PACIFIC BIOSCIENCES OF CALIFORNIA, INC. (PACB)

ITEM 7. 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 our consolidated financial statements and the related notes included in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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

•Overview and Outlook •Results of Operations •Liquidity and Capital Resources•Off Balance Sheet Arrangements•Critical Accounting Policies and Estimates•Recent Accounting Pronouncements

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 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. 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.

Our focus is on creating some of the world’s most advanced sequencing systems to provide our customers with the most complete and accurate view of genomes, transcriptomes, and epigenomes.

Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, CROs, pharmaceutical companies, and agricultural companies.

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Strategic Objectives

Though challenging, 2024 was a productive year for PacBio as we launched products, improved our financial flexibility, and made progress in reducing cash burn.

Looking ahead to 2025, our main 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. In 2024 Revio was increasingly being used in 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 our 2024 consolidated financial results include the following:

•Revenue decreased $46.5 million, or 23%, to $154.0 million for the year ended December 31, 2024, as compared to $200.5 million for the year ended December 31, 2023. Revenue was comprised of $65.8 million in instrument revenue, approximately $70.3 million in consumables revenue and $17.9 million in service and other revenue for the year ended December 31, 2024. The decrease was primarily due to lower Revio unit sales and lower average selling prices, 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. We ended the year with cumulative shipments of 270 Revio systems.

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•Gross profit decreased for the year ended December 31, 2024, primarily due to the decrease in revenue described above, $4.4 million of restructuring charges, and an increase of $7.4 million in amortization of acquired intangible assets, partially offset by lower inventory adjustments. During the year ended December 31, 2023 we recognized an increase of approximately $4.6 million of inventory adjustments primarily related to excess consumables inventory resulting from faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system. Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, future product launches, changes to inventory reserves, and costs of raw materials.

•Loss from operations increased $139.8 million or 42%, to $474.3 million for the year ended December 31, 2024, as compared to $334.5 million for the year ended December 31, 2023. Operating expenses increased $124.3 million primarily driven by $184.5 million of impairment charges, $20.8 million of restructuring charges, and an increase of $11.8 million in amortization of acquired intangible assets, partially offset by a $15.9 million decrease in the change in the fair value of the contingent consideration, a $9.0 million decrease in non-recurring merger-related costs, and a decrease in research and development expenses primarily driven by a decrease in personnel and related expenses due to restructuring activities.

•Cash, cash equivalents, and investments were $389.9 million at December 31, 2024, which represents a 38% decrease compared to the balance of $631.4 million at December 31, 2023. The decrease in cash includes approximately $50.2 million of payments made in conjunction with the convertible notes exchange transaction in November 2024.

The median 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 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.

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, 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 goodwill, 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 future impairment charges. We recorded $184.5 million of impairment charges during the year ended December 31, 2024. See additional discussion below in Results of Operations, as well as Note 4. Balance Sheet Components in Part II, Item 8 of this Annual Report on Form 10-K for further information. Additionally, refer to the Critical Accounting Policies and Estimates section later in this Item 7 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

A detailed discussion of our consolidated financial results comparison between 2024 and 2023 is presented below. A discussion of the changes in our results of operations between the years ended December 31, 2023 and December 31, 2022, has been omitted from this Annual Report on Form 10-K but may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 28, 2024, which is incorporated herein by reference, and is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.pacb.com).

Comparison of the Years Ended December 31, 2024 and 2023

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Revenue

Total Revenue

Total revenue decreased $46.5 million, or 23%, to $154.0 million for the year ended December 31, 2024, as compared to $200.5 million for the year ended December 31, 2023.

The decrease in product revenue resulted primarily from a decrease of $54.7 million in instrument revenue, partially offset by an increase of approximately $6.9 million in consumable revenue.

Service and other revenue increased approximately $1.3 million to $17.9 million for the year ended December 31, 2024 as compared to $16.6 million for the year ended December 31, 2023.

Instrument Revenue

Instrument revenue decreased $54.7 million, or 45%, to $65.8 million for the year ended December 31, 2024, as compared to $120.5 million for the year ended December 31, 2023, primarily due to the sale of 97 Revio systems during the year ended December 31, 2024 compared to 173 Revio systems during the year ended December 31, 2023.

Consumables Revenue

Consumables revenue increased approximately $6.9 million, or 11%, to $70.3 million for the year ended December 31, 2024, as compared to $63.4 million for the year ended December 31, 2023. The increase in consumable sales was primarily due to higher Revio consumables and library preparation 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, Gross Profit, and Gross Margin

Cost of product revenue decreased $35.3 million, or 28%, for the year ended December 31, 2024, compared to the year ended December 31, 2023 primarily driven by the decrease in revenue described above and lower inventory adjustments. During the year ended December 31, 2023, we recognized an increase of approximately $4.6 million of inventory adjustments primarily related to excess consumables inventory resulting from faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system. These decreases were partially offset by restructuring charges in cost of revenue of $4.4 million, including $3.6 million of charges for excess inventory due to a decrease in internal demand relating to the expense reduction initiatives during the year ended December 31, 2024. Cost of revenue included amortization attributable to acquired intangible assets of $9.4 million and $2.0 million that are related to sales generating activities during the years ended December 31, 2024 and 2023, respectively. Cost of revenue included share-based compensation expense of $5.7 million and $5.4 million during the years ended December 31, 2024 and 2023, respectively.

The loss on purchase commitment was $1.0 million and $3.4 million for the years ended December 31, 2024 and 2023, respectively. The purchase commitment loss is based on an estimate of future excess inventory related to supply agreements, for which we do not expect to have related sales.

Gross profit decreased $15.5 million, or 29% to $37.3 million for the year ended December 31, 2024, compared to $52.8 million for the year ended December 31, 2023. Gross margin was 24% for the year ended December 31, 2024, compared to gross margin of 26% for the year ended December 31, 2023. The decrease was primarily due to the decrease in revenue described above, restructuring charges, and an increase of $7.4 million in amortization of acquired intangible assets, partially offset by lower inventory adjustments. Gross margins may also be affected by product mix, manufacturing efficiencies, warranty cost improvements, average selling price fluctuations, future product launches, changes to inventory reserves, and costs of raw materials.

Research and Development Expense

Research and development expense decreased by $52.2 million, or 28%, to $134.9 million for the year ended December 31, 2024, compared to $187.2 million for the year ended December 31, 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 year ended December 31, 2024. Research and development expense included share-based compensation of $19.2 million and $22.4 million during the years ended December 31, 2024 and 2023, respectively.

Sales, General, and Administrative Expense

Sales, general and administrative expense increased by $5.2 million, or 3%, to $175.0 million for the year ended December 31, 2024, compared to $169.8 million for the year ended December 31, 2023. The increase was primarily driven by restructuring charges of $14.9 million, primarily related to employee separation benefits and lease-related costs during the year ended December 31, 2024, partially offset by a decrease in personnel expenses. We expect to incur an additional $0.9 million of remaining estimated restructuring costs through 2025 relating to the actions taken in 2024. Sales, general, and administrative expense included share-based compensation expenses of $46.2 million and $44.3 million during the years ended December 31, 2024 and 2023, respectively.

Impairment Charges

We identified indicators of impairment primarily relating to significant declines in our stock price and market capitalization compared to net book value, increases in the carrying value of the reporting unit, and changes in the amount and timing of expected future cash flows due to macroeconomic headwinds, among others, and performed interim impairment tests during the year ended December 31, 2024. The impairment tests showed the carrying amounts of our goodwill and in-process research and development ("IPR&D") exceeded fair values. As a result, we recorded $184.5 million of impairment charges for the year ended December 31, 2024. See Note 4. Balance Sheet Components in Part II, Item 8 of this Annual Report on Form 10-K for further details.

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Merger-Related Expenses

Merger-related expenses of $9.0 million during the year ended December 31, 2023, consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition. We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets of $18.0 million and $6.2 million during the years ended December 31, 2024 and 2023, respectively, consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities.

Change in Fair Value of Contingent Consideration

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

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $2.0 million during the year ended December 31, 2023, represents the loss resulting from the difference in the fair value of the 2030 Notes and the principal, in addition to the write-off of the unamortized debt issuance costs on the portion of the 2028 Notes that were exchanged as part of the debt modification during the year ended December 31, 2023.

Gain on Debt Restructuring

Gain on debt restructuring of $154.4 million during the year ended December 31, 2024, represents the gain resulting from the Exchange Transaction, which qualified as a troubled debt restructuring under Accounting Standards Codification ("ASC") 470-60, Debt - Troubled Debt Restructurings by Debtors. Since the undiscounted cash flows of the new 2029 Notes were less than the carrying amount of the exchanged 2028 Notes, the carrying value of the 2029 Notes was determined based on the total undiscounted cash flows. The gain was calculated as the difference between the carrying amount of the old debt and the carrying amount of the new debt, adjusted for debt issuance costs. See Note 5. Convertible Senior Notes in Part II, Item 8 of this Annual Report on Form 10-K for further details.

Interest Expense

Interest expense for the year ended December 31, 2024 was $13.4 million compared to $14.3 million for the year ended December 31, 2023 and was primarily comprised of interest on the Notes.

Other Income, Net

The decrease in other income, net was primarily driven by lower investment income due to lower cash and investment balances.

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Income Tax Provision (Benefit)

We recorded an income tax provision of $0.3 million for the year ended December 31, 2024. A deferred income tax benefit of $11.4 million for the year ended December 31, 2023, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition. Accordingly, this benefit from income taxes is reflected on our consolidated statements of operations and comprehensive loss for the year ended December 31, 2023. We maintain a valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, has primarily been through the issuance of debt or equity securities, together with cash flow from operating activities. For example, in January 2023, as discussed in Note 9. Stockholders’ Equity in Part II, Item 8 of this Annual Report on Form 10-K, we issued and sold an aggregate of 20,125,000 shares of our common stock in a follow-on public offering for aggregate gross proceeds of approximately $201.3 million. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis due to the investments we intend to make as described in Results of Operations above, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business.

We approved and implemented certain efficiency and expense reduction initiatives during 2024. These expense reduction initiatives included workforce reductions, facilities downsizing and a refined pipeline of development programs.

Cash, Cash Equivalents, and Investments

As of December 31, 2024, we had $389.9 million in cash, cash equivalents, and investments, compared to $631.4 million at December 31, 2023. The decrease was primarily attributable to $206.1 million cash used in operating activities during the year ended December 31, 2024 and an additional $50.2 million of payments made in conjunction with the convertible notes exchange transaction in November 2024.

Convertible Senior Notes

On February 9, 2021, we entered into an investment agreement with SB Northstar LP (“SBN”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to SBN of $900.0 million in aggregate principal amount of our 2028 Notes. The 2028 Notes were issued on February 16, 2021 and, as of November 21, 2024, no 2028 Notes were outstanding.

In June 2023, we entered into a privately negotiated exchange agreement with a holder of our outstanding 2028 Notes, pursuant to which we issued $441.0 million in aggregate principal amount of our 2030 Notes in exchange for $441.0 million principal amount of the 2028 Notes, leaving approximately $459.0 million in aggregate principal amount outstanding of our 2028 Notes. Interest on the 2030 Notes is payable semi-annually in arrears on June 15 and December 15 commencing on December 15, 2023. The 2030 Notes will mature on December 15, 2030, subject to earlier conversion, redemption, or repurchase.

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In November 2024, we entered into an exchange agreement with SBN, pursuant to which we agreed to exchange the remaining approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding for (i) $200.0 million aggregate principal amount of the 2029 Notes, (ii) 20,451,570 shares of common stock (the “Exchange Shares”) and (iii) $50.0 million of cash. The exchange and issuances closed on November 21, 2024 (the “Closing Date”). The 2029 Notes, the Exchange Shares, and shares of common stock issuable upon conversion of the 2029 Notes are subject to certain lock-up restrictions for a six-month period (the “Lock-Up Period”) beginning on the Closing Date of the Exchange Transaction; the lock-up restrictions will terminate immediately prior to the consummation of any change in control of the Company. The 2029 Notes bear interest at a rate of 1.50% per annum. Interest on the 2029 Notes is payable semi-annually in arrears on February 15 and August 15 and commencing on February 15, 2025. The 2029 Notes will mature on August 15, 2029, subject to earlier conversion, redemption or repurchase.

The 2029 Notes are convertible at the option of the holder at any time from the expiration of the Lock-Up Period until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2029 Notes are convertible into shares of our common stock based on an initial conversion rate of 204.5157 shares of common stock per $1,000 principal amount of the 2029 Notes (which is equal to an initial conversion price of approximately $4.89 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2029 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.

The 2030 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2030 Notes are convertible into shares of our common stock based on an initial conversion rate of 46.5116 shares of common stock per $1,000 principal amount of the 2030 Notes (which is equal to an initial conversion price of approximately $21.50 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2030 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.

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

The indenture governing the 2029 Notes and the 2030 Notes include customary “events of default,” which may result in the acceleration of the maturity of the Notes under the respective indentures. The indentures also include customary covenants for convertible notes of this type.

