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Item 2. Management’s Discussion and Analysis

2025-05-12 compared with 2024-11-12 · 127 added, 211 removed, 101 unchanged (77% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

You should read the following discussion and analysis of our financial condition and results of operations together with (i) our unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and (ii) our 2024 Annual Report filed with the U.S.

Securities and Exchange Commission, or the SEC, on March 17, 2025.

This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties.

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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:

In preparing this Management's Discussion and Analysis ("MD&A"), we presume that readers have access to and have read the MD&A in our 2024 Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.

Our MD&A is organized into the following sections:

• Overview and Outlook

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OVERVIEW AND OUTLOOK

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.

We are a premier life science technology company that designs, develops, and manufactures 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, which include our HiFi long-read sequencing technology, 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.

Long-read sequencing has been applied to produce telomere-to-telomere genomes of humans, pangenome references, and has been recognized for its ability to provide more complete views of human variation .

We focus 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.

Q1 Fiscal 2025 Form 10-Q

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;

• Reduce annualized run-rate operating expenses.

We will continue to leverage our commercial organization and significantly improve our products' efficiency and usability to seek to reach a broader customer base.

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

To increase the adoption of HiFi sequencing, we have various development programs in progress to expand our product portfolio, increase the throughput, and improve the usability of our existing sequencing solutions.

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

We commenced commercial shipments of Revio, our new HiFi long-read sequencing system, in the first quarter of 2023.

To address the oncology research markets with a highly differentiated alternative to existing third-party short-read sequencing products already on the market, we commenced customer shipments of the Onso short-read sequencing instrument in August 2023.

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.

Our 2025 strategic objectives are to grow revenue and expand gross margins through the following four activities:

• Enabling the full-scale release of the Vega benchtop platform to broaden our market reach.

We believe this platform broadens the long-read market opportunity.

• Accelerating samples onto the Revio platform via SPRQ chemistry and application kits.

The SPRQ chemistry enables the sub-$500 HiFi genome, improves methylation detection capabilities, and achieves a 75% reduction in DNA input requirements for human whole genome sequencing.

These features can drive more samples onto HiFi sequencing than ever before.

• Investing in future product launches to diversify our offerings.

We continue to develop sequencing systems designed to increase throughput and lower the cost to sequence a genome, which we believe will allow us to address an even larger part of the market.

Additionally, we continue to develop kitted-solutions, like our Kinnex Full-length RNA kits and PureTarget, and enhance our on-market sequencers with products like SPRQ chemistry to drive more sequencing volume.

• Progressing our clinical strategy to improve outcomes and create durability.

Revio is increasingly being used in laboratory developed tests ("LDT") and clinical research settings to consolidate multiple tests and address complex genetic challenges.

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.

We believe the market opportunity for clinical sequencing is significant and could drive substantial revenue growth for the Company.

We plan to continue to pursue partner collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing.

Collaborative arrangements add to the awareness of our products and service offerings and may drive new applications for use of our technology.

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.

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.

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;

Key highlights of the three months ended March 31, 2025 consolidated financial results include the following:

Revenue of Gross loss of

Operating loss of

Cash, cash equivalents, and investments of

$37.2 M $1.4 M

compared to $38.8 M during the same period of 2024

compared to gross profit of $11.3 M during the same period of 2024

compared to $81.4 M during the same period of 2024

compared to $389.9 M at December 31, 2024

• Revenue was comprised of $11.0 million in instrument revenue, $20.1 million in consumables revenue and $6.0 million in service and other revenue for the first quarter of 2025.

Revenue was comprised of $19.0 million in instrument revenue, $16.0 million in consumables revenue and $3.8 million in service and other revenue for the first quarter of 2024.

The decrease was primarily due to lower Revio unit sales, which was partially offset by higher Vega unit sales, consumable sales, and service and other revenue.

• We recorded a gross loss for the first quarter of 2025 primarily due to $12.0 million of restructuring charges, which include $7.7 million in inventory adjustments and $3.8 million of losses on purchase commitments, and an increase of $3.0 million in amortization of acquired intangible assets, partially offset by lower per unit costs to manufacture our products.

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

Gross margins may be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, future product launches, changes to inventory reserves, costs of raw materials, and tariffs.

Q1 Fiscal 2025 Form 10-Q

• Loss from operations increased $347.6 million for the first quarter of 2025 compared with the same quarter of 2024.

Operating expenses increased $334.9 million primarily due to $381.8 million of costs incurred in connection with the restructuring and strategic shift, which include $359.3 million of accelerated amortization of acquired intangible assets, $15.0 million of impairment charges, and $4.6 million of employee separation costs.

The increase was partially offset by an $18.7 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 $343.1 million at March 31, 2025, which represents a 12% decrease compared to the balance at December 31, 2024.

The sales cycle for Revio instrument purchases continues to be elongated.

