PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-Q

Item 1. Financial Statements PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except per share amounts) March 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 353,834 $ 325,089 Investments 521,058 447,229 Accounts receivable, net 29,589 18,786 Inventory, net 61,955 50,381 Prepaid expenses and other current assets 14,375 10,289 Short-term restricted cash 300 300 Total current assets 981,111 852,074 Property and equipment, net 40,833 41,580 Operating lease right-of-use assets, net 38,247 39,763 Long-term restricted cash 2,922 2,922 Intangible assets, net 410,011 410,245 Goodwill 409,974 409,974 Other long-term assets 13,319 10,528 Total assets $ 1,896,417 $ 1,767,086 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 17,390 $ 12,028 Accrued expenses 19,380 32,596 Deferred revenue, current 30,866 30,498 Operating lease liabilities, current 9,018 8,886 Other liabilities, current 4,670 7,233 Contingent consideration liability, current 184,350 172,094 Total current liabilities 265,674 263,335 Deferred revenue, non-current 1,849 1,794 Operating lease liabilities, non-current 38,969 41,070 Convertible senior notes, net, non-current 896,839 896,683 Other liabilities, non-current 969 1,300 Total liabilities 1,204,300 1,204,182 Commitments and contingencies Stockholders’ equity Preferred stock, $ 0.001 par value: Authorized 50,000 shares; No shares issued or outstanding — — Common stock, $ 0.001 par value: Authorized 1,000,000 shares; issued and outstanding 249,803 and 226,505 shares at March 31, 2023 and December 31, 2022, respectively 250 227 Additional paid-in capital 2,314,146 2,099,782 Accumulated other comprehensive loss ( 1,924 ) ( 4,765 ) Accumulated deficit ( 1,620,355 ) ( 1,532,340 ) Total stockholders’ equity 692,117 562,904 Total liabilities and stockholders’ equity $ 1,896,417 $ 1,767,086 See accompanying notes to the condensed consolidated financial statements. 3 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) Three Months Ended March 31, (in thousands, except per share amounts) 2023 2022 Revenue: Product revenue $ 34,654 $ 28,244 Service and other revenue 4,246 4,929 Total revenue 38,900 33,173 Cost of Revenue: Cost of product revenue 25,164 14,820 Cost of service and other revenue 3,792 4,015 Amortization of intangible assets 183 183 Total cost of revenue 29,139 19,018 Gross profit 9,761 14,155 Operating Expense: Research and development 48,939 52,937 Sales, general and administrative 39,818 39,804 Change in fair value of contingent consideration 12,256 ( 1,063 ) Total operating expense 101,013 91,678 Operating loss ( 91,252 ) ( 77,523 ) Interest expense ( 3,630 ) ( 3,697 ) Other income (expense), net 6,867 ( 279 ) Loss before expense (benefit) from income taxes ( 88,015 ) ( 81,499 ) Expense (benefit) from income taxes — — Net loss ( 88,015 ) ( 81,499 ) Other comprehensive income (loss): Unrealized gain (loss) on investments 2,841 ( 2,998 ) Comprehensive loss $ ( 85,174 ) $ ( 84,497 ) Net loss per share: Basic $ ( 0.36 ) $ ( 0.37 ) Diluted $ ( 0.36 ) $ ( 0.37 ) Weighted average shares outstanding used in calculating net loss per share: Basic 242,032 222,289 Diluted 242,032 222,289 See accompanying notes to the condensed consolidated financial statements. 4 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Accumulated Deficit Total Stockholders' Equity (in thousands) Shares Amount For the three months ended March 31, 2023 Balance at December 31, 2022 226,505 $ 227 $ 2,099,782 $ ( 4,765 ) $ ( 1,532,340 ) $ 562,904 Net loss — — — — ( 88,015 ) ( 88,015 ) Other comprehensive income — — — 2,841 — 2,841 Issuance of common stock from Underwritten Public Equity Offering, net of issuance costs 20,125 20 189,180 — — 189,200 Issuance of common stock in conjunction with equity plans 3,173 3 7,232 — — 7,235 Share-based compensation expense — — 17,952 — — 17,952 Balance at March 31, 2023 249,803 $ 250 $ 2,314,146 $ ( 1,924 ) $ ( 1,620,355 ) $ 692,117 For the three months ended March 31, 2022 Balance at December 31, 2021 220,978 $ 221 $ 2,009,945 $ ( 1,087 ) $ ( 1,218,092 ) $ 790,987 Net loss — — — — ( 81,499 ) ( 81,499 ) Other comprehensive loss — — — ( 2,998 ) — ( 2,998 ) Issuance of common stock in conjunction with equity plans 3,351 3 5,589 — — 5,592 Share-based compensation expense — — 22,496 — — 22,496 Balance at March 31, 2022 224,329 $ 224 $ 2,038,030 $ ( 4,085 ) $ ( 1,299,591 ) $ 734,578 See accompanying notes to the condensed consolidated financial statements. 