Item 2. Management’s Discussion and Analysis
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) 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. 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 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
• 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 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. 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.
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Strategic Objectives
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 the Company. We plan to continue to pursue partner collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing. Collaborative arrangements add to the awareness of our products and service offerings and may drive new applications for use of our technology.
Financial Overview
Key highlights of the 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
$428.9 M
$343.1 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. See Note 5 . 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.
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• 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; 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.
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 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 . 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.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2025 and 2024
Three Months Ended March 31,
(In thousands, except percentages)
2025 2024 $ Change % Change
Revenue:
Product revenue $ 31,113 $ 35,009 $ (3,896) (11 %)
Service and other revenue 6,040 3,801 2,239 59 %
Total revenue 37,153 38,810 (1,657) (4 %)
Cost of Revenue:
Cost of product revenue 26,333 22,447 3,886 17 %
Cost of service and other revenue 3,778 3,738 40 1 %
Amortization of acquired intangible assets
4,345 1,343 3,002 224 %
Loss on purchase commitment
4,068 — 4,068 —
Total cost of revenue 38,524 27,528 10,996 40 %
Gross (loss) profit (1,371) 11,282 (12,653) —
Operating Expense:
Research and development 29,053 43,455 (14,402) (33) %
Sales, general and administrative 40,168 43,753 (3,585) (8) %
Impairment charges 15,000 — 15,000 —
Amortization of acquired intangible assets 362,042 5,506 356,536 6475 %
Change in fair value of contingent consideration (18,700) (70) (18,630) 26,614 %
Total operating expense 427,563 92,644 334,919 362 %
Operating loss (428,934) (81,362) (347,572) 427 %
Interest expense (1,737) (3,575) 1,838 (51) %
Other income, net 4,294 6,759 (2,465) (36 %)
Loss before benefit from income taxes (426,377) (78,178) (348,199) 445 %
Income tax benefit
(302) — (302) —
Net loss $ (426,075) $ (78,178) $ (347,897) 445 %
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Revenue
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.
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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. See Note 5 . Restructuring in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about restructuring activities. 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.
Research and Development Expense
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 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. See Note 3 . Balance Sheet Components in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
Amortization of Acquired Intangible Assets
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 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
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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 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 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.
LIQUIDITY AND CAPITAL RESOURCES
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. 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 March 31, 2025.
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 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; 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 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. 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 estimated fair value of the contingent consideration liability was $0.
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Cash Flow Summary
Three Months Ended March 31,
(In thousands) 2025 2024
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 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, 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 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 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.
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Contractual Obligations
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
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 our 2024 Annual Report.
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 March 31, 2025, 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 6 . 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 March 31, 2025.
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