We believe this has been caused by, among other reasons, the uncertainty surrounding the funding for new capital equipment, in particular, uncertainty in the United States related to the National Institutes of Health ("NIH") and academic funding;

procurement delays;

small-to-mid-size existing customers yet to increase their sample volumes to drive an upgrade to Revio;

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and sample volumes materializing slower than expected for some potential Revio customers.

We believe our consumables revenue was also impacted primarily by 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.

Macroeconomic dynamics impacting the Company in the future may include rising inflation, geopolitical tensions, volatile capital markets, tariffs, uncertainty in the United States related to NIH and academic funding, 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.

however, the magnitude and duration of these impacts is highly uncertain and inherently unpredictable.

On an ongoing basis, we evaluate our significant estimates, including those related to the valuation of goodwill and finite-lived assets.

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

We recorded $15.0 million of impairment charges for the first quarter of 2025.

See additional discussion below in Results of Operations, as well as Note 3 .

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.

B alance 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 2024 Annual Report 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.

Q1 Fiscal 2025 Form 10-Q

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

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 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.

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.

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.

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

Nine Months Ended September 30,

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

Comparison of the Three Months Ended March 31, 2025 and 2024

Three Months Ended March 31,

(In thousands, except percentages)

2025 2024 $ Change % Change

Product revenue $ 31,113 $ 35,009 $ (3,896) (11 %)

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Loss on purchase commitment

4,068 — 4,068 —

Total cost of revenue 38,524 27,528 10,996 40 %

Gross profit 27,224 43,209 (15,985) (37) %

Gross (loss) profit (1,371) 11,282 (12,653) —

Operating Expense:

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Sales, general and administrative 40,168 43,753 (3,585) (8) %

Goodwill impairment 93,200 — 93,200 —

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

Impairment charges 15,000 — 15,000 —

Amortization of acquired intangible assets 362,042 5,506 356,536 6475 %

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Operating loss (428,934) (81,362) (347,572) 427 %

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

Interest expense (1,737) (3,575) 1,838 (51) %

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Loss before benefit from income taxes (426,377) (78,178) (348,199) 445 %

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

Income tax benefit

(302) — (302) —

Net loss $ (426,075) $ (78,178) $ (347,897) 445 %

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.

Q1 Fiscal 2025 Form 10-Q

Total Revenue

Total revenue decreased $1.7 million, or 4%, for the first quarter of 2025 compared with the same quarter of 2024.

Product revenue decreased $3.9 million, or 11%, primarily due to a decrease of $8.0 million, or 42%, in instrument revenue, partially offset by an increase of $4.1 million, or 26%, in consumable revenue.

Service and other revenue increased $2.2 million, or 59%, primarily driven by an increase in Revio service contracts.

Instrument Revenue

Instrument revenue decreased primarily due to the sale of 12 Revio systems in the first quarter of 2025 compared to 28 Revio systems in the first quarter of 2024, partially offset by the sale of 28 Vega systems in the first quarter of 2025.

Consumables Revenue

Consumables revenue increased 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.

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.

Q1 Fiscal 2025 Form 10-Q

Cost of Revenue and Gross (Loss) Profit

Total cost of revenue increased $11.0 million, or 40% due to an increase in cost of product revenue, $3.8 million of restructuring costs relating to loss on purchase commitments which is based on an estimate of future excess inventory related to supply agreements for which we do not expect to have related sales, and an increase of $3.0 million in amortization attributable to acquired intangible assets that are related to sales generating activities.

Cost of product revenue increased $3.9 million, or 17%, for the first quarter of 2025 compared with the same quarter of 2024 primarily due to $7.7 million of charges for excess inventory due to our updated strategy to prioritize long-read technology and decrease in demand for short-read related inventory partially offset by lower per unit costs to manufacture our products.

Total cost of revenue included share-based compensation expense of $1.2 million and $2.1 million during the first quarter of 2025 and 2024, respectively.

We recorded a gross loss of $1.4 million for the first quarter of 2025, compared to a gross profit of $11.3 million in the same quarter of 2024, primarily driven by the increase in cost of revenue from restructuring activities and the decrease in revenue described above.

Restructuring in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about restructuring activities.

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.

Research and development expense decreased by $14.4 million, or 33%, for the first quarter of 2025, compared to the same quarter of 2024.

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

Research and development expense included share-based compensation expense of $2.6 million and $5.8 million during the first quarter of 2025 and 2024, 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.

Sales, general and administrative expense decreased by $3.6 million, or 8%, for the first quarter of 2025, compared to the same quarter of 2024.

The decrease was primarily due to a net decrease in personnel and related expenses due to restructuring activities.

Sales, general, and administrative expense included share-based compensation expense of $5.4 million and $11.6 million during the first quarter of 2025 and 2024, respectively.

Impairment Charges

We identified indicators of impairment during the first quarter of 2025 and performed an interim impairment assessment.

Impairment testing demonstrated that the carrying value of our in-process research and development ("IPR&D") exceeded its estimated fair value.

As a result, we recorded $15.0 million of impairment charges for the first quarter of 2025.

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

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.