5 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, (in thousands) 2023 2022 Cash flows from operating activities Net loss $ ( 88,015 ) $ ( 81,499 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 2,755 2,268 Amortization of intangible assets 234 228 Amortization of right-of-use assets 1,527 1,696 Amortization of debt discount and financing costs 162 159 Share-based compensation expense 17,952 22,703 Accretion of discount and amortization of premium on marketable securities, net ( 2,155 ) 758 Change in the estimated fair value of contingent consideration 12,256 ( 1,063 ) Inventory provision 3,521 386 Loss on disposition of equipment 201 100 Changes in assets and liabilities Accounts receivable, net ( 10,803 ) ( 3,611 ) Inventory, net ( 13,319 ) ( 6,661 ) Prepaid expenses and other assets ( 6,888 ) ( 1,185 ) Accounts payable 5,068 6,373 Accrued expenses ( 13,186 ) ( 17,234 ) Deferred revenue 423 1,949 Operating lease liabilities ( 1,969 ) ( 1,884 ) Other liabilities ( 2,455 ) ( 2,512 ) Net cash used in operating activities ( 94,691 ) ( 79,029 ) Cash flows from investing activities Purchase of property and equipment ( 3,721 ) ( 3,638 ) Purchase of investments ( 233,291 ) ( 76,369 ) Sales of investments 595 — Maturities of investments 163,864 122,060 Net cash (used in) provided by investing activities ( 72,553 ) 42,053 Cash flows from financing activities Proceeds from issuance of common stock under equity offerings, net of issuance costs 189,200 — Proceeds from issuance of common stock from equity plans 7,235 5,592 Notes payable principal payoff ( 446 ) ( 377 ) Net cash provided by financing activities 195,989 5,215 Net increase (decrease) in cash, cash equivalents, and restricted cash 28,745 ( 31,761 ) Cash, cash equivalents, and restricted cash at beginning of period 328,311 465,817 Cash, cash equivalents, and restricted cash at end of period $ 357,056 $ 434,056 Cash and cash equivalents at end of period 353,834 428,574 Restricted cash at end of period 3,222 5,482 Cash, cash equivalents, and restricted cash at end of period $ 357,056 $ 434,056 See accompanying notes to the condensed consolidated financial statements. 6 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES We are a life science technology company that is designing, developing, and manufacturing advanced sequencing solutions that enable scientists and clinical researchers to improve their understanding of the genome and ultimately, resolve genetically complex problems. Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality, and completeness, which include our existing HiFi long-read sequencing technology and our emerging short-read Sequencing by Binding (SBB TM ) technology. Our products address solutions across a broad set of applications including human genomics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Our focus is on providing our customers with advanced sequencing technologies with higher throughput and improved workflows that we believe will enable dramatic advancements in routine healthcare. Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations ("CROs"), pharmaceutical companies, and agricultural companies. References in this report to “PacBio,” “we,” “us,” the “Company,” and “our” refer to Pacific Biosciences of California, Inc. and its consolidated subsidiaries. Basis of Presentation and Consolidation Our unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, as set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. The unaudited condensed consolidated financial statements include the accounts of Pacific Biosciences and our wholly owned subsidiaries. Certain information and footnote disclosures typically included in our audited financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on a consistent basis with the December 31, 2022 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state our financial position, results of operations, comprehensive loss, and cash flows for the period, but are not necessarily indicative of the results to be expected for the entire year or any future periods. All intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation. The financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022. Use of Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. On an ongoing basis, we evaluate our significant estimates including, but not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the fair value of contingent consideration, the valuation of acquired intangible assets, the fair value of certain equity awards, the useful lives assigned to long-lived assets, the computation of provisions for income taxes, the borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities, the probability associated with variable payments under partnership development agreements, and the valuations related to our convertible senior notes. While the extent of the potential impact of the current macroeconomic conditions on our business is highly uncertain, we considered information available related to assumptions and estimates used to determine the results reported and asset valuations as of March 31, 2023. Actual results could differ materially from these estimates. Cash, Cash Equivalents, Restricted Cash and Investments We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash equivalents may be comprised of money market funds, certificates of deposit, commercial paper, corporate bonds and notes, and government agencies’ securities. 