What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-28 · 126 added, 137 removed, 225 unchanged (54% of the section changed)

14 unchanged sentences

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 technology and our emerging Sequencing by Binding (SBB ® ) short-read sequencing technology.

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 technologies with higher throughput and improved workflows that we believe will enable dramatic advancements in routine healthcare.

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 research 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 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.

1 unchanged sentence

Strategic Objectives

2022 was a productive year for us as we set out to transform the company, scale the business, and drive adoption for our advanced sequencing technologies.

2023 exceeded our expectations as we drove adoption of our advanced sequencing technologies, demonstrated short-read accuracy with our Onso platform, and progressed development of our pipeline technologies and products.

Our 2024 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

 Progress development of ultra-high-throughput and bench top long-read sequencers and next generation SBB 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.

• Increase technology adoption by increasing market share via new customer acquisition, continue Sequel II conversions to Revio, and scale Onso production;

• Leverage innovation to complete development of new sequencing platforms and launch on-market system improvements;

• Build upon clinical momentum by expanding HiFi usage in large-scale programs and translational research projects;

• Drive towards positive cash flow through gross margin expansion, disciplined operating expense management, and a focus on working capital.

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

We believe the commercial investments we have recently made will further help drive growth in our business.

1 unchanged sentence

We continue to focus on programs to accelerate new platform launches in the near to mid-term as well as increase applications for our technologies.

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

We began taking orders in the fourth quarter of 2022 and expect to commence commercial Revio shipments in March 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 are also progressing development of Onso TM , our SBB short-read platform.

We began taking orders in January 2023 and remain on track for commercial shipment in the second quarter of 2023.

We continue to believe that with the capabilities of our HiFi chemistry and SMRT technology, we can be a market leader in whole-genome clinical sequencing.

4 unchanged sentences

Financial Overview

Broader macroeconomic dynamics including rising inflation, global supply chain constraints, volatile capital markets, competition, and lockdown restrictions associated with COVID-19 have adversely impacted our customers and lengthened customer sales cycles.

Additionally, lock downs in China have led to lower than previously anticipated revenue in the Asia-Pacific region as customers had difficulty accessing labs and lower sample volumes from which to sequence.

We expect some headwinds from a strengthening U.S.

dollar, which impacts our revenue denominated in EUR and GBP but also impacts purchasing power of our customers in Asia as a stronger U.S.

dollar makes buying our products more expensive.

Ongoing global supply chain constraints and rising inflation are also increasing our costs;

as a result, we expect these costs to impact gross margins and cash flow.

Due to the rising costs from global supply chain constraints and rising inflation, we are moderating our hiring with the aim of reducing our operating expense growth in 2023.

We will continue to prioritize investments to develop and commercialize our new products, prioritizing opportunities that will generate a return over the near to mid-term.

The degree of further adverse impacts of COVID-19 on our business will depend on several factors, such as the duration and the extent of the pandemic, as well as actions taken by governments, businesses, and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.

The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the regions in which we sell our products and services and conduct our business operations.

We have been negatively impacted by the COVID-19 pandemic and expect to continue to be impacted by COVID-19 for the foreseeable future.

Due to the uncertain scope and duration of the pandemic, we cannot reasonably estimate the future impact to our operations and financial results.

The spread of COVID-19 caused us to modify our business practices, including limiting some of our commercial operations and limiting certain employees from working in the office.

Starting in April 2022, we invited employees located near our reopened offices to return to the office.

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

Key highlights of our 2023 consolidated financial results include the following:

 Revenue decreased $2.2 million, or 2%, to $128.3 million for the year ended December 31, 2022, as compared to $130.5 million for the year ended December 31, 2021.

The decline was primarily caused by a decrease in instrument revenue, which was due in part to the robust demand for Revio, displacing previously anticipated Sequel IIe sales in the fourth quarter of 2022.

We received orders in the fourth quarter of 2022 for 76 Revio systems with delivery in 2023.

The decline in instrument revenue was partially offset by an increase in consumables revenue of $7.8 million.

• Revenue increased $72.2 million, or 56%, to $200.5 million for the year ended December 31, 2023, as compared to $128.3 million for the year ended December 31, 2022.

Revenue was comprised of $120.5 million in instrument revenue, $63.4 million in consumables revenue and $16.6 million in service and other revenue for the year ended December 31, 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 platforms.

We ended the year with an installed base of 173 Revio systems.