Additionally, on November 21, 2024, in connection with the issuance of the 2029 Notes, the Company and SBN entered into the Letter Agreement pursuant to which the Company and SBN agreed that, for so long as SBN and its affiliates hold at least $180 million aggregate principal amount of the 2029 Notes, the Company and its subsidiaries are subject to certain negative covenants that restrict the Company’s and its subsidiaries’ ability to incur additional indebtedness and create liens, in each case, subject to the exceptions set forth in the Letter Agreement, including exceptions which permit the Company to incur up to $75 million in aggregate principal amount of secured indebtedness pursuant to Credit Facilities (as defined in the Letter Agreement). In addition, the Letter Agreement restricts the ability of the Company and its subsidiaries from guaranteeing any indebtedness or incurring certain indebtedness outside of the ordinary course of business unless, in each case, the Company and its subsidiaries concurrently provide a guarantee of the Company’s obligations under the 2029 Notes.

See Note 5. Convertible Senior Notes in Part II, Item 8 of this Annual Report on Form 10-K for further details.

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Additional Capital Requirements

We believe that our existing cash, cash equivalents, and investments will be sufficient to fund our projected operating and capital requirements for at least the next 12 months from the date of filing of this Annual Report on Form 10-K for the year ended December 31, 2024. Operating needs include planned costs to operate our business, including costs to fund working capital and capital expenditures. Recent and expected working and other capital requirements, in addition to the above matters, include:

•Our purchase orders and contractual obligations of approximately $57.6 million as of December 31, 2024, which consist of open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

•As described in more detail in Note 7 - Commitments and Contingencies in Part II, Item 8 of this Annual Report on Form 10-K we signed a Supply Agreement, which was most recently amended in September 2024, with a supplier for the purchase of certain products over the period of 2023 through 2027. As part of the Supply Agreement, we made a $9.0 million deposit during the year ended December 31, 2022, and an additional deposit of $6.0 million in 2023, to secure the supply of certain products through the term of the contract. $3.0 million was refunded to us during the year ended December 31, 2024. If we breach the minimum volume purchase commitment during any applicable year, the supplier is entitled to retain a portion or all of the deposit corresponding to that year. If we terminate the Supply Agreement before January 15, 2027, Supplier will refund the remaining balance of the Deposit. If the supplier breaches its minimum volume supply commitment during any applicable year or portions thereof, our remedies include termination, pursuit of damages, or pursuit of specific performance.

•Our research and development expenditures of $134.9 million in 2024 and $187.2 million in 2023. While we expect to continue our investment in research and development in 2025, including enhancements of our existing products, and continued development of other new technology and products, we expect research and development expenses to decline in 2025 as compared to the year ended December 31, 2024 due to recent product transitions.

•Cash outflows for capital expenditures of $6.2 million in 2024 and $8.8 million in 2023. We expect to continue to invest in capital expenditures in fiscal 2025 to continue to support manufacturing and expansion of our business.

•Amounts related to future lease payments for operating lease obligations at December 31, 2024, totaling $27.4 million, with $11.5 million expected to be paid within the next 12 months. See Note 12. Subsequent Events in Part II, Item 8 of this Annual Report on Form 10-K for further details on our lease amendment entered into on March 7, 2025.

•Payments related to licensing and other arrangements, which are cancellable license agreements with third parties for certain patent rights and technology. Under the terms of these agreements, we may be obligated to pay royalties based on revenue from the sales of licensed products, or minimum royalties, whichever is greater, and license maintenance fees. The future license maintenance fees and minimum royalty payments under the license agreements are not deemed to be material.

•Payments related to acquisitions. See “—Contingent Consideration” below for further details on potential payments related to our recent acquisitions.

Our future capital requirements and the adequacy of our available funds will depend on many factors, including:

•our ability to successfully commercialize and develop products and solutions that address customer needs;

•the pace of adoption of our products and our ability to obtain new customers in markets;

•the progress of our research and development programs and our ability to initiate or expand research programs;

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•our ability to manage manufacturing and production costs, including purchase obligations, and litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and

•the extent to which we engage in collaborations with partners and acquire other businesses or technologies.

If economic, financial, business, or other factors adversely affect our ability to fund our projected operating cash requirements, we may be required to obtain funding through traditional or alternative sources of financing. We cannot be certain that funds will be available on favorable terms, or at all. If we are required and unable to raise additional capital when desired, our business, operating results, and financial condition may be adversely affected. See our risk factor captioned “We are not cash flow positive and may not have sufficient cash to make required payments under the terms of our debt or fund our long-term planned operations” for more information.

Cash Flow Summary

Operating Activities

Our primary uses of cash in operating activities include the development of future products and product enhancements, manufacturing, and support functions related to our sales, general, and administrative activities.

Cash used in operating activities for the year ended December 31, 2024, of $206.1 million was due primarily to a $309.9 million net loss that included non-cash items such as impairment charges of $184.5 million, share-based compensation of $71.0 million, amortization of intangible assets of $27.4 million, depreciation of $13.8 million, and amortization of right-of-use assets of $12.2 million, offset by a gain on debt restructuring of $154.4 million, and accretion of discount and amortization of premium on marketable securities, net of $13.0 million. Cash flow impact from changes in net operating assets and liabilities of $40.6 million, was primarily driven by an increase of $8.3 million in inventory, net, as well as decreases of $26.3 million in accrued expenses and $11.9 million in operating lease liabilities. These uses of cash were partially offset by a decrease of $9.1 million in accounts receivable, net.

Cash used in operating activities for the year ended December 31, 2023, of $259.2 million was due primarily to a $306.7 million net loss that was partially offset by non-cash items such as share-based compensation of $72.1 million, a change in the estimated fair value of contingent consideration of $15.1 million, depreciation of $11.5 million, inventory provision of $10.6 million, amortization of intangible assets of $8.3 million, and amortization of right-of-use assets of $6.8 million, offset by accretion of discount and amortization of premium on marketable securities, net of $12.8 million, and deferred income taxes of $11.4 million. Cash flow impact from changes in net operating assets and liabilities of $59.0 million, was primarily attributable to increases of $17.8 million in accounts receivable, net, $13.8 million in inventory, net, $9.0 million in prepaid expenses and other assets, and decreases of $14.9 million in contingent consideration liability, $10.4 million in deferred revenue, and $8.8 million in operating lease liabilities, partially offset by increases of $13.1 million in accrued expenses, and $2.4 million in other liabilities.

Investing Activities

Our investing activities consist primarily of purchases, sales and maturities of investments as well as capital expenditures.

Cash provided by investing activities for the year ended December 31, 2024, was due primarily to maturities of investments of $594.0 million partially offset by purchases of investments of $498.6 million and capital expenditures of $6.2 million.

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

Financing Activities

Cash used in financing activities during the year ended December 31, 2024, was primarily due to payments made in conjunction with the convertible notes exchange of $50.2 million partially offset by proceeds of $7.7 million from the issuance of common stock through our equity compensation plans.

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

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2024, we did not have any off-balance sheet arrangements.

In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract, any defective products supplied by us, or any acts or omissions, or willful misconduct, committed by us or any of our employees, agents or representatives. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between us and such third parties in connection with such fundraising efforts. To the extent that such indemnification obligations apply to the lawsuits described in Legal Proceedings in Part I, Item 3 of this Annual Report on Form 10-K, 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 December 31, 2024.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, cost of revenue, and operating expenses, and related disclosure of contingent assets and liabilities. Management based its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

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Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of our instruments and related consumables; service and other revenue consist primarily of revenue earned from product maintenance agreements.

We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods are transferred to our customers, or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Invoicing typically occurs upon shipment, or delivery in the case of an instrument, and payment is typically due within 30 days from invoice. In instances where the right to payment or transfer of title is contingent upon customer acceptance of the product, revenue is deferred until the acceptance criteria has been met. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from development agreements generally includes upfront and milestone payments. Revenue for these agreements is recognized when each distinct performance obligation is satisfied.

We may enter into, or periodically modify, contracts with customers that include a combination of promised products and services, resulting in arrangements containing multiple performance obligations. We determine whether each product or service is distinct, in order to identify the performance obligations in the contract and allocate the contract transaction price among the distinct performance obligations. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Therefore, instrument revenue is recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers and upon shipment for sales made to our distributor customers.

The consideration for contracts with multiple performance obligations is allocated between separate performance obligations based on their individual standalone selling price. We determine the best estimate of standalone selling price using historical average selling prices combined with an assessment of current market conditions. If the standalone selling price is not directly observable, we rely on estimates by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices, and other observable inputs. We recognize revenues as performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer. Our revenue arrangements generally do not provide a right of return. Revenue is recorded net of discounts and sales taxes collected on behalf of governmental authorities. We update the transaction price for expected consideration, subject to constraint. Where we expect, at contract inception, the timing of payments to be consistent with the transfer of goods or services or the contract duration to be one year or less, we do not adjust the transaction price for the effects of a significant financing component.

We periodically modify existing contracts with customers, which could change the scope or the price of the contract, or both. When a contract modification occurs, we exercise judgment to determine if the modification should be accounted for as: (i) a separate contract, (ii) the termination of the original contract and creation of a new contract, (iii) a cumulative catch-up adjustment to the original contract, or a combination thereof. Further, contract modifications require the identification and evaluation of the performance obligations of the modified contract, allocation of revenue to the remaining performance obligations and determination of the period of recognition for each identified performance obligation.

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Certain of our agreements provide options to customers which can be exercised at a future date, such as the option to purchase our product at discounted prices, among others. In accounting for customer options, we determine whether an option is a material right and this may require us to exercise judgment. If a contract provides the customer an option to acquire additional goods or services at a discount that exceeds the range of discounts that we typically give for that product or service for the same class of customer, or if the option provides the customer certain additional goods or services for free, the option may be considered a material right and, therefore, a performance obligation. If the contract gives the customer the option to acquire additional goods or services at their normal standalone selling prices, we would likely determine that the option is not a material right and, therefore, account for it when the customer exercises the option. If the standalone selling price of the option is not directly observable, an estimated standalone selling price is utilized which considers adjustments for discounts that the customer could receive without exercising the option and the likelihood that the option will be exercised.

Additionally, we generally provide a one-year warranty on instruments. We accrue the cost of the assurance warranty when revenue of the instrument is recognized. Employee sales commissions are generally recorded as selling, general, and administrative expense when incurred as the amortization period for such costs, if capitalized, would have been one year or less.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete balances. Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs. Determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories.

We make inventory purchases and commitments to meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration, and quality issues. Based on our analysis, we record adjustments to inventory for potentially excess, obsolete, or impaired goods, when appropriate, to report inventory at net realizable value. Inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates. Any such adjustments would result in a charge to our results of operations.

Business Combinations

Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. Costs that we incur to complete the business combination, such as legal and other professional fees, are expensed as they are incurred.

In connection with certain acquisitions, contingent consideration can be earned by the sellers upon completion of certain future performance milestones. In these cases, a liability is recorded on the acquisition date for an estimate of the acquisition date fair value of the contingent consideration. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in operating expenses on our consolidated statements of operations and comprehensive loss.

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We typically use the discounted cash flow method to value our acquired intangible assets. This method requires significant management judgment to forecast future operating results and utilizes significant assumptions such as assumed revenue projections, discount rates and obsolescence factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expense could be accelerated or extended. We capitalize in-process research and development ("IPR&D"), which is considered indefinite lived until the completion or abandonment of the associated research and development efforts. Upon reaching the end of the relevant research and development project (i.e., upon commercialization), the IPR&D asset is amortized over its estimated useful life. If the relevant research and development project is abandoned, the IPR&D asset is expensed in the period of abandonment.

If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. We record these adjustments to the provisional amounts with a corresponding offset to goodwill. Any adjustments identified after the measurement period are recorded on our consolidated statements of operations and comprehensive loss.

We acquired $55.0 million of IPR&D, and $52.3 million of goodwill in connection with the acquisition of Apton Biosystems, Inc. in the third quarter of 2023.

Goodwill and Intangible Assets with Indefinite Lives — Impairment Assessment

Goodwill and other intangible assets with indefinite useful lives (i.e., IPR&D) are not amortized, however they are tested annually for impairment, as of the first day of the second and third quarter of our fiscal year, respectively, and whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than the carrying value. Events that would indicate impairment and trigger an interim impairment test include, but are not limited to, unexpected adverse business conditions, weak demand for a specific product line or business, economic factors, shifting focus to certain lines of business, unanticipated technological changes or competitive activities, loss of key personnel, changes in business strategy and acts by governments or courts.

We perform our goodwill impairment analysis at the reporting unit level. We have one reporting unit, which aligns with our reporting structure and availability of discrete financial information. During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and our overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair value of the reporting unit with the carrying value, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, we record an impairment loss based on the difference. We generally perform our impairment test using a combination of an income and a market approach to determine the fair value of goodwill. The income approach utilizes estimated discounted cash flows, while the market approach utilizes comparable company information. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies, including the observable implied multiples of those companies. Key assumptions include, but are not limited to, revenue and operating income growth rates, discount rates and other factors. We consider peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the asset under measurement and estimated weighted-average costs of capital. Different assumptions from those made in our analysis could materially affect projected cash flows and the evaluation of assets for impairment. We also consider our market capitalization as a part of our analysis. We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative goodwill impairment test.

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Significant estimates and assumptions used in the income approach during the fourth quarter of 2024, included revenue growth expectations and a discount rate of 12.0%. The discount rate was based on the weighted average cost of capital, determined using market, peer company, industry data, and related risk factors. The assumptions used were inherently subject to uncertainty and small changes in these assumptions could have had a significant impact on the concluded value. An increase of 100 basis points to the discount rate used in our assessment would have resulted in additional goodwill impairment of approximately $95 million. The assessed fair value was deemed reasonable based on a market capitalization reconciliation. See Note 4. Balance Sheet Components in Part II, Item 8 of this Annual Report on Form 10-K for further information.

During the IPR&D impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D is less than the carrying amount. The qualitative factors include, but are not limited to, macroeconomic conditions, industry-specific conditions, and company-specific conditions. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of the IPR&D is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair value of the IPR&D with the carrying value. If the carrying amount of the IPR&D exceeds the fair value, we record an impairment loss based on the difference. We generally perform our impairment test using an income approach to determine the fair value of IPR&D. The income approach utilizes estimated discounted cash flows. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections. Key assumptions include, but are not limited to, revenue projections, revenue growth rates, discount rates and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and the evaluation of assets for impairment. We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative impairment test. There is substantial risk inherent in forecasting revenues and spend associated with research and development, including assumptions around the timing and level of resources and investment to be made.

Significant estimates and assumptions used in the income approach during the fourth quarter of 2024, included revenue growth assumptions, a discount rate of 14.0%, and an obsolescence factor of 13 years. The carrying value of the IPR&D exceeded its estimated fair value, and we recorded an impairment of $40.0 million in the fourth quarter of 2024, primarily due to a decrease in projected cash flows. An increase of 100 basis points to the discount rate used in our analysis would have resulted in additional IPR&D impairment of approximately $5 million. A decrease of one year to the obsolescence factor used in our analysis would have resulted in additional IPR&D impairment of approximately $5 million. See Note 4. Balance Sheet Components in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Assumptions and estimates about future values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of our reporting unit, or if there is a delay in development of the IPR&D or lower projected sales, we may be required to record future impairment charges for goodwill and intangible assets with indefinite lives. Impairment charges could materially decrease our future results of operations and result in lower asset values on our balance sheet.

Intangible Assets and Other Finite-Lived Assets — Impairment Assessment

We capitalize finite-lived intangibles assets and generally amortize them on a straight-line basis over the estimated useful lives. We review intangible assets with finite lives and other finite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. We assess the recoverability of assets based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, we estimate the fair value of the assets and record an impairment loss if the carrying value exceeds the fair value. In light of the changes in circumstances that led to the recoverability assessment, we also assess the remaining estimated useful life of the assets. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to net book value, significant changes in the ability of an asset to generate positive cash flows for our strategic business objectives, and the pattern of utilization of a particular asset.

In order to estimate the fair values of identifiable intangible assets with finite lives and other finite-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our

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cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Management judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of the asset group, we may be required to record future impairment charges. Impairment charges could materially decrease our future results of operations and result in lower asset values on our balance sheet.

Contingent Consideration

In connection with the acquisition of Omniome in the third quarter of 2021, we entered into an arrangement where we were obligated to pay $200 million in cash and equity dependent upon the achievement of a milestone event upon the first commercial shipment of products developed from our acquired sequencing technology. In the third quarter of 2023, we commenced customer shipments of the Onso short-read sequencing instrument. The milestone payment associated with PacBio’s acquisition of Omniome was triggered in September 2023 once both the Onso instrument and related consumables had been shipped to one customer. Consequently, we paid the former Omniome securityholders milestone consideration of an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock in October 2023.

In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay former holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, provided that the milestone event occurs prior to the 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 II, Item 8 of this Annual Report on Form 10-K for further information.

The contingent consideration liability was measured at fair value as of the acquisition date and is remeasured periodically at each reporting date, with changes in fair value recorded as change in fair value of contingent consideration on our consolidated statements of operations and comprehensive loss. For the Apton contingent consideration, the initial measurement and post-acquisition remeasurement required estimates and assumptions using a Monte Carlo simulation to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate to determine the total fair value of the contingent consideration payment as of each reporting period. This method requires significant management judgment, including risk-adjusted forecasted revenues for products and services leveraging Apton's technology and an estimated credit spread.     Assumptions and estimates about future values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Future changes in our estimates could result in expenses or gains. For the Omniome contingent consideration, the initial measurement and post-acquisition remeasurement required estimates and assumptions using a scenario-based method that considers a range of potential outcomes of milestone achievement dates and assigned probabilities of occurrence for each outcome. Outcomes were discounted to present value, which was then weighted by the probability of each scenario to determine the total fair value of the contingent consideration payment as of each reporting period. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. Refer to Note 3. Financial Instruments for further discussion on valuation assumptions.

RECENT ACCOUNTING PRONOUNCEMENTS

Please see Note 1. Organization and Significant Accounting Policies, subsection titled “Recent Accounting Pronouncements”, in Part II, Item 8 of this Annual Report on Form 10-K for information regarding applicable recent accounting pronouncements.

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ITEM 7.    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 our consolidated financial statements and the related notes included in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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

•Overview and Outlook

•Results of Operations

•Liquidity and Capital Resources

•Critical Accounting Policies and Estimates

•Quantitative and Qualitative Disclosure of Market Risk

•Recent Accounting Pronouncements

•Contractual Obligations

•Off Balance Sheet Arrangements

Overview and Outlook

About PacBio

We are a premier life science technology company that is designing, developing, and manufacturing advanced sequencing solutions that enable scientists and clinical researchers to improve their understanding of the genome and ultimately, resolve genetically complex problems.

Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality, and completeness, which include our HiFi long-read sequencing technology and our Sequencing by Binding (SBB®) short-read sequencing technology. Our products address solutions across a broad set of research applications including human genetics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications.

Our focus is on creating some of the world’s most advanced sequencing systems to provide our customers the most complete and accurate view of genomes, transcriptomes, and epigenomes.

Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations (CROs), pharmaceutical companies, and agricultural companies.

As of December 31, 2023, our commercial team is comprised of approximately 215 employees, including 71 quota-carrying representatives, many with advanced degrees in biology and significant experience in the genomics industry.

Strategic Objectives

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

Our 2024 strategic objectives are to:

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

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

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

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

We will continue to leverage our commercial organization and make significant improvements in the efficiency and usability of our products in pursuit of a broader customer base. We believe the commercial investments we have recently made will further help drive growth in our business.

To increase the adoption of HiFi sequencing, we have various development programs in progress to expand our product portfolio as well as increase the throughput and improve the usability of our existing sequencing technologies. 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 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 our 2023 consolidated financial results include the following:

•Revenue increased $72.2 million, or 56%, to $200.5 million for the year ended December 31, 2023, as compared to $128.3 million for the year ended December 31, 2022. Revenue was comprised of $120.5 million in instrument revenue, $63.4 million in consumables revenue and $16.6 million in service and other revenue for the year ended December 31, 2023. The increase was primarily driven by the launch of Revio in the first quarter of 2023, which is sold at a higher average selling price than our previous Sequel II and IIe platforms. We ended the year with an installed base of 173 Revio systems.

•Gross profit as a percentage of revenue (gross margin) was 26.3% for the year ended December 31, 2023, compared to 38.2% for the year ended December 31, 2022. Gross margin declined due primarily to the instrument mix, as Revio instruments sold during the period had a lower margin than the Sequel II/IIe system, primarily due to loyalty discounts provided and higher initial manufacturing costs, including warranty costs as well as charges for scrap inventory. In addition, we recognized an adjustment during the year ended December 31, 2023 primarily related to excess instrument and consumables inventory. The excess instrument adjustment was primarily due to a change in the Sequel II demand primarily from one customer. The consumables inventory adjustment was primarily resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system.

•Loss from operations increased $27.3 million or 9%, to $334.5 million for the year ended December 31, 2023, as compared to $307.2 million for the year ended December 31, 2022, driven primarily by an increase of $31.0 million of operating expenses, including a $12.7 million increase in the change in the fair value of the contingent consideration, a $9.0 million increase in non-recurring merger-related costs incurred, and a $9.0 million increase in sales, general, and administrative expenses, partially offset by a $5.8 million decrease in research and development expenses. See Note 2. Business Acquisitions for further details.

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

Macroeconomic dynamics including inflation, exchange rates and concerns about an economic downturn, have impacted both the Company and our customers’ behavior. For example, some customers and potential customers are managing capital more conservatively, resulting in lengthened sales cycles, and capital funding in China is being deferred, resulting in less capital equipment purchases. These factors could continue to impact our revenues and results of operations in 2024; however, as the size and duration of these impacts is uncertain, we cannot reasonably estimate the future impact to our operations and financial results.

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See the Risk Factors section for further discussion of the possible impact of macroeconomic factors on our business.

Results of Operations

A detailed discussion of our consolidated financial results comparison between 2023 and 2022 is presented below. A discussion of the changes in our results of operations between the years ended December 31, 2022 and December 31, 2021, has been omitted from this Annual Report on Form 10-K but may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on February 28, 2023, which is incorporated herein by reference, and is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.pacb.com).

Comparison of the Years Ended December 31, 2023 and 2022

Revenue

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

The increase in instrument revenue was primarily due to the sale of 173 Revio systems that have a higher average selling price as compared to the Sequel II/IIe platform. We expect the installed base of Revio instruments to grow, reflecting customer demand for the new product. As a result of this new product launch, we anticipate the installed base and sales volumes of Sequel II/IIe to continue to decline compared to recent

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

The increase in consumable sales was primarily due to higher Revio consumables sales attributable to the growth in the Revio instrument installed base, partially offset by a decline in Sequel consumables as customers transition to the new platform. As the Revio installed base continues to grow, we anticipate the related consumable sales to continue to increase.

The decrease in service and other revenue was primarily due to the change in our terms of the warranty provided with the instrument during the first quarter of 2022 to remove the service component. As a result, the warranty is no longer a separate performance obligation and, accordingly, we accrue for the cost of the assurance warranty when revenue of the instrument is recognized, and no longer recognize a component of the instrument revenue in service and other revenue over the warranty period. Service revenue also declined as customers transition to Revio, which includes a first-year warranty, and opt to not renew their Sequel II/IIe plans. As the Revio installed base begins to surpass the warranty period in 2024 and customers transition to service plans, we expect the retrospective decline in growth trend to reverse within the year and service revenues to potentially exceed 2023 levels.

Cost of Revenue, Gross Profit, and Gross Margin

The increase in the cost of product revenue was driven primarily by an increase in system placements and higher overall product costs on the Revio platform, including warranty costs, as well as an increase in adjustments of approximately $4.6 million as compared to the prior year primarily relating to excess consumables inventory resulting from faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system. Cost of revenue included share-based compensation expense of $5.4 million and $4.8 million during the years ended December 31, 2023 and 2022 respectively.

The loss on purchase commitment was $3.4 million and $3.7 million for the years ended December 31, 2023 and 2022, respectively. The purchase commitment loss is based on an estimate of future excess inventory related to supply agreements, for which we do not expect to have related sales.

Gross profit increased $3.7 million, or 8%. Gross margin was 26.3% for the year ended December 31, 2023 compared to 38.2% for the year ended December 31, 2022. The decrease in gross margin percentage was primarily due to instrument mix, in addition to charges for scrap inventory and an increase in adjustments primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due primarily to a faster than expected ramp on the Revio system. Revio instruments sold during the period had a lower margin primarily due to loyalty discounts provided and higher initial manufacturing costs, including warranty costs. Gross margin could fluctuate depending on the pace at which Sequel II/IIe revenue declines, Revio consumable revenue ramps, manufacturing efficiencies and warranty costs improve, as well as fluctuation in average selling prices.

Research and Development Expense

The decrease in research and development expense was primarily driven by the transition of Revio from development to commercialization. Research and development expense included share-based compensation of $22.4 million and $30.7 million during the years ended December 31, 2023 and 2022, respectively.

Sales, General, and Administrative Expense

The increase in sales, general, and administrative expense was primarily driven by an increase in sales and marketing headcount as we continue to grow our commercial footprint. Sales, general, and administrative expense included share-based compensation expenses of $44.3 million and $43.1 million during the years ended December 31, 2023 and 2022, respectively.

Merger-Related Expenses

Merger-related expenses of $9.0 million during the year ended December 31, 2023, consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition. We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services.

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Amortization of Acquired Intangible Assets

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

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration during the year ended December 31, 2023, represents the remeasurement impact of the Omniome and Apton contingent consideration due upon the achievement of the respective milestone. The increase in the change in fair value of contingent consideration during the year was primarily due to the Omniome contingent consideration and was primarily attributable to the passage of time, changes in the discount rates and probabilities of milestone achievement.

The contingent consideration milestone for the Omniome acquisition was defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology. As a result of the milestone achievement in September 2023, former Omniome securityholders received as milestone consideration, among other things, an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $2.0 million during the year ended December 31, 2023, represents the loss resulting from the difference in the fair value of the 2030 Notes and the principal, in addition to the write-off of the unamortized debt issuance costs on the portion of the 2028 Notes that were exchanged as part of the debt modification during the year ended December 31, 2023.

Interest Expense

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

Other Income, Net

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

Benefit from Income Taxes

A deferred income tax benefit of $11.4 million for the year ended December 31, 2023, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition. We maintain a valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our consolidated statements of operations and comprehensive loss for the year ended December 31, 2023.

Liquidity and Capital Resources

Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, has primarily been through the issuance of debt or equity securities, together with cash flow from operating activities. For example, in January 2023, as discussed above, we issued and sold an aggregate of 20,125,000 shares of our common stock in a follow-on public offering for aggregate gross proceeds of approximately $201.3 million. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis due to the investments we intend to make as described in Results of Operations above, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business.

Cash, Cash Equivalents, and Investments

As of December 31, 2023, we had $631.4 million in cash, cash equivalents, and investments, compared to $772.3 million at December 31, 2022. The decrease was primarily attributable to $259.2 million cash used in operating activities for the twelve months ended December 31, 2023.

Convertible Senior Notes

At December 31, 2022, we had $900 million of principal Convertible Senior Notes outstanding resulting from our February 9, 2021, issuance of convertible notes due 2028 (the “2028 Notes”) with an aggregate principal of $900 million. The Notes bear interest at a rate of 1.50% per annum. Interest on the 2028 Notes is payable semi-

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annually in arrears on February 15 and August 15 commencing on August 15, 2021. The 2028 Notes will mature on February 15, 2028, subject to earlier conversion, redemption, or repurchase. The proceeds from the issuance of the convertible notes are being used to fund operations, strategic investments, and capital requirements.

The 2028 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by us. The 2028 Notes are convertible into shares of our common stock based on an initial conversion rate of 22.9885 shares of common stock per $1,000 principal amount of the 2028 Notes (which is equal to an initial conversion price of $43.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2028 Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.

In June 2023, we entered into a privately negotiated exchange agreement with the holder of our outstanding 2028 Notes, pursuant to which we issued $441.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due in 2030 (the "2030 Notes") in exchange for $441.0 million principal amount of the 2028 Notes. Interest on the 2030 Notes is payable semi-annually in arrears on June 15 and December 15 commencing on December 15, 2023. The 2030 Notes will mature on December 15, 2030, subject to earlier conversion, redemption, or repurchase.

The 2030 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2030 Notes are convertible into shares of our common stock based on an initial conversion rate of 46.5116 shares of common stock per $1,000 principal amount of the 2030 Notes (which is equal to an initial conversion price of $21.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2030 Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.

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

The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture. The Indenture also includes customary covenants for convertible notes of this type.

See Note 7. Convertible Senior Notes for further details.

Additional Capital Requirements

We believe that our existing cash, cash equivalents, and investments will be sufficient to fund our projected operating and capital requirements for at least the next 12 months from the date of filing of this Annual Report on Form 10-K for the year ended December 31, 2023. Operating needs include planned costs to operate our business, including costs to fund working capital and capital expenditures. Recent and expected working and other capital requirements, in addition to the above matters, include:

•Our purchase orders and contractual obligations of approximately $109.9 million as of December 31, 2023, which consist of open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

•As described in more detail in Note 8 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements, we signed a Supply Agreement, which was amended in October 2022, with a supplier for the purchase of certain products over the period of 2023 through 2026. As part of the Supply Agreement, we made a $9.0 million deposit during the year ended December 31, 2022, and an additional deposit of $6.0 million in 2023, to secure the supply of certain products through the term of the contract. If we breach the minimum volume purchase commitment during any applicable year, the supplier is entitled to retain a portion or all of the deposit corresponding to that year. If we terminate the Supply Agreement before January 15, 2027, Supplier will refund the remaining balance of the Deposit. If the supplier breaches its minimum volume supply commitment during any applicable year or portions thereof, our remedies include termination, pursuit of damages, or pursuit of specific

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performance. If, on or before October 31, 2024, we commit to purchasing a set amount of additional products during the calendar year 2026, Supplier will increase its maximum capacity guarantee to meet the additional demand. Should we exercise this option, we will be required to make an additional deposit of $5.0 million to Supplier within 30 days of the exercise.

•Our research and development expenditures of $187.2 million in 2023 and $193.0 million in 2022. While we expect to continue our investment in research and development in 2024, including enhancements of our existing products, and continued development of other new technology and products, we expect research and development expenses to decline slightly in 2024 as compared to the year ended December 31, 2023 due to recent product transitions.

•Cash outflows for capital expenditures of $8.8 million in 2023 and $16.8 million in 2022. We expect to continue to invest in capital expenditures in fiscal 2024 to continue to support manufacturing and expansion of our business, and anticipate a slight increase in 2024 as compared to the year ended December 31, 2023.

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

•Amounts due under the term loan acquired in connection with Omniome at December 31, 2023, totaling $0.5 million, the remainder of which is expected to be paid within the next 12 months. Please see Note 6. Balance Sheet Components for additional information.

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

•Payments related to licensing and other arrangements, which are cancellable license agreements with third parties for certain patent rights and technology. Under the terms of these agreements, we may be obligated to pay royalties based on revenue from the sales of licensed products, or minimum royalties, whichever is greater, and license maintenance fees. The future license maintenance fees and minimum royalty payments under the license agreements are not deemed to be material.

Our future capital requirements and the adequacy of our available funds will depend on many factors, including:

•our ability to successfully commercialize and develop products and solutions that address customer needs;

•the pace of adoption of our products and our ability to obtain new customers in markets;

•the progress of our research and development programs and our ability to initiate or expand research programs;

•our ability to manage manufacturing and production costs, including purchase obligations, and litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and

•the extent to which we engage in collaborations with partners and acquire other businesses or technologies.

If economic, financial, business, or other factors adversely affect our ability to fund our projected operating cash requirements, we may be required to obtain funding through traditional or alternative sources of financing. We cannot be certain that funds will be available on favorable terms, or at all. If we are required and unable to raise additional capital when desired, our business, operating results, and financial condition may be adversely affected. See our risk factor captioned “We are not cash flow positive and may not have sufficient cash to make required payments under the terms of our debt or fund our long-term planned operations” for more information.

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Cash Flow Summary

Operating Activities

Our primary uses of cash in operating activities include the development of future products and product enhancements, manufacturing, and support functions related to our sales, general, and administrative activities.

Cash used in operating activities for the year ended December 31, 2023, of $259.2 million was due primarily to a $306.7 million net loss that was partially offset by non-cash items such as share-based compensation of $72.1 million, a change in the estimated fair value of contingent consideration of $15.1 million, depreciation of $11.5 million, inventory provision of $10.6 million, amortization of intangible assets of $8.3 million, and amortization of right-of-use assets of $6.8 million, offset by accretion of discount and amortization of premium on marketable securities, net of $12.8 million, and deferred income taxes of $11.4 million. Cash flow impact from changes in net operating assets and liabilities of $59.0 million, was primarily attributable to increases of $17.8 million in accounts receivable, net, $13.8 million in inventory, net, $9.0 million in prepaid expenses and other assets, and decreases of $14.9 million in contingent consideration liability, $10.4 million in deferred revenue, and $8.8 million in operating lease liabilities, partially offset by increases of $13.1 million in accrued expenses, and $2.4 million in other liabilities.

Cash used in operating activities for the year ended December 31, 2022, of $263.2 million was due primarily to a $314.2 million net loss that was partially offset by non-cash items such as share-based compensation of $78.6 million, depreciation of $9.5 million, amortization of right-of-use assets of $6.9 million, inventory provision of $6.0 million, and a change in the estimated fair value of contingent consideration of $2.4 million. Cash flow impact from changes in net operating assets and liabilities of $54.0 million, was primarily attributable to increases of $33.9 million in inventory, net, $12.3 million in prepaid expenses and other assets, and decreases of $7.7 million in operating lease liabilities, $3.7 million in accrued expenses, and $3.7 million in deferred revenue, partially offset by a decrease of $5.5 million in accounts receivable, net, an increase of $1.0 million in accounts payable, and $0.9 million in other liabilities.

Investing Activities

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

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

Financing Activities

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

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

Off-Balance Sheet Arrangements

As of December 31, 2023, we did not have any off-balance sheet arrangements.

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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 Legal Proceedings in Part I, Item 3 of this Annual Report on Form 10-K, 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 December 31, 2023.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which we have prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, cost of revenue, and operating expenses, and related disclosure of contingent assets and liabilities. Management based its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of our instruments and related consumables; service and other revenue consist primarily of revenue earned from product maintenance agreements.

We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods are transferred to our customers, or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We may enter into contracts with customers that include a combination of promised products and services, resulting in arrangements containing multiple performance obligations. We determine whether each product or service is distinct, in order to identify the performance obligations in the contract and allocate the contract transaction price among the distinct performance obligations. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Therefore, instrument revenue is recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers and upon shipment for sales made to our distributor customers.

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The consideration for contracts with multiple performance obligations is allocated between separate performance obligations based on their individual standalone selling price. We determine the best estimate of standalone selling price using average selling prices over a 12-month period combined with an assessment of current market conditions. If the standalone selling price is not directly observable, we rely on estimates by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices, and other observable inputs. We recognize revenues as performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer. Our revenue arrangements generally do not provide a right of return.

Certain of our agreements provide options to customers which can be exercised at a future date, such as the option to purchase our product at discounted prices, among others. In accounting for customer options, we determine whether an option is a material right and this requires us to exercise significant judgment. If a contract provides the customer an option to acquire additional goods or services at a discount that exceeds the range of discounts that we typically give for that product or service for the same class of customer, or if the option provides the customer certain additional goods or services for free, the option may be considered a material right. If the contract gives the customer the option to acquire additional goods or services at their normal standalone selling prices, we would likely determine that the option is not a material right and, therefore, account for it when the customer exercises the option. If the standalone selling price of the option is not directly observable, an estimated standalone selling price is utilized which considers adjustments for discounts that the customer could receive without exercising the option and the likelihood that the option will be exercised. We may also utilize the alternative approach to estimate the standalone selling price, available pursuant to the applicable accounting guidance, to the extent we conclude the applicable criteria for using the alternative approach has been met. We update the transaction price for expected consideration, subject to constraint, each reporting period if our estimate of future goods to be ordered by customers change.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete balances. Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs. Determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories.

We make inventory purchases and commitments to meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration, and quality issues. Based on our analysis, we record adjustments to inventory for potentially excess, obsolete, or impaired goods, when appropriate, to report inventory at net realizable value. Inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates. Any such adjustments would result in a charge to our results of operations.

Business Combinations

Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. Costs that we incur to complete the business combination, such as legal and other professional fees, are expensed as they are incurred.

In connection with certain acquisitions, contingent consideration can be earned by the sellers upon completion of certain future performance milestones. In these cases, a liability is recorded on the acquisition date for an estimate of the acquisition date fair value of the contingent consideration. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in operating expenses in our consolidated statements of operations and comprehensive loss.

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We typically use the discounted cash flow method to value our acquired intangible assets. This method requires significant management judgment to forecast future operating results and utilizes significant assumptions such as assumed revenue projections, discount rates and obsolescence factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expense could be accelerated or extended. We capitalize in-process research and development (IPR&D), which is considered indefinite lived until the completion or abandonment of the associated research and development efforts. Upon reaching the end of the relevant research and development project (i.e., upon commercialization), the IPR&D asset is amortized over its estimated useful life. If the relevant research and development project is abandoned, the IPR&D asset is expensed in the period of abandonment.

If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. We record these adjustments to the provisional amounts with a corresponding offset to goodwill. Any adjustments identified after the measurement period are recorded in the consolidated statements of operations and comprehensive loss.

We acquired $55.0 million of IPR&D, and $52.3 million of goodwill in connection with the acquisition of Apton Biosystems, Inc. in the third quarter of 2023.

Goodwill and Intangible Assets with Indefinite Lives — Impairment Assessment

Goodwill and other intangible assets with indefinite useful lives (i.e., IPR&D) are not amortized, however they are tested annually for impairment, in the second and fourth quarter of our fiscal year, respectively, and whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than the carrying value. Events that would indicate impairment and trigger an interim impairment test include, but are not limited to, unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments or courts.

We perform our goodwill impairment analysis at the reporting unit level. We have one reporting unit, which aligns with our reporting structure and availability of discrete financial information. During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and our overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair value of the reporting unit with the carrying value, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, we record an impairment loss based on the difference. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions include, but are not limited to, revenue and operating income growth rates, discount rates and other factors. We consider peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the asset under measurement and estimated weighted-average costs of capital. Different assumptions from those made in our analysis could materially affect projected cash flows and the evaluation of assets for impairment. We also consider our market capitalization as a part of our analysis. We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative goodwill impairment test.

During the IPR&D impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D is less than the carrying amount. The qualitative factors include, but are not limited to, macroeconomic conditions, industry-specific conditions, and company-specific conditions. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of the IPR&D is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair value of the IPR&D with the carrying value. If the carrying

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amount of the IPR&D exceeds the fair value, we record an impairment loss based on the difference. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections. Key assumptions include, but are not limited to, revenue projections, revenue growth rates, discount rates and other factors. We consider peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the asset under measurement and estimated weighted-average costs of capital. Different assumptions from those made in our analysis could materially affect projected cash flows and the evaluation of assets for impairment. We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative impairment test.

Intangible Assets and Other Long-Lived Assets — Impairment Assessment

We perform regular reviews to determine if any event has occurred that may indicate that the carrying values of our intangible assets with finite lives and other long-lived assets are impaired. If indicators of impairment exist, we assess the recoverability of the affected assets by determining whether their carrying amounts exceed their undiscounted expected future cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value exceeds the fair value. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to net book value, significant changes in the ability of an asset to generate positive cash flows and the pattern of utilization of a particular asset.

