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What changed in PACIFIC BIOSCIENCES OF CALIFORNIA, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of PACIFIC BIOSCIENCES OF CALIFORNIA, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+400 added−394 removedSource: 10-K (2024-02-28) vs 10-K (2023-02-28)

Top changes in PACIFIC BIOSCIENCES OF CALIFORNIA, INC.'s 2023 10-K

400 paragraphs added · 394 removed · 312 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeGenomics is core to all biological processes, and our advanced genomics tools provide scientists and clinical researchers with the insights to better understand biology and health. The “promise of genomics” postulates that medicine, agriculture, public health, drug development, and other disciplines will be fundamentally transformed with the incorporation of routine genomic information over the coming decades .
Biggest changeAs of December 31, 2023, we received orders from over 70 customers. Our Mission and Impact Our mission is to enable the promise of genomics to better human health. Genomics is core to all biological processes, and our advanced genomics tools provide scientists and clinical researchers with the insights to better understand biology and health.
Oncology: Enable the discoveries of underlying causes of cancer, progression, and relapse Understanding the cellular and molecular complexity of tumor cells is critical in developing more effective targeted cancer therapies. Single-cell transcriptomics is particularly impactful in defining cellular identity and function; however, other technologies miss critical information by only sequencing a portion of RNA.
Oncology: Enable the discoveries of underlying causes of cancer, progression, and relapse Understanding tumor cells` cellular and molecular complexity is critical in developing more effective targeted cancer therapies. Single-cell transcriptomics is particularly impactful in defining cellular identity and function; however, other technologies miss critical information by only sequencing a portion of RNA.
A library preparation kit is used to convert DNA into SMRTbell double-stranded DNA library formats and includes typical molecular biology reagents, such as ligase, buffers, and exonucleases. Our binding kits include our modified DNA polymerase and are used to bind SMRTbell libraries to the polymerase in preparation for sequencing.
A library preparation kit is used to convert DNA into SMRTbell double-stranded DNA library formats and includes typical molecular biology reagents, such as ligase, buffers, and exonucleases. Our binding/polymerase kits include our modified DNA polymerase and are used to bind SMRTbell libraries to the polymerase in preparation for sequencing.
FDA defines a medical device as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component part or accessory, which is (i) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (ii) intended to affect the structure or any function of the body of man or other animals and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being 7 metabolized for the achievement of any of its primary intended purposes.
FDA defines a medical device as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component part or accessory, which is (i) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (ii) intended to affect the structure or any function of the body of man or other animals and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.
These discoveries include the presence of chemical modifications to the bases, such as methylation, and post-translational modification, or the processing of RNA molecules after they are transcribed from the genome, both of which can affect protein synthesis. 2 Our Principal Markets Researchers utilize our solutions in human genomics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications.
These discoveries include the presence of chemical modifications to the bases, such as methylation, and post-translational modification, or the processing of RNA molecules after they are transcribed from the genome, both of which can affect protein synthesis. Our Principal Markets Researchers utilize our solutions in human genomics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications.
Obtaining coverage 9 and reimbursement for such products can be uncertain, time-consuming, and expensive, and, even if favorable coverage and reimbursement status were attained for our tests, to the extent applicable, less favorable coverage policies and reimbursement rates may be implemented in the future.
Obtaining coverage and reimbursement for such products can be uncertain, time-consuming, and expensive, and, even if favorable coverage and reimbursement status were attained for our tests, to the extent applicable, less favorable coverage policies and reimbursement rates may be implemented in the future.
PMA reviews generally last between one and two years, 8 although they can take longer. Both the 510(k) and the PMA processes can be expensive and lengthy and may not result in clearance or approval.
PMA reviews generally last between one and two years, although they can take longer. Both the 510(k) and the PMA processes can be expensive and lengthy and may not result in clearance or approval.
We have sought, and will continue to seek, patent protection for our SMRT and SBB technology, for improvements to our SMRT and SBB technology, as well as for any of our other technologies where we believe such protection will be advantageous.
We have sought, and will continue to seek, patent protection for our SMRT and SBB technology, for improvements to our SMRT kit and SBB technology, as well as for any of our other technologies where we believe such protection will be advantageous.
Our products address solutions across a broad set of applications including human genomics sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Long-read sequencing was recognized by the journal Nature Methods as its “method of the year” for 2022 for its contributions to biological understanding and future potential.
Our 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.
Some of the patents and applications that we own, as well as some of the patents and applications that we have licensed from other parties, are subject to U.S. government march-in rights, whereby the U.S. government may disregard our exclusive patent rights on its own behalf or on behalf of third parties by imposing licenses in certain circumstances, such as if we fail to achieve practical application of the U.S. government funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry.
Some of the patents and applications that we own, as well as some of the patents and applications that we have licensed from other parties, are subject to U.S. 7 Table of Contents government march-in rights, whereby the U.S. government may disregard our exclusive patent rights on its own behalf or on behalf of third parties by imposing licenses in certain circumstances, such as if we fail to achieve practical application of the U.S. government funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry.
The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov. Additionally, we use our website (including the blog section of our website) as well as our Twitter account ( @pacbio ) as a channel of distribution for important company information and to comply with our disclosure obligations under Regulation FD.
The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov. Additionally, we use our website (including the blog section of our website) as well as our X (formerly Twitter) account ( @pacbio ) as a channel of distribution for important company information and to comply with our disclosure obligations under Regulation FD.
Our current patent portfolio, including patents exclusively licensed to us, is directed to various technologies, including SMRT nucleic acid sequencing and other methods for analyzing biological samples, ZMW arrays, surface treatments, phospholinked nucleotides and other reagents for use in nucleic acid sequencing, optical short-read nucleic acid sequencing, nucleic acid preparation, and purification components and systems, processes for identifying nucleotides within nucleic acid sequences, and processes for analysis and comparison of nucleic acid sequence data.
Our current patent portfolio, including patents exclusively licensed to us, is directed to various technologies, including SMRT nucleic acid sequencing and other methods for analyzing biological samples, zero-mode waveguide (ZMW) arrays, surface treatments, phospholinked nucleotides and other reagents for use in nucleic acid sequencing, optical short-read nucleic acid sequencing, nucleic acid preparation, and purification components and systems, processes for identifying nucleotides within nucleic acid sequences, and processes for analysis and comparison of nucleic acid sequence data.
For the years ended December 31, 2022, 2021, and 2020, one customer accounted for approximately 12%, 13%, and 14% of our total revenue, respectively. We believe that the majority of our current customers are early adopters of sequencing technology.
For the years ended December 31, 2022, and 2021, one customer accounted for approximately 12% and 13% of our total revenue, respectively. We believe that the majority of our current customers are early adopters of sequencing technology.
The accuracy of our novel sequencing approach has the potential to advance translational cancer research, drive higher fidelity single-cell applications, and broadly enable clinical sequencing—even in regions of the genome prone to sequencing errors with other short-read sequencing technologies. SBB Short-Read Sequencing Instrument: Onso system Our Onso instrument, currently under development, conducts, monitors, and analyzes SBB biochemical reactions.
The accuracy of our novel sequencing approach has the potential to advance translational cancer research, drive higher fidelity single-cell applications, and broadly enable clinical sequencing—even in regions of the genome prone to sequencing errors with other short-read sequencing technologies. SBB Short-Read Sequencing Instrument: Onso system Our Onso instrument conducts, monitors, and analyzes SBB biochemical reactions.
A human carries two copies of the chromosomes, one inherited from each parent. There are approximately 23,000 smaller regions within these chromosomes, called genes, which contain the blueprints for protein production. The proteins synthesized from these blueprints essentially underlie the operation of all biological systems. Genome sequencing reads the bases of long fragments of nucleic acids.
A human carries two copies of the chromosomes, one inherited from each parent. Approximately 23,000 smaller regions within these chromosomes, called genes, contain the blueprints for protein production. The proteins synthesized from these blueprints essentially underlie the operation of all biological systems. Genome sequencing reads the bases of long fragments of nucleic acids.
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 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.
In addition, important information is routinely posted and accessible on the blog section of our website, which is accessible through our website at www.pacb.com/blog , as well as our Twitter account ( @pacbio ).
In addition, important information is routinely posted and accessible on the blog section of our website, which is accessible through our website at www.pacb.com/blog , as well as our X account ( @pacbio ).
Initial genome sequencing studies have shown that mutations in these DNA base-pairs play a critical role in human disease, contributing to the burgeoning field of genomics. Since then, recent discoveries have highlighted additional complexities of DNA and ribonucleic acid, or RNA.
Initial genome sequencing studies have shown that mutations in these DNA base pairs play a critical role in human disease, contributing to the burgeoning field of genomics. Since then, recent discoveries have highlighted additional complexities of DNA and RNA.
Researchers deploy multiple tactics to try to mitigate these effects, including oversampling or implementing complex library preparation methods, yet still face challenges, including missing rare variants. We believe our proprietary SBB approach will enable researchers to address the gap in detecting rare variants, especially in complex heterogenous samples.
Researchers deploy multiple tactics to try to mitigate these effects, including oversampling or implementing complex library preparation methods, yet still face challenges, including missing rare variants. 5 Table of Contents We believe our proprietary SBB approach will enable researchers to address the gap in detecting rare variants, especially in complex heterogenous samples.
The regulatory approval process for such products may be significantly delayed, may be significantly more expensive than anticipated, and may conclude without such products being approved by the FDA. Without timely regulatory approval, we will not be able to launch or successfully commercialize such diagnostic products.
The regulatory approval process for such products may be significantly delayed, may be significantly more expensive than anticipated, 9 Table of Contents and may conclude without such products being approved by the FDA. Without timely regulatory approval, we will not be able to launch or successfully commercialize such diagnostic products.
In the future, products that we may develop in the molecular diagnostic markets, depending on their intended use, may be regulated as medical devices or in vitro diagnostic products (“IVDs”) by the FDA and comparable agencies in other countries.
In the future, products that we may develop in the molecular 8 Table of Contents diagnostic markets, depending on their intended use, may be regulated as medical devices or in vitro diagnostic products (“IVDs”) by the FDA and comparable agencies in other countries.
Any of these risks could harm our international operations and negatively impact our sales, adversely affecting our business, results of operations, financial condition, and growth prospects. Human Capital As of December 31, 2022, we had 769 full-time employees.
Any of these risks could harm our international operations and negatively impact our sales, adversely affecting our business, results of operations, financial condition, and growth prospects. Human Capital As of December 31, 2023, we had 796 full-time employees.
We expect to convert this backlog to revenue during 2023; however, our ability to do so is subject to customers who may seek to cancel or delay their orders even if we are prepared to fulfill them. Manufacturing We manufacture sequencing instruments, SMRT cells, and reagents.
We expect to convert the majority of this backlog to revenue during 2024; however, our ability to do so is subject to customers who may seek to cancel or delay their orders even if we are prepared to fulfill them. Manufacturing We manufacture sequencing instruments, SMRT Cells, and reagents.
The contents of our website and our Twitter account are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our website or Twitter account are intended to be inactive textual references only. ‎ 11
The contents of our website and our X account are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our website or X account are intended to be inactive textual references only. 12 Table of Contents
One flow cell and associated sequencing reagent pack is consumed per sequencing reaction. Each flow cell contains two lanes and scientists can choose to sequence different samples in each lane while additionally combining any number of flow cells needed per experiment. We intend to offer several reagent kits, each designed to address a specific step in the core sequencing workflow.
Each flow cell contains two lanes and scientists can choose to sequence different samples in each lane while additionally combining any number of flow cells needed per experiment. We offer several reagent kits, each designed to address a specific step in the core sequencing workflow.
In the future, to the extent we develop any clinical diagnostic assays, we may pursue payment for such products through a diverse and broad range of channels and seek coverage and reimbursement by government health insurance programs and commercial third-party payors for such products. In the United States, there is no uniform coverage for clinical laboratory tests.
In the future, to the extent we develop any clinical diagnostic assays, we may pursue payment for such products through a diverse and broad range of channels and seek coverage and reimbursement by government health insurance programs and commercial third-party payors for such products.
Our products also have enhanced multi-omic capabilities to look beyond the genome to the transcriptome and epigenome, which we believe is key to deep understanding. The Underlying Science Genetic inheritance in living systems is conveyed through a naturally occurring information storage system known as deoxyribonucleic acid, or DNA.
Our products also have enhanced multi-omic capabilities to look beyond the genome to the transcriptome and epigenome, which we believe is key to understanding a full picture of biology. 3 Table of Contents The Underlying Science Genetic inheritance in living organisms is conveyed through a naturally occurring information storage system known as deoxyribonucleic acid, or DNA.