Operating expenses for the first quarter of 2025 included $362.0 million of amortization expense, primarily driven by $359.3 million of accelerated amortization related to developed technology from the 2021 Omniome acquisition, reflecting our revised estimate that the asset will no longer generate economic benefit beyond March 31, 2025.

We expect significantly lower amortization expense for the remainder of 2025.

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.

Change in fair value of contingent consideration during the first quarter of 2025 and 2024 represents the remeasurement impact of the contingent consideration due upon the achievement of the milestone.

As of March 31, 2025, primarily due to management's decision to cease development of the high-throughput short-read system, and the resulting changes in the expected future revenues, among other factors, and as the milestone event must occur prior to the five-year anniversary of the closing date of the acquisition, the

Q1 Fiscal 2025 Form 10-Q

estimated fair value of the contingent consideration liability was $0, resulting in a change in fair value for the first quarter of 2025 of $18.7 million.

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.

Interest expense for the first quarter of 2025, was $1.7 million compared to $3.6 million for the first quarter of 2024 and was primarily comprised of interest on the 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.

Other income, net for the first quarter of 2025, was $4.3 million compared to $6.8 million for the first quarter of 2024.

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

Benefit from Income Taxes

A deferred income tax benefit of $10.7 million for the nine months ended September 30, 2023 is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition.

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

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

Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2023.

LIQUIDITY AND CAPITAL RESOURCES

As of 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.

As of March 31, 2025, we had cash, cash equivalents and investments of $343.1 million compared to $389.9 million as of December 31, 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.

We began implementing expense reduction initiatives in the second quarter of 2024, including workforce reductions, facility downsizing, and a streamlined development pipeline, with the goal of lowering annualized run-rate operating expenses by year-end.

In the first quarter of 2025, we implemented additional actions, including further workforce reductions, to support continued cost savings.

Factors that may affect our capital needs include, but are not limited to, the pace of adoption of our products, which affects the sales of our products and services;

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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.

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 connection with the 2023 Apton acquisition, 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.

Q1 Fiscal 2025 Form 10-Q

Cash Flow Summary

Three Months Ended March 31,

(In thousands) 2025 2024

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

Net cash used in operating activities $ (44,056) $ (75,682)

Net cash provided by (used in) investing activities 45,234 (34,136)

Net cash provided by financing activities 1,959 6,553

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 3,137 $ (103,265)

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.

Cash used in operating activities for the first quarter of 2025 of $44.1 million was due primarily to a $426.1 million net loss that included non-cash items such as amortization of acquired intangible assets of $366.4 million, an impairment charge of $15.0 million, share-based compensation of $9.2 million,$7.7 million of inventory adjustments, depreciation expense of $5.1 million, and $2.4 million in net changes to operating assets and liabilities, partially offset by an $18.7 million decrease in the change in the fair value of the contingent consideration.

Cash flow impact from changes in net operating assets and liabilities was primarily driven by an increase in accrued expenses partially offset by an increase in accounts receivable.

Cash used in operating activities for the first quarter of 2024 of $75.7 million was due primarily to a $78.2 million net loss that included non-cash items such as share-based compensation of $19.5 million, amortization of intangible assets of $6.9 million, depreciation expense of $3.2 million, and amortization of right-of-use assets of $1.9 million.

This was offset by the accretion of discount and amortization of premium on marketable securities, net of $4.0 million, and $25.3 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.

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, other liabilities, and operating lease liabilities.

These uses of cash were partially offset by decreases in accounts receivable and prepaid expenses and other assets and increases in accounts payable and deferred revenue.

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.

Cash provided by investing activities for the first quarter of 2025, was primarily from $113.4 million of maturities of investments partially offset by $61.8 million of purchases of investments and $5.0 million in purchases of intangible assets.

Cash used in investing activities for the first quarter of 2024, was primarily due to $191.9 million in purchases of investments and $3.9 million in purchases of property and equipment partially offset by $161.7 million of maturities of investments.

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.

Cash provided by financing activities during the first quarter of 2025 resulted from $2.0 million from the issuance of common stock through our equity compensation plans.

Cash provided by financing activities during the first quarter of 2024 resulted from $6.9 million from the issuance of common stock through our equity compensation plans.

Q1 Fiscal 2025 Form 10-Q

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.

We presented our contractual obligations at December 31, 2024 in our 2024 Annual Report.

There were no material changes outside the ordinary course of business to our contractual obligations during the first quarter of 2025.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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.

There have been no changes to our significant accounting policies as disclosed in our 2024 Annual Report.

RECENT ACCOUNTING PRONOUNCEMENTS

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OFF-BALANCE SHEET ARRANGEMENTS

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

As of March 31, 2025, we did not have any off-balance sheet arrangements.

In the ordinary course of business, we enter into standard indemnification arrangements.

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Commitments and Contingencies in Part I, Item 1 of this Quarterly Report on Form 10-Q, any associated expenses incurred are included within the related accrued litigation expense amounts.

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

No additional liability associated with such indemnification agreements has been recorded as of March 31, 2025.

Q1 Fiscal 2025 Form 10-Q

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis