Pacific Biosciences of California(PACB) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and related disclosures for the company ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for Pacific Biosciences of California, Inc., including the balance sheets, statements of operations and comprehensive loss, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining significant accounting policies, financial instruments, balance sheet components, convertible senior notes, restructuring activities, commitments, equity plans, net loss per share, and segment information Condensed Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time | (In thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Assets | | | | Cash and cash equivalents | $54,803 | $55,370 | | Investments | $259,932 | $334,561 | | Total current assets | $413,397 | $495,681 | | Intangible assets, net | $17,163 | $389,572 | | Goodwill | $317,761 | $317,761 | | Total assets | $825,470 | $1,260,447 | | Liabilities | | | | Total current liabilities | $59,754 | $66,299 | | Convertible senior notes, net, non-current | $646,436 | $647,494 | | Total liabilities | $763,981 | $753,853 | | Stockholders' Equity | | | | Total stockholders' equity | $61,489 | $506,594 | - Total assets decreased by approximately $435 million from December 31, 2024, to June 30, 2025, primarily due to a significant reduction in intangible assets, net, from $389.6 million to $17.2 million[9] - Total stockholders' equity decreased substantially from $506.6 million at December 31, 2024, to $61.5 million at June 30, 2025[9] Condensed Consolidated Statements of Operations and Comprehensive Loss This section details the company's revenues, expenses, and net loss over specific reporting periods | (In thousands, except per share amounts) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $39,766 | $36,013 | $76,919 | $74,823 | | Gross profit | $14,684 | $5,938 | $13,313 | $17,220 | | Operating loss | $(44,853) | $(175,846) | $(473,787) | $(257,208) | | Net loss | $(41,930) | $(173,319) | $(468,005) | $(251,497) | | Basic net loss per share | $(0.14) | $(0.64) | $(1.57) | $(0.93) | - Total revenue increased by 10% for the three months ended June 30, 2025, compared to the same period in 2024, and by 3% for the six months ended June 30, 2025, compared to the same period in 2024[10] - Operating loss significantly increased for the six months ended June 30, 2025, to $(473.8) million from $(257.2) million in the prior year, primarily due to higher amortization of acquired intangible assets and impairment charges[10] Condensed Consolidated Statements of Stockholders' Equity This section outlines the changes in the company's equity accounts over a specific period, reflecting net loss, stock issuances, and other comprehensive loss | (In thousands) | Balance at December 31, 2024 | Net loss | Other comprehensive loss | Issuance of common stock in conjunction with equity plans | Share-based compensation expense | Balance at June 30, 2025 | | :--------------- | :--------------------------- | :------- | :----------------------- | :-------------------------------------------------------- | :------------------------------- | :----------------------- | | Total Stockholders' Equity | $506,594 | $(468,005) | $(155) | $1,959 | $21,096 | $61,489 | - Total stockholders' equity decreased significantly by $445.1 million during the six months ended June 30, 2025, primarily due to a net loss of $468.0 million, partially offset by share-based compensation expense and common stock issuance[12] Condensed Consolidated Statements of Cash Flows This section reports the cash generated and used by the company's operating, investing, and financing activities | (In thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(73,433) | $(129,945) | | Net cash provided by investing activities | $70,517 | $42,701 | | Net cash provided by financing activities | $1,959 | $6,401 | | Net decrease in cash, cash equivalents, and restricted cash | $(957) | $(80,843) | | Cash, cash equivalents, and restricted cash at end of period | $56,635 | $101,790 | - Net cash used in operating activities decreased by $56.5 million, from $(129.9) million in the first six months of 2024 to $(73.4) million in the same period of 2025[13] - Net cash provided by investing activities increased by $27.8 million, from $42.7 million in the first six months of 2024 to $70.5 million in the same period of 2025[13] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES This note describes the company's business