Recent Developments On October 25, 2022, we announced two new sequencing platforms, Revio TM and Onso TM . 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.
Recent Developments In 2023, we commercially released two new sequencing platforms, Revio TM and Onso TM . 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.
Backlog As of December 31, 2022, our instrument backlog was approximately $45.4 million, compared to $2.0 million as of December 31, 2021. We define backlog as purchase orders or signed contracts from our customers, which we believe are firm and for which we have not yet recognized revenue.
Backlog As of December 31, 2023, our product backlog was approximately $18.7 million, compared to $51.5 million as of December 31, 2022. We define backlog as purchase orders or signed contracts from our customers, which we believe are firm and for which we have not yet recognized revenue.
One SMRT Cell is consumed per sequencing reaction, and scientists can choose the number of SMRT Cells they use per experiment. We offer several reagent kits, each designed to address a specific step in the core sequencing workflow.
HiFi Consumables Customers purchase proprietary consumable products to run their PacBio systems, including our SMRT Cells and reagent kits. One SMRT Cell is consumed per sequencing reaction, and scientists can choose the number of SMRT Cells they use per experiment. We offer several reagent kits, each designed to address a specific step in the core sequencing workflow.
Of these employees, 352 were in research and development, 64 were in operations, 36 were in service, 204 were in marketing, sales, and customer support, and 113 were in general and administration. With the exception of our field-based sales, marketing, and service teams, the majority of our employees are in California.
Of these employees, 317 were in research and development, 91 were in operations, 45 were in service, 226 were in marketing, sales, and customer support, and 117 were in general and administration. With the exception of our field-based sales, marketing, and service teams, the majority of our employees are in California.
We purchase both custom and off-the-shelf components from a large number of suppliers and subject them to significant quality specifications. We periodically conduct quality audits of most of our critical suppliers and have established a supplier certification program.
We purchase both custom and off-the-shelf components from a large number of suppliers and subject them to significant quality specifications. We periodically conduct quality audits of most of our critical suppliers and have established a supplier qualification program. Some of the components required in our products are currently either sole sourced or single sourced.
Program benefits are intended to provide protection and security, so employees can have peace of mind concerning events that may require time away from work or that may impact their financial well-being.
We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs. Program benefits are intended to provide protection and security, so employees can have peace of mind concerning events that may require time away from work or that may impact their financial well-being.
SMRT Sequencing is based on following the activity of DNA polymerase on individual DNA molecules in real time that occurs on our SMRT Cells that are monitored and analyzed within our HiFi long-read sequencing systems: the Revio system, Sequel II system, Sequel IIe system, and Sequel system.
After determining which nucleotide is required, the polymerases incorporate that nucleotide into the growing strand being produced. 4 Table of Contents SMRT Sequencing is based on following the activity of DNA polymerase on individual DNA molecules in real time that occurs on our SMRT Cells that are monitored and analyzed within our HiFi long-read sequencing systems: the Revio system, Sequel II system, Sequel IIe system, and Sequel system.
Increased competition may result in pricing pressures, which could harm our sales, profitability, or share of supply. In order for us to maintain and increase our sales, we will need to demonstrate that our products deliver superior performance and value as a result of our key differentiators.
In order for us to maintain and increase our sales, we will need to demonstrate that our products deliver superior performance and value as a result of our key differentiators.
Computer algorithms are used to translate the information that is captured by the optics system. Using the recorded information, light pulses are converted into either an A, C, G, or T base call with associated quality metrics.
Computer algorithms are used to translate the information that is captured by the optics system. Using the recorded information, light pulses are converted into either an A, C, G, or T base call with associated quality metrics. Once sequencing is started, the real-time data is delivered to the system’s primary analysis pipeline, which outputs base identity and quality values.
For example, customers in academic research institutions may have bacteria, animal, or human DNA samples isolated from various sources while agricultural biology companies may have DNA samples isolated from different strains of rice, corn, or other crops.
For example, customers in academic research institutions may have bacteria, animal, or human DNA samples isolated from various sources while agricultural biology companies may have DNA samples isolated from different strains of rice, corn, or other crops. For the year ended December 31, 2023, no single customer accounted for 10% or more of our total revenue.
We believe that unleashing the full potential of genomics will require a level of accuracy and completeness that is inaccessible to legacy technologies. Accuracy and completeness are central to our product development strategy, and thus we have created some of the most innovative and high-quality genomics solutions on the market.
Accuracy and completeness are central to our product development strategy; thus, we have created some of the most innovative and high-quality genomics solutions on the market.
We also offer comprehensive employee benefits, which vary by country and region, such as life, disability, and health insurance, health savings and flexible spending accounts, paid time off, paid parental leave, Employee Stock Purchase Program, and a 401(k) plan. It is our expressed intent to be an employer of choice in our industry by providing market-competitive compensation and benefits packages.
We also offer comprehensive employee benefits, which vary by country and region, such as life, disability, and health insurance, health savings and flexible spending accounts, time off benefits, paid parental leave, Employee Stock Purchase Program, and a 401(k) plan.
As of December 31, 2022, we own or hold exclusive licenses to 406 issued U.S. patents, 100 pending U.S. patent applications, 396 granted foreign patents, and 158 pending foreign patent applications, including foreign counterparts of U.S. patent and patent applications. The full term of the issued U.S. patents will expire between 2023 and 2041.
As of December 31, 2023, we own or hold exclusive licenses to 437 issued U.S. patents, 89 pending U.S. patent applications, 6 pending Patent Cooperation Treaty ("PCT") patent applications, 441 issued foreign patents, and 166 pending foreign patent applications. The full term of the issued U.S. patents will expire between 2024 and 2041.
We continue to monitor this evolving situation and will continue to seek programs to educate and assist employees whenever possible. Diversity, Equity, and Inclusion We believe a diverse workforce is critical to our success. Our mission is to value differences in races, ethnicities, religions, nationalities, genders, ages, sexual orientations, as well as education, skill sets and experience.
These programs are highlighted and updated regularly on our internal benefits platform. Diversity, Equity, and Inclusion We believe a diverse workforce is critical to our success. Our mission is to value differences in races, ethnicities, religions, nationalities, genders, ages, sexual orientations, as well as education, skill sets and experience.
We believe scIso-Seq is uniquely positioned to enable discoveries by researchers of the underlying causes of cancer initiation, progression, and relapse, as well as the discovery by researchers of novel diagnostic, prognostic, and predictive biomarkers that may inform future clinical tests.
We believe scIso-Seq is uniquely positioned to enable discoveries by researchers of the underlying causes of cancer initiation, progression, and relapse, as well as the discovery by researchers of novel diagnostic, prognostic, and predictive biomarkers that may inform future clinical tests. 3 Table of Contents As novel discoveries continue to be made using our long-read sequencing technology, we believe our SBB short-read sequencing technology will enable us to meet customers` demands in the expanding non-invasive testing market in oncology.
Our sales consist of sequencing instruments, nanofluidic chips (SMRT Cells), and reagents for preparing DNA and performing sequencing based on our SMRT technology; reagents for DNA extraction based on our nanobind technology; and the services we perform for customers. 3 HiFi Long-Read Sequencing Our HiFi long-read sequencing protocol was built upon our SMRT sequencing systems, including consumables and software, and offers customized end-to-end workflows for different sequencing applications.
Our sales consist of sequencing instruments, nanofluidic chips (SMRT Cells), and reagents for preparing DNA and performing sequencing based on our SMRT technology; flow cells and reagents for preparing DNA and performing sequencing based on our SBB technology, reagents for DNA extraction based on our Nanobind technology; and the services we perform for customers.
Customers 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.
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.
The extent of coverage and rate of payment for covered services or items vary from payor to payor.
In the United States, there is no 10 Table of Contents uniform coverage for clinical laboratory tests. The extent of coverage and rate of payment for covered services or items vary from payor to payor.
Once sequencing is started, the imaging data is delivered to the system’s primary analysis pipeline, which outputs base identity and quality values. SBB Consumables After Onso’s anticipated launch in the second quarter of 2023, our SBB consumable products will be available for purchase, including flow cells, clustering, and sequencing reagent kits.
Once sequencing is started, the imaging data is delivered to the system’s primary analysis pipeline, which outputs base identity and quality values. SBB Consumables To complement our Onso instrument, we also sell a range of SBB consumable products including flow cells, clustering, and sequencing reagent kits. One flow cell and associated sequencing reagent pack is consumed per sequencing reaction.
We began taking orders for Revio in the fourth quarter of 2022 and 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.
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 customer shipments of Onso in the third quarter of 2023. In August 2023, we acquired Apton Biosystems to accelerate the development of a high-throughput platform based on the SBB chemistry utilized by Onso.
See the Risk Fact ors section, specifically the risk factor titled Our operating results fluctuate from quarter to quarter and year over year, which makes our future results difficult to predict and could negatively impact the market price of our common stock for additional information.
See the Risk Factors section, specifically the risk factor titled Our operating results fluctuate from quarter to quarter and year over year, which makes our future results difficult to predict and could negatively impact the market price of our common stock , for additional information. 6 Table of Contents Customers 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.
Highly accurate, long sequence reads simplify and accelerate data analysis algorithms, reducing the needs for error correction steps and/or assembly aspects, depending on the application.
HiFi Long-Read Sequencing Our HiFi long-read sequencing protocol was built upon our SMRT sequencing systems, including consumables and software, and offers customized end-to-end workflows for different sequencing applications. Highly accurate, long sequence reads simplify and accelerate data analysis algorithms, reducing the need for error correction steps and/or assembly aspects, depending on the application.
Other Sequencing Solutions There are a significant number of companies offering nucleic acid sequencing equipment or consumables. These include, but are not limited to, Illumina, Inc. (“Illumina”), BGI Genomics (also known as MGI or Complete Genomics), Thermo Fisher Scientific Inc. (“Thermo”), Oxford Nanopore Technologies Ltd. (“ONT Ltd.”) , Roche Holding AG (“Roche”), Qiagen N.V. (“Qiagen”), Element Biosciences, Inc.
We also have non-exclusive patent licenses with various third parties to supplement our own large and robust patent portfolio. Other Sequencing Solutions There are a significant number of companies offering nucleic acid sequencing equipment or consumables. These include, but are not limited to, Illumina, Inc. (“Illumina”), BGI Genomics (also known as MGI or Complete Genomics), Thermo Fisher Scientific Inc.
Our core sequencing kits contain reagents required for on-instrument, real-time sequencing, including phospholinked nucleotides. We have also developed and offer the Multiplexed Arrays Sequencing (MAS-Seq) 3’ kit to enable cost-effective long-read single-cell RNA sequencing for a more complete interrogation of the transcriptome.
Our core sequencing kits contain reagents required for on-instrument, real-time sequencing, including phospholinked nucleotides. We have developed and offered a new line of Kinnex kits with companion SMRT Link software to enable high-throughput, scalable, cost-effective RNA applications including bulk RNA, single-cell RNA, and 16S rRNA sequencing.
Our research and development efforts focus on programs to develop new and existing platforms, as well as increasing throughput and decreasing costs on behalf of our customers. We are currently developing higher throughput platforms that encompass our HiFi long-read sequencing. Our mid-throughput short-read Sequencing by Binding platform, Onso, is currently under development.
Research and Development We have historically made and plan to continue to make significant investments in research and development. Our research and development efforts focus on programs to develop new and existing platforms, as well as increasing throughput and decreasing costs on behalf of our customers.
Health, Safety, and Wellness The health, safety, and wellness of our employees is a priority in which we have always invested and will continue to do so. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs.
It is our expressed intent to be an employer of choice in our industry by providing market-competitive compensation and benefits packages. 11 Table of Contents Health, Safety, and Wellness The health, safety, and wellness of our employees is a priority in which we have always invested and will continue to do so.
(“Element”), Bionano Genomics, Inc. (“Bionano”), Ultima Genomics, Inc. (“Ultima”) and Singular Genomics Systems, Inc. (“Singular”). These companies may have different levels of financial, technical, manufacturing, administrative, and support resources available to them. We expect the competition to intensify within the overall nucleic acid sequencing market as there are also several companies developing new sequencing technologies, products and/or services.
We expect the competition to intensify within the overall nucleic acid sequencing market as there are also several companies developing new sequencing technologies, products and/or services. Increased competition may result in pricing pressures, which could harm our sales, profitability, or share of supply.
We see early progress toward this transformation in the applied use of genomics in areas such as genetic disease, oncology, and sustainable food production. However, legacy genomics technologies have fundamental limitations in progressing these fields toward the promise of genomics.
The “promise of genomics” postulates that medicine, agriculture, public health, drug development, and other disciplines will be transformed by incorporating routine genomic information over the coming decades. We see early progress toward this transformation in the applied use of genomics in areas such as genetic disease, oncology, and sustainable food production.
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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.
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Commercial shipments for Revio commenced in the first quarter of 2023, and 173 systems have since been shipped to more than twenty countries as of December 31, 2023.
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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. Our Mission and Impact Our mission is to enable the promise of genomics to better human health.
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We released SMRT Link 13.0 software on the Revio system which includes the adaptive loading feature for consistent run performance, run preview for improved lab efficiency, and expanded application support with functionality to sequence shorter and longer fragments of DNA.
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As novel discoveries continue to be made using our long-read sequencing technology, we believe our SBB short-read sequencing technology will enable us to meet the demands of customers in the expanding non-invasive testing market in oncology.
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Through acquiring Apton, we obtained expertise in state-of-the-art optics and image processing and a novel clustering method and chemistry designed to enable the sequencing of billions of clusters of DNA on one flow cell. We also develop products used to prepare molecules for sequencing on our platforms.
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Plant and Animal Sciences: Helping scientists answer biological questions across a broad range of plant and animal sciences There are hundreds of thousands of distinct plant and animal species.
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In the fourth quarter of 2023, we commenced commercial shipments for a new Kinnex TM line of products used to concatenate small molecules into larger fragments to optimize the output on HiFi sequencing systems like Revio. The Kinnex products are designed for various applications in RNA and amplicon sequencing.
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Our technology is used to build de novo reference genomes for these organisms across several global initiatives which are dedicated to preserving, monitoring, and cataloging biodiversity with actionable and accurate genomic data.
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However, legacy genomics technologies have fundamental limitations in progressing these fields toward the promise of genomics. We believe that unleashing the full potential of genomics will require a level of accuracy and completeness inaccessible to legacy technologies.
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Upon launch of the SBB platform, we believe we will be the only company offering both native long-read and native short-read technologies into the market.
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Plant and Animal Sciences: Helping scientists answer biological questions for a healthier world In Plant and Animal Sciences, academic, government and corporate researchers are using our technology to explore and catalog the genetic and biological diversity of organisms for the breeding, propagation, and production of crops and livestock while conserving the planet’s natural resources.
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After determining which nucleotide is required, the polymerases incorporate that nucleotide into the growing strand being produced.
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PacBio HiFi sequencing enables researchers to build high quality de novo reference genomes and transcriptomes to study variations across species enabling improvements to global conservation initiatives and support the breeding and production of resilient and higher yielding crops to meet the world's growing population and demand.
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Once sequencing is started, the real-time data is delivered to the system’s primary analysis pipeline, which outputs base identity and quality values. 4 HiFi Consumables Customers purchase proprietary consumable products to run their PacBio systems, including our SMRT Cells and reagent kits.
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The Kinnex kits are built upon the Multiplexed Array Sequencing (MAS-Seq) method for concatenating smaller amplicons into larger fragments to sequence on PacBio's long read sequencers, increasing the molecular yield by up to 16-fold.
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The MAS-Seq kit takes single-cell cDNA as an input and outputs a sequencing-ready library, which enables researchers to move beyond gene counting to get full-length isoform information, characterize the full diversity of transcript isoforms at the single-cell level and ultimately reveal cell type-specific spliced isoforms and expressed variants.
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Throughput increase in these key RNA applications where the dynamic range of different RNA isoforms (bulk and single-cell) or microbial species (16S) can vary by orders of magnitude, enables characterization of these complex RNA samples while drastically reducing sequencing need.
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In addition, we offer HiFiViral for SARS-CoV-2, our first fit-for-purpose, end-to-end solution for COVID-19 genome sequencing. This solution uses a differentiated molecular inversion probe (MIPs) design that is robust to the emergence of new variants in the COVID-19 genome and allows for detection of all known classes of variation across the entire viral genome.
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Finally, our clustering and sequencing kits contain all reagents required for generating sequence ready clusters on flow cell and performing SBB sequencing reactions on instrument, respectively.
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Both characteristics are required for efficient and effective public health surveillance programs battling the COVID-19 pandemic. The solution also includes fit-for-purpose software that enables automated variant calling and preparation of files for submission into public databases tracking the evolution of the COVID-19 genome.
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Our Strategy for Growth To enable the promise of genomics, our strategy includes the following key elements: • 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; • 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.
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Finally, our clustering and sequencing kits contain all reagents required for generating sequence ready clusters on flow cell and performing SBB sequencing reactions on instrument, respectively. 5 Our Strategy for Growth To enable the promise of genomics, our strategy includes the following key elements:  drive rapid adoption of Revio 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 Marketing, Sales, Service, and Support We market our products through a global sales force and through distribution partners in Asia and Australia, certain parts of Europe, the Middle East and Africa, and Latin America.
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Marketing, Sales, Service, and Support We market our products through a global sales force and through distribution partners in Asia and Australia, certain parts of Europe, the Middle East and Africa, and Latin America.
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Some of the components required in our products are currently either sole sourced or single sourced. 6 Research and Development We have historically made and plan to continue to make significant investments in research and development.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeSuch risks are discussed more fully below and include, but are not limited to, risks related to: • our ability to successfully market, commercialize, and sell current and future products and related maintenance services; • our ability to achieve profitability for our business; • our ability to successfully leverage and integrate our acquisitions and future acquisitions; • our ability to successfully research, develop and timely manufacture our current and future products; • management of new product introductions and transitions, resultant costs, and ability of new products to generate promised performance; • recent significant changes to our leadership team and resultant disruptions to our business; • retention, recruitment, and training of senior management, key personnel, scientists and engineers; • our ability to further penetrate nucleic acid sequencing applications, as well as grow product demand; • our reliance on outsourcing to other companies for manufacturing certain components and sub-assemblies, some of which are sole-sourced; • our ability to consistently manufacture our instruments and consumables to meet customers’ specifications, quantity, cost, or performance requirements; • the high amount of competition we face in our industry; • our ability to attract customers and increase sales of current and future products; • reliance on a limited number of customers for a significant portion of our revenues, including academic, research and government institutions; • the complexity of our products giving rise to defects or errors; • our unpredictable and lengthy sales cycles; • our business, financial condition and results of operations could be adversely affected by political and economic tensions between the United States and other countries, including China and Russia; • securing and maintaining patent or other intellectual property protection for our products and related improvements; • current and future legal proceedings filed against us claiming intellectual property infringement; • the potential adverse impact of health epidemics, including the ongoing COVID-19 pandemic; • governmental regulations that burden operations or narrow the market for our products; • evolving ethical, legal, privacy, social, and regulatory concerns regarding genetic testing; • volatility of the price of our common stock; and • our stock price falling as a result of future offerings or sales of securities.
Biggest changeSuch risks are discussed more fully below and include, but are not limited to, risks related to: • our ability to successfully market, commercialize, and sell current and future products and related maintenance services; • our ability to achieve profitability for our business; • our ability to repay our debt and fund our long-term operations; • our ability to successfully leverage and integrate our acquisitions and future acquisitions; • our ability to successfully research, develop and timely manufacture our current and future products; • management of new product introductions and transitions, resultant costs, and ability of new products to generate promised performance; • recent significant changes to our leadership team and resultant disruptions to our business; • retention, recruitment, and training of senior management, key personnel, scientists and engineers; • our ability to further penetrate nucleic acid sequencing applications, as well as grow product demand; • our reliance on outsourcing to other companies for manufacturing certain components and sub-assemblies, some of which are sole-sourced; • our ability to consistently manufacture our instruments and consumables to meet customers’ specifications, quantity, cost, or performance requirements; • the high amount of competition we face in our industry; • our ability to attract customers and increase sales of current and future products; • reliance on a limited number of customers for a significant portion of our revenues, including academic, research and government institutions; • the complexity of our products giving rise to defects or errors; • our unpredictable and lengthy sales cycles; • adverse effects resulting from political and economic tensions between the United States and other countries, including China and Russia, and other geopolitical uncertainties; • securing and maintaining patent or other intellectual property protection for our products and related improvements; • current and future legal proceedings filed against us claiming intellectual property infringement; • the potential adverse impact of health epidemics, including any resurgence of COVID-19 cases or other similar outbreaks; • governmental regulations that burden operations or narrow the market for our products; • evolving ethical, legal, privacy, social, and regulatory concerns regarding genetic testing; • volatility of the price of our common stock; and • our stock price falling as a result of future offerings or sales of securities. 13 Table of Contents Our risk factors are not guarantees that no such conditions exist as of the date hereof and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part.
In addition, our competitors may seek to use this transition and the related potential disruptions to gain a competitive advantage over us. Furthermore, these changes increase our dependency on the other members of our leadership team that remain with us, who are not contractually obligated to remain employed with us and may leave at any time.
In addition, our competitors may seek to use this transition and the related potential disruptions to gain a competitive advantage over us. Furthermore, these changes may increase our dependency on the other members of our leadership team that remain with us, who are not contractually obligated to remain employed with us and may leave at any time.
If our manufacturing partners or suppliers are unable or fail to fulfill their obligations to us for any reason, we may not be able to manufacture our products and satisfy customer demand or our obligations under sales agreements in a timely manner, and our business could be harmed as a result.
If our manufacturing partners or suppliers are unable or fail to fulfill their obligations to us for any reason, we may not be able to manufacture our products and satisfy customer demand or our obligations under sales agreements in a timely manner, and our business could be harmed as a result.
Our customers have previously experienced reliability issues with our existing products, including the Sequel System and the Sequel II/IIe Systems. In addition, it is possible our customers could experience reliability issues with current or future products, including the Sequel II/IIe, Onso, and Revio Systems.
Our customers have previously experienced reliability issues with our existing products, including the Sequel System and the Sequel II/IIe Systems. In addition, it is possible our customers could experience reliability issues with current or future products, including the Sequel II/IIe, Revio and Onso Systems.
Information technology (“IT”) helps us to operate efficiently, interface with customers, maintain financial accuracy and efficiently and accurately produce our financial statements. IT systems are used extensively in virtually all aspects of our business, including sales forecast, order fulfillment and billing, customer service, logistics, and management of data from running samples on our products.
Information technology (“IT”) helps us to operate efficiently, interface with customers, maintain financial accuracy and efficiently and accurately produce our financial statements. IT systems are used extensively in virtually all aspects of our business, including in our products, sales forecast, order fulfillment and billing, customer service, logistics, and management of data from running samples on our products.
In anticipation of product orders, we may incur substantial costs before the sales cycle is complete and before we receive any customer payments. As a result, if a sale is not completed 24 or is canceled or delayed, we may have incurred substantial expenses, making it more difficult for us to become profitable or otherwise negatively impacting our financial results.
In anticipation of product orders, we may incur substantial costs before the sales cycle is complete and before we receive any customer payments. As a result, if a sale is not completed or is canceled or delayed, we may have incurred substantial expenses, making it more difficult for us to become profitable or otherwise negatively impacting our financial results.
Bribery Act of 2010 and other anti-corruption laws, regulations relating to the use of certain hazardous substances or chemicals in commercial products, and require the collection, reuse, and recycling of waste from products we manufacture; • required compliance with U.S. laws such as the Foreign Corrupt Practices Act, and other U.S. federal laws and trade and economic sanctions and other regulations established by the Office of Foreign Asset Control; • export requirements and import or trade restrictions; • laws and business practices favoring local companies; • restrictions on both inbound and outbound cross-border investment; • foreign currency exchange, longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; • changes in social, economic, and political conditions or in laws, regulations and policies governing foreign trade, manufacturing, research and development, and investment both domestically as well as in the other countries and jurisdictions in which we operate and into which we may sell our products including as a result of the separation of the United Kingdom from the European Union (“Brexit”) and ongoing geopolitical tensions related to the political uncertainty and military actions associated with the war in Ukraine, resulting sanctions imposed by the U.S. and other countries, and retaliatory actions taken by Russia in response to such sanctions; • potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements, and other trade barriers; • difficulties and costs of staffing and managing foreign operations; and • difficulties protecting, maintaining, enforcing, or procuring intellectual property rights and defending against intellectual property claims under the law and judicial systems of other countries.
Bribery Act of 2010 and other anti-corruption laws, regulations relating to the use of certain hazardous substances or chemicals in commercial products, and require the collection, reuse, and recycling of waste from products we manufacture; • required compliance with U.S. laws such as the Foreign Corrupt Practices Act, and other U.S. federal laws and trade and economic sanctions and other regulations established by the Office of Foreign Asset Control; • export requirements and import or trade restrictions; • laws and business practices favoring local companies; • restrictions on both inbound and outbound cross-border investment; • foreign currency exchange, longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; • changes in social, economic, and political conditions or in laws, regulations and policies governing foreign trade, manufacturing, research and development, and investment both domestically as well as in the other countries and jurisdictions in which we operate and into which we may sell our products including as a result of the separation of the United Kingdom from the European Union (“Brexit”) and ongoing geopolitical tensions related to the political uncertainty and military actions associated with the war in Ukraine, resulting sanctions imposed by the U.S. and other countries, and retaliatory actions taken by Russia in response to such sanctions; • potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements, and other trade barriers; • difficulties and costs of staffing and managing foreign operations; and 39 Table of Contents • difficulties protecting, maintaining, enforcing, or procuring intellectual property rights and defending against intellectual property claims under the law and judicial systems of other countries.
This may also present risks for our strategy and may present operational, cybersecurity, and workplace culture challenges that may adversely affect our business. 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 recessionary effects and inflationary pressures.
This may also present risks for our strategy and may present operational, cybersecurity, and workplace culture challenges that may adversely affect our business. Even after the COVID-19 pandemic has further subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including recessionary effects and inflationary pressures.
If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such products. Such a loss of patent protection would have a material adverse impact on our business. 28 Some of our technology is subject to “march-in” rights by the U.S. government.
If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such products. Such a loss of patent protection would have a material adverse impact on our business. Some of our technology is subject to “march-in” rights by the U.S. government.
In addition, we would be required to obtain a new 510(k) clearance before we could introduce subsequent material modifications or improvements to such products. We could also be subject to 32 additional FDA post-marketing obligations for such products, any or all of which would increase our costs and divert resources away from other projects.
In addition, we would be required to obtain a new 510(k) clearance before we could introduce subsequent material modifications or improvements to such products. We could also be subject to additional FDA post-marketing obligations for such products, any or all of which would increase our costs and divert resources away from other projects.
Acquisitions and strategic transactions involve numerous risks, any of which could harm our business and negatively affect our financial condition and results of operations, including: • intense competition for suitable acquisition targets, which could increase prices and adversely affect our ability to consummate deals on favorable or acceptable terms; • failure or material delay in closing a transaction; • transaction-related lawsuits or claims; • difficulties in integrating the technologies, operations, existing contracts, and personnel of an acquired company; • difficulties in retaining key employees or business partners of an acquired company; • difficulties in retaining suppliers, partners, or customers of an acquired company; • challenges with integrating the brand identity of an acquired company with our own; • diversion of financial and management resources from existing operations or alternative acquisition opportunities; • failure to realize the anticipated benefits or synergies of a transaction; • difficulties in developing technology post-acquisition; • failure to identify the problems, liabilities, or other shortcomings or challenges of an acquired company or technology, including issues related to intellectual property, regulatory compliance practices, litigation, revenue recognition or other accounting practices, or employee or user issues; • risks that regulatory bodies may enact new laws or promulgate new regulations that are adverse to an acquired company or business; • risks that regulatory bodies do not approve our acquisitions or business combinations or delay such approvals; • theft of our trade secrets or confidential information that we share with potential acquisition candidates or other potential strategic partners; • risk that an acquired company or investment in new services cannibalizes a portion of our existing business; and • adverse market reaction to an acquisition or other strategic transaction.
Acquisitions and strategic transactions involve numerous risks, any of which could harm our business and negatively affect our financial condition and results of operations, including: • intense competition for suitable acquisition targets, which could increase prices and adversely affect our ability to consummate deals on favorable or acceptable terms; • failure or material delay in closing a transaction; • transaction-related lawsuits or claims; • difficulties in integrating the technologies, operations, existing contracts, and personnel of an acquired company; • difficulties in retaining key employees or business partners of an acquired company; • difficulties in retaining suppliers, partners, or customers of an acquired company; • challenges with integrating the brand identity of an acquired company with our own; 16 Table of Contents • diversion of financial and management resources from existing operations or alternative acquisition opportunities; • failure to realize the anticipated benefits or synergies of a transaction; • difficulties in developing technology post-acquisition; • failure to identify the problems, liabilities, or other shortcomings or challenges of an acquired company or technology, including issues related to intellectual property, regulatory compliance practices, litigation, revenue recognition or other accounting practices, or employee or user issues; • risks that regulatory bodies may enact new laws or promulgate new regulations that are adverse to an acquired company or business; • risks that regulatory bodies do not approve our acquisitions or business combinations or delay such approvals; • theft of our trade secrets or confidential information that we share with potential acquisition candidates or other potential strategic partners; • risk that an acquired company or investment in new services cannibalizes a portion of our existing business; and • adverse market reaction to an acquisition or other strategic transaction.
Given the evolving nature of this industry, legislative bodies or regulatory authorities may adopt additional regulations that may adversely affect our market opportunities. Additionally, if 30 ethical and other concerns surrounding the use of genetic information, diagnostics or therapies become widespread, there may be less demand for our products.
Given the evolving nature of this industry, legislative bodies or regulatory authorities may adopt additional regulations that may adversely affect our market opportunities. Additionally, if ethical and other concerns surrounding the use of genetic information, diagnostics or therapies become widespread, there may be less demand for our products.
Moreover, we may need to increase our efforts to train our personnel to detect and defend against cyber- or phishing-attacks, which are becoming more sophisticated and frequent, and we may need to implement additional 41 protective measures to reduce the risk of potential security breaches and security incidents, which could cause us to incur significant additional expenses.
Moreover, we may need to increase our efforts to train our personnel to detect and defend against cyber- or phishing-attacks, which are becoming more sophisticated and frequent, and we may need to implement additional protective measures to reduce the risk of potential security breaches and security incidents, which could cause us to incur significant additional expenses.
Problems in the design or quality of our products, including low manufacturing yields of SMRT Cells, or sub-performing reagent lots may have a material adverse effect on our brand, business, financial condition, and operating results, and could result in us losing our ISO certifications.
Problems in the design or quality of our products, including low manufacturing yields of SMRT Cells, flow cells, or sub-performing reagent lots may have a material adverse effect on our brand, business, financial condition, and operating results, and could result in us losing our ISO certifications.
To avoid or settle legal claims, it may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future 29 technologies, which could negatively affect our gross margins. We may not be able to obtain these licenses on commercially reasonable terms, or at all.
To avoid or settle legal claims, it may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies, which could negatively affect our gross margins. We may not be able to obtain these licenses on commercially reasonable terms, or at all.
Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the political or economic climate and financial market conditions could adversely impact our business. 38 Delivery of our products could be delayed or disrupted by factors beyond our control, and we could lose customers as a result.
Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the political or economic climate and financial market conditions could adversely impact our business. Delivery of our products could be delayed or disrupted by factors beyond our control, and we could lose customers as a result.
We also may have to reduce sales, marketing, engineering, customer support or other resources devoted to our existing or new products, or we may need to cease operations. Any of these actions could materially 14 impede our ability to achieve our business objectives and could materially harm our operating results.
We also may have to reduce sales, marketing, engineering, customer support or other resources devoted to our existing or new products, or we may need to cease operations. Any of these actions could materially impede our ability to achieve our business objectives and could materially harm our operating results.
Our products are highly complex, have recurring support requirements and could have unknown defects or errors, which may give rise to claims against us or divert application of our resources from other purposes. Products using our SMRT sequencing technology are highly complex and may develop or contain undetected defects or errors.
Our products are highly complex, have recurring support requirements and could have unknown defects or errors, which may give rise to claims against us or divert application of our resources from other purposes. Products using our SMRT sequencing and SBB technology are highly complex and may develop or contain undetected defects or errors.
Despite internal and external testing, defects, or errors may arise in our products, which could result in a failure to obtain, maintain, or increase market acceptance of our products, 23 diversion of development resources, injury to our reputation and increased warranty, service, and maintenance costs.
Despite internal and external testing, defects, or errors may arise in our products, which could result in a failure to obtain, maintain, or increase market acceptance of our products, diversion of development resources, injury to our reputation and increased warranty, service, and maintenance costs.
These new opportunities may be outside the scope of our proven expertise or in areas where demand is unproven, and new products and services developed by us may not gain market acceptance or may not adequately perform in order to capture market share.
These new opportunities may be outside the scope of our proven expertise or in areas where demand is unproven, and new products and services developed by us may not gain market acceptance or may not adequately perform to capture market share.
Our failure to further enhance our existing products and to introduce new products to compete effectively could materially and adversely affect our business, operations, financial condition, and prospects. 22 We may be unable to successfully increase sales of our current products or market and sell our future products.
Our failure to further enhance our existing products and to introduce new products to compete effectively could materially and adversely affect our business, operations, financial condition, and prospects. We may be unable to successfully increase sales of our current products or market and sell our future products.
Such laws include, without limitation, state and federal anti-kickback or anti-referral laws, healthcare fraud and abuse laws, false claims laws, privacy 31 and security laws, Physician Payments Sunshine Act and related transparency and manufacturer reporting laws, and other laws and regulations applicable to medical device manufacturers.
Such laws include, without limitation, state and federal anti-kickback or anti-referral laws, healthcare fraud and abuse laws, false claims laws, privacy and security laws, Physician Payments Sunshine Act and related transparency and manufacturer reporting laws, and other laws and regulations applicable to medical device manufacturers.
International operations entail a variety of other risks, including, without limitation: • limits to travel as a result of the COVID-19 pandemic or other epidemics; • challenges in staffing and managing foreign operations; • potentially longer sales cycles and more time required to engage and educate customers on the benefits of our platform outside of the United States; • the potential need for localized software and documentation; • reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad; • defending against intellectual property claims in other countries; • restrictions on both inbound and outbound cross-border investment, including enhanced oversight by the Committee on Foreign Investment in the United States (“CFIUS”) and substantial restrictions on investment from China; • U.S. and foreign government trade restrictions, including those which may impose restrictions on the importation, exportation, re-exportation, sale, shipment or other transfer of programming, technology, components, and/or services to foreign persons; • changes in diplomatic and trade relationships, including new tariffs, trade protection measures, import or export licensing requirements, trade embargoes, sanctions, and other trade barriers; • tariffs imposed by the U.S. on goods from other countries and tariffs imposed by other countries on U.S. goods, including the tariffs by the U.S. government on various imports from China, Canada, Mexico, and the European Union (“E.U.”) and by the governments of these jurisdictions on certain U.S. goods, and any other possible tariffs that may be imposed on products such as ours, the scope and duration of which, if implemented, remains uncertain; • deterioration of political relations between the U.S. and Russia, China, Japan, Korea, Canada, the United Kingdom (“U.K.”), and the E.U., which could have a material adverse effect on our sales and operations in these countries; • changes in social, political, and economic conditions or in laws, regulations and policies governing foreign trade, manufacturing, development, and investment both domestically as well as in the other countries and jurisdictions into which we sell our products, including as a result of the withdrawal of the U.K. from the E.U.; • difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; • fluctuations in currency exchange rates and the related effect on our results of operations; • increased financial accounting and reporting burdens and complexities; • disruptions to global trade due to disease outbreaks or conflicts; • potential increases on tariffs or restrictions on trade generally; and 39 • significant taxes or other burdens of complying with a variety of foreign laws and regulations, including laws and regulations relating to privacy and data protection such as the E.U.
International operations entail a variety of other risks, including, without limitation: • potential limits to travel as a result of COVID-19 or other epidemics or pandemics; • challenges in staffing and managing foreign operations; • potentially longer sales cycles and more time required to engage and educate customers on the benefits of our platform outside of the United States; • the potential need for localized software and documentation; • reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad; • defending against intellectual property claims in other countries; • restrictions on both inbound and outbound cross-border investment, including enhanced oversight by the Committee on Foreign Investment in the United States (“CFIUS”) and substantial restrictions on investment from China; 45 Table of Contents • U.S. and foreign government trade restrictions, including those which may impose restrictions on the importation, exportation, re-exportation, sale, shipment or other transfer of programming, technology, components, and/or services to foreign persons; • changes in diplomatic and trade relationships, including new tariffs, trade protection measures, import or export licensing requirements, trade embargoes, sanctions, and other trade barriers; • tariffs imposed by the U.S. on goods from other countries and tariffs imposed by other countries on U.S. goods, including the tariffs by the U.S. government on various imports from China, Canada, Mexico, and the European Union (“E.U.”) and by the governments of these jurisdictions on certain U.S. goods, and any other possible tariffs that may be imposed on products such as ours, the scope and duration of which, if implemented, remains uncertain; • deterioration of political relations between the U.S. and Russia, China, Japan, Korea, Canada, the United Kingdom (“U.K.”), and the E.U., which could have a material adverse effect on our sales and operations in these countries; • changes in social, political, and economic conditions or in laws, regulations and policies governing foreign trade, manufacturing, development, and investment both domestically as well as in the other countries and jurisdictions into which we sell our products, including as a result of the withdrawal of the U.K. from the E.U.; • difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; • fluctuations in currency exchange rates and the related effect on our results of operations; • increased financial accounting and reporting burdens and complexities; • disruptions to global trade due to disease outbreaks or conflicts; • potential increases on tariffs or restrictions on trade generally; and • significant taxes or other burdens of complying with a variety of foreign laws and regulations, including laws and regulations relating to privacy and data protection such as the E.U.