7 Table of Contents We classify our investments in debt securities as available-for sale and report the investments at fair value in current assets. We evaluate our available-for-sale investments in unrealized loss positions and assess whether the unrealized loss is credit-related. Unrealized gains and losses that are not credit-related are recognized in accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses, expected credit losses, as well as interest income, on available-for-sale securities are also reported in other income (expense), net. The cost used in the determination of gains and losses of securities sold is based on the specific identification method. The cost of marketable securities is adjusted for the amortization of premiums and discounts to expected maturity. Premium and discount amortization is recorded in other income (expense), net. Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and U.S. government and agency securities with high credit ratings. We have established guidelines regarding diversification and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield. Restricted cash includes cash that is not readily available for use in the Company’s operating activities. Restricted cash is primarily comprised of cash pledged under letters of credit. Concentration and Other Risks For the three months ended March 31, 2023, no customer represented 10% or greater of our total revenue during the period. For the three months ended March 31, 2022, two customers accounted for approximately 14 % and 11 %, respectively, of total revenue during the period. No other customers exceeded 10% during those periods. As of March 31, 2023, 49 % of our accounts receivable were from domestic customers, compared to 57 % as of December 31, 2022. As of March 31, 2023, no customer represented 10% or greater of our accounts receivable, while one customer represented approximately 10 % of our net accounts receivable as of December 31, 2022. Recent Accounting Pronouncements Recently Adopted Accounting Standards In October 2021, the FASB issued Accounting Standards Update ("ASU") No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU provides specific guidance on how to recognize contract assets and contract liabilities related to revenue contracts with customers acquired in a business combination. This amendment improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. We adopted this ASU on January 1, 2023. The adoption of this guidance did not have a material effect on our consolidated financial statements. Significant Accounting Policies There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022. NOTE 2. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy established under GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows: • Level 1: quoted prices in active markets for identical assets or liabilities; • Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and 8 Table of Contents • Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively. We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis (in thousands): March 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 103,753 $ 250,081 $ — $ 353,834 $ 137,636 $ 187,453 $ — $ 325,089 Investments: Commercial paper — 109,873 — 109,873 — 127,302 — 127,302 Corporate debt securities — 87,381 — 87,381 — 49,491 — 49,491 U.S. government & agency securities — 323,804 — 323,804 — 270,436 — 270,436 Total investments — 521,058 — 521,058 — 447,229 — 447,229 Short-term restricted cash 300 — — 300 300 — — 300 Long-term restricted cash 2,922 — — 2,922 2,922 — — 2,922 Total assets measured at fair value $ 106,975 $ 771,139 $ — $ 878,114 $ 140,858 $ 634,682 $ — $ 775,540 Liabilities Contingent consideration $ — $ — $ 184,350 $ 184,350 $ — $ — $ 172,094 $ 172,094 Total liabilities measured at fair value $ — $ — $ 184,350 $ 184,350 $ — $ — $ 172,094 $ 172,094 We classify contingent consideration, which was incurred in connection with the acquisition of Omniome, within Level 3 as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value. We estimate the fair value of the contingent consideration liability by discounting the probability-weighted outcomes to present value using an estimate of our borrowing rate and the risk-free rate. The potential outcomes of milestone achievement dates are within the period from June 30, 2023 to June 30, 2025. A decrease in the probability of an earlier scenario within this range would result in a decrease in the fair value of the liability. The discount rates used are the sum of the U.S. risk-free rate and the estimated subordinated credit spread for B- and B credit rating, which ranges from 9.3 % to 10.2 %. Changes in our estimated subordinated credit spread can result in changes in the fair value of the contingent consideration liability, where a lower credit spread may result in an increased liability valuation. 