and outlines the key accounting principles and estimates applied in preparing the financial statements - Pacific Biosciences is a life science technology company focused on designing, developing, and manufacturing advanced sequencing solutions, including HiFi long-read sequencing technology, for various applications like human germline sequencing, plant and animal sciences, infectious disease, and oncology[14][15] - The company's unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP and include all adjustments necessary for fair presentation, consistent with the 2024 Annual Report[17][18] - Significant accounting estimates include inventory valuation, fair value of contingent consideration, acquired intangible assets, useful lives of assets, impairment assessments, and income tax provisions[19] - The company classifies investments in debt securities as available-for-sale at fair value and evaluates unrealized losses for credit-related impacts, recognizing non-credit related losses in accumulated other comprehensive income[21] - New accounting pronouncements pending adoption include ASU 2023-09 (Income Tax Disclosures), ASU 2024-04 (Convertible Debt Instruments), and ASU 2024-03 (Income Statement Expense Disaggregation), with impacts currently being evaluated[24][25][26] NOTE 2. FINANCIAL INSTRUMENTS This note details the company's financial instruments, including their fair value measurement and classification - Financial instruments are measured at fair value using a three-level hierarchy, with cash, cash equivalents, and restricted cash primarily classified as Level 1 or Level 2, and investments (corporate debt, U.S. government & agency securities) as Level 2[31][34] | (In thousands) | June 30, 2025 (Total) | December 31, 2024 (Total) | | :-------------------------------- | :-------------------- | :------------------------ | | Cash and cash equivalents | $54,803 | $55,370 | | Investments | $259,932 | $334,561 | | Short-term restricted cash | $300 | $690 | | Long-term restricted cash | $1,532 | $1,532 | | Contingent consideration liability | $0 | $18,700 | - The fair value of the contingent consideration liability related to the Apton acquisition was reduced to $0 as of June 30, 2025, from $18.7 million at December 31, 2024, due to the decision to cease development of the high-throughput short-read system and resulting changes in expected future revenues[39][40] | (In thousands) | Fair Value (June 30, 2025) | | :--------------- | :------------------------- | | Due in one year or less | $214,595 | | Due after one year through five years | $48,816 | | Total | $263,411 | - Investment income decreased to $3.4 million for Q2 2025 (from $6.5 million in Q2 2024) and $7.3 million for YTD 2025 (from $13.8 million in YTD 2024), primarily due to lower cash and investment balances[44][160][179] NOTE 3. BALANCE SHEET COMPONENTS This note provides a breakdown and analysis of specific asset and liability accounts on the balance sheet, including inventory, goodwill, and intangible assets | (In thousands) | June 30, 2025 | December 31, 2024 | | :--------------- | :------------ | :---------------- | | Inventory, net | $53,839 | $58,755 | | Inventory reserve | $(33,787) | $(22,768) | - Goodwill was assessed for impairment as of March 31, 2025, and April 1, 2025, with no impairment found, despite a decline in stock price and revised strategic plans. In 2024, impairment charges of $93.2 million and $51.3 million were recorded[46][47] - An impairment charge of $15.0 million was recognized for acquired in-process research and development (IPR&D) during the six months ended June 30, 2025, due to the decision to cease development of the high-throughput short-read sequencing platform[51][53] | (In thousands, except years) | As of June 30, 2025 (Net Carrying Amount) | As of December 31, 2024 (Net Carrying Amount) | | :--------------------------- | :---------------------------------------- | :-------------------------------------------- | | Developed technology | $17,163 | $374,572 | | Customer relationships | $0 | $0 | | Total | $17,163 | $374,572 | - Accelerated amortization of $359.3 million was recognized in Q1 2025 for developed technology from the 2021 Omniome acquisition, reflecting a revised estimated useful life due to the cessation of high-throughput short-read platform development[55] - Total deferred revenue as of June 30, 2025, was $20.6 million, with $14.9 million current and $5.7 million non-current, primarily from service contracts[59] - The aggregate amount of