From time to time, certain 20 components of our systems and reagents may reach the end of their life cycles or become obsoleted by our suppliers, and we would have to procure alternative sources for these end-of-life products.
From time to time, certain components of our systems and reagents may reach the end of their life cycles or become obsoleted by our suppliers, and we would have to procure alternative sources for these end-of-life products.
If our ESG practices fail to meet regulatory requirements or investor or other industry stakeholders' evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship, support for local communities, Board of Director and employee diversity, human capital management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency, and employing ESG strategies in our operations, our brand, reputation and employee retention may be negatively impacted and customers and suppliers may be unwilling to do business with us.
If our ESG practices fail to meet regulatory requirements or investor or other industry stakeholders' evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship, support for local communities, board and employee diversity, human capital management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency, and employing ESG strategies in our operations, our brand, reputation and employee retention may be negatively impacted and customers and suppliers may be unwilling to do business with us.
Should we face delays in or discover unexpected defects during the further development or manufacturing process of instruments or consumables related to our products, including with respect to SMRT Cells, reagents, Sequel II/IIe Systems, Revio, Onso, and other SMRT Cell, HiFi, and SBB products under development, and including any delays or defects in software development or product functionality, the timing and success of the continued rollout and scaling of our products may be significantly impacted, which may materially and negatively impact our revenue and gross margin.
Should we face delays in or discover unexpected defects during the further development or manufacturing process of instruments or consumables related to our products, including with respect to SMRT Cells, reagents, Sequel II/IIe Systems, Revio, Onso, and other SMRT Cell, HiFi, and SBB products under development, including acquired technologies, and including any delays or defects in software development or product functionality, the timing and success of the continued rollout and scaling of our products may be significantly impacted, which may materially and negatively impact our revenue and gross margin.
Our joint research and development efforts with partners require significant management attention and operational resources. If we are unable to successfully manage such joint research and development efforts, our future results may be adversely impacted.
Moreover, our joint research and development efforts with partners require significant management attention and operational resources. If we are unable to successfully manage such joint research and development efforts, our future results may be adversely impacted.
We and our third-party service providers may face difficulties in identifying, or promptly responding to, potential security breaches and other instances of unauthorized access to, or disclosure or other loss or unavailability of, information.
We and our third-party service providers may face difficulties in identifying, or promptly responding to, potential security breaches and other instances of unauthorized access to, or disclosure, other processing, or loss or unavailability of, information.
Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: 36 • authorize our board of directors to issue, without further action by the stockholders, up to 50,000,000 shares of undesignated preferred stock and up to approximately 1,000,000,000 shares of authorized but unissued shares of common stock; • require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; • specify that special meetings of our stockholders can be called only by our board of directors, the Chair of the Board, the Chief Executive Officer or the President; • establish advance notice procedures for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; • establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms; • provide that our directors may be removed only for cause; and • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.
Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: • authorize our board of directors to issue, without further action by the stockholders, up to 50,000,000 shares of undesignated preferred stock and up to approximately 1,000,000,000 shares of authorized but unissued shares of common stock; • require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; 42 Table of Contents • specify that special meetings of our stockholders can be called only by our board of directors, the Chair of the Board, the Chief Executive Officer or the President; • establish advance notice procedures for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors; • establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms; • provide that our directors may be removed only for cause; and • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.
We have experienced and may experience in the future manufacturing delays, product defects, variability in the performance of SMRT Cells and other products, inadequate reserves for inventory, or other issues.
We have experienced and may experience in the future manufacturing delays, product defects, variability in the performance of SMRT Cells, flow cells and other products, inadequate reserves for inventory, or other issues.
The commercial success of our products, including the Sequel and Sequel II/IIe Systems, and the Revio and Onso products under development, depends on a number of factors, including performance and reliability of the systems, our anticipating and effectively addressing customer preferences and demands, the success of our sales and marketing efforts, effective forecasting and management of product demand, purchase commitments and inventory levels, effective management of manufacturing and supply costs, and the quality of our products, including consumables such as SMRT Cells and reagents.
The commercial success of our products, including the Sequel, Sequel II/IIe, Revio and Onso Systems, and the products under development, including acquired technologies, depends on a number of factors, including performance and reliability of the systems, our anticipating and effectively addressing customer preferences and demands, the success of our sales and marketing efforts, effective forecasting and management of product demand, purchase commitments and inventory levels, effective management of manufacturing and supply costs, and the quality of our products, including consumables such as SMRT Cells and reagents.
Under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) to offset future taxable income. We believe that we have had one or more ownership changes, as a result of which our existing NOLs are currently subject to limitation.
Under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) to offset future taxable income. We believe that we have had one or more ownership changes, and as a result our existing NOLs are currently subject to limitation.
More recently, the FDA has issued warning letters to certain genomics labs for illegally marketing genetic tests that claim to predict patients’ responses to specific medications, noting that the FDA has not created a legal “carve-out” for LDTs and retains discretion to take action when appropriate, such as when certain genomic tests raise significant public health concerns.
The FDA has issued warning letters to certain genomics labs for illegally marketing genetic tests that claim to predict patients’ responses to specific medications, noting that the FDA has not created a legal “carve-out” for LDTs and retains discretion to take action when appropriate, such as when certain genomic tests raise significant public health concerns.
The continued threats of tariffs, trade restrictions and trade barriers could have a generally disruptive impact on the global 33 economy and, therefore, negatively impact our sales.
The continued threats of tariffs, trade restrictions and trade barriers could have a generally disruptive impact on the global economy and, therefore, negatively impact our sales.
For example, the Chinese government may re-impose lockdowns or similar measures to combat the spread of COVID-19 and these measures have had, and may continue to have in the future, a negative impact on manufacturing and/or supply chains, in addition to customer demand for our products and demand through certain distributors.
For example, the Chinese government may re-impose lockdowns or similar measures to combat the spread of COVID-19 or other similar outbreaks and these measures have had, and may continue to have in the future, a negative impact on manufacturing and/or supply chains, in addition to customer demand for our products and demand through certain distributors.
Specifically, difficult macroeconomic conditions, such as decreases in discretionary capital expenditure spending, changes to the government funding environment, a reduction in or the lapsing of COVID-19-related governmental stimulus measures, increased and prolonged unemployment or a decline in consumer confidence as a result of the COVID-19 pandemic, as well as limited or significantly reduced points of access of our products, could have a continuing adverse effect on the demand for some of our products and, consequently, related maintenance and support services.
Specifically, difficult macroeconomic conditions, such as decreases in discretionary capital expenditure spending, changes to the government funding environment, a reduction in or the lapsing of COVID-19-related governmental stimulus measures, increased and prolonged unemployment or a decline in consumer confidence as a result of the COVID-19 pandemic or other epidemics or pandemics, as well as limited or significantly reduced points of access of our products, could have a continuing adverse effect on the demand for some of our products and, consequently, related maintenance and support services.
In addition, we do not have “key person” life insurance policies covering any member of our management team or other key personnel. Further, our vaccination and return to office protocols related to COVID-19 may also impact the recruitment and retention of key employees.
In addition, we do not have “key person” life insurance policies covering any member of our management team or other key personnel. Further, our vaccination and return to office protocols related to COVID-19 or other epidemics or pandemics may also impact the recruitment and retention of key employees.
Stock markets in general and the market for companies in our industry in particular have experienced price and volume fluctuations, which have been exacerbated by the COVID-19 pandemic, and current macroeconomic trends and geopolitical events, and have affected and continue to affect the market prices of equity securities of many companies.
Stock markets in general and the market for companies in our industry in particular have experienced price and volume fluctuations, which were exacerbated by the COVID-19 pandemic, and current macroeconomic trends and geopolitical events, and have affected and continue to affect the market prices of equity securities of many companies.
The market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future in response to many risk factors listed in this section, and others beyond our control, including: • actual or anticipated fluctuations in our financial condition and operating results; • announcements of new products, technological innovations or strategic partnerships by us or our competitors; • announcements by us, our customers, partners, or suppliers relating directly or indirectly to our products, services or technologies; • overall conditions in our industry and market; • addition or loss of significant customers; • changes in laws or regulations applicable to our products; • actual or anticipated changes in our growth rate relative to our competitors; • announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments or achievement of significant milestones; • additions or departures of key personnel; • competition from existing products or new products that may emerge; • issuance of new or updated research or reports by securities analysts; • fluctuations in the valuation of companies perceived by investors to be comparable to us; • disputes or other developments related to proprietary rights, including patents, litigation matters or our ability to obtain intellectual property protection for our technologies; • announcement or expectation of additional financing efforts; • sales of our common stock by us or our stockholders; 35 • stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares; • reports, guidance and ratings issued by securities or industry analysts; • operating results below the expectations of securities analysts or investors; and • general economic and market conditions, which could be impacted by various events including COVID-19 or interest rate fluctuations, increases in fuel prices, foreign currency fluctuations, international tariffs, acts of terrorism, hostilities or the perception that hostilities may be imminent, military conflict and acts of war, including further political uncertainty and military actions associated with the war in Ukraine and the related response, including sanctions or other restrictive actions, by the United States and/or other countries.
The market price of our common stock is highly volatile, and we expect it to continue to be volatile for the foreseeable future in response to many risk factors listed in this section, and others beyond our control, including: • actual or anticipated fluctuations in our financial condition and operating results; • announcements of new products, technological innovations or strategic partnerships by us or our competitors; • announcements by us, our customers, partners, or suppliers relating directly or indirectly to our products, services or technologies; • overall conditions in our industry and market; • addition or loss of significant customers; • changes in laws or regulations applicable to our products; • actual or anticipated changes in our growth rate relative to our competitors; • announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments or achievement of significant milestones; • additions or departures of key personnel; • competition from existing products or new products that may emerge; • issuance of new or updated research or reports by securities analysts; • fluctuations in the valuation of companies perceived by investors to be comparable to us; • disputes or other developments related to proprietary rights, including patents, litigation matters or our ability to obtain intellectual property protection for our technologies; • announcement or expectation of additional financing efforts; • sales of our common stock by us or our stockholders; • stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares; • reports, guidance and ratings issued by securities or industry analysts; • operating results below the expectations of securities analysts or investors; and 41 Table of Contents • general economic and market conditions, which could be impacted by various events including health epidemics or pandemics, interest rate fluctuations, increases in fuel prices, foreign currency fluctuations, international tariffs, acts of terrorism, hostilities or the perception that hostilities may be imminent, military conflict and acts of war, including further political uncertainty and military actions associated with the war in Ukraine and the related response, including sanctions or other restrictive actions, by the United States and/or other countries.
The degree of impact of COVID-19 on our business will depend on several factors, such as the duration and the extent of the pandemic, the risk of waning immunity among persons already vaccinated and an increase in fatigue or skepticism with respect to initial or booster vaccinations, 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 degree of impact of COVID-19 or other epidemics or pandemics on our business will depend on several factors, such as the duration and the extent of the pandemic, the risk of waning immunity among persons already vaccinated and an increase in fatigue or skepticism with respect to initial or booster vaccinations, 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.
In addition, some of our licenses from third parties limit 27 the field in which we can use the licensed technology.
In addition, some of our licenses from third parties limit the field in which we can use the licensed technology.
In November 2020, California also passed the California Privacy Rights Act, or (“CPRA”), which significantly expands the CCPA as of January 1, 2023, including by introducing additional obligations such as data minimization and storage limitations and granting additional rights to consumers, among others.
In November 2020, California also passed the California Privacy Rights Act, or (“CPRA”), which significantly expanded the CCPA as of January 1, 2023, including by introducing additional obligations such as data minimization and storage limitations and granting additional rights to consumers, among others.
If we fail to address the foregoing risks or other problems encountered in connection with past or future acquisitions of businesses, new technologies, services, and other assets and strategic investments, or if we fail to successfully integrate such acquisitions or investments, our business, financial condition, and results of operations could be adversely affected, including potential impairments of goodwill and intangible assets. 15 If we are unable to successfully develop and timely manufacture our current and future products, including with respect to SMRT Cells, Sequel II/IIe Systems, Revio, Onso, and other SMRT Cell, HiFi, and SBB products under development, and related products, our business may be adversely affected.
