PACIFIC BIOSCIENCES OF CALIFORNIA INC

Previous wording

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.

Current wording

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.

Previous wording

Our Management’s Discussion and Analysis (MD&A) is organized into the following sections:

Current wording

Our MD&A is organized into the following sections:

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

Our 2024 strategic objectives are to:

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

Key highlights of the nine months ended September 30, 2024 consolidated financial results include the following:

Current wording

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

Previous wording

•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.

Current wording

•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.

Previous wording

•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.

Current wording

•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.

Previous wording

•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.

Current wording

•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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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 2024 Annual Report for further discussion on the Company's asset impairment assessments.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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