Flows Six Months Ended June 30, (in thousands) 2023 2022 Cash used in operating activities $ (136,432) $ (139,592) Cash used in investing activities (171,144) (18,228) Cash provided by financing activities 191,274 5,670 Net decrease in cash, cash equivalents and restricted cash $ (116,302) $ (152,150) 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, 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. Cash used in operating activities for the six months ended June 30, 2022, of $139.6 million was due primarily to a $152.9 million net loss that included non-cash items such as stock-based compensation of $41.7 million, depreciation expense of $4.6 million, amortization of right-of-use assets of $3.4 million, amortization of investment premium of $1.1 million, partially offset by a $6.5 million decrease in liability due to the change in estimated fair value of contingent consideration, and a net cash outflow due to $31.9 million in net changes to operating assets and liabilities. The change in net operating assets and liabilities was primarily attributable to increases in inventory and accounts receivable, 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. Investing Activities Our investing activities consist primarily of capital expenditures and investment purchases, sales, and maturities. Cash used in investing activities for the six months ended June 30, 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. Our investing activities consist primarily of capital expenditures and investment purchases, sales and maturities. Cash used in investing activities for the six months ended June 30, 2022, was due to $241.1 million in purchases of investments offset by $230.5 million in maturities of investments, and $7.7 million in purchases of property and equipment. Financing Activities 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 six months ended June 30, 2022 primarily resulted from proceeds of $6.4 million from the issuance of common stock through our equity compensation plans. 31 Table of Contents Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our critical accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022. Recent Accounting Pronouncements Please see Note 1. Organization and Significant Accounting Policies , subsection titled “Recent Accounting Pronouncements”, in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding applicable recent accounting pronouncements. Off-Balance Sheet Arrangements As of June 30, 2023, we did not have any off-balance sheet arrangements. In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract, any defective products supplied by us, or any acts or omissions, or willful misconduct, committed by us or any of our employees, agents or representatives. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between us and such third parties in connection with such fundraising efforts. To the extent that such indemnification obligations apply to the lawsuits described in Note 5. 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, 2023.