If we fail to address the foregoing risks or other problems encountered in connection with past or future acquisitions of businesses, new technologies, services, and other assets and strategic investments, or if we fail to successfully integrate such acquisitions or investments, our business, financial condition, and results of operations could be adversely affected, including potential impairments of goodwill and intangible assets. 17 Table of Contents If we are unable to successfully develop and timely manufacture our current and future products, including with respect to SMRT Cells, Sequel II/IIe Systems, Revio, Onso, and other SMRT Cell, HiFi, and SBB products under development, and related products, our business may be adversely affected.
Unanticipated difficulties or delays in replacing existing products with new products or in commercializing our existing or new products in sufficient quantities and of acceptable quality to meet customer demand, including with respect to the SMRT Cell, Sequel II/IIe Systems, Revio and Onso, could diminish future demand for our products and may materially and adversely harm our future operating results. 21 The size of the markets for our products, including our Revio and Onso instruments, may be smaller than estimated, and new market opportunities may not develop as quickly as we expect, or at all, limiting our ability to successfully sell our products.
Unanticipated difficulties or delays in replacing existing products with new products or in commercializing our existing or new products in sufficient quantities and of acceptable quality to meet customer demand, including with respect to the SMRT Cell, Sequel II/IIe Systems, Revio and Onso, could diminish future demand for our products and may materially and adversely harm our future operating results. 24 Table of Contents The size of the markets for our products, including our Revio and Onso instruments, may be smaller than estimated, and new market opportunities may not develop as quickly as we expect, or at all, limiting our ability to successfully sell our products.
If we are unable to successfully develop SBB technology and sell acquired technology products, we may fail to achieve our strategic commercial initiatives in connection with the planned release of new products and anticipated entry into new markets.
If we are unable to successfully develop acquired technologies and sell acquired technology products, we may fail to achieve our strategic commercial initiatives in connection with the planned release of new products and anticipated entry into new markets.
Any action brought against us for violations of these laws or regulations, even if successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Enhan ced trade tariffs, import restrictions, export restrictions, Chinese regulations, or other trade barriers may materially harm our business.
Any action brought against us for violations of these laws or regulations, even if successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations, or other trade barriers may materially harm our business.
To the extent changes in the political environment have a negative impact on us or on our markets, our business, results of operation and financial condition could be materially and adversely impacted in the future. Disruption of critical information technology systems or material breaches in the security of our systems could harm our business, customer relations and financial condition.
To the extent changes in the political environment have a negative impact on us or on our markets, our business, results of operation and financial condition could be materially and adversely impacted in the future. 47 Table of Contents Disruption of critical information technology systems or material breaches in the security of our systems could harm our business, customer relations and financial condition.
Any such impairment could materially and adversely affect our reputation, financial condition, results of operations, cash flows and the timeliness with which we report our internal and external operating results. Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
Any such impairment could materially and adversely affect our reputation, financial condition, results of operations, cash flows and the timeliness with which we report our internal and external operating results. 48 Table of Contents Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
There is significant uncertainty relating to the long-term effect of COVID-19 on our business. Infections may resurge or become more widespread and any ensuing disruptions to business activities or supply chains could have a negative impact on our business, financial condition, and operating results.
There is significant uncertainty relating to the long-term effect of COVID-19 or other epidemics or pandemics on our business. Infections may resurge or become more widespread and any ensuing disruptions to business activities or supply chains could have a negative impact on our business, financial condition, and operating results.
Any hacking or other attack on our or our third-party service providers’ or vendors’ systems, and any unauthorized access to, or disclosure or other loss of, information suffered by us or our third-party service providers or vendors, or the perception that any of these have occurred, could result in legal claims or proceedings, loss of intellectual property, liability under laws that protect the privacy of personal information, negative publicity, disruption of our operations and damage to our reputation, which could divert our management’s attention from the operation of our business and materially and adversely affect our business, revenues and competitive position.
Any hacking or other attack on our or our third-party service providers’ or vendors’ systems, and any unauthorized access to, or disclosure, other processing, or loss or unavailability of, information suffered by us or our third-party service providers or vendors, or the perception that any of these have occurred, could result in legal claims or proceedings, loss of intellectual property, liability under laws that protect the privacy of personal information, negative publicity, disruption of our operations and damage to our reputation, and data integrity issues, which could divert our management’s attention from the operation of our business and materially and adversely affect our business, revenues and competitive position.
For more information, see “— Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business . ” Other risks could include: • interruptions to operations in China as a result of the COVID-19 pandemic or other disease outbreaks and natural catastrophic events, which have in the past and can result in the future in business closures, transportation restrictions, import and export complications and cause shortages in the supply of raw materials or disruptions in manufacturing; • product supply disruptions and increased costs as a result of heightened exposure to changes in the policies of the Chinese government, political unrest or unstable economic conditions in China; and • the nationalization or other expropriation of private enterprises or intellectual property by the Chinese government.
For more information, see “— Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business . ” Other risks could include: • interruptions to operations in China as a result of potential disease outbreaks, including any further COVID-19 related outbreaks, and natural catastrophic events, which have in the past and can result in the future in business closures, transportation restrictions, import and export complications and cause shortages in the supply of raw materials or disruptions in manufacturing; • product supply disruptions and increased costs as a result of heightened exposure to changes in the policies of the Chinese government, political unrest or unstable economic conditions in China; and • the nationalization or other expropriation of private enterprises or intellectual property by the Chinese government.
Further, in the event a court finds either exclusive forum provision contained in our bylaws to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our results of operations. 37 Our large number of authorized but unissued shares of common stock may potentially dilute existing stockholders’ stockholdings.
Further, in the event a court finds either exclusive forum provision contained in our bylaws to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our results of operations. 43 Table of Contents Our large number of authorized but unissued shares of common stock may potentially dilute existing stockholders’ stockholdings.
We are also engaged in substantial and complex research and development efforts, which, if successful, may result in the introduction of new products in the future, including in connection with the SMRT Cell, the Sequel II/IIe Systems and Revio, in addition to Onso and other SBB products currently under development.
We are also engaged in substantial and complex research and development efforts, which, if successful, may result in the introduction of new products in the future, including in connection with the SMRT Cell, the Sequel II/IIe Systems, Revio and Onso, in addition to other products currently under development, including acquired technologies.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personal information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations.
Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other malicious or inadvertent disruptions.
Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or disrupted, breached or otherwise compromised due to employee error, malfeasance or other malicious or inadvertent disruptions.
If as a result of global economic or political instability, such as the political uncertainty associated with an escalation of the war in Ukraine, potential uncertainty related to Taiwan and its relationship with China, other disease outbreaks, or supply issues, we or our contractors could experience shortages, business disruptions or delays for materials sourced or manufactured in the affected countries, and their ability to supply us with instruments or product components may be affected.
If as a result of global economic or political instability, such as the political uncertainty in the Middle East associated with the Israel and Hamas conflict, an escalation of the war in Ukraine, potential uncertainty related to Taiwan and its relationship with China, other disease outbreaks, or supply issues, we or our contractors could experience shortages, business disruptions or delays for materials sourced or manufactured in the affected countries, and their ability to supply us with instruments or product components may be affected.
Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition, results of operations and prospects. In addition, any worsening of the economic environment and the ongoing COVID-19 pandemic may exacerbate the risks described below, any of which could have a material impact on us.
Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition, results of operations and prospects. In addition, any worsening of the economic environment may exacerbate the risks described below, any of which could have a material impact on us.
In the ordinary course of our business, we currently, and in the future will, collect, store, transfer, use or process sensitive data, including personally identifiable information of employees, and intellectual property and proprietary business information owned or controlled by ourselves and other parties.
In the ordinary course of our business, we currently, and in the future will, collect, store, transfer, use or process sensitive data, including personal information of employees, and intellectual property and proprietary business information owned or controlled by ourselves and other parties.
Our IT systems may be vulnerable to damage from a variety of sources, including telecommunications or network failures, power loss, natural disasters, human acts, computer viruses, ransomware, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets, and other attempts to harm our systems.
Our IT systems, including those used in our products, may be vulnerable to damage from a variety of sources, including telecommunications or network failures, power loss, natural disasters, human acts, computer viruses, ransomware, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets, and other attempts to harm our systems.
For example, the Chinese government may re-impose lockdowns or similar measures to combat the spread of COVID-19 and such measures have had, and may continue to have in the future, a negative impact on manufacturing and/or supply chains, as well as customer demand for our products and demand through certain distributors.
For example, the Chinese government may re-impose lockdowns or similar measures to combat the spread of health epidemics such as COVID-19 or other similar outbreaks and such measures have had, and may continue to have in the future, a negative impact on manufacturing and/or supply chains, as well as customer demand for our products and demand through certain distributors.
Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business. Risks Related to Our Intellectual Property Failure to secure patent or other intellectual property protection for our products and improvements to our products may reduce our ability to maintain any technological or competitive advantage over our current and potential competitors.
Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business. 30 Table of Contents Risks Related to Our Intellectual Property Failure to secure patent or other intellectual property protection for our products and improvements to our products may reduce our ability to maintain any technological or competitive advantage over our current and potential competitors.
These components are either sourced directly from companies in China or indirectly from third parties that source from companies in China. Consequently, we are subject to significant risks associated with the trading relationship between the U.S. and China, which is currently characterized by significant uncertainty.
These components are either sourced directly from companies in China or indirectly from third parties that source from companies in China. 28 Table of Contents Consequently, we are subject to significant risks associated with the trading relationship between the U.S. and China, which is currently characterized by significant uncertainty.
However, due to challenges we may experience in developing and marketing our existing products and launching new products, we may not be able to effectively: • manage the timeliness of our new product introductions and the rate at which sales of our new products may cannibalize sales of our older products or manage sales and marketing of multiple sequencing platforms; • drive adoption of our current and future products, including the Sequel II/IIe Systems, the Revio system and products under development related to our emerging SBB technology, including the Onso system; • maintain our competitive position by continuing to attract and retain customers for our products; • provide appropriate levels of customer training and support for our products; • implement an effective marketing strategy to promote awareness of our products; • develop and implement an effective sales and distribution strategy for our current and future products; • develop, manufacture and commercialize new products or achieve an acceptable return on our manufacturing or research and development efforts and expenses; • comply with regulatory requirements applicable to our products; • anticipate and adapt to changes in our market; • accommodate customer expectations and demands with respect to our products, increase product adoption by our existing customers or develop new customer relationships; • deliver our beta systems to our external beta testing sites or complete our external beta testing program on our currently expected timelines; • overcome unexpected challenges discovered during beta testing; • complete the scientific and technical validation of new products, such as Onso, on our currently expected timeline or at all; • deliver our future products in a timely manner to our customers; • grow our share by marketing and selling our products for new and additional applications; • manage the significant burdens that expanding our existing or future products into current and new markets may impose on marketing, compliance, and other administrative and managerial resources; • maintain and develop strategic relationships with vendors, manufacturers, and other industry partners to acquire necessary materials for the production of, and to develop, manufacture and commercialize, our existing or future products; • adapt or scale our manufacturing activities to meet performance specifications and potential demand at a reasonable cost; • avoid infringement and misappropriation of third-party intellectual property; • obtain and maintain any necessary licenses to third-party intellectual property on commercially reasonable terms; • obtain valid and enforceable patents that give us a competitive advantage or enforce existing patents; • protect our proprietary technology; and • attract, retain, and motivate qualified personnel. 13 The risks noted above, especially with respect to the marketing, sales, and commercialization of our products, may be heightened by the impact of current uncertain market and other conditions.
Due to challenges we may experience in developing and marketing our existing products and launching new products, we may not be able to effectively: • manage the timeliness of our new product introductions and the rate at which sales of our new products may cannibalize sales of our older products or manage sales and marketing of multiple sequencing platforms; • drive adoption of our current and future products, including the Sequel II/IIe, Revio and Onso systems, and products under development; • maintain our competitive position by continuing to attract and retain customers for our products; • provide appropriate levels of customer training and support for our products; • implement an effective marketing strategy to promote awareness of our products; • develop and implement an effective sales and distribution strategy for our current and future products; • develop, manufacture and commercialize new products or achieve an acceptable return on our manufacturing or research and development efforts and expenses; • comply with regulatory requirements applicable to our products; • anticipate and adapt to changes in our market; • accommodate customer expectations and demands with respect to our products, increase product adoption by our existing customers or develop new customer relationships; • deliver our beta systems to our external beta testing sites or complete our external beta testing program on our currently expected timelines; • overcome unexpected challenges discovered during beta testing; • complete the scientific and technical validation of new products on our currently expected timeline or at all; • deliver our future products in a timely manner to our customers; • grow our market share by marketing and selling our products for new and additional applications; • manage the significant burdens that expanding our existing or future products into current and new markets may impose on marketing, compliance, and other administrative and managerial resources; • maintain and develop strategic relationships with vendors, manufacturers, and other industry partners to acquire necessary materials for the production of, and to develop, manufacture and commercialize, our existing or future products; 14 Table of Contents • adapt or scale our manufacturing activities to meet performance specifications and potential demand at a reasonable cost; • avoid infringement and misappropriation of third-party intellectual property; • obtain and maintain any necessary licenses to third-party intellectual property on commercially reasonable terms; • obtain valid and enforceable patents that give us a competitive advantage or enforce existing patents; • protect our proprietary technology; and • attract, retain, and motivate qualified personnel.