In order to estimate the fair values of identifiable intangible assets with finite lives and other long-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Contingent Consideration

In connection with the acquisition of Omniome in the third quarter of 2021, we entered into an arrangement where we were obligated to pay $200 million in cash and equity dependent upon the achievement of a milestone event upon the first commercial shipment of products developed from our acquired sequencing technology. In the third quarter of 2023, we commenced customer shipments of the Onso short-read sequencing instrument. The milestone payment associated with PacBio’s acquisition of Omniome was triggered in September 2023 once both the Onso instrument and related consumables had been shipped to one customer. Consequently, we paid the former Omniome security holders milestone consideration of an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock in October 2023.

In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay former holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, provided that the milestone event occurs prior to the 5-year anniversary of the closing date of the acquisition, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock. See Note 2. Business Acquisitions for further information.

The contingent consideration liability was measured at fair value as of the acquisition date and is remeasured periodically at each reporting date, with changes in fair value recorded as change in fair value of contingent consideration in the consolidated statements of operations and comprehensive loss. For the Omniome contingent consideration, the initial measurement and post-acquisition remeasurement required estimates and assumptions using a scenario-based method that considers a range of potential outcomes of milestone achievement dates and assigned probabilities of occurrence for each outcome. Outcomes were discounted to present value, which was then weighted by the probability of each scenario to determine the total fair value of the contingent consideration payment as of each reporting period. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. For the Apton contingent consideration, the initial measurement and post-acquisition remeasurement required estimates and assumptions using a Monte Carlo Simulation to estimate the volatility and systematic relative

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risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate to determine the total fair value of the contingent consideration payment as of each reporting period. This method requires significant management judgment, including risk-adjusted forecasted revenues for products and services leveraging Apton's technology and an estimated credit spread. Future changes in our estimates could result in expenses or gains. Refer to Note 5. Financial Instruments for further discussion on valuation assumptions.

Recent Accounting Pronouncements

Please see Note 1. Organization and Significant Accounting Policies, subsection titled “Recent Accounting Pronouncements”, in Part II, Item 8 of this Annual Report on Form 10-K for information regarding applicable recent accounting pronouncements.

ITEM 7. 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 our consolidated financial statements and the related notes included in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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

Overview and Outlook

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies and Estimates

Quantitative and Qualitative Disclosure of Market Risk

Recent Accounting Pronouncements

Contractual Obligations

Off Balance Sheet Arrangements

Overview and Outlook

About PacBio

We are a premier life science technology company that is designing, developing, and manufacturing advanced sequencing solutions that enable scientists and clinical researchers to improve their understanding of the genome and ultimately, resolve genetically complex problems.

Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality, and completeness, which include our existing HiFi long-read sequencing technology and our emerging Sequencing by Binding (SBB®) short-read sequencing technology. Our products address solutions across a broad set of research applications including human genomics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications.

Our focus is on providing our customers with advanced sequencing technologies with higher throughput and improved workflows that we believe will enable dramatic advancements in routine healthcare.

Our 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.

As of December 31, 2022, our commercial team is comprised of approximately 195 employees, including 57 quota-carrying representatives, many with advanced degrees in biology and significant experience in the genomics industry.

Strategic Objectives

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

Our 2023 strategic objectives are to:

Drive rapid adoption of RevioTM by converting existing Sequel II/IIe customers and attracting new PacBio customers

Demonstrate Onso’s extraordinary level of accuracy in the field and show how it can transform research in needle-in-haystack applications

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

Leverage current infrastructure to drive toward positive cash flow

Expand partnerships across ecosystem and workflow to drive customer adoption of SBB short-read sequencing and HiFi long-read sequencing

We will continue to leverage our commercial organization and make significant improvements in the efficiency and usability of our products to seek to reach a broader customer base. We believe the commercial investments we have recently made will further help drive growth in our business.

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To increase the adoption of HiFi sequencing, we have various development programs in progress to expand our product portfolio as well as increase the throughput and improve the usability of our existing sequencing technologies. We continue to focus on programs to accelerate new platform launches in the near to mid-term as well as increase applications for our technologies. In October 2022, we announced Revio, our new HiFi long-read sequencing system. We began taking orders in the fourth quarter of 2022 and expect to commence commercial Revio shipments in March 2023. To address the oncology research markets with a highly differentiated alternative to existing third-party short-read sequencing products already on the market, we are also progressing development of OnsoTM, our SBB short-read platform. We began taking orders in January 2023 and remain on track for commercial shipment in the second quarter of 2023.

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

Broader macroeconomic dynamics including rising inflation, global supply chain constraints, volatile capital markets, competition, and lockdown restrictions associated with COVID-19 have adversely impacted our customers and lengthened customer sales cycles. Additionally, lock downs in China have led to lower than previously anticipated revenue in the Asia-Pacific region as customers had difficulty accessing labs and lower sample volumes from which to sequence. We expect some headwinds from a strengthening U.S. dollar, which impacts our revenue denominated in EUR and GBP but also impacts purchasing power of our customers in Asia as a stronger U.S. dollar makes buying our products more expensive.

Ongoing global supply chain constraints and rising inflation are also increasing our costs; as a result, we expect these costs to impact gross margins and cash flow. Due to the rising costs from global supply chain constraints and rising inflation, we are moderating our hiring with the aim of reducing our operating expense growth in 2023. We will continue to prioritize investments to develop and commercialize our new products, prioritizing opportunities that will generate a return over the near to mid-term.

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

The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the regions in which we sell our products and services and conduct our business operations. We have been negatively impacted by the COVID-19 pandemic and expect to continue to be impacted by COVID-19 for the foreseeable future. Due to the uncertain scope and duration of the pandemic, we cannot reasonably estimate the future impact to our operations and financial results.

The spread of COVID-19 caused us to modify our business practices, including limiting some of our commercial operations and limiting certain employees from working in the office. Starting in April 2022, we invited employees located near our reopened offices to return to the office.

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

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Key highlights of our 2022 consolidated financial results include the following:

Revenue decreased $2.2 million, or 2%, to $128.3 million for the year ended December 31, 2022, as compared to $130.5 million for the year ended December 31, 2021. The decline was primarily caused by a decrease in instrument revenue, which was due in part to the robust demand for Revio, displacing previously anticipated Sequel IIe sales in the fourth quarter of 2022. We received orders in the fourth quarter of 2022 for 76 Revio systems with delivery in 2023. The decline in instrument revenue was partially offset by an increase in consumables revenue of $7.8 million.

Gross profit as a percentage of revenue (gross margin) was 38.2% for the year ended December 31, 2022, compared to 45.1% for the year ended December 31, 2021. Gross margin declined due primarily to adjustments for excess inventory, either on hand or at our contract manufacturer, related to a faster than expected ramp in Revio demand, which resulted in a faster than expected decline in Sequel II/IIe demand upon the launch of Revio, as well as a decrease in instrument volume and higher overall product costs. Our gross margin in future periods will depend on several factors, including new product transitions, strategic product pricing; product mix; sales of higher-margin consumables; supply chain constraints and inflation increasing costs of raw materials; manufacturing capacity and production volumes impacting the cost of inventory; freight costs; and excess or obsolete inventories.

Loss from operations increased $96.8 million or 46%, to $307.2 million for the year ended December 31, 2022, as compared to $210.4 million for the year ended December 31, 2021, driven primarily by an increase of $86.9 million of operating expenses, including a $80.1 million increase in research and development expenses, a $36.7 million increase in sales, general, and administrative expenses, and a $1.2 million increase in the change in the fair value of the contingent consideration, partially offset by a $31.1 million decrease in non-recurring merger-related costs incurred in 2021. See Note 2. Business Acquisitions for further details.

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

Recent Developments

Product Announcements

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

Revio is a new long-read sequencing system designed to enable the use of HiFi sequencing for large studies in human genetics, cancer research, and agricultural genomics. We expect to commence commercial Revio shipments in March 2023.

Onso, a short-read DNA sequencing system, is designed to deliver industry-leading sensitivity and specificity for novel insights in oncology, disease research, and other applications. We commenced the beta program for Onso in the fourth quarter of 2022. We began taking orders for Onso during the first quarter of 2023 and remain on track for commercial shipment in the second quarter of 2023.

January 2023 Public Offering

On January 27, 2023, we issued and sold an aggregate of 20,125,000 shares of our common stock at a purchase price of $10.00 per share pursuant to an automatic shelf registration statement filed on Form S-3 (File No. 333-249999) with the Securities and Exchange Commission, resulting in aggregate gross proceeds of approximately $201.3 million.

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Results of Operations

A detailed discussion of our consolidated financial results comparison between 2022 and 2021 is presented below. A discussion of the changes in our results of operations between the years ended December 31, 2021 and December 31, 2020, has been omitted from this Annual Report on Form 10-K but may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 28, 2022, which is incorporated herein by reference, and which is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.pacb.com).

Comparison of the Years Ended December 31, 2022 and 2021

Revenue

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

The decrease in instrument revenue was primarily due to fewer instruments sold. We believe this decrease was driven primarily by the anticipation of and robust demand for Revio, displacing previously anticipated Sequel IIe sales in 2022. At December 31, 2022, our installed base was 512 Sequel II and Sequel IIe systems compared to the 374 systems at December 31, 2021. We anticipate that sales volumes of Sequel II/IIe may decline as a result of the announcement of Revio and its anticipated availability for shipment in the first quarter of 2023. During the fourth quarter of 2022, we received orders for 76 Revio systems for delivery in 2023 and expect to see continued growth in Revio system sales, as well as the Onso system for which we began taking orders in January 2023.

The increase in consumable sales was primarily due to higher Sequel II/IIe consumables sales attributable to the growth in the instrument installed base. Consumable growth reflects approximately 24% growth in Sequel II and IIe SMRT cells shipped in 2022, as compared to 2021.

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

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Cost of Revenue, Gross Profit, and Gross Margin

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

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

The loss on purchase commitment was $3.7 million for the year ended December 31, 2022. The purchase commitment loss is based on an estimate of future excess inventory related to a supply agreement with a third-party vendor, for which we do not expect to have related sales.

Gross profit decreased $9.8 million, or 17%. Gross margin was 38.2% for the year ended December 31, 2022 compared to 45.1% for the year ended December 31, 2021. The decrease in gross margin percentage was primarily due to adjustments for excess inventory, either on hand or at our contract manufacturer, related to a faster than expected ramp in Revio demand, which resulted in a faster than expected decline in Sequel II/IIe demand upon the launch of Revio, as well as a decrease in instrument sales volume and higher product costs, which was partially offset by consumables volumes and higher service and other revenues during the year ended December 31, 2022, compared to the year ended December 31, 2021.

We expect our gross margin will trend slightly lower during the first half of 2023, due in part to new product transitions and the impacts of inflation and increased supply chain costs. The global shortage of semiconductors continues to be a challenge for us in our supply chain and has resulted in cost increases that have and may continue to adversely impact margins. During these periods of shortages or delays, the price of components may increase, or the components may not be available at all. Additionally, in response to the surge in COVID-19 infections in 2022, the Chinese government-imposed lockdowns in certain parts of the country, which has had, and may continue to have, a negative impact on manufacturing and/or supply chains, as well as customer demand for our products and demand through certain distributors. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer until other sources can be developed.

Research and Development Expense

The increase in research and development expense was primarily driven by an increase of $34.1 million in product development costs and an increase of $33.9 million in personnel expenses, including the acquired workforce from the Omniome acquisition. In addition, facilities and information technology related expenses associated with our research and development activities increased $9.9 million to support our operational expansion during the year ended December 31, 2022, compared to the year ended December 31, 2021. Research and development expense included share-based compensation expense of $30.7 million and $20.3 million during the twelve months ended December 31, 2022 and 2021, respectively.

We will continue to focus a significant portion of our resources on developing new products and solutions, including improving the efficiency and usability of existing products, developing new solutions, software, workflows and applications leveraging our core technologies. We anticipate that our spend will decline slightly in 2023 due to new product transitions. Additionally, we have collaborated and expect to continue to collaborate with strategic partners to develop sequencing solutions and expand the application of our technology.

Sales, General, and Administrative Expense

The increase in sales, general, and administrative expense was primarily driven by an increase of $13.0 million in personnel costs, $9.7 million in marketing expenses, including costs incurred in connection with product launches, $4.7 million in consulting and professional services, $4.2 million in travel-related expenses, and $2.7 million in facilities expenses and information technology related expenses. Sales, general, and administrative expense included share-based compensation expense of $43.1 million and $35.4 million during the twelve months ended December 31, 2022 and 2021, respectively. We anticipate sales, general, and administrative expense to continue to increase primarily as a result of the new product commercialization efforts.

Change in Fair Value of Contingent Consideration

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

Loss from Continuation Advances from Illumina

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

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

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

Interest Expense

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

Other Income, Net

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

Benefit from Income Taxes

A deferred income tax benefit of $93.6 million for the year ended December 31, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

Liquidity and Capital Resources

Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, has primarily been through the issuance of debt or equity securities, together with cash flow from operating activities. For example, in January 2023, as discussed above, we issued and sold an aggregate of 20,125,000 shares of our common stock in a follow-on public offering for aggregate gross proceeds of approximately $201.3 million. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis due to the investments we intend to make as described in Results of Operations above, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business.

Cash, cash equivalents, and investments

As of December 31, 2022, we had $772.3 million in cash, cash equivalents, and investments, compared to $1.0 billion at December 31, 2021. The decrease was primarily attributable to $263.2 million cash used in operating activities for the twelve months ended December 31, 2022.

Convertible Senior Notes

At December 31, 2022, we had $900 million of principal Convertible Senior Notes outstanding resulting from our February 9, 2021, issuance of convertible notes due 2028 (the “Notes”) with an aggregate principal of $900 million. The Notes bear interest at a rate of 1.50% per annum. Interest on the Notes is payable semi-annually in arrears on February 15 and August 15 commencing on August 15, 2021. The Notes will mature on February 15, 2028, subject to earlier conversion, redemption, or repurchase. The proceeds from the issuance of the convertible notes are being used to fund operations, strategic investments, and capital requirements.

The Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The Notes are convertible into shares of our common stock based on an initial conversion rate of 22.9885 shares of common stock per $1,000 principal amount of the Notes (which is equal to an initial conversion price of $43.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.

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

The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture. The Indenture also includes customary covenants for convertible notes of this type.

See Note 7. Convertible Senior Notes for further details.

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Additional Capital Requirements

We believe that our existing cash, cash equivalents, and investments will be sufficient to fund our projected operating and capital requirements for at least the next 12 months from the date of filing of this Annual Report on Form 10-K for the year ended December 31, 2022. Operating needs include planned costs to operate our business, including costs to fund working capital and capital expenditures. Recent and expected working and other capital requirements, in addition to the above matters, include:

Our purchase orders and contractual obligations of approximately $145.7 million as of December 31, 2022, which consist of open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

As described in more detail in Note 8 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements, we signed a Supply Agreement, which was amended in October 2022, with a supplier for the purchase of certain products over the period of 2023 through 2026. As part of the Supply Agreement, we made a $9.0 million deposit during the year ended December 31, 2022, and will pay an additional deposit of $6.0 million in 2023, to secure the supply of certain products through the term of the contract. If we breach the minimum volume purchase commitment during any applicable year, the supplier is entitled to retain a portion or all of the deposit corresponding to that year. If we terminate the Supply Agreement before January 15, 2027, Supplier will refund the remaining balance of the Deposit. If the supplier breaches its minimum volume supply commitment during any applicable year or portions thereof, our remedies include termination, pursuit of damages, or pursuit of specific performance. If, on or before October 31, 2024, we commit to purchasing a set amount of additional products during the calendar year 2026, Supplier will increase its maximum capacity guarantee to meet the additional demand. Should we exercise this option, we will be required to make an additional deposit of $5.0 million to Supplier within 30 days of the exercise.

Our research and development expenditures of $193.0 million in 2022 and $112.9 million in 2021. While we expect to continue our investment in research and development in 2023, including enhancements of our existing products, and continued development of our Revio and Onso systems and other new technology and products, we expect research and development expenses to decline slightly in 2023 as compared to the year ended December 31, 2022 due to new product transitions.

Cash outflows for capital expenditures of $16.8 million in 2022 and $5.9 million in 2021. We expect to continue to invest in capital expenditures in fiscal 2023 to continue to support manufacturing and expansion of our business, and anticipate a slight decline in 2023 as compared to the year ended December 31, 2022.

Amounts related to future lease payments for operating lease obligations at December 31, 2022, totaling $58.6 million, with $12.0 million expected to be paid within the next 12 months.

Amounts due under the term loan acquired in connection with Omniome at December 31, 2022, totaling $2.3 million, with $1.8 million expected to be paid within the next 12 months. Please see Note 6. Balance Sheet Components for additional information.

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

Payments related to licensing and other arrangements, which are cancelable license agreements with third parties for certain patent rights and technology. Under the terms of these agreements, we may be obligated to pay royalties based on revenue from the sales of licensed products, or minimum royalties, whichever is greater, and license maintenance fees. The future license maintenance fees and minimum royalty payments under the license agreements are not deemed to be material.

Our future capital requirements and the adequacy of our available funds will depend on many factors, including:

our ability to successfully commercialize and develop products and solutions that address customer needs;

the pace of adoption of our products and our ability to obtain new customers in markets;

the progress of our research and development programs and our ability to initiate or expand research programs;

our ability to manage manufacturing and production costs, including purchase obligations, and litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and

the extent to which we engage in collaborations with partners and acquire other businesses or technologies.

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If economic, financial, business, or other factors adversely affect our ability to fund our projected operating cash requirements, we may be required to obtain funding through traditional or alternative sources of financing. We cannot be certain that funds will be available on favorable terms, or at all. If we are required and unable to raise additional capital when desired, our business, operating results, and financial condition may be adversely affected.

Cash Flow Summary

Operating Activities

Our primary uses of cash in operating activities include the development of future products and product enhancements, manufacturing, and support functions related to our sales, general, and administrative activities.

Cash used in operating activities for the year ended December 31, 2022, of $263.2 million was due primarily to a $314.2 million net loss that was partially offset by non-cash items such as share-based compensation of $78.6 million, depreciation of $9.5 million, amortization of right-of-use assets of $6.9 million, inventory provision of $6.0 million, and a change in the estimated fair value of contingent consideration of $2.4 million. Cash flow impact from changes in net operating assets and liabilities of $54.0 million, was primarily attributable to increases of $33.9 million in inventory, net, $12.3 million in prepaid expenses and other assets, and decreases of $7.7 million in operating lease liabilities, $3.7 million in accrued expenses, and $3.7 million in deferred revenue, partially offset by a decrease of $5.5 million in accounts receivable, net, an increase of $1.0 million in accounts payable, and $0.9 million in other liabilities.

Cash used in operating activities for the year ended December 31, 2021, of $111.2 million was due primarily to a $181.2 million net loss, which includes a $93.6 million deferred income tax benefit, that was partially offset by a loss of $52.0 million from Continuation Advances repaid to Illumina that is considered a financing activity, non-cash items such as share-based compensation of $73.4 million, depreciation of $7.2 million, amortization of right-of-use assets of $4.0 million and a net cash inflow from changes in operating assets and liabilities of $20.3 million. Cash flow impact from changes in operating assets and liabilities was primarily attributable to increases of $25.7 million in deferred revenue, an increase of $15.3 million in accrued expenses and an increase of $6.4 million in accounts payable partially offset by an increase of $13.1 million in inventory, net, an increase of $7.2 million in accounts receivable, net, an increase of $1.0 million in prepaid expenses and other assets, and a decrease of $5.0 million in operating lease liabilities.

Investing Activities

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

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

Financing Activities

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

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

Off-Balance Sheet Arrangements

As of December 31, 2022, 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,

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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 Legal Proceedings in Part I, Item 3 of this Annual Report on Form 10-K, 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 December 31, 2022.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which we have prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, cost of revenue, and operating expenses, and related disclosure of contingent assets and liabilities. Management based its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of our instruments and related consumables; service and other revenue consist primarily of revenue earned from product maintenance agreements.

We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods, or services is transferred to our customers, or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Our instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, training, and consumables. For such bundled arrangements, we account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Installation services are considered distinct from the instrument. Therefore, instrument revenue is recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers and upon shipment for sales made to our distributor customers.

The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price. We determine the best estimate of standalone selling price using average selling prices over a 12-month period combined with an assessment of current market conditions. If the standalone selling price is not directly observable, we rely on estimates by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices, and other observable inputs. We recognize revenues as performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer. Our revenue arrangements generally do not provide a right of return.

Certain of our agreements provide options to customers which can be exercised at a future date, such as the option to purchase our product at discounted prices, among others. In accounting for customer options, we determine whether an option is a material right and this requires us to exercise significant judgment. If a contract provides the customer an option to acquire additional goods or services at a discount that exceeds the range of discounts that we typically give for that

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product or service for the same class of customer, or if the option provides the customer certain additional goods or services for free, the option may be considered a material right. If the contract gives the customer the option to acquire additional goods or services at their normal standalone selling prices, we would likely determine that the option is not a material right and, therefore, account for it as a separate performance obligation when the customer exercises the option. If the standalone selling price of the option is not directly observable, an estimated standalone selling price is utilized which considers adjustments for discounts that the customer could receive without exercising the option and the likelihood that the option will be exercised. We may also utilize the alternative approach to estimate the standalone selling price, available pursuant to the applicable accounting guidance, to the extent we conclude the applicable criteria for using the alternative approach has been met. We update the transaction price for expected consideration, subject to constraint, each reporting period if our estimate of future goods to be ordered by customers change.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete balances. Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs while determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories.

We make inventory purchases and commitments to meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration, and quality issues. Based on our analysis, we record adjustments to inventory for potentially excess, obsolete, or impaired goods, when appropriate, to report inventory at net realizable value. Inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates. Any such adjustments would result in a charge to our results of operations.

Business Combinations

Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. Costs that we incur to complete the business combination, such as legal and other professional fees, are expensed as they are incurred.

In connection with certain acquisitions, contingent consideration can be earned by the sellers upon completion of certain future performance milestones. In these cases, a liability is recorded on the acquisition date for an estimate of the acquisition date fair value of the contingent consideration. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in operating expenses in our consolidated statements of operations and comprehensive (loss) income.

We typically use the discounted cash flow method to value our acquired intangible assets. This method requires significant management judgment to forecast future operating results and utilizes significant assumptions such as assumed revenue growth rates, discount rates and obsolescence factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expense could be accelerated or extended. We capitalize in-process research and development (IPR&D), which is considered indefinite lived until the completion or abandonment of the associated research and development efforts. Upon reaching the end of the relevant research and development project (i.e., upon commercialization), the IPR&D asset is amortized over its estimated useful life. If the relevant research and development project is abandoned, the IPR&D asset is expensed in the period of abandonment.

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If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. We record these adjustments to the provisional amounts with a corresponding offset to goodwill. Any adjustments identified after the measurement period are recorded in the consolidated statements of income.

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

Goodwill and Intangible Assets with Indefinite Lives — Impairment Assessment

Goodwill and other intangible assets with indefinite useful lives (i.e., IPR&D) are not amortized, however they are tested annually for impairment, in the second and fourth quarter of our fiscal year, respectively, and whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than the carrying value. Events that would indicate impairment and trigger an interim impairment test include, but are not limited to, unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments or courts.

We perform our goodwill impairment analysis at the reporting unit level. We have one reporting unit, which aligns with our reporting structure and availability of discrete financial information. During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and our overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair value of the reporting unit with the carrying value, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, we record an impairment loss based on the difference. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions include, but are not limited to, revenue and operating income growth rates, discount rates and other factors. We consider peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the asset under measurement and estimated weighted-average costs of capital. Different assumptions from those made in our analysis could materially affect projected cash flows and the evaluation of assets for impairment. We also consider our market capitalization as a part of our analysis. We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative goodwill impairment test.

During the IPR&D impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D is less than the carrying amount. The qualitative factors include, but are not limited to, macroeconomic conditions, industry-specific conditions, and company-specific conditions. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of the IPR&D is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair value of the IPR&D with the carrying value. If the carrying amount of the IPR&D exceeds the fair value, we record an impairment loss based on the difference. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections. Key assumptions include, but are not limited to, revenue and operating income growth rates, discount rates and other factors. We consider peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the asset under measurement and estimated weighted-average costs of capital. Different assumptions from those made in our analysis could materially affect projected cash flows and the evaluation of assets for impairment. We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative impairment test.

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Intangible Assets and Other Long-Lived Assets — Impairment Assessment

We perform regular reviews to determine if any event has occurred that may indicate that the carrying values of our intangible assets with finite lives and other long-lived assets are impaired. If indicators of impairment exist, we assess the recoverability of the affected assets by determining whether their carrying amounts exceed their undiscounted expected future cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value exceeds the fair value. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to net book value, significant changes in the ability of an asset to generate positive cash flows and the pattern of utilization of a particular asset.

In order to estimate the fair values of identifiable intangible assets with finite lives and other long-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Contingent Consideration

In connection with the acquisition of Omniome in the third quarter of 2021, we entered into an arrangement where we are obligated to pay $200 million in cash and equity dependent upon the achievement of a milestone event upon the first commercial shipment of products developed from our acquired sequencing technology. See Note 2. Business Acquisitions for further information.

The contingent consideration liability was measured at fair value as of the acquisition date and is remeasured periodically at each reporting date, with changes in fair value recorded as change in fair value of contingent consideration in the statement of operations. The initial measurement and post-acquisition remeasurement require estimates and assumptions using a scenario-based method that considers a range of potential outcomes of milestone achievement dates and assigned probabilities of occurrence for each outcome. Outcomes are discounted to present value, which is then weighted by the probability of each scenario to determine the total fair value of the contingent consideration payment as of each reporting period. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses or gains. Refer to Note 5. Financial Instruments for further discussion on valuation assumptions.

Recent Accounting Pronouncements

Please see Note 1. Organization and Significant Accounting Policies, subsection titled “Recent Accounting Pronouncements”, in Part II, Item 8 of this Annual Report on Form 10-K for information regarding applicable recent accounting pronouncements.

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ITEM 7. 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 our consolidated financial statements and the related notes included in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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

Overview and Outlook

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies and Estimates

Quantitative and Qualitative Disclosure of Market Risk

Recent Accounting Pronouncements

Contractual Obligations

Off Balance Sheet Arrangements

Overview and Outlook

About PacBio

We are a premier life science technology company that is designing, developing and manufacturing advanced sequencing solutions to help scientists and clinical researchers resolve genetically complex problems.

Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality and completeness which include our existing HiFi long read sequencing and our emerging SBB short read sequencing technologies. Our products address solutions across a broad set of research applications including human germline sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications.