9 Table of Contents Changes in the estimated fair value of the contingent consideration liability for the three months ended March 31, 2023 were as follows (in thousands): Level 3 Beginning balance as of December 31, 2022 $ 172,094 Change in estimated fair value 12,256 Ending balance as of March 31, 2023 $ 184,350 Changes to the fair value are recorded as change in fair value of contingent consideration in the Condensed Consolidated Statement of Operations and Comprehensive Loss. For the three months ended March 31, 2023, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis, and our valuation techniques did not change compared to the prior year. 10 Table of Contents The following tables summarize our cash, cash equivalents and investments (in thousands): As of March 31, 2023 Amortized Cost Gross unrealized gains Gross unrealized losses Fair Value Cash and cash equivalents 353,837 24 ( 27 ) 353,834 Investments: Commercial paper 110,009 17 ( 153 ) 109,873 Corporate debt securities 87,426 299 ( 344 ) 87,381 U.S. government & agency securities 325,544 576 ( 2,316 ) 323,804 Total investments 522,979 892 ( 2,813 ) 521,058 Total cash, cash equivalents and investments $ 876,816 $ 916 $ ( 2,840 ) $ 874,892 Short-term restricted cash $ 300 $ — $ — $ 300 Long-term restricted cash $ 2,922 $ — $ — $ 2,922 As of December 31, 2022 Amortized Cost Gross unrealized gains Gross unrealized losses Fair Value Cash and cash equivalents 325,144 6 ( 61 ) 325,089 Investments: Commercial paper 127,626 9 ( 333 ) 127,302 Corporate debt securities 49,998 — ( 507 ) 49,491 U.S. government & agency securities 274,315 1 ( 3,880 ) 270,436 Total investments 451,939 10 ( 4,720 ) 447,229 Total cash, cash equivalents and investments $ 777,083 $ 16 $ ( 4,781 ) $ 772,318 Short-term restricted cash $ 300 $ — $ — $ 300 Long-term restricted cash $ 2,922 $ — $ — $ 2,922 The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of March 31, 2023 (in thousands): Fair Value Due in one year or less $ 634,191 Due after one year through five years 136,948 Total $ 771,139 Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties. 11 Table of Contents NOTE 3. BALANCE SHEET COMPONENTS Inventory, net Our inventory, net, consisted of the following components (in thousands): March 31, 2023 December 31, 2022 Purchased materials $ 25,475 $ 24,139 Work in process 21,705 14,062 Finished goods 14,775 12,180 Inventory, net $ 61,955 $ 50,381 Intangible Assets and Goodwill Intangible assets include acquired in-process research and development ("IPR&D") of $ 400 million as a result of the Omniome acquisition in September 2021. The IPR&D will remain on our Consolidated Balance Sheet as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development activities. During the development period following the acquisition, IPR&D will not be amortized, but instead will be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Upon completion of the development, we will begin to amortize the asset over the life of the product, or record an impairment charge if the asset is determined to be impaired. In addition to IPR&D, definite-lived intangible assets included the following (in thousands, except years): As of March 31, 2023 As of December 31, 2022 Estimated Useful Life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Developed technology 15 $ 11,179 $ ( 1,228 ) $ 9,951 $ 11,179 $ ( 1,039 ) $ 10,140 Customer relationships 2 360 ( 300 ) 60 360 ( 255 ) 105 Total $ 11,539 $ ( 1,528 ) $ 10,011 $ 11,539 $ ( 1,294 ) $ 10,245 The estimated future amortization expense of intangible assets with definite lives is as follows (in thousands): Remainder of 2023 $ 619 2024 745 2025 745 2026 745 2027 746 2028 and thereafter 6,411 Total $ 10,011 We review definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in the second quarter of 2022, noting no impairment. Deferred Revenue On June 24, 2022, we entered into an Amended and Restated Development and Commercialization Agreement (the “Amended and Restated Agreement”) with Invitae Corporation (“Invitae”). During the three months ended March 31, 2023, Invitae