transaction price allocated to remaining performance obligations was $56.6 million as of June 30, 2025, with approximately 72% expected to be converted to revenue in the next twelve months[60] | (In thousands) | Balance at June 30, 2025 | | :--------------- | :----------------------- | | Product warranty reserve | $2,688 | NOTE 4. CONVERTIBLE SENIOR NOTES This note describes the terms, carrying amounts, and fair values of the company's convertible senior notes - In November 2024, the company exchanged $459.0 million of 2028 Notes for $200.0 million of 2029 Notes, 20,451,570 shares of common stock, and $50.0 million cash, resulting in a $154.4 million gain on debt restructuring[64][75] - The 2029 Notes bear 1.50% interest, mature on August 15, 2029, and are convertible at an initial rate of 204.5157 shares per $1,000 principal amount (approx. $4.89/share)[66][67] - The carrying amount of the 2029 Notes liability as of June 30, 2025, is $213.5 million, with an estimated fair value (Level 2) of $161.9 million[79] - The 2030 Notes, issued in June 2023 for $441.0 million, bear 1.375% interest, mature on December 15, 2030, and are convertible at an initial rate of 46.5116 shares per $1,000 principal amount (approx. $21.50/share)[80][81][82] | (In thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | 2030 Notes Interest Expense | $1,756 | $1,752 | $3,511 | $3,524 | | 2028 Notes Interest Expense | $0 | $1,802 | $0 | $3,604 | - As of June 30, 2025, the estimated fair value (Level 2) of the 2030 Notes was $291.3 million[93] NOTE 5. RESTRUCTURING This note details the company's restructuring initiatives, including associated charges and their impact on financial results - In Q1 2025, the company implemented an expense reduction initiative, including workforce reductions, to prioritize HiFi sequencing, incurring $5.4 million in restructuring charges (employee separation and other costs)[97] - The 2025 restructuring also led to $388.5 million in additional costs, including $359.3 million in accelerated amortization of intangible assets, $15.0 million in IPR&D impairment, $8.0 million for excess inventory, and $3.8 million for purchase commitment losses[99] | (In thousands) | Employee Separation Costs | Other Costs | Total | | :--------------- | :------------------------ | :---------- | :---- | | Expense recorded in YTD 2025 | $4,787 | $563 | $5,350 | | Cash paid during YTD 2025 | $(4,463) | $0 | $(4,463) | | Amount recorded in current liabilities as of June 30, 2025 | $324 | $563 | $887 | - The 2024 restructuring initiative, which included workforce reductions and closing the San Diego office, resulted in cumulative charges of $26.1 million to date, with no new charges in Q2 2025[101] - The 2024 restructuring included $8.1 million in accelerated amortization and depreciation for the San Diego office's right-of-use asset and leasehold improvements, and $3.6 million for excess inventory[102] NOTE 6. COMMITMENTS AND CONTINGENCIES This note outlines the company's contractual obligations, legal proceedings, and indemnification arrangements - The company amended its corporate headquarters lease, extending the term to April 30, 2034[105] - The company accrues liabilities for legal proceedings when probable and estimable, but does not believe current pending matters will have a material adverse effect, though litigation is inherently unpredictable[106][107] - The company indemnifies directors and officers, and certain third parties, against losses and claims, with no additional liability recorded as of June 30, 2025[109] NOTE 7. EQUITY PLANS AND SHARE-BASED COMPENSATION This note describes the company's equity incentive plans, share-based compensation expense, and related stock activity - Stockholders approved an amendment to the 2020 Equity Incentive Plan on June 4, 2025, reserving an additional 23 million shares, bringing total available shares for future issuance under various plans to 13.5 million as of June 30, 2025[111][112] | (shares in thousands) | Outstanding at December 31, 2024 | Granted | Canceled | Expired | Outstanding at June 30, 2025 | | :-------------------- | :------------------------------- | :------ | :------- | :------ | :--------------------------- | | Stock Options | 10,509 | 8,290 | (1,892) | (358) | 16,549 | | (shares in thousands) | Outstanding at December 31, 2024 | Granted | Vested | Forfeited | Outstanding at June 30, 2025 | | :-------------------- | :------------------------------- | :------ | :----- | :-------- | :--------------------------- | | Restricted