• Gross profit as a percentage of revenue (gross margin) was 26.3% for the year ended December 31, 2023, compared to 38.2% for the year ended December 31, 2022.

Gross margin declined due primarily to adjustments for excess inventory, either on hand or at our contract manufacturer, related to a faster than expected ramp in Revio demand, which resulted in a faster than expected decline in Sequel II/IIe demand upon the launch of Revio, as well as a decrease in instrument volume and higher overall product costs.

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

sales of higher-margin consumables;

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.

 Loss from operations increased $96.8 million or 46%, to $307.2 million for the year ended December 31, 2022, as compared to $210.4 million for the year ended December 31, 2021, driven primarily by an increase of $86.9 million of operating expenses, including a $80.1 million increase in research and development expenses, a $36.7 million increase in sales, general, and administrative expenses, and a $1.2 million increase in the change in the fair value of the contingent consideration, partially offset by a $31.1 million decrease in non-recurring merger-related costs incurred in 2021.

Gross margin declined due primarily to the instrument mix, as Revio instruments sold during the period had a lower margin than the Sequel II/IIe system, primarily due to loyalty discounts provided and higher initial manufacturing costs, including warranty costs as well as charges for scrap inventory.

In addition, we recognized an adjustment during the year ended December 31, 2023 primarily related to excess instrument and consumables inventory.

The excess instrument adjustment was primarily due to a change in the Sequel II demand primarily from one customer.

The consumables inventory adjustment was primarily resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system.

• Loss from operations increased $27.3 million or 9%, to $334.5 million for the year ended December 31, 2023, as compared to $307.2 million for the year ended December 31, 2022, driven primarily by an increase of $31.0 million of operating expenses, including a $12.7 million increase in the change in the fair value of the contingent consideration, a $9.0 million increase in non-recurring merger-related costs incurred, and a $9.0 million increase in sales, general, and administrative expenses, partially offset by a $5.8 million decrease in research and development expenses.

Business Acquisitions for further details.

 Cash, cash equivalents, and short-term investments were $772.3 million at December 31, 2022, which represents a 26% decrease compared to the balance at December 31, 2021.

Recent Developments

Product Announcements

On October 25, 2022, we announced two new sequencing platforms, Revio and Onso.

Revio is a new long-read sequencing system designed to enable the use of HiFi sequencing for large studies in human genetics, cancer research, and agricultural genomics.

We expect to commence commercial Revio shipments in March 2023.

Onso, a short-read DNA sequencing system, is designed to deliver industry-leading sensitivity and specificity for novel insights in oncology, disease research, and other applications.

We commenced the beta program for Onso in the fourth quarter of 2022.

We began taking orders for Onso during the first quarter of 2023 and remain on track for commercial shipment in the second quarter of 2023.

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 (File No.

333-249999) with the Securities and Exchange Commission, resulting in aggregate gross proceeds of approximately $201.3 million.

• Cash, cash equivalents, and short-term investments were $631.4 million at December 31, 2023, which represents an 18% decrease compared to the balance at December 31, 2022.

Macroeconomic dynamics including inflation, exchange rates and concerns about an economic downturn, have impacted both the Company and our customers’ behavior.

For example, some customers and potential customers are managing capital more conservatively, resulting in lengthened sales cycles, and capital funding in China is being deferred, resulting in less capital equipment purchases.

These factors could continue to impact our revenues and results of operations in 2024;

however, as the size and duration of these impacts is uncertain, 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 macroeconomic factors on our business.

Results of Operations

1 unchanged sentence

A discussion of the changes in our results of operations between the years ended December 31, 2022 and December 31, 2021, has been omitted from this Annual Report on Form 10-K but may be found in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021 , filed with the Securities and Exchange Commission on February 28, 2022, which is incorporated herein by reference, and which is available free of charge on the SEC’s website at www.sec.gov and our corporate website ( www.pacb.com ).

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on February 28, 2023, which is incorporated herein by reference, and is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.pacb.com).