did not purchase any of the instruments or consumables under the terms of the 12 Table of Contents Amended and Restated Agreement. As of March 31, 2023 and December 31, 2022, $ 21.4 million of deferred revenue, current, is recorded on the Condensed Consolidated Balance Sheet relating to all future performance obligations under the Amended and Restated Agreement. Refer to Note 3 – Invitae Collaboration , in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for more information . As of March 31, 2023, we had a total of $ 32.7 million of deferred revenue, $ 30.9 million of which was recorded as deferred revenue, current, and primarily relates to future performance obligations under the Amended and Restated Agreement with Invitae. The deferred revenue, non-current balance of $ 1.8 million primarily relates to deferred service contract revenues and is scheduled to be recognized in the next 5 years. Revenue recorded in the three months ended March 31, 2023 includes $ 3.5 million of previously deferred revenue that was included in deferred revenue as of December 31, 2022. Product Warranties We generally provide a one-year warranty on instruments. In addition, we provide a limited warranty on consumables. At the time revenue is recognized, an accrual is established for estimated warranty costs based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue. There were no material changes in estimates for the periods presented below. Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Three Months Ended March 31, 2023 2022 Balance at beginning of period $ 1,651 $ 594 Additions charged to cost of product revenue 604 953 Repairs and replacements ( 631 ) ( 373 ) Balance at end of period $ 1,624 $ 1,174 Term loans In connection with the acquisition of Omniome, we acquired $ 1.3 million in short-term debt and $ 3.0 million in long-term debt relating to a term loan facility that Omniome obtained in April 2020. Borrowings on the term loan facility were used to fund Omniome’s purchases of equipment, which serves as collateral. Each term loan has a term of 43 months and bears a fixed interest rate of approximately 17 % annually. The fee for the elective option to prepay all, but not less than all, of the borrowed amounts at any time after the 24 th month and before the 43 rd month after the commencement date, is 4 % of the outstanding loan balance. Payments are made in equal monthly installments including principal and interest. As of March 31, 2023, the carrying value of term loans outstanding was $ 1.9 million. The related long-term portion of $ 0.2 million was recorded as part of other liabilities, non-current and the short-term portion of $ 1.7 million was recorded as part of other liabilities, current on the Condensed Consolidated Balance Sheet. The interest expense was $ 0.1 million for the three months ended March 31, 2023, which was included as part of interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss. The following table presents the future principal payments on the term loans (in thousands): Remainder of 2023 $ 1,395 2024 490 Total $ 1,885 NOTE 4. CONVERTIBLE SENIOR NOTES On February 9, 2021, we entered into an investment agreement (the “Investment Agreement”) with SB Northstar LP (the “Purchaser”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to the Purchaser of $ 900 million in aggregate principal amount of our 1.5 % Convertible Senior Notes (the “Notes”). The Notes were issued on February 16, 2021. 13 Table of Contents The Notes are governed by an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at a rate of 1.5 % per annum. Interest on the Notes is payable semi-annually in arrears on February 15 and August 15 and commenced on August 15, 2021. The Notes will mature on February 15, 2028, subject to earlier conversion, redemption or repurchase. The Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The Notes are convertible into shares of our common stock based on an initial conversion rate of 22.9885 shares of common stock per $1,000 principal amount of the Notes (which is equal to an initial conversion price of $ 43.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash. On or after February 20, 2026, the Notes will be redeemable by the Company in the event that the closing sale price of our common stock has been at least 150 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the redemption notice at a redemption price of 100 % of the principal amount of such Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. 