Stock Units (RSU) | 14,211 | 11,814 | (4,179) | (2,939) | 18,907 | | Performance Stock Units (PSU) | 392 | — | — | — | 392 | - Shares issued under the ESPP were 1.75 million for YTD 2025, compared to 1.19 million for YTD 2024, with an additional 4.0 million shares reserved in Q1 2025[116] | (In thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total share-based compensation expense | $11,895 | $17,219 | $21,096 | $36,744 | - Share-based compensation expense decreased by $5.3 million for Q2 2025 and $15.6 million for YTD 2025 compared to the prior year periods, primarily due to restructuring activities[117][155][156][172][173] NOTE 8. NET LOSS PER SHARE This note provides the calculation of basic and diluted net loss per share, including the factors affecting share count | (In thousands, except per share amounts) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(41,930) | $(173,319) | $(468,005) | $(251,497) | | Basic net loss per share | $(0.14) | $(0.64) | $(1.57) | $(0.93) | | Diluted net loss per share | $(0.14) | $(0.64) | $(1.57) | $(0.93) | | Weighted average shares outstanding (Basic) | 300,162 | 272,385 | 298,519 | 270,982 | - Net loss per share (basic and diluted) improved to $(0.14) for Q2 2025 from $(0.64) for Q2 2024, but worsened to $(1.57) for YTD 2025 from $(0.93) for YTD 2024[123] - Shares issuable upon conversion of convertible senior notes (61.4 million) and equity awards (44.6 million) were excluded from diluted EPS calculation for YTD 2025 due to their antidilutive effect[123] NOTE 9. SEGMENT AND GEOGRAPHIC INFORMATION This note presents revenue breakdowns by geographic region and product type, reflecting the company's single operating segment - The company operates in one reportable segment: development, manufacturing, and marketing of integrated platforms for genetic analysis[124] | (In thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Americas | $17,687 | $20,757 | $33,990 | $38,435 | | Europe, Middle East and Africa | $9,467 | $7,022 | $18,707 | $15,378 | | Asia-Pacific | $12,612 | $8,234 | $24,222 | $21,010 | | Total revenue | $39,766 | $36,013 | $76,919 | $74,823 | | (In thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Instrument revenue | $14,150 | $14,678 | $25,166 | $33,703 | | Consumable revenue | $18,933 | $17,068 | $39,030 | $33,052 | | Service and other revenue | $6,683 | $4,267 | $12,723 | $8,068 | | Total revenue | $39,766 | $36,013 | $76,919 | $74,823 | - Consumable revenue increased by 11% for Q2 2025 and 18% for YTD 2025, driven by higher Revio consumables sales and initial Vega consumable shipments[126][150][168] - Instrument revenue decreased by 4% for Q2 2025 and 25% for YTD 2025, primarily due to lower Revio system sales (15 units in Q2 2025 vs. 24 in Q2 2024; 27 units in YTD 2025 vs. 52 in YTD 2024), partially offset by Vega system sales (38 units in Q2 2025; 66 units in YTD 2025)[126][148][149][166][167] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides a detailed discussion and analysis of the company's financial condition and results of operations, including an overview of its business, strategic objectives, and financial performance for the three and six months ended June 30, 2025, compared to the prior year. It also covers liquidity, capital resources, critical accounting policies, recent accounting pronouncements, and off-balance sheet arrangements OVERVIEW AND OUTLOOK This section provides a summary of the company's business, strategic objectives, and key financial highlights for the reporting period - Pacific Biosciences is a life science technology company specializing in advanced sequencing solutions, including HiFi long-read technology, for various applications[128][129] - Key strategic objectives for 2025 include: full-scale release of the Vega benchtop platform, accelerating Revio platform adoption with SPRQ chemistry, investing in future product launches, and progressing clinical strategy[132][135] | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------- | :----------------------------- | :----------------------------- | | Revenue | $76.9 M | $74.8 M | | Gross profit | $13.3 M | $17.2 M | | Operating loss | $473.8 M | $257.2 M | | Cash, cash equivalents, and investments (as of period end) | $314.7 M (June 30, 2025) | $389.9 M (Dec 31, 2024) | - Operating loss increased by $216.6 million for YTD 2025, primarily due to $382.4 million in restructuring-related costs, including $359.3 million in accelerated amortization of acquired intangibles and $15.0 million