Comparison of the Years Ended December 31, 2023 and 2022

Year Ended December 31,

(in thousands, except percentages)

Years Ended December 31,

(in thousands, except per share amounts) 2023 2022 $ Change % Change

Product revenue $ 183,872 $ 108,699 $ 75,173 69 %

4 unchanged sentences

Cost of service and other revenue 14,754 13,899 855 6 %

Amortization of intangible assets

Amortization of acquired intangible assets 1,983 733 1,250 171 %

Loss on purchase commitment 3,436 3,705 (269) (7 %)

Total cost of revenue 147,741 79,269 68,472 86 %

Gross profit 52,780 49,035 3,745 8 %

Operating Expense:

2 unchanged sentences

Merger-related expenses 9,042 — 9,042 —

Amortization of acquired intangible assets

6,157 — 6,157 —

Change in fair value of contingent consideration 15,060 2,377 12,683 534 %

1 unchanged sentence

Operating loss (334,467) (307,196) (27,271) 9 %

Loss from continuation advances from Illumina

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

Interest expense (14,343) (14,690) 347 (2 %)

2 unchanged sentences

Benefit from income taxes (11,424) — (11,424) —

The decrease in product revenue resulted primarily from a decrease of $12.6 million in instrument revenue, which was partially offset by an increase of $7.8 million in consumable revenue.

The decrease in instrument revenue was primarily due to fewer instruments sold.

We believe this decrease was driven primarily by the anticipation of and robust demand for Revio, displacing previously anticipated Sequel IIe sales in 2022.

At December 31, 2022, our installed base was 512 Sequel II and Sequel IIe systems compared to the 374 systems at December 31, 2021.

We anticipate that sales volumes of Sequel II/IIe may decline as a result of the announcement of Revio and its anticipated availability for shipment in the first quarter of 2023.

During the fourth quarter of 2022, we received orders for 76 Revio systems for delivery in 2023 and expect to see continued growth in Revio system sales, as well as the Onso system for which we began taking orders in January 2023.

The increase in consumable sales was primarily due to higher Sequel II/IIe consumables sales attributable to the growth in the instrument installed base.

Consumable growth reflects approximately 24% growth in Sequel II and IIe SMRT cells shipped in 2022, as compared to 2021.

The increase in service and other revenue was primarily due to product services contracts sold on the growing installed base.

Net loss $ (306,735) $ (314,248) $ 7,513 (2 %)

The increase in product revenue resulted primarily from an increase of $71.7 million in instrument revenue, as well as an increase of $3.4 million in consumable revenue.

The increase in instrument revenue was primarily due to the sale of 173 Revio systems that have a higher average selling price as compared to the Sequel II/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 the installed base and sales volumes of Sequel II/IIe to continue to decline compared to recent

Additionally, we commenced the shipment of Onso products during the year ended December 31, 2023 and expect the installed base to continue to grow.

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.

As the Revio installed base continues to grow, we anticipate the related consumable sales to continue to increase.

The decrease in service and other revenue was 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.

Service revenue also declined as customers transition to Revio, which includes a first-year warranty, and opt to not renew their Sequel II/IIe plans.

As the Revio installed base begins to surpass the warranty period in 2024 and customers transition to service plans, we expect the retrospective decline in growth trend to reverse within the year and service revenues to potentially exceed 2023 levels.

Cost of Revenue, Gross Profit, and Gross Margin

The increase in the cost of product revenue was driven primarily by adjustments for excess inventory primarily resulting from adjustments for excess inventory related to a faster than expected ramp in Revio demand, which resulted in a faster than expected decline in Sequel II/IIe demand upon the launch of Revio, as well as higher overall product costs.

The decrease in the cost of service and other revenue was primarily due to lower service personnel costs.

The loss on purchase commitment was $3.7 million for the year ended December 31, 2022.

The purchase commitment loss is based on an estimate of future excess inventory related to a supply agreement with a third-party vendor, for which we do not expect to have related sales.

Gross profit decreased $9.8 million, or 17%.

The increase in the cost of product revenue was driven primarily by an increase in system placements and higher overall product costs on the Revio platform, including warranty costs, as well as an increase in adjustments of approximately $4.6 million as compared to the prior year primarily relating to excess consumables inventory resulting from faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system.

Cost of revenue included share-based compensation expense of $5.4 million and $4.8 million during the years ended December 31, 2023 and 2022 respectively.

The loss on purchase commitment was $3.4 million and $3.7 million for the years ended December 31, 2023 and 2022, respectively.

The purchase commitment loss is based on an estimate of future excess inventory related to supply agreements, for which we do not expect to have related sales.

Gross profit increased $3.7 million, or 8%.

Gross margin was 26.3% for the year ended December 31, 2023 compared to 38.2% for the year ended December 31, 2022.

The decrease in gross margin percentage was primarily due to adjustments for excess inventory, either on hand or at our contract manufacturer, r elated to a faster than expected ramp in Revio demand, which resulted in a faster than expected decline in Sequel II/IIe demand upon the launch of Revio , as well as a decrease in instrument sales volume and higher product costs, which was partially offset by consumables volumes and higher service and other revenues during the year ended December 31, 2022, compared to the year ended December 31, 2021.

We expect our gross margin will trend slightly lower during the first half of 2023, due in part to new product transitions and the impacts of inflation and increased supply chain costs.

The global shortage of semiconductors continues to be a challenge for us in our supply chain and has resulted in cost increases that have and may continue to adversely impact margins.

During these periods of shortages or delays, the price of components may increase, or the components may not be available at all.

Additionally, in response to the surge in COVID-19 infections in 2022, the Chinese government-imposed lockdowns in certain parts of the country, which has had, and may continue to have, a negative impact on manufacturing and/or supply chains, as well as customer demand for our products and demand through certain distributors.

We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed.

Accordingly, our revenue and gross margins could suffer until other sources can be developed.

The decrease in gross margin percentage was primarily due to instrument mix, in addition to charges for scrap inventory and an increase in adjustments primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system.

Revio instruments sold during the period had a lower margin primarily due to loyalty discounts provided and higher initial manufacturing costs, including warranty costs.

Gross margin could fluctuate depending on the pace at which Sequel II/IIe revenue declines, Revio consumable revenue ramps, manufacturing efficiencies and warranty costs improve, as well as fluctuation in average selling prices.

Research and Development Expense

The increase in research and development expense was primarily driven by an increase of $34.1 million in product development costs and an increase of $33.9 million in personnel expenses, including the acquired workforce from the Omniome acquisition.

In addition, facilities and information technology related expenses associated with our research and development activities increased $9.9 million to support our operational expansion during the year ended December 31, 2022, compared to the year ended December 31, 2021 .

Research and development expense included share-based compensation expense of $30.7 million and $20.3 million during the twelve months ended December 31, 2022 and 2021, respectively.

We will continue to focus a significant portion of our resources on developing new products and solutions, including improving the efficiency and usability of existing products, developing new solutions, software, workflows and applications leveraging our core technologies.

We anticipate that our spend will decline slightly in 2023 due to new product transitions.

Additionally, we have collaborated and expect to continue to collaborate with strategic partners to develop sequencing solutions and expand the application of our technology.

The decrease in research and development expense was primarily driven by the transition of Revio from development to commercialization.

Research and development expense included share-based compensation of $22.4 million and $30.7 million during the years ended December 31, 2023 and 2022, respectively.

Sales, General, and Administrative Expense

The increase in sales, general, and administrative expense was primarily driven by an increase of $13.0 million in personnel costs, $9.7 million in marketing expenses, including costs incurred in connection with product launches, $4.7 million in consulting and professional services, $4.2 million in travel-related expenses, and $2.7 million in facilities expenses and information technology related expenses.

Sales, general, and administrative expense included share-based compensation expense of $43.1 million and $35.4 million during the twelve months ended December 31, 2022 and 2021, respectively.

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

The increase in sales, general, and administrative expense was primarily driven by an increase in sales and marketing headcount as we continue to grow our commercial footprint.

Sales, general, and administrative expense included share-based compensation expenses of $44.3 million and $43.1 million during the years ended December 31, 2023 and 2022, respectively.

Merger-Related Expenses

Merger-related expenses of $9.0 million during the year ended December 31, 2023, consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition.

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

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets of $6.2 million during the year ended December 31, 2023 consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities.

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration during the year ended December 31, 2022, represents the remeasurement impact of the contingent consideration of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) that is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology.

The increase in contingent consideration liability was primarily due to the passage of time and changes in the probabilities of milestone achievement, offset by increases in the discount rate.

Loss from Continuation Advances from Illumina

As part of the Termination Agreement, Illumina paid us Continuation Advances totaling $52.0 million, which was repayable without interest to Illumina if, within two years of March 31, 2020, we entered into, or consummated a Change of Control

Transaction or raised at least $100 million in a single equity or debt financing (that may have multiple closings), with the amount repayable dependent on the amount raised by us.

Resulting from the issuance and sale of $900 million of 1.50% Convertible Senior Notes due February 15, 2028, $52.0 million of Continuation Advances were paid without interest to Illumina in February 2021 and recorded as other expense in the year ended December 31, 2021.

The change in fair value of contingent consideration during the year ended December 31, 2023, represents the remeasurement impact of the Omniome and Apton contingent consideration due upon the achievement of the respective milestone.

The increase in the change in fair value of contingent consideration during the year was primarily due to the Omniome contingent consideration and was primarily attributable to the passage of time, changes in the discount rates and probabilities of milestone achievement.

The contingent consideration milestone for the Omniome acquisition was defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology.

As a result of the milestone achievement in September 2023, former Omniome securityholders received as milestone consideration, among other things, an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $2.0 million during the year ended December 31, 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 year ended December 31, 2023.

Interest Expense

The increase in interest expense for the year ended December 31, 2022, was primarily due to the twelve months of interest incurred on the $900 million of 1.50% Convertible Senior Notes due February 15, 2028, that we issued on February 16, 2021 during the year ended December 31, 2022 compared to only ten months of interest during the year ended December 31, 2021.

Interest expense for the year ended December 31, 2023 was $14.3 million compared to $14.7 million for the year ended December 31, 2022 and was primarily comprised of interest on the Convertible Senior Notes.

Other Income, Net

The increase in other income, net was primarily driven by a $8.4 million increase in interest income, partially offset by a $0.6 million increase in foreign exchange loss.

The increase in other income, net was primarily driven by investment income.

Benefit from Income Taxes

A deferred income tax benefit of $93.6 million for the year ended December 31, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions.

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

A deferred income tax benefit of $11.4 million for the year ended December 31, 2023, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition.

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

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

Accordingly, this benefit from income taxes is reflected on our Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

Accordingly, this benefit from income taxes is reflected on our consolidated statements of operations and comprehensive loss for the year ended December 31, 2023.

Liquidity and Capital Resources

3 unchanged sentences

Cash, Cash Equivalents, and Investments

As of December 31, 2022, we had $772.3 million in cash, cash equivalents, and investments, compared to $1.0 billion at December 31, 2021.

As of December 31, 2023, we had $631.4 million in cash, cash equivalents, and investments, compared to $772.3 million at December 31, 2022.

The decrease was primarily attributable to $259.2 million cash used in operating activities for the twelve months ended December 31, 2023.

2 unchanged sentences

The Notes bear interest at a rate of 1.50% per annum.

Interest on the Notes is payable semi-annually in arrears on February 15 and August 15 commencing on August 15, 2021.

Interest on the 2028 Notes is payable semi-

annually in arrears on February 15 and August 15 commencing on August 15, 2021.

The 2028 Notes will mature on February 15, 2028, subject to earlier conversion, redemption, or repurchase.

The proceeds from the issuance of the convertible notes are being used to fund operations, strategic investments, and capital requirements.

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 us.

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), 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, cash or a combination of shares and cash.

In June 2023, we entered into a privately negotiated exchange agreement with the holder of our outstanding 2028 Notes, pursuant to which we issued $441.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due in 2030 (the "2030 Notes") in exchange for $441.0 million principal amount of the 2028 Notes.

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.

1 unchanged sentence

Upon conversion of the 2030 Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.

With certain exceptions, upon a change of control of the Company or the failure of our common stock to be listed on certain stock exchanges, the holders of the Notes may require that we repurchase all or part of the principal amount of the Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date.

With certain exceptions, upon a change of control of our company or the failure of our common stock to be listed on certain stock exchanges, the holders of the 2028 Notes and 2030 notes may require that we repurchase all or part of the principal amount of those Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date.

The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture.

9 unchanged sentences

• As described in more detail in Note 8 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements, we signed a Supply Agreement, which was amended in October 2022, with a supplier for the purchase of certain products over the period of 2023 through 2026.

As part of the Supply Agreement, we made a $9.0 million deposit during the year ended December 31, 2022, and will pay an additional deposit of $6.0 million in 2023, to secure the supply of certain products through the term of the contract.

As part of the Supply Agreement, we made a $9.0 million deposit during the year ended December 31, 2022, and an additional deposit of $6.0 million in 2023, to secure the supply of certain products through the term of the contract.

If we breach the minimum volume purchase commitment during any applicable year, the supplier is entitled to retain a portion or all of the deposit corresponding to that year.

If we terminate the Supply Agreement before January 15, 2027, Supplier will refund the remaining balance of the Deposit.

If the supplier breaches its minimum volume supply commitment during any applicable year or portions thereof, our remedies include termination, pursuit of damages, or pursuit of specific performance.