If we are unable to mitigate these or other similar risks, our business, results of operations and financial condition may be materially and adversely affected. 18 We depend on the continuing efforts of our senior management team and other key personnel.
If we are unable to mitigate these or other similar risks, our business, results of operations and financial condition may be materially and adversely affected. 20 Table of Contents We depend on the continuing efforts of our senior management team and other key personnel.
The introduction of new products, including the recent announcement of our Revio system, has had and may in the future also have a negative impact on our revenue in the near-term as our current and future customers have delayed or cancelled and may in the future delay or cancel orders of existing products in anticipation of new products and we may also be pressured to decrease prices for our existing products.
The introduction of new products, including the recent commercialization of our Revio and Onso systems, has had and may in the future also have a negative impact on our revenue in the near-term as our current and future customers have delayed or cancelled and may in the future delay or cancel orders of existing products in anticipation of new products and we may also be pressured to decrease prices for our existing products.
Our future success is substantially dependent on our ability to successfully develop and commercialize our products, including Revio and Onso, which are anticipated to be used in demanding scientific research that requires substantial levels of accuracy and precision.
Our future success is substantially dependent on our ability to successfully develop and commercialize our products, including Revio and Onso, as well as acquired technologies, which are anticipated to be used in demanding scientific research that requires substantial levels of accuracy and precision.
Because our semiconductor manufacturers are located in a region where immunization rates in certain communities may be low, new and emerging variants of COVID-19 could impact workforce availability at those locations and disrupt supply.
Because our semiconductor manufacturers are located in a region where immunization rates in certain communities may be low, new and emerging variants of COVID-19 or other epidemics or pandemics could impact workforce availability at those locations and disrupt supply.
Our industry, particularly in the San Francisco Bay Area, is characterized by high demand and intense competition for talent, and the turnover rate has been and may continue to be high. We compete for qualified management and scientific personnel with other life science companies, academic institutions and research institutions, particularly those focusing on genomics.
Our industry, is characterized by high demand and intense competition for talent, and the turnover rate has been and may continue to be high. We compete for qualified management and scientific personnel with other life science companies, academic institutions and research institutions, particularly those focusing on genomics.
General conditions in the global economy and in the global financial markets could adversely affect our results of operations, including the potential effects from the ongoing COVID-19 pandemic as discussed above, and the overall demand for nucleic acid sequencing products may be particularly vulnerable to unfavorable economic conditions.
General conditions in the global economy and in the global financial markets could adversely affect our results of operations, including the potential effects from the COVID-19 pandemic or other similar outbreaks as discussed above, and the overall demand for nucleic acid sequencing products may be particularly vulnerable to unfavorable economic conditions.
The COVID-19 pandemic has caused us to modify our business practices, including limiting certain of our commercial operations and limiting certain employees from working in the office.
For example, the COVID-19 pandemic caused us to modify our business practices, including limiting certain of our commercial operations and limiting certain employees from working in the office.
Many events can cause an order to be delayed or not completed at all, some of which may be out of our control, including the potential impacts from COVID-19 and our suppliers, especially our sole source suppliers, not being able to provide us with products or components.
Many events can cause an order to be delayed or not completed at all, some of which may be out of our control, including the potential impacts from health epidemics or pandemics and our suppliers, especially our sole source suppliers, not being able to provide us with products or components.
Additionally, new restrictions on the ability to send certain products and technology related to semiconductors, semiconductor manufacturing, and supercomputing to China without an export license discussed above impact our ability to provide products to customers or distributors in China.
Additionally, restrictions on the ability to send certain products and technology related to semiconductors, semiconductor manufacturing, and supercomputing to China without an export license may impact our ability to provide products to customers or distributors in China.
Our vendors and service providers may also be the targets of the risks described above, including cyberattacks, malicious software, ransomware, phishing schemes, and fraud.
Our vendors and service providers may also be the targets of the risks described above, including cyber-attacks, malicious software, ransomware, phishing schemes, and fraud.
A global financial crisis, inflation or a global or regional political disruption, as well as acts of terrorism, hostilities, military conflict and acts of war, including any further political uncertainty and military actions associated with the war in Ukraine and the related response, could cause extreme volatility in the capital and credit markets.
A global financial crisis, inflation or a global or regional political disruption, as well as acts of terrorism, hostilities, military conflict and acts of war, including any further political uncertainty and military actions in the Middle East associated with the Israel and Hamas conflict and the war in Ukraine, as well as the related responses, could cause extreme volatility in the capital and credit markets.
As part of our business strategy, we have acquired and expect to continue to pursue acquisitions of complementary businesses, technologies, or assets. We may also pursue technology license arrangements, strategic alliances or investments that complement our business. In July 2021, we acquired Circulomics, and in September 2021, we acquired Omniome.
As part of our business strategy, we have acquired and expect to continue to pursue acquisitions of complementary businesses, technologies, or assets. We may also pursue technology license arrangements, strategic alliances or investments that complement our business as we have previously with our acquisitions of Circulomics, Omniome and Apton in July 2021, September 2021 and August 2023, respectively.
There are a significant number of companies offering nucleic acid sequencing products and/or services, including Illumina, BGI Genomics, Thermo, ONT Ltd., Roche, Bionano, and Qiagen. Other companies recently entering the market include Ultima Genomics, Element Biosciences and Singular Genomics.
There are a significant number of companies offering nucleic acid sequencing products and/or services, including Illumina, BGI Genomics (also known as MGI or Complete Genomics), Thermo, ONT Ltd., Roche, Bionano, and Qiagen. Other companies recently entering the market include Ultima, Element and Singular.
The current global economic conditions and uncertain credit markets and concerns regarding the availability of credit pose a risk that could impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors, including financial institutions. If the current global economic environment deteriorates, our business could be negatively affected.
The current global economic conditions and uncertain credit markets and concerns regarding the availability of credit pose a risk that could impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors, including financial institutions.
If we do not allocate and effectively manage the resources necessary to build and sustain the proper IT infrastructure, we could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions or loss of or damage to intellectual property.
If we do not allocate and effectively manage the resources necessary to build and sustain the proper IT infrastructure, including those used in our products, we could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions or loss of or damage to intellectual property.
We have experienced and may continue to experience delays, quality issues or other difficulties leading to customer dissatisfaction with our products. Our production of SMRT Cells and reagents involves a long and complex manufacturing process and has been and may in the future be below desired yields and resulting output levels.
We have experienced and may continue to experience delays, quality issues or other difficulties leading to customer dissatisfaction with our products. Our production of SMRT Cells, flow cells and of reagents for both our-long and short-read technologies, involve a long and complex manufacturing process and has been and may in the future be below desired yields and resulting output levels.
If the third parties who license intellectual property to us fail to maintain the intellectual property that we have licensed, or lose rights to that intellectual property, the rights we have licensed may be reduced or eliminated, which would eliminate barriers against our competition.
We license from third parties some of the intellectual property that is important to our business. If the third parties who license intellectual property to us fail to maintain the intellectual property that we have licensed, or lose rights to that intellectual property, the rights we have licensed may be reduced or eliminated, which would eliminate barriers against our competition.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe believe that our existing facilities, together with suitable additional or alternative space available on commercially reasonable terms, will be sufficient to meet our needs.
Biggest changeWe believe that our existing facilities, together with suitable additional or alternative space available on commercially reasonable terms, will be sufficient to meet our needs. 53 Table of Contents
We operate additional research, development, and support functions in San Diego, where we lease approximately 73,500 square feet under a lease expiring on September 30, 2027. Additionally, our European headquarters is located in London, where we lease approximately 7,300 square feet under a lease expiring November 30, 2026. Including these leases, we lease approximately 275,000 square feet globally.
We operate additional research, development, and support functions in San Diego, where we lease approximately 73,500 square feet under a lease expiring on September 30, 2027. Additionally, our European headquarters is located in London, where we lease approximately 7,300 square feet under a lease expiring November 30, 2026. Including these leases, we lease approximately 270,000 square feet globally.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe are appealing the decision in the second IPR to the U.S. Court of Appeals for the Federal Circuit. On August 19, 2020, the court ordered a stay of the PGI District Court matter based on a joint stipulation by the parties pending a final written decision on the IPRs.
Biggest changeOn August 19, 2020, the court ordered a stay of the PGI District Court matter based on a joint stipulation by the parties pending a final written decision on the IPRs. Following the final decision on the IPRs described above, on February 2, 2022, the judge ordered that the PGI District Court matter be reopened.
Regardless of the outcome, litigation can have an adverse impact on us because of litigation and settlement costs, diversion of management resources, and other factors. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ‎ 44 PART II
Regardless of the outcome, litigation can have an adverse impact on us because of litigation and settlement costs, diversion of management resources, and other factors. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 55 Table of Contents PART II
We filed a petition with the Wuhan Intermediate People’s court requesting dismissal of the infringement action based on the CNIPA invalidation decision, and PGI filed a petition to withdraw its complaint. The Wuhan Intermediate People’s court granted PGI’s petition and dismissed the infringement action in May 2022.
We filed a petition with the Wuhan Intermediate People’s court requesting dismissal of the infringement action based on the CNIPA invalidation decision, and PGI filed a petition to withdraw its complaint.
The complaint alleges that our Sequel® II systems, Sequel IIe Systems, and Revio™ Systems that operate version 11.0 or later of the SMRT® Link software, infringe the ‘794 Patent. The complaint seeks unspecified monetary damages and an order enjoining us from infringing the ’794 Patent. We filed a motion to dismiss on February 14, 2023.
The complaint alleges that our Sequel TM II systems, Sequel IIe Systems, and Revio TM Systems that operate version 11.0 or later of the SMRT TM Link software, infringe the ‘794 Patent. The complaint seeks unspecified monetary damages and an order enjoining us from infringing the ’794 Patent.
We believe the infringement allegations in the complaint lack merit and we intend to vigorously defend in this matter. Proceedings in China On May 12, 2020, PGI filed a complaint in the Wuhan Intermediate People’s Court in China alleging infringement of one or more claims of China patent No. CN101743321B (the “CN321 Patent”), which is related to the ‘441 Patent.
Proceedings in China On May 12, 2020, PGI filed a complaint in the Wuhan Intermediate People’s Court in China alleging infringement of one or more claims of China patent No. CN101743321B (the “CN321 Patent”), which is related to the ‘441 Patent.
Other Proceedings From time to time, we may also be involved in a variety of other claims, lawsuits, investigations, and proceedings relating to securities laws, product liability, patent infringement, contract disputes, employment, and other matters that arise in the normal course of our business.
The Wuhan Intermediate People’s court granted PGI’s petition and dismissed the infringement action in May 2022. 54 Table of Contents Other Proceedings From time to time, we may also be involved in a variety of other claims, lawsuits, investigations, and proceedings relating to securities laws, product liability, patent infringement, contract disputes, employment, and other matters that arise in the normal course of our business.
On November 20, 2019, we filed our answer to the complaint, denying infringement and seeking a declaratory judgement of invalidity of the ‘441 Patent. 43 On June 22, 2020, we filed a petition requesting institution of an inter-partes review ("IPR") to the Patent Trial and Appeals Board (the “Board”) at the United States Patent Office requesting the Board to find a set of claims in the ‘441 Patent invalid.
On June 22, 2020, we filed a petition requesting institution of an inter-partes review ("IPR") to the Patent Trial and Appeals Board (the “Board”) at the United States Patent Office requesting the Board to find a set of claims in the ‘441 Patent invalid.
We plan to vigorously defend against the remaining claims. In December 2022, Take2 Technologies, Ltd. and the Chinese University of Hong Kong filed a complaint in the U.S. District Court for Delaware against us alleging infringement of U.S. Patent No. 11,091,794 (the “’794 Patent”) (C.A. No. 22- cv-01595).
(“Take2”) and the Chinese University of Hong Kong filed a complaint in the U.S. District Court for Delaware against us alleging infringement of U.S. Patent No. 11,091,794 (the “’794 Patent”) (C.A. No. 22- cv-01595).