Our focus is on providing our customers with advanced sequencing technologies with higher throughput and improved workflows that we believe will enable dramatic advancements in routine healthcare.

Our 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.

As of December 31, 2021, our commercial team is comprised of over 178 employees, including 48 commissionable employees, many with advanced degrees in biology and significant experience in the genomics industry.

In 2021, we grew revenues by 65% as compared to December 31, 2020, driven by increased sales of our sequencing platforms and newly developed products as well as through strategic business acquisitions. We have added to our leadership team, expanded our critical commercial and research and development capabilities, and achieved development milestones toward commercialization of new and enhanced technologies. These achievements in 2021 focused on building a foundation for growth, that we will leverage to continue to focus on strategic, future-oriented execution as an organization, with our products and for our customers.

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2022 Strategic Objectives

2021 was a productive year for us as we set out to transform the company, scale the business and drive adoption for our advanced sequencing technologies.

Our 2022 strategic objectives include:

Execution – leveraging commercial investment to drive continued HiFi and Sequel II/IIe adoption;

Progress our product pipeline – continue developing our future higher throughput HiFi sequencing platform and differentiated short-read technology; and

Delight our customers – deepening our customer relationships and expanding customer collaborations across existing and rapidly expanding new applications for our technology.

We will continue to leverage our commercial organization and make significant improvements in efficiency and usability of our Sequel II/IIe to seek to reach a broader customer base. We believe the commercial investments we have made in 2021 and will continue to make in 2022 will further help drive growth in our business.  We employed 48 quota-carrying field sales personnel as of December 31, 2021, and we expect to continue to grow the number of quota-carrying field sales personnel throughout 2022.  In 2021, we sought to increase the awareness of our products and the number of potential customers. In 2022, we expect to continue to expand our sales, general and administrative departments to invest in our growth.

To increase the adoption of HiFi sequencing, we have various development programs in progress to expand our product portfolio as well as increase the throughput and improve the usability of our existing sequencing technologies. Our focus for 2022 will be to progress these programs to accelerate new platform launches in the near to mid-term as well as increase application for our technologies. In an effort to address the oncology markets with a highly differentiated alternative, we are also progressing our short read platform development with a goal of launching our SBB short read sequencing platform in the first half of 2023.  As a result, we expect our research and development expense to increase significantly in 2022 as compared to 2021.

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 pursue an expanding pipeline of other potential customer collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing. Collaborative arrangements will likely increase through 2022, ultimately adding to the awareness of our products and service offerings and driving new applications for use of our technology.

Financial Overview

The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the regions in which we sell our products and services and conduct our business operations. Due to the uncertain scope and duration of the pandemic, we cannot reasonably estimate the future impact to our operations and financial results.

In response to local stay-at-home orders and in alignment with CDC recommendations, we have limited our manufacturing and commercial operations. We have and will continue to provide consumables, instruments, and support to scientists at government, academic, and commercial labs that remain open. To aid in containing the spread of COVID-19, we have implemented remote-work options and are limiting employee travel. We are monitoring this rapidly evolving situation.

Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future. Specifically, difficult macroeconomic conditions, decreases in discretionary capital spending, increased and prolonged unemployment or a decline in consumer confidence as a result of the COVID-19 pandemic could have a continuing adverse effect on the demand for some of our products. Such economic disruption could have a material adverse effect on our business, results of operations and liquidity. The degree of impact of COVID-19 on our business will depend on several factors, such as the

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duration and the extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.

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

Key highlights of our 2021 consolidated financial results include the following:

Revenue increased $51.6 million, or 65%, to $130.5 million for the year ended December 31, 2021, as compared to $78.9 million for the year ended December 31, 2020, driven primarily by an increase in instrument and consumable revenue. We expect revenue to grow in 2022 compared to 2021 and 2020. However, our future revenues largely depend on the rate of sales of our sequencing instruments, which are a leading indicator of future sales of consumables. We expect instrument placements to continue to grow as we expand our sales globally through our expanded sales force, through application of technology in new markets and through offering new features and solutions. In turn, we expect that this will continue to increase our sales of consumables and related services.

Gross profit as a percentage of revenue (gross margin) was 45.1% in 2021 compared to 41.3% for the year ended December 31, 2020. The improved gross margin percentage was primarily due to higher sales volumes and increased utilization of our products during the year ended December 31, 2021, compared to 2020. Our gross margin in future periods will depend on several factors, including: strategic product pricing; product mix; sales of higher-margin consumables; supply chain constraints increasing the cost of raw materials; manufacturing capacity and production volumes impacting the cost of inventory; freight costs; warranty costs; and excess or obsolete inventories.

Loss from operations increased $105.8 million or 101%, to $210.2 million for the year ended December 31, 2021, as compared to $104.4 million for the year ended December 31, 2020, driven primarily by an increase of $132.1 million of operating expenses, including $31.1 million of merger-related expenses incurred in connection with the acquisitions of Omniome, Inc. and Circulomics, Inc. in 2021. We expect the loss from operations to continue to grow due to continued increases in operating expenses, as we further invest in product commercialization, product development efforts and incur a full year of operating expenses associated with the acquisition of Omniome. See Note 2. Business Acquisitions for further details.

Cash, cash equivalents and short-term investments were $1.04 billion at December 31, 2021, which represents an increase of 228% compared to the balance at December 31, 2020.

A detailed discussion of our comparison between 2021 and 2020 is presented below. A discussion of the changes in our results of operations between the years ended December 31, 2020 and December 31, 2019, has been omitted from this Annual Report on Form 10-K but may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on February 26, 2021, which is incorporated herein by reference, and which is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.pacb.com).

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Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

Revenue

Revenue increased $51.6 million, or 65%, to $130.5 million for the year ended December 31, 2021, as compared to $78.9 million for the year ended December 31, 2020, driven primarily by an increase in instrument and consumable revenue.

Instrument revenue increased $27.0 million, or 79%, to $61.3 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to an increase in instruments sold. During the year ended December 31, 2021, our installed base was 374 Sequel II and Sequel IIe systems compared to the 203 systems in the year ended December 31, 2020. We expect the number of Sequel II/IIe placements to continue to grow during 2022, reflecting our increased commercial presence and customer demand.

Consumables revenue increased $21.0 million, or 68%, to $52.2 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase in consumable sales was primarily attributable to higher Sequel II/IIe consumables sales from growth of the installed base.

Service and other revenue increased $3.5 million, or 26%, to $17.0 million for the year ended December 31, 2021, primarily due to product services contracts sold on the growing installed base.

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Cost of revenue, gross profit and gross margin

Cost of product revenue increased by $20.9 million, or 59%, to $56.4 million for the year ended December 31, 2021, compared to $35.4 million for the year ended December 31, 2020. The increase in cost of product revenue was primarily due to higher sales.

Cost of service and other revenue increased by $4.1 million, or 37%, to $15.0 million for the year ended December 31, 2021, compared to $10.9 million for the year ended December 31, 2020, primarily due to higher service volumes from our growing installed base and increased stock-based compensation expense.

Gross profit increased $26.3 million, or 81%, to $58.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. Gross margin was 45.1%, for the year ended December 31, 2021, compared to gross margin of 41.3% for the year ended December 31, 2020. The improved gross margin percentage was primarily due to higher sales volumes and increased factory utilization during the year ended December 31, 2021, compared to 2020, which was more adversely impacted by the impact of the COVID-19 pandemic.

The global shortage of semiconductors, which has been reported since early 2021, has caused challenges for us in our supply chain and resulted in some cost increases that have and may continue to adversely impact margins. During these periods of shortages or delays, the price of components may increase, or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer until other sources can be developed.

Research and Development Expense

Research and development expense increased by $48.7 million, or 76%, to $112.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. This change was primarily driven by an increase of $29.0 million in personnel expenses, due to an increase in headcount, including the acquired workforce from the Omniome acquisition, and an increase of $14.3 million of product development costs. Research and development expense included stock-based compensation expense of $20.3 million and $7.1 million during the twelve months ended December 31, 2021 and 2020, respectively.

We will continue to focus a significant portion of our resources on developing new products and solutions, including improving the efficiency and usability of existing products, developing new solutions, software, workflows and applications leveraging our core technologies. We have and expect to continue to collaborate with strategic partners to develop sequencing solutions and expand the application of our technology. We intend to continue to significantly invest in research and development efforts into the foreseeable future. We expect research and development expenses to increase significantly in 2022, due to continued product development, research collaboration efforts, the acquisition of Omniome and our intent to continue to hire additional personnel in research and development. We also expect to continue to incur costs associated with products being developed in connection with the Invitae collaboration.

Sales, General and Administrative Expense

Sales, general and administrative expense increased by $51.3 million, or 71%, to $124.1 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. This change was primarily driven by an increase of $53.6 million in salaries and related expense due to increased headcount, which included quota-carrying sales representatives and executive hires, which was partially offset by a decrease of $6.6 million in consulting and professional services fees. Sales, general and administrative expense included stock-based compensation expense of $35.4 million and $8.2 million during the twelve months ended December 31, 2021 and 2020, respectively.

Sales, general and administrative expense is planned to increase significantly in 2022 as we expect to increase quota-carrying sales representatives, increase headcount as part of our business expansion and incur incremental costs in connection with the acquisition of Omniome.

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Merger-related expenses

Merger-related expenses of $31.1 million during the year ended December 31, 2021, consist of $12.2 million of transaction costs arising from the acquisitions of Omniome and Circulomics and $18.9 million of stock-based compensation expense resulting from the acceleration of certain equity awards in connection with the Omniome merger. We recognized $18.9 million of stock-based compensation expense for the acceleration that was not attributable to pre-combination services, consisting of $6.3 million that was settled in shares of our common stock, $7.4 million that was settled in cash and $5.2 million related to contingent consideration.

Change in fair value of contingent consideration

Change in fair value of contingent consideration of $1.1 million during the year ended December 31, 2021, represents the remeasurement impact of the contingent consideration of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) that is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of a nucleotide sequencing platform, utilizing SBB technology.

Gain from Reverse Termination Fee from Illumina

As part of the Termination Agreement, Illumina paid us a Reverse Termination Fee of $98.0 million in the first quarter of 2020. Pursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we entered into a definitive agreement providing for, or consummated, a Change of Control Transaction, then we may have been required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction. We deferred the gain from the Reverse Termination Fee from Illumina until the date when the associated contingency was resolved. On October 1, 2020, the contingency clauses lapsed and we recorded the $98.0 million as a part of other income.

(Loss) Gain from Continuation Advances from Illumina

As part of the Termination Agreement, Illumina paid us Continuation Advances of $18.0 million during the fourth quarter of 2019 and $34.0 million during the first quarter of 2020. We recorded the $34.0 million as part of other income in the year ended December 31, 2020.

Up to the full $52.0 million of Continuation Advances paid to us were repayable without interest to Illumina if, within two years of March 31, 2020, we entered into, or consummated a Change of Control Transaction or raised at least $100 million in a single equity or debt financing (that may have multiple closings), with the amount repayable dependent on the amount raised by us.

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

Interest Expense

Interest expense for the year ended December 31, 2021, was $12.5 million compared to $0.3 million for the year ended December 31, 2020, primarily due to the interest incurred on the $900 million of 1.50% Convertible Senior Notes due February 15, 2028 that we issued on February 16, 2021.

Other Income, Net

The decrease in Other income, net was primarily driven by a $0.8 million foreign exchange loss for the year ended December 31, 2021, compared to a $1.0 million foreign exchange gain recognized for the year ended December 31, 2020.

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Benefit from Income Taxes

A deferred income tax benefit of $93.6 million for the year ended December 31, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

Liquidity and Capital Resources

Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, has 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 due to the investments we intend to make as described in Results of Operations above, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business.

Cash, cash equivalents and investments

As of December 31, 2021, we had $1.04 billion in cash, cash equivalents and investments, compared to $318.8 million at December 31, 2020. The increase was attributable to the net proceeds from our issuance of $900 million of 1.50% Convertible Senior Notes on February 16, 2021, and $300 million of common stock in a private placement on September 20, 2021. This increase was partially offset by the payment of $319.8 million, net of cash acquired, in the acquisitions of Omniome and Circulomics in the third quarter of 2021, repayment of $52 million of Continuation Advances to Illumina in the first quarter of 2021 and $111.2 million cash used in operating activities for the twelve months ended December 31, 2021.

Convertible Senior Notes

At December 31, 2021, we had $900 million of principal Convertible Senior Notes outstanding which mature on February 15, 2028, subject to earlier conversion, redemption or repurchase.

On February 9, 2021, we issued convertible notes due 2028 (Notes) with an aggregate principal of $900 million. The net proceeds from the issuance, after deducting offering expenses, were $895.6 million. The Notes are governed by an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at a rate of 1.50% per annum. Interest on the Notes is payable semi-annually in arrears on February 15 and August 15 commencing on August 15, 2021. The Notes will mature on February 15, 2028, subject to earlier conversion, redemption or repurchase. The proceeds from the issuance of the convertible notes will be used to fund operations, strategic investments and capital requirements.

The Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The Notes are convertible into shares of our common stock based on an initial conversion rate of 22.9885 shares of common stock per $1,000 principal amount of the Notes (which is equal to an initial conversion price of $43.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.

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

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The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture. The Indenture also includes customary covenants for convertible notes of this type.

See Note 7. Convertible Senior Notes for further details.

