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 (i) the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and (ii) our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission, or the SEC, on February 28, 2024. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and you should not place undue reliance on our forward-looking statements. We do not assume any obligation to update any forward-looking statements. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. Our Management’s Discussion and Analysis (MD&A) is organized into the following sections: • Overview and Outlook • Results of Operations • Liquidity and Capital Resources • Critical Accounting Policies and Estimates • Recent Accounting Pronouncements • Off Balance Sheet Arrangements Overview and Outlook About PacBio We are a premier life science technology company that is designing, developing, and manufacturing advanced sequencing solutions that enable scientists and clinical researchers to improve their understanding of the genome and ultimately, resolve genetically complex problems. Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality, and completeness, which include our HiFi long-read sequencing technology and our Sequencing by Binding (SBB) short-read sequencing technology. Our products address solutions across a broad set of applications including human genetics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Long-read sequencing was recognized by the journal Nature Methods as its “method of the year” for 2022 for its contributions to biological understanding and future potential. Our focus is on creating some of the world's most advanced sequencing systems to provide our customers with the most complete and accurate view of genomes, transcriptomes, and epigenomes. Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations (CROs), pharmaceutical companies, and agricultural companies. Strategic Objectives Our 2024 strategic objectives are to: • Improve commercial execution to drive adoption of both the Revio ® and Onso TM platforms; • Continue the development of our Vega TM benchtop long-read and high throughput short-read platforms; • Improve our gross margin and drive manufacturing efficiencies; and • Reduce annualized run-rate operating expenses. We will continue to leverage our commercial organization and significantly improve our products' efficiency and usability to seek to reach a broader customer base. We believe the commercial investments we have recently made will further help drive growth in our business. 26 Table of Contents To increase the adoption of HiFi sequencing, we have various development programs in progress to expand our product portfolio, increase the throughput, and improve the usability of our existing sequencing solutions. We continue to focus on programs to accelerate new platform launches in the near to mid-term as well as increase applications for our technologies. We commenced commercial shipments of Revio, our new HiFi long-read sequencing system, in the first quarter of 2023. To address the oncology research markets with a highly differentiated alternative to existing third-party short-read sequencing products already on the market, we commenced customer shipments of the Onso short-read sequencing instrument in August 2023. In November 2024, we announced the Vega system, our first benchtop long-read sequencing platform. We began taking orders in the fourth quarter of 2024 with shipments expected to commence in the first quarter of 2025. We continue to believe that with the capabilities of our HiFi chemistry and SMRT ® technology, we can be a market leader in whole-genome clinical sequencing. Leading institutions have adopted our products to study rare and inherited disease. We believe the market opportunity for clinical sequencing is significant and could drive substantial revenue growth for us. We plan to continue to pursue collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing. Collaborative arrangements add to the awareness of our products and service offerings and may drive new applications for use of our technology. During the second quarter of 2024, we announced plans to reduce annualized run-rate operating expenses by the end of 2024, with the intent of better aligning our organizational structure and resources with our strategic initiatives. Our expense reduction initiatives include workforce reductions, facilities downsizing and a refined pipeline of development programs. For the nine months ended September 30, 2024, we incurred approximately $24.7 million of restructuring charges primarily related to employee separation costs, accelerated amortization and depreciation for right-of-use assets, leasehold improvements, and furniture and fixtures relating to the abandonment of the San Diego office, as well as charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives. We also expect to incur approximately $2.1 million in additional costs through 2025. See Note 6. Restructuring in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Financial Overview Key highlights of the nine months ended September 30, 2024 consolidated financial results include the following: • Revenue decreased to $114.8 million for the nine months ended September 30, 2024, as compared to $142.2 million for the nine months ended September 30, 2023. Revenue was comprised of $50.5 million in instrument revenue, $51.6 million in consumables revenue and $12.7 million in service and other revenue for the nine months ended September 30, 2024. Revenue was comprised of $85.3 million in instrument revenue, $44.6 million in consumables revenue and $12.3 million in service and other revenue for the nine months ended September 30, 2023. The decrease was primarily due to lower Revio unit sales, which was partially offset by higher consumable sales. While we do not expect Vega to meaningfully impact Revio sales, we are mindful that there may be some cases where potential customers take more time to assess our new offerings, which may prolong some sales cycles. • Gross profit decreased for the nine months ended September 30, 2024 primarily due to the decrease in revenue described above, $4.4 million of restructuring charges, and an increase of $6.6 million in amortization of acquired intangible assets, partially offset by lower inventory adjustments. While we anticipate continued reduction in the production cost of the Revio platform, we expect to begin to realize these additional savings in 2025. Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, and future product launches. We expect Vega to be accretive to our gross margin as we scale the platform in 2025. • Loss from operations increased $74.4 million to $321.3 million for the nine months ended September 30, 2024, as compared to $246.9 million for the nine months ended September 30, 2023. Operating expenses increased $58.4 million primarily driven by a $93.2 million goodwill impairment charge, $20.3 million of restructuring charges, and a $12.6 million increase in amortization of acquired intangible assets, partially offset by a $12.9 million decrease in the change in the fair value of the contingent consideration and a decrease in research and development expenses. • Cash, cash equivalents, and short-term investments were $471.1 million at September 30, 2024, which represents a 25% decrease compared to the balance at December 31, 2023. 27 Table of Contents The median sales cycle for Revio instrument purchases continues to be longer than expected. We believe this has been caused by, among other reasons, the uncertainty surrounding the funding for new capital equipment; procurement delays, particularly in the Asia-Pacific and Europe regions; small-to-mid-size existing customers yet to increase their sample volumes to drive an upgrade to Revio; new customers, which have shown they have longer sales cycles compared to existing PacBio customers; and sample volumes materializing slower than expected for some potential Revio customers. We believe our consumables revenue was also impacted primarily by slower-than-expected ramp-up in sequencing by our small- to mid-sized customers, many of whom are new to PacBio; sample delays impacting sequencing volume at certain large customers; and some service providers in China operating at lower utilization as a result of the difficult funding environment. Macroeconomic dynamics impacting the Company in the future may include rising inflation, geopolitical tensions, volatile capital markets, and fluctuating exchange rates. These factors could continue to impact our revenues and results of operations in future periods; however, the magnitude and duration of these impacts is uncertain and inherently unpredictable. On an ongoing basis, we evaluate our significant estimates, including those related to the valuation of indefinite-lived and finite-lived assets. However, these estimates could change in future periods based on events or changes in circumstances, which could result in material impairment charges. We recorded a $93.2 million goodwill impairment charge in the nine months ended September 30, 2024. See additional discussion below in Results of Operations, as well as Note 4. Balance Sheet Components in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Additionally, refer to the Critical Accounting Policies and Estimates section of our Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion on the Company's asset impairment assessments. See the Risk Factors section for further discussion. Recent Developments Product Announcements On November 6, 2024, we announced a new sequencing platform, Vega. Vega is a new benchtop long-read sequencing system that delivers the functionality of the Revio system, our high-throughput long-read sequencer, into a compact, lower-throughput benchtop platform that is designed for researchers adopting long-read sequencing across a variety of applications, including targeted sequencing, RNA sequencing, and small genome sequencing. 2028 Convertible Senior Notes Exchange As discussed in Note 11. Subsequent Events in Part I, Item 1 of this Quarterly Report on Form 10-Q, on November 7, 2024, we entered into an exchange agreement with SBN, pursuant to which we have agreed to exchange the remaining approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding for $200.0 million aggregate principal amount of 2029 Notes as well as the issuance of 20,451,570 shares of common stock and $50.0 million of cash. The exchange and issuances are expected to close on or about November 21, 2024. 28 Table of Contents Results of Operations Comparison of the Three Months Ended September 30, 2024 and 2023 Three Months Ended September 30, (in thousands, except percentages) 2024 2023 $ Change % Change Revenue: Product revenue $ 35,296 $ 51,562 $ (16,266) (32 %) Service and other revenue 4,671 4,129 542 13 % Total revenue 39,967 55,691 (15,724) (28 %) Cost of Revenue: Cost of product revenue 23,278 33,551 (10,273) (31) % Cost of service and other revenue 3,484 4,054 (570) (14 %) Amortization of acquired intangible assets 3,201 184 3,017 1640 % Total cost of revenue 29,963 37,789 (7,826) (21 %) Gross profit 10,004 17,902 (7,898) (44 %) Operating Expense: Research and development 25,516 47,514 (21,998) (46) % Sales, general and administrative 43,746 43,431 315 1 % Merger-related expenses — 8,979 (8,979) (100 %) Amortization of acquired intangible assets 3,649 741 2,908 392 % Change in fair