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 (a “Fundamental Change”), the holders of the Notes may require that we repurchase all or part of the principal amount of the Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date. The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture. The Indenture also includes customary covenants for convertible notes of this type. To the extent we elect, the sole remedy for an event of default relating to our failure to comply with certain of our reporting obligations shall, for the first 360 calendar days after the occurrence of such an event of default, consist exclusively of the right to receive additional interest on the Notes at a rate equal to (i) 0.25 % per annum of the principal amount of the Notes outstanding for each day during the first 180 calendar days of the 360 -day period after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived) and (ii) 0.50 % per annum of the principal amount of the Notes outstanding for each day from, and including, the 181 st calendar day to, and including, the 360 th calendar day after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived as provided for in the Indenture). On the 361 st day after such event of default (if the event of default relating to our failure to comply with its obligations is not cured or waived prior to such 361 st day), the Notes shall be subject to acceleration as provided for in the Indenture. The Notes are accounted for in accordance with the authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. Under ASU 2020-06, the guidance requires that debt with an embedded conversion feature is accounted for in its entirety as a liability and no portion of the proceeds from the issuance of the convertible debt instrument is accounted for as attributable to the conversion feature unless the conversion feature is required to be accounted for separately as an embedded derivative or the conversion feature results in a substantial premium. The conversion feature of the Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the Notes were not issued at a premium; therefore, the Notes are accounted for in their entirety as a liability. Because we may elect to settle any conversions entirely in shares, and because settlement in shares is the default settlement method, the liability is classified as non-current. The requirement to repurchase the Notes including unpaid interest to the maturity date in the event of a Fundamental Change is considered a put option for certain periods requiring bifurcation under ASC 815 – Derivatives and Hedging. However, given the low probability of a Fundamental Change occurring during the applicable periods, the value of the embedded derivative is immaterial. The additional interest feature in the event of our failure to comply with certain reporting obligations is also considered an embedded derivative requiring bifurcation under ASC 815. However, due to the nature and terms of the reporting obligations, the value of the embedded derivative is immaterial. We incurred issuance costs related to the Notes of approximately $ 4.5 million, which were recorded as debt issuance cost and are presented as a reduction to the Notes on our Consolidated Balance Sheets and are 14 Table of Contents amortized to interest expense using the effective interest method over the term of the Notes, resulting in an effective interest rate of 1.6 %. The net carrying amount of the liability for the Notes is recorded as convertible senior notes, net, non-current in the Condensed Consolidated Balance Sheets as follows (in thousands): March 31, 2023 December 31, 2022 Principal amount $ 900,000 $ 900,000 Unamortized debt issuance costs ( 3,161 ) ( 3,317 ) Net carrying amount $ 896,839 $ 896,683 For the three months ended March 31, 2023 and 2022, interest expense for the Notes was as follows (in thousands): Three Months Ended March 31, 2023 2022 Contractual interest expense $ 3,375 $ 3,375 Amortization of debt issuance costs 156 153 Total interest expense $ 3,531 $ 3,528 As of March 31, 2023, the estimated fair value (Level 2) of the Notes was $ 693.0 million. The fair value of the Notes is estimated using a pricing model that is primarily affected by the trading price of our common stock and market interest rates. NOTE 5. COMMITMENTS AND CONTINGENCIES The Company has entered into various operating lease agreements, primarily relating to our corporate offices. See Note 8 – Commitments and Contingencies , subsection titled “Leases”, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for information regarding the Company’s maturity of lease liabilities under its lease agreements. Contingencies We may become involved in legal proceedings, claims and assessments from time to time in the ordinary course of business. We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We do not believe that the ultimate outcome of any such pending matters is probable or reasonably estimable, or that these matters will have a material adverse effect on our business; however, the results of litigation and claims are inherently unpredictable. 