in impairment charges[141] - The sales cycle for Revio instrument purchases remains elongated due to funding uncertainty (NIH, academic), procurement delays, and slower sample volume increases from new and existing customers[137] RESULTS OF OPERATIONS This section analyzes the company's financial performance, including revenue, expenses, and profitability, for the reported periods Comparison of the Three Months Ended June 30, 2025 and 2024 This section compares the company's financial results for the three-month periods ended June 30, 2025, and 2024 | (In thousands, except percentages) | 2025 | 2024 | $ Change | % Change | | :--------------------------------- | :---------- | :---------- | :---------- | :------- | | Total revenue | $39,766 | $36,013 | $3,753 | 10% | | Product revenue | $33,083 | $31,746 | $1,337 | 4% | | Service and other revenue | $6,683 | $4,267 | $2,416 | 57% | | Gross profit | $14,684 | $5,938 | $8,746 | 147% | | Operating loss | $(44,853) | $(175,846) | $130,993 | (74)% | | Net loss | $(41,930) | $(173,319) | $131,389 | (76)% | - Instrument revenue decreased by $0.5 million (4%) in Q2 2025, with 15 Revio units sold compared to 24 in Q2 2024, partially offset by 38 Vega unit sales[148][149] - Consumables revenue increased by $1.9 million (11%) in Q2 2025, driven by higher Revio consumables sales and initial Vega consumable shipments[150] - Gross profit increased by $8.7 million (147%) in Q2 2025, primarily due to lower cost of revenue and higher consumables sales, with restructuring-related charges being not significant in Q2 2025 compared to $4.6 million in Q2 2024[153][154] - R&D expense decreased by $16.0 million (41%) in Q2 2025, and SG&A expense decreased by $9.7 million (21%), both primarily due to personnel and related cost reductions from restructuring activities[155][156] - No impairment charges were recognized in Q2 2025, compared to a $93.2 million goodwill impairment charge in Q2 2024[157] Comparison of the Six Months Ended June 30, 2025 and 2024 This section compares the company's financial results for the six-month periods ended June 30, 2025, and 2024 | (In thousands, except percentages) | 2025 | 2024 | $ Change | % Change | | :--------------------------------- | :---------- | :---------- | :---------- | :------- | | Total revenue | $76,919 | $74,823 | $2,096 | 3% | | Product revenue | $64,196 | $66,755 | $(2,559) | (4%) | | Service and other revenue | $12,723 | $8,068 | $4,655 | 58% | | Gross profit | $13,313 | $17,220 | $(3,907) | (23%) | | Operating loss | $(473,787) | $(257,208) | $(216,579) | 84% | | Net loss | $(468,005) | $(251,497) | $(216,508) | 86% | - Instrument revenue decreased by $8.5 million (25%) for YTD 2025, with 27 Revio units sold compared to 52 in YTD 2024, partially offset by 66 Vega unit sales[166][167] - Consumables revenue increased by $6.0 million (18%) for YTD 2025, driven by higher Revio consumables sales and initial Vega consumable shipments[168] - Gross profit decreased by $3.9 million (23%) for YTD 2025, primarily due to increased cost of revenue from restructuring activities ($12.4 million in YTD 2025 vs. $4.6 million in YTD 2024), including $3.8 million for purchase commitment losses[170][171] - R&D expense decreased by $30.4 million (37%) and SG&A expense decreased by $13.3 million (15%) for YTD 2025, both due to restructuring-related personnel and cost savings[172][173] - Impairment charges for YTD 2025 were $15.0 million (related to IPR&D), a decrease from $93.2 million (goodwill impairment) in YTD 2024[174][175] - Amortization of acquired intangible assets increased significantly by $353.1 million for YTD 2025, primarily due to $359.3 million of accelerated amortization related to developed technology from the Omniome acquisition[176] - A change in fair value of contingent consideration resulted in an $18.7 million gain for YTD 2025, reducing the liability to $0, due to the decision to cease development of the high-throughput short-read system[177] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's ability to generate and manage cash, its financial position, and funding requirements - As of June 30, 2025, cash, cash equivalents, and investments totaled $314.7 million, a 19% decrease from $389.9 million at December 31, 2024[180][141] - The company believes existing liquidity will fund projected operating requirements beyond the next 12 months, but historically incurs operating losses and negative cash flows, potentially requiring additional capital[180][181] - Expense reduction initiatives, including workforce reductions, were implemented in Q2 2024 and Q1 2025 to lower annualized operating expenses and support cost savings[182] - The contingent consideration liability of $25.0 million from the Apton acquisition was estimated at $0 as of June 30, 2025, due to the decision to discontinue development of the high-throughput sequencer[184] | (In thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(73,433) | $(129,945) | | Net cash provided by investing activities | $70,517 | $42,701 | | Net cash provided by financing activities | $1,959 | $6,401 | - Cash used in operating activities for YTD 2025 was $73.4 million, primarily due to a $468.0 million net loss, partially offset by non-cash items like $367.4 million amortization of intangible assets and $21.1 million share-based compensation[187] - Cash provided by investing activities for YTD 2025 was $70.5 million, mainly from $195.4 million in investment maturities, partially offset by $118.0 million in investment purchases and $5.0 million in intangible asset purchases[189] - Cash provided by financing activities for YTD 2025 was $2.0 million, from common stock issuance through equity plans[191] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section highlights the accounting policies that require significant judgment and estimation in preparing the financial statements - The company's financial statements rely on estimates and judgments affecting reported asset, liability, revenue, and expense amounts, with evaluations performed on an ongoing basis[193] - There have been no changes to the significant accounting policies disclosed in the 2024 Annual Report[194] RECENT ACCOUNTING PRONOUNCEMENTS This section provides information on new accounting standards and their potential impact on the company's financial reporting - Information regarding recent accounting pronouncements is detailed in Note 1. Organization and Significant Accounting Policies[195] OFF-BALANCE SHEET ARRANGEMENTS This section discloses any transactions, agreements, or other contractual arrangements that are not recorded on the balance sheet but may have a material impact - As of June 30, 2025, the company had no off-balance sheet arrangements[196] - The company enters into standard indemnification arrangements with third parties, directors, and officers, with maximum potential future payments not determinable, and no additional liability recorded as of June 30, 2025[197][198] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily related to interest rates and its investment portfolio. It highlights the fixed interest rates of its convertible senior notes and the potential impact of interest rate changes on the fair value of its marketable securities - The 2030 and 2029 Convertible Senior Notes have fixed annual interest rates (1.375% and 1.50% respectively), limiting economic interest rate exposure, though their fair value may fluctuate with interest rates and stock price[200] - As of June 30, 2025, cash equivalents and available-for-sale investments totaled $314.7 million[201] - A hypothetical 100 basis-point increase or decrease in interest rates would affect the fair value of the investment portfolio by approximately $1.5 million[202] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and procedures at a reasonable assurance level as of June 30, 2025, and reports no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025[204] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[206] PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, and other miscellaneous disclosures not covered in the financial information ITEM 1. LEGAL PROCEEDINGS This section details ongoing and resolved legal proceedings, including patent infringement lawsuits in the U.S. and China. It covers the PGI District Court matter, the Take2 District Court matter (which was resolved through patent purchase), and a closed proceeding in China, emphasizing the unpredictable nature and potential costs of litigation - The PGI District Court matter (patent infringement) is ongoing, with a trial date set for October 5, 2026, following appeals and a transfer to the Northern District of California[207][208][209] - The Take2 District Court matter (patent infringement) was resolved by the company's purchase of the '794 patent from CUHK on March 7, 2025, leading to the discharge of all outstanding litigation claims and patent challenges[210][211] - A patent infringement proceeding in China related to the '441 Patent was closed after the Supreme People's