Acquisitions

On September 20, 2021, we acquired Omniome, a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy results, for total consideration of $714.8 million, consisting of $315.7 million in cash, $249.4 million in shares of PacBio common stock, and contingent consideration with a fair value of $168.6 million. Out of the total payment, approximately $18.9 million, comprised of $7.4 million of cash, 226,811 shares of PacBio common stock with a fair value of $6.3 million and $5.2 million of contingent consideration, was accounted for as a one-time post acquisition stock-based compensation expense. See Note 2. Business Acquisitions for further details.

With regards to the contingent consideration with a fair value of $168.6 million, we are required to pay Omniome stockholders an additional payment of $200 million, composed of $100 million in cash and $100 million in shares of our common stock, upon the achievement of a milestone, defined as the first commercial shipment to a customer of a nucleotide sequencing platform, comprising both an instrument and related consumables, that utilizes SBB technology.

Private Placement of Common Stock

On July 19, 2021, we entered into a purchase agreement with certain qualified institutional buyers and institutional accredited investors, pursuant to which we agreed to sell an aggregate of 11,214,953 shares of common stock, at a price of $26.75 per share, for aggregate gross proceeds of approximately $300 million. The transaction closed on September 20, 2021. We registered the private placement shares for resale following the closing of the merger.

Invitae Collaboration Arrangement

On January 12, 2021, we entered into a multi-year Development and Commercialization Agreement with Invitae Corporation (“Invitae”). Pursuant to the Development Agreement, Invitae is providing certain funding to us to develop products relating to production-scale high-throughput sequencing (“Program Products”). If Program Products become commercially available, Invitae may purchase the Program Products. In addition to selling the Program Products to Invitae, we will have the right to broadly commercialize Program Products for sale to other customers.

Under the Development Agreement, we are conducting a program to develop and will subsequently manufacture the Program Products. Invitae is funding certain development costs we incur in connection with the Program Products (“Program Development Costs”) and will receive preferred pricing on the Program Products as further described in Note 3. Invitae Collaboration Arrangement.

In certain termination circumstances, (i) we will be obligated to refund all or a portion of the development costs advanced by Invitae and/or (ii) we will owe Invitae a share of the revenue that may be generated from the sale of the Program Products to third parties if and when they are commercialized, until such time as Invitae has recouped the amounts paid to us, and in certain circumstances, a mutually agreed return.

We have incurred and expect to incur significant development costs over the duration of the Development Agreement. There can be no assurances that the development program will be successful or that the Program Products will become ready for commercial sale.

All amounts received from Invitae are initially deferred and accumulated in deferred revenue, non-current. As of December 31, 2021, we have recognized payments received from Invitae of $23.5 million in deferred revenue, non-current, on the Consolidated Balance Sheet.

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Additional Capital Requirements

We anticipate that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating and capital requirements for at least the next 12 months from the date of filing of this Annual Report on Form 10-K for the year ended December 31, 2021. Operating needs include planned costs to operate our business, including costs to fund working capital and capital expenditures.  Recent and expected working and other capital requirements, in addition to the above matters, include:

Our purchase orders and contractual obligations of approximately $68.7 million as of December 31, 2021, which consist of open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

Our research and development expenditures were $112.9 million in 2021 and $64.2 million in 2020, and we expect to increase our investment in research and development in 2022, including enhancements of our existing products, continued development of a commercial product leveraging our acquired SBB technology, continued development of products in connection with our Invitae collaboration and new technology and products.

Cash outflows for capital expenditures were $5.9 million in 2021 and $1.0 million in 2020.  We expect capital expenditures to increase in fiscal 2022 to support the increase in manufacturing and expansion of our business.

Amounts related to future lease payments for operating lease obligations at December 31, 2021, totaled $57.7 million, with $11.3 million expected to be paid within the next 12 months.

Amounts due under the term loan acquired in connection with Omniome at December 31, 2021, totaled $3.9 million, with $1.6 million expected to be paid within the next 12 months. Please see Note 6. Balance Sheet Components for additional information.

Payments made to 3rd party collaborators to help advance our technologies and the capabilities of our products. We may also choose to drive investments to help create an ecosystem of customers, partners and collaborators whose expertise and offerings complement and enhance the capabilities and utility of our technology and increase genomic data available on our platforms.

Payments related to licensing and other arrangements are cancelable license agreements with third parties for certain patent rights and technology. Under the terms of these agreements, we may be obligated to pay royalties based on revenue from the sales of licensed products, or minimum royalties, whichever is greater, and license maintenance fees. The future license maintenance fees and minimum royalty payments under the license agreements are not deemed to be material. At this time, obligations for future royalties under our license agreements are not estimable or probable.

Our capital needs may be impacted by the pace of adoption of our products, which affects the sales of our products and services; our ability to obtain new collaboration and customer arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the purchase of patent licenses; manufacturing costs; service costs; 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; macroeconomic impacts of COVID-19; and other factors.

If economic, financial, business or other factors adversely affect our ability to fund our projected operating cash requirements, we may be required to obtain funding through traditional or alternative sources of financing.  We cannot be certain that funds will be available on favorable terms, or at all. If we are required and unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected.

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Cash Flow Summary

Operating Activities

Our primary uses of cash in operating activities are for the development of future products and product enhancements, manufacturing, and support functions related to our sales, general and administrative activities.

We used $111.2 million of cash in operating activities for the year ended December 31, 2021, compared to cash provided by operating activities of $19.5 million for the year ended December 31, 2020.

Cash used in operating activities for the year ended December 31, 2021, of $111.2 million was due primarily to a $181.0 million net loss, which includes a $93.6 million deferred income tax benefit, that was partially offset by a loss of $52.0 million from Continuation Advances repaid to Illumina that is considered a financing activity, non-cash items such as stock-based compensation of $73.4 million, depreciation of $7.2 million, amortization of right-of-use assets of $4.0 million and a net cash inflow from changes in operating assets and liabilities of $20.7 million. The change in net operating assets and liabilities was primarily attributable to increases of $25.7 million in deferred revenue, an increase of $15.1 million in accrued expenses and an increase of $6.4 million in accounts payable partially offset by an increase of $12.4 million in inventory, an increase of $7.2 million in accounts receivable, an increase of $1.0 million in prepaid expenses and other assets and a decrease of $5.0 million in operating lease liabilities.

Cash provided by operating activities for the year ended December 31, 2020, was $19.5 million, reflecting net income of $29.4 million which included a gain from the Reverse Termination Fee received from Illumina of $98.0 million and a gain from the Continuation Advances from Illumina of $34.0 million. However, the Continuation Advances are considered a financing activity and therefore an associated $34.0 million adjustment has been reflected to cash provided by operating activities. The net income of $29.4 million included non-cash expense items such as stock-based compensation of $17.5 million and depreciation of $6.4 million. The change in net operating assets and liabilities was primarily attributed to an increase of $4.1 million in accrued expenses and an increase of $5.0 million in other liabilities, partially offset by a decrease of $5.1 million in accounts payable.

Investing Activities

Our investing activities consist primarily of business acquisitions, capital expenditures and investment purchases, sales and maturities. We used $678.5 million of cash for investing activities for the year ended December 31, 2021, compared to $219.3 million for the same period in 2020.

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

Cash used in investing activities for the year ended December 31, 2020, was due primarily to net purchases of investments of $218.3 million and purchases of property and equipment of $1.0 million.

Financing Activities

Cash provided by financing activities was $1.17 billion and $251.8 million for the year ended December 31, 2021 and 2020, respectively.

Cash provided by financing activities during the year ended December 31, 2021, resulted from net proceeds of $895.5 million from our February 2021 issuance of $900 million of 1.50% Convertible Senior Notes after deducting debt issuance costs, net proceeds of $294.8 million from our September 2021 private placement of common stock after deducting issuance

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costs and proceeds of $31.8 million from the issuance of common stock through our equity compensation plans, partially offset by $52.0 million of Continuation Advances repaid to Illumina.

Cash provided by financing activities during the year ended December 31, 2020, resulted from net proceeds of $187.5 million from our August 2020 and November 2020 underwritten public equity offerings after deducting underwriter commissions and paid offering expenses, $34.0 million of Continuation Advances from Illumina and proceeds of $46.4 million from the issuance of common stock through our equity compensation plans, partially offset by $16.0 million we repaid for the remaining outstanding principal to Deerfield upon the maturity of the Facility Agreement.

Off-Balance Sheet Arrangements

As of December 31, 2021, 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 8. Commitments and Contingencies of this Form 10-K, 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 December 31, 2021.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which we have prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, cost of revenue, and operating expenses, and related disclosure of contingent assets and liabilities. Management based its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of our instruments and related consumables; Service and other revenue consist primarily of revenue earned from product maintenance agreements.

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We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods or services is transferred to our customers or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Our instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, installation, training, and consumables. Additionally, our instrument sale arrangements generally include a one year period of service. For such bundled arrangements, we account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Our customers cannot benefit from our instrument systems without installation, and installation can only be performed by us or qualified distributors. As a result, the system and installation are considered to be a single performance obligation recognized after installation is completed except for sales to qualified distributors, in which case the system is distinct and recognized when control has transferred to the distributor which typically occurs upon shipment.

The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price. We determine the best estimate of standalone selling price using average selling prices over a 12-month period combined with an assessment of current market conditions. If the standalone selling price is not directly observable, we rely on estimates by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices and other observable inputs.

We recognize revenues as performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer. Our revenue arrangements generally do not provide a right of return. Revenue is recorded net of discounts, distributor commissions, and sales taxes collected on behalf of governmental authorities.

Inventories

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out (“FIFO”) basis. The cost basis of our inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand, market conditions and the release of new products that may supersede old ones. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on the results of our operations.

Goodwill and Intangible Assets

We make assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of fair value of intangible assets, which represents a significant portion of the purchase price in most acquisitions, requires the use of significant judgment relating to the fair value, whether the asset should be amortized, and if so, the period and method by which the intangible asset should be amortized. The Company estimates the fair value of the acquisition-related intangible assets primarily using the income approach, which discounts expected future cash flows to present value at the dates of the acquisition. Expected future cash flows utilize significant assumptions such as assumed revenue growth, discount rate and obsolescence factors

Finite-lived intangible assets, our developed technology and customer relationships, are capitalized and amortized over the lesser of the terms of the agreement or estimated useful life. We regularly review the carrying amount of our finite-lived intangible assets to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. We make judgements about the recoverability of finite-lived assets when events or changes in circumstances indicate that an impairment may exist. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset. Should impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset over the asset’s fair value.

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Goodwill is evaluated for impairment annually in the second quarter of each year, and when events occur, or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. Qualitative factors that might require an interim evaluation include unexpected adverse business conditions, economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments or courts. When impairment seems more likely than not during our qualitative assessment, we perform the quantitative assessment where we compare the fair value of the reporting unit with the carrying values, including goodwill. If the carrying amounts of the reporting units exceed the fair values, we will record an impairment loss based on the difference.

Indefinite-lived intangible assets, our In-Process Research and Development (IPR&D), is not subject to amortization and is assessed for impairment on, at least, an annual basis in the second quarter of each year. We review indefinite-lived intangible assets for impairment using a qualitative assessment. When impairment seems more likely than not during our qualitative assessment, we will proceed with a quantitative assessment where we estimate the fair value. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to its fair value. We make judgements about the recoverability of indefinite-lived assets when events or changes in circumstances indicate that an impairment may exist. Upon the commercialization of an IPR&D asset, it is reclassified to developed technology, which is a finite-lived intangible asset, and amortized over its estimated useful life.

Estimates of discounted future cash flows require assumptions related to revenue and operating income growth rates, discount rates and other factors. We consider peer revenues and earnings trading multiples from companies that have operational and financial characteristics that are similar to the asset under measurement and estimated weighted average costs of capital. Different assumptions from those made in our analysis could materially affect projected cash flows and the evaluation of assets for impairment.

We acquired $11.4 million of finite-lived intangible assets, $400.0 million of IPR&D and $410.0 million of goodwill in connection with the acquisitions of Omniome and Circulomics in the third quarter of 2021. We will perform the first annual quantitative goodwill and IPR&D impairment test in the second quarter of 2022. Through the review of qualitative factors in the fourth quarter of 2021, we noted no indications of impairment.

Contingent Consideration

In connection with the acquisition of Omniome in the third quarter of 2021, we entered into an arrangement where we are obligated to pay $200 million in cash and equity dependent upon the achievement of a milestone event upon the first commercial shipment of products developed from our acquired sequencing technology. See Note 2. Business Acquisitions for further information.

The contingent consideration liability was measured at fair value as of the acquisition date and is remeasured periodically at each reporting date, with changes in fair value recorded as change in fair value of contingent consideration in the statement of operations. The initial measurement and post-acquisition remeasurement require estimates and assumptions using a scenario-based method that considers a range of potential outcomes and assigned probabilities of occurrence for each outcome. Outcomes are discounted to present value, which is then weighted by the probability of each scenario to determine the total fair value of the contingent consideration payment as of each reporting period. Refer to Note 5. Financial Instruments for further discussion on valuation assumptions.

Recent Accounting Pronouncements

Please see Note 1. Organization and Significant Accounting Policies, subsection titled “Recent Accounting Pronouncements”, in Part II, Item 8 of this Annual Report on Form 10-K for information regarding applicable recent accounting pronouncements.