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. Please see subsection titled Legal Proceedings, in Part II, Item 1 of this Quarterly Report on Form 10-Q. Indemnification Pursuant to Delaware law and agreements entered into with each of our directors and officers, we may have obligations, under certain circumstances, to hold harmless and indemnify each of our directors and officers against losses suffered or incurred by the indemnified party in connection with their service to us, and judgements, fines, settlements and expenses related to claims arising against such directors and officers to the fullest extent permitted under Delaware law, our bylaws and our certificate of incorporation. We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between such third parties and us in connection with such fundraising efforts. To the extent that any such indemnification obligations apply to the lawsuits described above, any associated expenses incurred are included within the related accrued litigation 15 Table of Contents expense amounts. No additional liability associated with such indemnification obligations has been recorded as of March 31, 2023 and December 31, 2022. N OTE 6. STOCKHOLDERS’ EQUITY Underwritten Public Equity Offering In January 2023, we entered into an underwriting agreement, relating to the public offering of 17.5 million shares of our common stock, $ 0.001 par value per share, at a price to the public of $ 10.00 per share. Under the terms of the underwriting agreement, we also granted the underwriters a 30 -day option to purchase up to an additional 2.6 million shares of our common stock, which was subsequently exercised in full, and the offering, including the sale of shares of common stock subject to the underwriters' option, closed in January 2023. In total, we sold 20.1 million shares of our common stock. We paid a commission equal to 5.75 % of the gross proceeds from the sale of shares of our common stock. The total net proceeds to us from the offering after deducting the underwriting discount were approximately $ 189.7 million, excluding approximately $ 0.5 million of offering expenses. Refer to Note 10 – Stockholders' Equity , in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for more information on the Company's underwritten public equity offerings and private placement of common stock . Equity Plans At March 31, 2023, the Company had share-based compensation awards outstanding under the 2020 Equity Incentive Plan (the “2020 Plan”), the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”), the 2021 adopted Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”) and the 2010 Employee Stock Purchase Plan, from which we issued equity awards and employee stock. As of March 31, 2023, we had 12.8 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan. Refer to Note 10 – Stockholders' Equity , in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for more information on the Company's equity plans . Stock Options Time-based Stock Options The following table summarizes stock option activity for time-based awards (shares in thousands): Number of shares Weighted average exercise price Outstanding at December 31, 2022 14,618 $ 10.60 Granted — — Exercised ( 250 ) 3.75 Canceled ( 362 ) 17.16 Outstanding at March 31, 2023 14,006 $ 10.55 16 Table of Contents Performance-based Stock Options The following table summarizes stock option activity for performance-based awards (shares in thousands): Number of shares Weighted average exercise price Outstanding at December 31, 2022 258 $ 4.71 Granted — — Exercised ( 230 ) 4.71 Canceled ( 4 ) 4.71 Outstanding at March 31, 2023 24 $ 4.71 Restricted Stock Units (“RSU”) and Performance Stock Units ("PSU") We issue RSUs for which the respective shares vest when the requisite service period is achieved. We issue PSUs for which the number of shares issuable in the third year of the performance period based on performance relative to specified revenue targets and continued employment through the vesting period. The following table summarizes the time-based RSUs and PSUs activity (shares in thousands): Restricted Stock Units (RSU) Performance Stock Units (PSU) Weighted average grant date fair value RSU PSU Outstanding at December 31, 2022 8,535 — $ 15.16 $ — Granted 6,341 564 9.47 9.43 Vested ( 1,640 ) — 16.47 — Forfeited ( 465 ) — 17.80 — Outstanding at March 31, 2023 12,771 564 $ 12.07 $ 9.43 Employee Stock Purchase Plan (“ESPP”) Shares issued under our ESPP were 1,052,908 and 1,316,923 during the three months ended March 31, 2023 