Court upheld the invalidation of all claims of the CN321 patent on May 29, 2025[212] - The company accrues for contingent losses when probable and estimable, but does not believe current matters will have a material adverse effect, acknowledging litigation's unpredictable nature and potential impact on resources[214] ITEM 1A. RISK FACTORS This section outlines significant risks that could adversely affect the company's business, financial condition, and results of operations. These risks span commercialization challenges, financial sustainability, operational disruptions, intellectual property protection, regulatory compliance, market volatility, and geopolitical tensions - Key risks include the ability to successfully market and sell products, achieve profitability, implement expense reduction initiatives, repay debt, integrate acquisitions, develop and manufacture products, manage new product introductions, retain key personnel, penetrate nucleic acid sequencing applications, and manage supply chain dependencies[216] - The company has incurred significant losses and expects to continue doing so, with no assurance of achieving or sustaining profitability, and expense reduction initiatives may not fully succeed or could be disruptive[224][228] - The company may not have sufficient cash to meet debt obligations or fund long-term operations, potentially requiring additional capital that may dilute existing stockholders[231][232] - Acquisitions and strategic investments carry risks such as integration difficulties, failure to realize benefits, diversion of resources, and potential dilution of stockholders' ownership[235][238] - Dependence on sole-source suppliers for critical components, manufacturing complexities, and long lead times pose risks to product supply, quality, and cost, potentially harming the business if disruptions occur[255][256][258] - The company faces intense competition, unpredictable and lengthy sales cycles, and reliance on a limited number of customers, which can lead to revenue fluctuations and pricing pressures[265][271][280] - Intellectual property risks include challenges to patent validity, reliance on licensed IP, and the potential for infringement claims from third parties, which can be costly and divert resources[295][298][306] - Regulatory risks include potential FDA regulation of products as medical devices, export control restrictions (especially to China), and compliance with evolving data privacy laws (e.g., CCPA, CPRA, HIPAA), which could increase costs and impede commercialization[311][314][327][386][388][389] - Risks related to common stock ownership include high price volatility, potential dilution from future stock sales, and anti-takeover provisions in charter documents[338][340][344] - Risks related to the convertible notes include the inability to raise funds for cash settlement or repurchase upon a fundamental change, and operating restrictions imposed by the 2029 Notes' Letter Agreement[353][358] - General risks include unfavorable global economic/political conditions, disruptions to international business, reliance on third-party carriers, and the potential for IT system breaches or AIML technology liabilities[364][366][378][381] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section states that there were no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds occurred during the last fiscal quarter[395] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred during the last fiscal quarter[396] ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[397] ITEM 5. OTHER INFORMATION This section confirms that none of the company's directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the last fiscal quarter - None of the company's directors or officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the last fiscal quarter[399] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including organizational documents, equity incentive plans, and certifications - Exhibits include Amended and Restated Certificate of Incorporation, Third Amended and Restated Bylaws, 2020 Equity Incentive Plan, and certifications from the CEO and CFO[401] Signatures This section contains the required signatures from the President and Chief Executive Officer, Chief Financial Officer, and Vice President and Chief Accounting Officer, certifying the report's submission - The report is signed by Christian O. Henry (President and CEO), Jim R. Gibson (CFO), and Michele Farmer (VP and Chief Accounting Officer) on August 7, 2025[407]