If the supplier breaches its minimum volume supply commitment during any applicable year or portions thereof, our remedies include termination, pursuit of damages, or pursuit of specific

If, on or before October 31, 2024, we commit to purchasing a set amount of additional products during the calendar year 2026, Supplier will increase its maximum capacity guarantee to meet the additional demand.

1 unchanged sentence

• Our research and development expenditures of $187.2 million in 2023 and $193.0 million in 2022.

While we expect to continue our investment in research and development in 2023, including enhancements of our existing products, and continued development of our Revio and Onso systems and other new technology and products, we expect research and development expenses to decline slightly in 2023 as compared to the year ended December 31, 2022 due to new product transitions.

While we expect to continue our investment in research and development in 2024, including enhancements of our existing products, and continued development of other new technology and products, we expect research and development expenses to decline slightly in 2024 as compared to the year ended December 31, 2023 due to recent product transitions.

• Cash outflows for capital expenditures of $8.8 million in 2023 and $16.8 million in 2022.

We expect to continue to invest in capital expenditures in fiscal 2023 to continue to support manufacturing and expansion of our business, and anticipate a slight decline in 2023 as compared to the year ended December 31, 2022.

We expect to continue to invest in capital expenditures in fiscal 2024 to continue to support manufacturing and expansion of our business, and anticipate a slight increase in 2024 as compared to the year ended December 31, 2023.

• Amounts related to future lease payments for operating lease obligations at December 31, 2023, totaling $46.7 million, with $12.1 million expected to be paid within the next 12 months.

 Amounts due under the term loan acquired in connection with Omniome at December 31, 2022, totaling $2.3 million, with $1.8 million expected to be paid within the next 12 months.

• Amounts due under the term loan acquired in connection with Omniome at December 31, 2023, totaling $0.5 million, the remainder of which is expected to be paid within the next 12 months.

Please see Note 6.

2 unchanged sentences

We may also choose to drive investments to help create an ecosystem of customers, partners, and collaborators whose expertise and offerings complement and enhance the capabilities and utility of our technology and increase genomic data available on our platforms.

 Payments related to licensing and other arrangements, which are cancelable license agreements with third parties for certain patent rights and technology.

• Payments related to licensing and other arrangements, which are cancellable license agreements with third parties for certain patent rights and technology.

Under the terms of these agreements, we may be obligated to pay royalties based on revenue from the sales of licensed products, or minimum royalties, whichever is greater, and license maintenance fees.

9 unchanged sentences

If we are required and unable to raise additional capital when desired, our business, operating results, and financial condition may be adversely affected.

See our risk factor captioned “ We are not cash flow positive and may not have sufficient cash to make required payments under the terms of our debt or fund our long-term planned operations ” for more information.

Cash Flow Summary

Year Ended December 31,

Years Ended December 31,

(in thousands) 2023 2022

Cash used in operating activities $ (259,173) $ (263,211)

Cash provided by (used in) investing activities

Cash provided by investing activities 4,604 116,083

Cash provided by financing activities 108,891 9,622

Net (decrease) increase in cash, cash equivalents, and restricted cash

Net decrease in cash, cash equivalents and restricted cash $ (145,678) $ (137,506)

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 year ended December 31, 2023, of $259.2 million was due primarily to a $306.7 million net loss that was partially offset by non-cash items such as share-based compensation of $72.1 million, a change in the estimated fair value of contingent consideration of $15.1 million, depreciation of $11.5 million, inventory provision of $10.6 million, amortization of intangible assets of $8.3 million, and amortization of right-of-use assets of $6.8 million, offset by accretion of discount and amortization of premium on marketable securities, net of $12.8 million, and deferred income taxes of $11.4 million.

Cash flow impact from changes in net operating assets and liabilities of $59.0 million, was primarily attributable to increases of $17.8 million in accounts receivable, net, $13.8 million in inventory, net, $9.0 million in prepaid expenses and other assets, and decreases of $14.9 million in contingent consideration liability, $10.4 million in deferred revenue, and $8.8 million in operating lease liabilities, partially offset by increases of $13.1 million in accrued expenses, and $2.4 million in other liabilities.

Cash used in operating activities for the year ended December 31, 2022, of $263.2 million was due primarily to a $314.2 million net loss that was partially offset by non-cash items such as share-based compensation of $78.6 million, depreciation of $9.5 million, amortization of right-of-use assets of $6.9 million, inventory provision of $6.0 million, and a change in the estimated fair value of contingent consideration of $2.4 million.