Following the final decision on the IPRs described above, on February 2, 2022, the judge ordered that the PGI District Court matter be reopened. However, in a subsequent order dated September 15, 2022, the judge stayed the PGI District Court matter pending a final decision by the U.S. Court of Appeals for the Federal Circuit regarding the appeal described above.
However, in a subsequent order dated September 15, 2022, the judge stayed the PGI District Court matter pending a final decision by the U.S. Court of Appeals for the Federal Circuit regarding the appeal described above. We plan to vigorously defend against the remaining claims. In December 2022, Take2 Technologies, Ltd.
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We plan to vigorously defend in this matter.
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We plan to vigorously defend in this matter. On November 20, 2019, we filed our answer to the complaint, denying infringement and seeking a declaratory judgement of invalidity of the ‘441 Patent.
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We appealed the decision in the second IPR to the U.S. Court of Appeals for the Federal Circuit, which held a hearing on December 7, 2023. On January 9, 2024, the U.S. Court of Appeals for the Federal Circuit affirmed the decisions of the Board.
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We believe the infringement allegations in the complaint lack merit and we intend to vigorously defend in this matter. We filed a motion to dismiss on February 14, 2023.
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We also filed a motion to transfer the case to the Northern District of California which was granted on August 2, 2023 and the case was transferred on August 16, 2023 (C.A. No. 5:23-cv-04166). A hearing occurred on February 22, 2024 on the motion to dismiss the case and the motion was taken under submission for future decision.
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Take2 filed a motion to disqualify our in-house legal department from representing PacBio in the district court action on September 20, 2023. We opposed Take2’s disqualification motion on October 4, 2023. An oral hearing on the disqualification motion was held on October 26, 2023 and the court issued orders November 6 and December 4 of 2023 partially granting the motion.
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While some members of the in-house legal department were disqualified, General Counsel for PacBio was not disqualified and continues to represent PacBio in the district court action. On October 17, 2023, we filed a petition requesting institution of an IPR requesting the Board to find all claims of the ’794 patent invalid.
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We anticipate a decision by the United States Patent and Trademark Office on whether to institute a trial on the validity of the claims of the '794 patent on or before April 26, 2024.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeOur 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.
Biggest changeThe 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.
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 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.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on The Nasdaq Global Select Market under the symbol “PACB.” Holders of Record As of January 31, 2023, there were approximately 58 stockholders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on The Nasdaq Global Select Market under the symbol “PACB.” Holders of Record As of January 31, 2024, there were approximately 76 stockholders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.
The following graph shows a comparison from December 31, 2017 through December 31, 2022 of the cumulative total return for our common stock, the Nasdaq Composite Index and the Nasdaq Biotechnology Index. Such returns are based on historical results and are not intended to suggest future performance.
The following graph shows a comparison from December 31, 2018 through December 31, 2023 of the cumulative total return for our common stock, the Nasdaq Composite Index and the Nasdaq Biotechnology Index. Such returns are based on historical results and are not intended to suggest future performance.
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
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
See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business. ‎ 47 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.
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.
We believe the commercial investments we have recently made will further help drive growth in our business. 46 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.
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.
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.
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.
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 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.
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 .
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.
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.
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.
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Data for The Nasdaq Composite Index and the Nasdaq Biotechnology Index assume reinvestment of dividends. Recent Sales of Unregistered Securities Not applicable. IT EM 6. [Reserved] 45 ITEM 7.
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Data for The Nasdaq Composite Index and the Nasdaq Biotechnology Index assume reinvestment of dividends. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Pacific Biosciences, Inc, the NASDAQ Composite Index and the NASDAQ Biotechnology Index *$100 invested on 12/31/2018 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
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Our 2023 strategic objectives are to:  Drive rapid adoption of Revio TM 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.
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Recent Sales of Unregistered Securities Other than as previously reported on our Current Reports on Form 8-K filed with the SEC on June 26, 2023 and August 2, 2023, there were no unregistered sales of equity securities by us during 2023. 56 Table of Contents ITEM 6. [Reserved] ITEM 7.
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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.
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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.
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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 Onso TM , 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.
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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; 57 Table of Contents • 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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. 58 Table of Contents See the Risk Factors section for further discussion of the possible impact of macroeconomic factors on our business.
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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.
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Starting in April 2022, we invited employees located near our reopened offices to return to the office.
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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.
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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.
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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.
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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.
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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. ‎ 48 Results of Operations A detailed discussion of our consolidated financial results comparison between 2022 and 2021 is presented below.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

63 edited+26 added−16 removed53 unchanged
Biggest changeComparison of the Years Ended December 31, 2022 and 2021 Year Ended December 31, (in thousands, except percentages) 2022 2021 $ Change % Change Revenue: Product revenue $ 108,699 $ 113,505 $ (4,806) (4%) Service and other revenue 19,605 17,008 2,597 15% Total revenue 128,304 130,513 (2,209) (2%) Cost of revenue: Cost of product revenue 60,932 56,358 4,574 8% Cost of service and other revenue 13,899 14,989 (1,090) (7%) Amortization of intangible assets 733 306 427 140% Loss on purchase commitment 3,705 — 3,705 100% Total cost of revenue 79,269 71,653 7,616 11% Gross profit 49,035 58,860 (9,825) (17%) Operating expense: Research and development 193,000 112,899 80,101 71% Sales, general and administrative 160,854 124,124 36,730 30% Merger-related expenses — 31,129 (31,129) (100%) Change in fair value of contingent consideration 2,377 1,143 1,234 108% Total operating expense 356,231 269,295 86,936 32% Operating loss (307,196) (210,435) (96,761) (46%) Loss from continuation advances from Illumina — (52,000) 52,000 100% Interest expense (14,690) (12,530) (2,160) (17%) Other income, net 7,638 93 7,545 8113% Loss before benefit from income taxes (314,248) (274,872) (39,376) (14%) Benefit from income taxes — (93,649) 93,649 100% Net loss $ (314,248) $ (181,223) $ (133,025) (73%) 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.
Biggest changeComparison of the Years Ended December 31, 2023 and 2022 Years Ended December 31, (in thousands, except per share amounts) 2023 2022 $ Change % Change Revenue: Product revenue $ 183,872 $ 108,699 $ 75,173 69 % Service and other revenue 16,649 19,605 (2,956) (15 %) Total revenue 200,521 128,304 72,217 56 % Cost of Revenue: Cost of product revenue 127,568 60,932 66,636 109 % Cost of service and other revenue 14,754 13,899 855 6 % Amortization of acquired intangible assets 1,983 733 1,250 171 % Loss on purchase commitment 3,436 3,705 (269) (7 %) Total cost of revenue 147,741 79,269 68,472 86 % Gross profit 52,780 49,035 3,745 8 % Operating Expense: Research and development 187,170 193,000 (5,830) (3 %) Sales, general and administrative 169,818 160,854 8,964 6 % Merger-related expenses 9,042 — 9,042 — Amortization of acquired intangible assets 6,157 — 6,157 — Change in fair value of contingent consideration 15,060 2,377 12,683 534 % Total operating expense 387,247 356,231 31,016 9 % Operating loss (334,467) (307,196) (27,271) 9 % Loss on extinguishment of debt (2,033) — (2,033) — Interest expense (14,343) (14,690) 347 (2 %) Other income, net 32,684 7,638 25,046 328 % Loss before benefit from income taxes (318,159) (314,248) (3,911) 1 % Benefit from income taxes (11,424) — (11,424) — Net loss $ (306,735) $ (314,248) $ 7,513 (2 %) 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.
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, 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.
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, 53 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.
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 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.
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.
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 54 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 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.
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 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.
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 ).
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).
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.
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.
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.
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.
Upon conversion of the Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.
Upon conversion of the 2028 Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.
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.
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.
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.
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.
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.
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.
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.
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.
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, 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.
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 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.
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.
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.
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.
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.
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 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 62 Table of Contents performance.
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.
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. 66 Table of Contents We typically use the discounted cash flow method to value our acquired intangible assets.
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.
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.
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.
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.
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.
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.
Convertible Senior Notes for further details. 51 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.
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.
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.
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.
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.
Off-Balance Sheet Arrangements As of December 31, 2023, we did not have any off-balance sheet arrangements. 64 Table of Contents In the ordinary course of business, we enter into standard indemnification arrangements.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. 52 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.
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.
We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative impairment test. 56 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.
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.
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.
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.
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.
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.
If the relevant research and development project is abandoned, the IPR&D asset is expensed in the period of abandonment. 55 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.
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.
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 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.
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.
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.
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. 57
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.
Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete balances.
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.
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.
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 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.
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.
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.
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.
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.
Interest on the 2028 Notes is payable semi- 61 Table of Contents 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.
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.
If the carrying 67 Table of Contents 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.
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.
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.
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.
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 increase in service and other revenue was primarily due to product services contracts sold on the growing installed base. 49 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.
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.
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.
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.
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.
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.
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.
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. 65 Table of Contents The consideration for contracts with multiple performance obligations is allocated between separate performance obligations based on their individual standalone selling price.
Cash Flow Summary Year Ended December 31, (in thousands) 2022 2021 Cash used in operating activities $ (263,211) $ (111,180) Cash provided by (used in) investing activities 116,083 (678,531) Cash provided by financing activities 9,622 1,169,581 Net (decrease) increase in cash, cash equivalents, and restricted cash $ (137,506) $ 379,870 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.
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. 63 Table of Contents Cash Flow Summary Years Ended December 31, (in thousands) 2023 2022 Cash used in operating activities $ (259,173) $ (263,211) Cash provided by investing activities 4,604 116,083 Cash provided by financing activities 108,891 9,622 Net decrease in cash, cash equivalents and restricted cash $ (145,678) $ (137,506) 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 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.
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.
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.
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 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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
The decrease in gross margin percentage was primarily due to adjustments for excess inventory, either on hand or at our contract manufacturer, r elated 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.
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.
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 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.
Removed
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.
Added
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.
Removed
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.
Added
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 59 Table of Contents 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.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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 .

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeBecause the notes have a fixed annual interest rate of 1.50%, we do not have any economic interest rate exposure or financial statement risk associated with changes in interest rates. The fair value of the notes, however, may fluctuate when interest rates and the market price of our stock changes. See Note 7.
Biggest changeWe carry our remaining 2028 Notes at the principal amount, less unamortized debt issuance costs, on our consolidated balance sheets. Because the 2030 Notes and 2028 Notes have fixed annual interest rates of 1.375% and 1.50%, respectively, we do not have any economic interest rate exposure or financial statement risk associated with changes in interest rates.
Our international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. 58
Our international operations are subject to risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. 69 Table of Contents
Our foreign currency exposure is primarily concentrated in the Euro. A 10% strengthening of the U.S. dollar exchange rate against all currencies with which we have exposure, after taking into account offsetting positions at December 31, 2022 would have resulted in a $1.3 million decrease in the carrying amounts of those net assets.
A 10% strengthening of the U.S. dollar exchange rate against all currencies with which we have exposure, after taking into account offsetting positions at December 31, 2023 would have resulted in a $0.9 million decrease in the carrying amounts of those net assets.
A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates on December 31, 2022 would have affected the fair value of our investment portfolio by approximately $2.5 million. We carry our convertible senior notes at the principal amount, less unamortized debt issuance costs, on our Consolidated Balance Sheets.
A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates on December 31, 2023 would have affected the fair value of our investment portfolio by approximately $2.7 million. The 2030 Notes were recorded at fair value as of the closing date of the Exchange Transaction, less debt issuance costs, on our consolidated balance sheets.
As a result, we have foreign exchange exposures relating to non-U.S. dollar denominated cash flows and monetary assets and liabilities that are denominated in currencies other than U.S. dollars. The value of the amounts is exposed to changes in currency exchange rates from the time the transactions are originated, until the time the cash settlement is converted into U.S. dollars.
The value of the amounts is exposed to changes in currency exchange rates from the time the transactions are originated, until the time the cash settlement is converted into U.S. dollars. Our foreign currency exposure is primarily concentrated in the Euro.
Convertible Senior Notes in Part II, Item 8 of this Annual Form 10-K for additional information. Foreign Exchange Risk Our revenue, expense, and capital purchasing activities are primarily transacted in U.S. dollars; however, a portion of our operations is conducted in foreign currencies.
Foreign Exchange Risk Our revenue, expense, and capital purchasing activities are primarily transacted in U.S. dollars; however, a portion of our operations is conducted in foreign currencies. As a result, we have foreign exchange exposures relating to non-U.S. dollar denominated cash flows and monetary assets and liabilities that are denominated in currencies other than U.S. dollars.
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The fair value of the notes, however, may fluctuate when interest rates and the market price of our stock changes. See Note 7. Convertible Senior Notes in Part II, Item 8 of this Annual Form 10-K for additional information.

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