and 2022, respectively. In February 2023, an additional 4.0 million shares were reserved under the ESPP. As of March 31, 2023, 12.9 million shares of our common stock remain available for issuance under our ESPP. Share-Based Compensation The following table summarizes share-based compensation expense (in thousands): Three Months Ended March 31, 2023 2022 Cost of revenue $ 1,949 $ 1,758 Research and development 6,705 8,965 Sales, general and administrative 9,299 11,980 Total share-based compensation expense $ 17,952 $ 22,703 Determining Fair Value We estimate the fair value of stock options granted using the Black-Scholes valuation method and a single option award approach. When determining the current share prices underlying the stock options for calculating the grant-date fair value, we reference the observable market prices of our stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair market value of RSUs and PSUs granted is the closing price of our shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting 17 Table of Contents period. For shares purchased under our ESPP, we estimate the grant-date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. We estimate forfeitures of stock options, RSUs and shares purchased under our ESPP which is utilized to determine the compensation expense to be recorded over the requisite service period. • Expected Term - The expected term used in the Black-Scholes valuation method represents the period that the stock options are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock options and vesting schedules. • Expected Volatility - The expected volatility used in the Black-Scholes valuation method is derived from the implied volatility related to our share price over the expected term. • Expected Dividend - We have never paid dividends on our shares and, accordingly, the dividend yield percentage is zero for all periods. • Risk-Free Interest Rate - The risk-free interest rate used in the Black-Scholes valuation method is the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected terms. For the three months ended March 31, 2023, there were no employee stock options granted. The fair value of employee stock options was estimated using the following assumptions: Three Months Ended March 31, 2022 Expected term in years 4.60 Expected volatility 70 % Risk-free interest rate 1.76 % Dividend yield — Weighted average grant date fair value per share $ 6.66 T he fair value of shares to be issued under the ESPP was estimated using the following assumptions: Three Months Ended March 31, 2023 2022 Expected term in years 0.5 — 2.0 0.5 — 2.0 Expected volatility 97 % 70 % Risk-free interest rate 4.89 % — 5.20 % 0.60 % — 1.31 % Dividend yield — — Weighted average grant date fair value per share $ 5.00 $ 5.42 NOTE 7. NET LOSS PER SHARE Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and potential shares assuming the dilutive effect of the convertible senior notes, using the if-converted method, and outstanding equity awards using the treasury stock method. 18 Table of Contents The following table presents the calculation of the basic and diluted net loss per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts): Three Months Ended March 31, 2023 2022 Numerator: Net loss $ ( 88,015 ) $ ( 81,499 ) Denominator: Basic Weighted average shares used in computing basic net loss 242,032 222,289 Basic net loss per share $ ( 0.36 ) $ ( 0.37 ) Diluted Weighted average shares used in computing diluted net loss per share 242,032 222,289 Diluted net loss per share $ ( 0.36 ) $ ( 0.37 ) The following shares issuable upon conversion of the convertible senior notes and outstanding equity awards were excluded from the computation of diluted net loss per share for the periods presented because the effect of including such shares would have been antidilutive (in thousands): Three Months Ended March 31, 2023 2022 Shares issuable upon conversion of convertible senior notes 20,690 20,690 Equity Awards 30,366 26,752 As described in Note 2. Business Acquisitions in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022, the contingently issuable shares would be due upon the achievement of a milestone. NOTE 8. REVENUE A summary of our revenue by geographic location is as follows (in thousands): Three Months Ended March 31, 2023 2022 Americas $ 19,071 $ 19,082 Europe, Middle East and Africa 7,870 5,700 Asia-Pacific 11,959 8,391 Total $ 38,900 $ 33,173 A summary of our revenue by category is as follows (in thousands): Three Months Ended March 31, 2023 2022 Instrument revenue $ 20,700 $ 15,550 Consumable revenue 13,954 12,694 Product revenue 34,654 28,244 Service and other revenue 4,246 4,929 Total revenue $ 38,900 $ 33,173 19 Table of Contents