Cash flow impact from changes in net operating assets and liabilities of $54.0 million, was primarily attributable to increases of $33.9 million in inventory, net, $12.3 million in prepaid expenses and other assets, and decreases of $7.7 million in operating lease liabilities, $3.7 million in accrued expenses, and $3.7 million in deferred revenue, partially offset by a decrease of $5.5 million in accounts receivable, net, an increase of $1.0 million in accounts payable, and $0.9 million in other liabilities.

Cash used in operating activities for the year ended December 31, 2021, of $111.2 million was due primarily to a $181.2 million net loss, which includes a $93.6 million deferred income tax benefit, that was partially offset by a loss of $52.0 million from Continuation Advances repaid to Illumina that is considered a financing activity, non-cash items such as share-based compensation of $73.4 million, depreciation of $7.2 million, amortization of right-of-use assets of $4.0 million and a net cash inflow from changes in operating assets and liabilities of $20.3 million.

Cash flow impact from changes in operating assets and liabilities was primarily attributable to increases of $25.7 million in deferred revenue, an increase of $15.3 million in accrued expenses and an increase of $6.4 million in accounts payable partially offset by an increase of $13.1 million in inventory, net, an increase of $7.2 million in accounts receivable, net, an increase of $1.0 million in prepaid expenses and other assets, and a decrease of $5.0 million in operating lease liabilities.

Investing Activities

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

Cash provided by investing activities for the year ended December 31, 2023, was due primarily to capital expenditures of $8.8 million and purchases of investments of $756.6 million offset by maturities of investments of $769.5 million.

Cash used in investing activities for the year ended December 31, 2022, was due primarily to capital expenditures of $16.8 million and purchases of investments of $442.8 million offset by maturities of investments of $575.8 million.

Cash used in investing activities for the year ended December 31, 2021, was due primarily to net purchases of investments of $352.8 million, cash paid, net of cash acquired, of $319.8 million for the acquisitions of Omniome and Circulomics, and purchases of property and equipment of $5.9 million.

Financing Activities

Cash provided by financing activities during the year ended December 31, 2023, resulted from net proceeds from issuance of common stock under equity offerings of $189.2 million, net proceeds of $15.3 million from the issuance of common stock through our equity compensation plans, partially offset by $86.4 million due to the payment of contingent consideration, $7.4 million due to the payment of debt issuance costs, and $1.8 million due to the payment of notes payable.

Cash provided by financing activities during the year ended December 31, 2022, resulted from net proceeds of $11.2 million from the issuance of common stock through our equity compensation plans, partially offset by $1.6 million due to the payment of notes payable.

Cash provided by financing activities during the year ended December 31, 2021, resulted from net proceeds of $895.5 million from our February 2021 issuance of $900 million of 1.50% Convertible Senior Notes after deducting debt issuance costs, net proceeds of $294.8 million from our September 2021 private placement of common stock after deducting issuance costs and proceeds of $31.8 million from the issuance of common stock through our equity compensation plans, partially offset by $52.0 million of Continuation Advances repaid to Illumina.

Off-Balance Sheet Arrangements

1 unchanged sentence

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.

16 unchanged sentences

We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable.

Revenues are recognized when control of the promised goods, or services is transferred to our customers, or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Our instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, training, and consumables.

For such bundled arrangements, we account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

Installation services are considered distinct from the instrument.

Revenues are recognized when control of the promised goods are transferred to our customers, or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We may enter into contracts with customers that include a combination of promised products and services, resulting in arrangements containing multiple performance obligations.

We determine whether each product or service is distinct, in order to identify the performance obligations in the contract and allocate the contract transaction price among the distinct performance obligations.

A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract.

We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service.

Therefore, instrument revenue is recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers and upon shipment for sales made to our distributor customers.

The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price.

The consideration for contracts with multiple performance obligations is allocated between separate performance obligations based on their individual standalone selling price.

We determine the best estimate of standalone selling price using average selling prices over a 12-month period combined with an assessment of current market conditions.

4 unchanged sentences

In accounting for customer options, we determine whether an option is a material right and this requires us to exercise significant judgment.

If a contract provides the customer an option to acquire additional goods or services at a discount that exceeds the range of discounts that we typically give for that

product or service for the same class of customer, or if the option provides the customer certain additional goods or services for free, the option may be considered a material right.

If the contract gives the customer the option to acquire additional goods or services at their normal standalone selling prices, we would likely determine that the option is not a material right and, therefore, account for it as a separate performance obligation when the customer exercises the option.