value of contingent consideration 1,170 (271) 1,441 (532) % Total operating expense 74,081 100,394 (26,313) (26 %) Operating loss (64,077) (82,492) 18,415 (22) % Interest expense (3,538) (3,588) 50 (1) % Other income, net 6,890 8,505 (1,615) (19 %) Loss before benefit from income taxes (60,725) (77,575) 16,850 (22 %) Benefit from income taxes — (10,706) 10,706 (100 %) Net loss $ (60,725) $ (66,869) $ 6,144 (9 %) Revenue Revenue decreased $15.7 million, or 28% to $40.0 million for the three months ended September 30, 2024, as compared to $55.7 million for the three months ended September 30, 2023. Instrument revenue decreased $17.9 million, or 52%, to $16.8 million for the three months ended September 30, 2024, as compared to $34.7 million for the three months ended September 30, 2023, primarily due to the sale of 22 Revio systems during the three months ended September 30, 2024 compared to 52 Revio systems during the three months ended September 30, 2023. Consumables revenue increased $1.6 million, or 10%, to $18.5 million for the three months ended September 30, 2024, as compared to $16.9 million for the three months ended September 30, 2023. The increase was primarily due to higher Revio consumables sales attributable to the growth in the Revio instrument installed base, partially offset by a decline in Sequel ® II and IIe consumables as customers transition to Revio. We expect Revio consumable sales to increase as the installed base grows. While we expect to see a decline in Sequel II and IIe consumable sales resulting from the product transition, there is uncertainty as to the rate at which these sales will decline. Service and other revenue increased $0.5 million, or 13%, to $4.7 million for the three months ended September 30, 2024, as compared to $4.1 million for the three months ended September 30, 2023. 29 Table of Contents Cost of Revenue, Gross Profit and Gross Margin Cost of product revenue decreased $10.3 million, or 31%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023 primarily driven by the decrease in revenue described above. Cost of revenue included amortization attributable to acquired intangible assets of $3.2 million that are related to sales generating activities. Cost of revenue included share-based compensation expense of $1.2 million and $1.1 million during the three months ended September 30, 2024 and 2023, respectively. Gross profit decreased $7.9 million, or 44%, to $10.0 million for the three months ended September 30, 2024, compared to $17.9 million for the three months ended September 30, 2023. Gross margin was 25% for the three months ended September 30, 2024, compared to gross margin of 32% for the three months ended September 30, 2023. The decrease was primarily due to the decrease in revenue described above and an increase in amortization of acquired intangible assets. We anticipate continued reduction in the production cost of the Revio platform, which we expect to realize in 2025. Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, and future product launches. Research and Development Expense Research and development expense decreased by $22.0 million, or 46%, to $25.5 million for the three months ended September 30, 2024, compared to $47.5 million for the three months ended September 30, 2023. The decrease was primarily driven by a decrease in personnel and related expenses due to restructuring activities, as well as the transition of launched products from development to commercialization. Research and development expense included share-based compensation expense of $4.7 million and $6.2 million during the three months ended September 30, 2024 and 2023, respectively. Sales, General and Administrative Expense Sales, general and administrative expense increased by $0.3 million, or 1%, to $43.7 million for the three months ended September 30, 2024, compared to $43.4 million for the three months ended September 30, 2023. Restructuring charges of approximately $6.9 million were primarily offset by a decrease in personnel expenses. We expect to incur an additional $2.1 million of remaining estimated restructuring costs through 2025. Sales, general, and administrative expense included share-based compensation expense of $12.3 million and $12.4 million during the three months ended September 30, 2024 and 2023, respectively. Merger-Related Expenses Merger-related expenses of $9.0 million during the three months ended September 30, 2023 consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition. We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration during the three months ended September 30, 2024, represents the remeasurement impact of the Apton contingent consideration due upon the achievement of the milestone. Change in fair value of contingent consideration during the three months ended September 30, 2023, represents the remeasurement impact of the Omniome contingent consideration liability of approximately $200 million that was due upon the achievement of a milestone. Amortization of Acquired Intangible Assets Amortization of acquired intangible assets included in operating expenses of $3.6 million during the three months ended September 30, 2024 consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities. 30 Table of Contents Interest Expense Interest expense for the three months ended September 30, 2024, was $3.5 million compared to $3.6 million for the three months ended September 30, 2023 and was primarily comprised of interest on the convertible senior notes. Other Income, Net Other income, net for the three months ended September 30, 2024, was $6.9 million compared to $8.5 million for the three months ended September 30, 2023. The decrease was primarily driven by lower investment income due to lower cash and investment balances. Benefit from Income Taxes A deferred income tax benefit of $10.7 million for the three months ended September 30, 2023 is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2023. 31 Table of Contents Comparison of the Nine Months Ended September 30, 2024 and 2023 Nine Months Ended September 30, (in thousands, except percentages) 2024 2023 $ Change % Change Revenue: Product revenue $ 102,051 $ 129,871 $ (27,820) (21) % Service and other revenue 12,739 12,293 446 4 % Total revenue 114,790 142,164 (27,374) (19) % Cost of Revenue: Cost of product revenue 68,808 87,147 (18,339) (21) % Cost of service and other revenue 10,588 11,258 (670) (6) % Amortization of acquired intangible assets 7,172 550 6,622 1204 % Loss on purchase commitment 998 — 998 — Total cost of revenue 87,566 98,955 (11,389) (12) % Gross profit 27,224 43,209 (15,985) (37) % Operating Expense: Research and development 107,456 142,626 (35,170) (25) % Sales, general and administrative 133,376 123,822 9,554 8 % Goodwill impairment 93,200 — 93,200 — Merger-related expenses — 8,979 (8,979) (100) % Amortization of acquired intangible assets 13,377 741 12,636 1705 % Change in fair value of contingent consideration 1,100 13,960 (12,860) (92) % Total operating expense 348,509 290,128 58,381 20 % Operating loss (321,285) (246,919) (74,366) 30 % Loss on extinguishment of debt — (2,033) 2,033 (100) % Interest expense (10,655) (10,772) 117 (1) % Other income, net 19,718 24,301 (4,583) (19) % Loss before benefit from income taxes (312,222) (235,423) (76,799) 33 % Benefit from income taxes — (10,706) 10,706 (100) % Net loss $ (312,222) $ (224,717) $ (87,505) 39 % Revenue Revenue decreased $27.4 million, or 19%, to $114.8 million for the nine months ended September 30, 2024, as compared to $142.2 million for the nine months ended September 30, 2023. Instrument revenue decreased $34.8 million, or 41%, to $50.5 million for the nine months ended September 30, 2024, as compared to $85.3 million for the nine months ended September 30, 2023, primarily due to the sale of 74 Revio systems during the nine months ended September 30, 2024 compared to 129 Revio systems during the nine months ended September 30, 2023. Consumables revenue increased $7.0 million, or 16%, to $51.6 million for the nine months ended September 30, 2024, as compared to $44.6 million for the nine months ended September 30, 2023. The increase in consumable sales was primarily due to higher Revio consumables sales attributable to the growth in the Revio instrument installed base, partially offset by a decline in Sequel II and IIe consumables as customers transition to Revio. We expect Revio consumable sales to increase as the installed base grows. While we expect to see a decline in Sequel II and IIe consumable sales resulting from the product transition, there is uncertainty as to the rate at which these sales will decline. Service and other revenue increased $0.4 million, or 4% to $12.7 million for the nine months ended September 30, 2024 as compared to $12.3 million for the nine months ended September 30, 2023. 32 Table of Contents Cost of Revenue, Gross Profit and Gross Margin Cost of product revenue decreased $18.3 million, or 21%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 primarily driven by the decrease in revenue described above and lower inventory adjustments, partially offset by restructuring charges of $4.4 million, including charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives during the nine months ended September 30, 2024. Cost of revenue included amortization attributable to acquired intangible assets of $7.2 million and $0.6 million that are related to sales generating activities during the nine months ended September 30, 2024 and 2023, respectively. Cost of revenue included share-based compensation expense of $4.5 million and $4.3 million during the nine months ended September 30, 2024 and 2023, respectively. Gross profit decreased $16.0 million, or 37%, to $27.2 million for the nine months ended September 30, 2024, compared to $43.2 million for the nine months ended September 30, 2023. Gross margin was 24% for the nine months ended September 30, 2024, compared to gross margin of 30% for the nine months ended September 30, 2023. The decrease was primarily due to the decrease in revenue described above, restructuring charges, and an increase of $6.6 million in amortization of acquired intangible assets, partially offset by lower inventory adjustments. We anticipate continued reduction in the production cost of the Revio platform, which we expect to realize in 2025. Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, and future product launches. Research and Development Expense Research and development expense decreased by $35.2 million, or 25%, to $107.5 million for the nine months ended September 30, 2024, compared to $142.6 million for the nine months ended September 30, 2023. The decrease was primarily driven by a decrease in personnel and related expenses due to restructuring activities, as well as the transition of products from development to commercialization. We incurred restructuring charges of $5.9 million, primarily related to employee separation benefits during the nine months ended September 30, 2024. Research and development expense included share-based compensation expense of $15.1 million and $18.3 million during the nine months ended September 30, 2024 and 2023, respectively. Sales, General and Administrative Expense Sales, general and administrative expense increased by $9.6 million, or 8%, to $133.4 million for the nine months ended September 30, 2024, compared to $123.8 million for the nine months ended September 30, 2023. The increase was primarily driven by restructuring charges of $14.4 million, primarily related to employee separation benefits and lease-related costs during the nine months ended September 30, 2024, partially offset by a decrease in personnel expenses. We expect to incur an additional $2.1 million of remaining estimated restructuring costs through 2025. Sales, general, and administrative expense included share-based compensation expense of $35.4 million and $33.0 million during the nine months ended September 30, 2024 and 2023, respectively. Merger-Related Expenses Merger-related expenses of $9.0 million during the nine months ended September 30, 2023 consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition. We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services. Goodwill Impairment Based primarily on the sustained decrease in our stock price during the second quarter and overall market capitalization as of the end of the second quarter of 2024, as well as other factors, we concluded that there was an indication that the fair value of the reporting unit might be less than it’s carrying amount and performed an interim impairment test on goodwill. The interim impairment test showed the reporting unit's carrying amount exceeded fair value. As a result, we recorded a $93.2 million goodwill impairment charge for the nine months ended September 30, 2024, mainly due to the decline in the stock price and changes in the timing of expected future cash flows as compared to our initial long-term plan due to continued impact of longer than expected median sales cycles resulting from various factors. 33 Table of Contents Amortization of Acquired Intangible Assets Amortization of acquired intangible assets included in operating expenses of $13.4 million and $0.7 million during the nine months ended September 30, 2024 and 2023, respectively consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration during the nine months ended September 30, 2024, represents the remeasurement impact of the Apton contingent consideration due upon the achievement of the milestone. Change in fair value of contingent consideration during the nine months ended September 30, 2023, represents the remeasurement impact of the Omniome contingent consideration liability of approximately $200 million that was due upon the achievement of a milestone. Loss on Extinguishment of Debt Loss on extinguishment of debt of $2.0 million during the nine months ended September 30, 2023, represents the loss resulting from the difference in the fair value of the 2030 Notes and the principal, in addition to the write-off of the unamortized debt issuance costs on the portion of the 2028 Notes that were exchanged as part of the debt modification during the nine months ended September 30, 2023. Interest Expense Interest expense for the nine months ended September 30, 2024, was $10.7 million compared to $10.8 million for the nine months ended September 30, 2023 and was primarily comprised of interest on the convertible senior notes. Other Income, Net Other income, net for the nine months ended September 30, 2024, was $19.7 million compared to $24.3 million for the nine months ended September 30, 2023. The decrease was primarily driven by lower investment income due to lower cash and investment balances. Benefit from Income Taxes A deferred income tax benefit of $10.7 million for the nine months ended September 30, 2023 is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2023. 34 Table of Contents Liquidity and Capital Resources As of September 30, 2024, we had cash, cash equivalents and investments of $471.1 million compared to $631.4 million as of December 31, 2023. 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 September 30, 2024. Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, have primarily been through the issuance of debt or equity securities, together with cash flow from operating activities. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business. We approved and began implementing certain efficiency and expense reduction initiatives in the second quarter of 2024. These expense reduction initiatives include workforce reductions, facilities downsizing and a refined pipeline of development programs and are expected to reduce annualized run-rate operating expenses by the end of 2024. Factors that may affect our capital needs include, but are not limited to, the pace of adoption of our products, which affects the sales of our products and services; our ability to efficiently manage our operations; the effectiveness of our expense reduction initiatives; our ability to obtain new collaboration and customer arrangements and maintain existing collaborations and arrangements; the progress of our research and development programs; initiation, expansion, or funding of research programs and collaborations; the purchase of patent licenses; the impact of product quality; litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; costs of developing new and enhanced products; acquisitions of complementary businesses, technologies or assets; achievement of milestones in connection with acquisitions; and other factors. There can be no assurance that funds will be available on favorable terms, or at all. Contingent Consideration In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay former holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50.0 million in revenue associated with a high throughput sequencer using Apton's technology, provided that the milestone event occurs prior to the five-year anniversary of the closing date of the acquisition, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock. See Note 2. Business Acquisitions in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. 2028 Convertible Senior Notes Exchange As discussed above under Recent Developments , on November 7, 2024, we entered into an exchange agreement with SBN, pursuant to which we have agreed to exchange the remaining approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding for $200.0 million aggregate principal amount of 2029 Notes as well as the issuance of 20,451,570 shares of common stock and $50.0 million of cash. The exchange and issuances are expected to close on or about November 21, 2024. Summary of Cash Flows Nine Months Ended September 30, (in thousands) 2024 2023 Cash used in operating activities $ (175,408) $ (201,613) Cash provided by investing activities 65,766 71,179 Cash provided by financing activities 7,213 190,493 Net (decrease) increase in cash, cash equivalents and restricted cash $ (102,429) $ 60,059 35 Table of Contents 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 nine months ended September 30, 2024 of $175.4 million was due primarily to a $312.2 million net loss that included non-cash items such as a goodwill impairment charge of $93.2 million, share-based compensation of $55.0 million, amortization of acquired intangible assets of $20.6 million, depreciation expense of $10.9 million and amortization of right-of-use assets of $10.9 million. This was offset by the accretion of discount and amortization of premium on marketable securities, net of $10.7 million and $48.9 million in net changes to operating assets and liabilities. Cash flow impact from changes in net operating assets and liabilities was primarily driven by an increase in inventory, as well as decreases in accrued expenses and operating lease liabilities. These uses of cash were partially offset by a decrease in accounts receivable. Cash used in operating activities for the nine months ended September 30, 2023 of $201.6 million was due primarily to a $224.7 million net loss that included non-cash items such as share-based compensation of $55.5 million, change in estimated fair value of contingent consideration of $14.0 million, depreciation expense of $8.5 million, amortization of right-of-use assets of $4.9 million, inventory provisions of $4.7 million, merger-related compensation expense of $3.4 million, and loss on extinguishment of debt of $2.0 million. This was offset by deferred income taxes of $10.7 million, the accretion of discount and amortization of premium on marketable securities, net of $10.1 million, and $51.2 million in net changes to operating assets and liabilities. Cash flow impact from changes in net operating assets and liabilities was primarily driven by increases in inventory, accounts receivable and prepaid and other assets, as well as decreases in operating lease liabilities, deferred revenue, other liabilities and the contingent consideration liability. These uses of cash were partially offset by an increase in accrued expenses and accounts payable. Investing Activities Our investing activities consist primarily of capital expenditures and investment purchases, sales, and maturities. Cash provided by investing activities for the nine months ended September 30, 2024, was primarily from $488.5 million of maturities and sales of investments partially offset by $418.2 million in purchases of investments and $4.6 million in purchases of property and equipment. Cash provided by investing activities for the nine months ended September 30, 2023, was due to $631.8 million of maturities and sales of investments offset by $553.7 million in purchases of investments, $6.8 million in purchases of property and equipment, and $0.1 million of cash paid for the Apton acquisition, net of cash acquired. Financing Activities Cash provided by financing activities during the nine months ended September 30, 2024 resulted primarily from $7.7 million of proceeds from the issuance of common stock through our equity compensation plans. Cash provided by financing activities during the nine months ended September 30, 2023 primarily resulted from $189.2 million in net proceeds related to the issuance of common stock from the underwritten public equity offering and $14.4 million from the issuance of common stock through our equity compensation plans partially offset by $7.3 million from the payment of debt issuance costs and $4.4 million from the payment of contingent consideration. 36 Table of Contents Contractual Obligations We presented our contractual obligations at December 31, 2023 in our Annual Report on Form 10-K for the year then ended. There were no material changes outside the ordinary course of business to our contractual obligations during the nine months ended September 30, 2024. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our critical accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023. Recent Accounting Pronouncements Please see Note 1. Organization and Significant Accounting Policies , subsection titled “Recent Accounting Pronouncements”, in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding applicable recent accounting pronouncements. Off-Balance Sheet Arrangements As of September 30, 2024, we did not have any off-balance sheet arrangements. In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract, any defective products supplied by us, or any acts or omissions, or willful misconduct, committed by us or any of our employees, agents or representatives. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between us and such third parties in connection with such fundraising efforts. To the extent that such indemnification obligations apply to the lawsuits described in Note 7. 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 September 30, 2024. 37 Table of Contents