If a contract provides the customer an option to acquire additional goods or services at a discount that exceeds the range of discounts that we typically give for that product or service for the same class of customer, or if the option provides the customer certain additional goods or services for free, the option may be considered a material right.

If the standalone selling price of the option is not directly observable, an estimated standalone selling price is utilized which considers adjustments for discounts that the customer could receive without exercising the option and the likelihood that the option will be exercised.

4 unchanged sentences

Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete balances.

Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs while determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories.

Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs.

Determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories.

We make inventory purchases and commitments to meet future shipment schedules based on forecasted demand for our products.

12 unchanged sentences

In these cases, a liability is recorded on the acquisition date for an estimate of the acquisition date fair value of the contingent consideration.

Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in operating expenses in our consolidated statements of operations and comprehensive (loss) income.

Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in operating expenses in our consolidated statements of operations and comprehensive loss.

We typically use the discounted cash flow method to value our acquired intangible assets.

This method requires significant management judgment to forecast future operating results and utilizes significant assumptions such as assumed revenue growth rates, discount rates and obsolescence factors.

This method requires significant management judgment to forecast future operating results and utilizes significant assumptions such as assumed revenue projections, discount rates and obsolescence factors.

The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages.

8 unchanged sentences

We record these adjustments to the provisional amounts with a corresponding offset to goodwill.

Any adjustments identified after the measurement period are recorded in the consolidated statements of income.

We acquired $11.4 million of finite-lived intangible assets, $400.0 million of IPR&D, and $410.0 million of goodwill in connection with the acquisitions of Omniome and Circulomics in the third quarter of 2021.

Any adjustments identified after the measurement period are recorded in the consolidated statements of operations and comprehensive loss.

We acquired $55.0 million of IPR&D, and $52.3 million of goodwill in connection with the acquisition of Apton Biosystems, Inc.

in the third quarter of 2023.

Goodwill and Intangible Assets with Indefinite Lives — Impairment Assessment

18 unchanged sentences

Otherwise, we proceed to compare the estimated fair value of the IPR&D with the carrying value.

If the carrying amount of the IPR&D exceeds the fair value, we record an impairment loss based on the difference.

If the carrying

amount of the IPR&D exceeds the fair value, we record an impairment loss based on the difference.

If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections.

Key assumptions include, but are not limited to, revenue and operating income growth rates, discount rates and other factors.

Key assumptions include, but are not limited to, revenue projections, revenue growth rates, discount rates and other factors.

We consider peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the asset under measurement and estimated weighted-average costs of capital.

12 unchanged sentences

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 $200 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 technology.

In connection with the acquisition of Omniome in the third quarter of 2021, we entered into an arrangement where we were obligated to pay $200 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 technology.

In the third quarter of 2023, we commenced customer shipments of the Onso short-read sequencing instrument.

The milestone payment associated with PacBio’s acquisition of Omniome was triggered in September 2023 once both the Onso instrument and related consumables had been shipped to one customer.

Consequently, we paid the former Omniome security holders milestone consideration of an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock in October 2023.

In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay former holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, provided that the milestone event occurs prior to the 5-year anniversary of the closing date of the acquisition, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock.

Business Acquisitions for further information.

The contingent consideration liability was measured at fair value as of the acquisition date and is remeasured periodically at each reporting date, with changes in fair value recorded as change in fair value of contingent consideration in the statement of operations.

The initial measurement and post-acquisition remeasurement require estimates and assumptions using a scenario-based method that considers a range of potential outcomes of milestone achievement dates and assigned probabilities of occurrence for each outcome.

Outcomes are discounted to present value, which is then weighted by the probability of each scenario to determine the total fair value of the contingent consideration payment as of each reporting period.

For the Omniome contingent consideration, the initial measurement and post-acquisition remeasurement required estimates and assumptions using a scenario-based method that considers a range of potential outcomes of milestone achievement dates and assigned probabilities of occurrence for each outcome.

Outcomes were discounted to present value, which was then weighted by the probability of each scenario to determine the total fair value of the contingent consideration payment as of each reporting period.

This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates.

For the Apton contingent consideration, the initial measurement and post-acquisition remeasurement required estimates and assumptions 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 to determine the total fair value of the contingent consideration payment as of each reporting period.

This method requires significant management judgment, including risk-adjusted forecasted revenues for products and services leveraging Apton's technology and an estimated credit spread.

Future changes in our estimates could result in expenses or gains.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis