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Item 1. Financial Statements

2023-08-04 compared with 2023-05-04 · 148 added, 73 removed, 429 unchanged (34% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts) March 31,

(in thousands, except per share amounts) June 30,

2023 December 31,

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Authorized 1,000,000 shares;

issued and outstanding 249,803 and 226,505 shares at March 31, 2023 and December 31, 2022, respectively

issued and outstanding 250,473 and 226,505 shares at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 2,334,623 2,099,782

6 unchanged sentences

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands, except per share amounts) 2023 2022 2023 2022

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Operating loss ( 73,175 ) ( 67,969 ) ( 164,427 ) ( 145,492 )

Loss on extinguishment of debt ( 2,033 ) — ( 2,033 ) —

Interest expense ( 3,554 ) ( 3,681 ) ( 7,184 ) ( 7,378 )

3 unchanged sentences

Net loss ( 69,833 ) ( 71,394 ) ( 157,848 ) ( 152,893 )

Other comprehensive income (loss):

Unrealized gain (loss) on investments 2,841 ( 2,998 )

Other comprehensive (loss) income:

Unrealized (loss) gain on investments ( 762 ) ( 1,372 ) 2,079 ( 4,370 )

Comprehensive loss $ ( 70,595 ) $ ( 72,766 ) $ ( 155,769 ) $ ( 157,263 )

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(in thousands) Shares Amount

For the three months ended March 31, 2023

For the three months ended June 30, 2023

Balance at March 31, 2023 249,803 $ 250 $ 2,314,146 $ ( 1,924 ) $ ( 1,620,355 ) $ 692,117

Net loss — — — — ( 69,833 ) ( 69,833 )

Other comprehensive loss — — — ( 762 ) — ( 762 )

Issuance of common stock in conjunction with equity plans 670 — 2,586 — — 2,586

Share-based compensation expense — — 17,891 — — 17,891

Balance at June 30, 2023 250,473 $ 250 $ 2,334,623 $ ( 2,686 ) $ ( 1,690,188 ) $ 641,999

For the three months ended June 30, 2022

Balance at March 31, 2022 224,329 $ 224 $ 2,038,030 $ ( 4,085 ) $ ( 1,299,591 ) $ 734,578

Net loss — — — — ( 71,394 ) ( 71,394 )

Other comprehensive loss — — — ( 1,372 ) — ( 1,372 )

Issuance of common stock in conjunction with equity plans 427 1 847 — — 848

Share-based compensation expense — — 19,226 — — 19,226

Balance at June 30, 2022 224,756 $ 225 $ 2,058,103 $ ( 5,457 ) $ ( 1,370,985 ) $ 681,886

For the six months ended June 30, 2023

Balance at December 31, 2022 226,505 $ 227 $ 2,099,782 $ ( 4,765 ) $ ( 1,532,340 ) $ 562,904

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Share-based compensation expense — — 35,843 — — 35,843

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 June 30, 2023 250,473 $ 250 $ 2,334,623 $ ( 2,686 ) $ ( 1,690,188 ) $ 641,999

For the six months ended June 30, 2022

Balance at December 31, 2021 220,978 $ 221 $ 2,009,945 $ ( 1,087 ) $ ( 1,218,092 ) $ 790,987

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Share-based compensation expense — — 41,722 — — 41,722

Balance at March 31, 2022 224,329 $ 224 $ 2,038,030 $ ( 4,085 ) $ ( 1,299,591 ) $ 734,578

Balance at June 30, 2022 224,756 $ 225 $ 2,058,103 $ ( 5,457 ) $ ( 1,370,985 ) $ 681,886

See accompanying notes to the condensed consolidated financial statements.

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands) 2023 2022

9 unchanged sentences

Change in the estimated fair value of contingent consideration 14,231 ( 6,501 )

Loss on extinguishment of debt 2,033 —

Inventory provision 4,295 1,789

2 unchanged sentences

Accounts receivable, net ( 5,248 ) ( 2,817 )

Inventory, net ( 13,319 ) ( 6,661 )

Inventory ( 19,703 ) ( 14,955 )

Prepaid expenses and other assets ( 6,085 ) ( 340 )

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Purchase of property and equipment ( 5,989 ) ( 7,657 )

Purchase of investments ( 233,291 ) ( 76,369 )

Purchases of investments ( 476,879 ) ( 241,086 )

Sales of investments 595 —

Maturities of investments 311,129 230,515

Net cash (used in) provided by investing activities ( 72,553 ) 42,053

Net cash used in investing activities ( 171,144 ) ( 18,228 )

Cash flows from financing activities

1 unchanged sentence

Proceeds from issuance of common stock from equity plans 9,821 6,440

Payment of debt issuance costs ( 6,836 ) —

Notes payable principal payoff ( 911 ) ( 770 )

Net cash provided by financing activities 191,274 5,670

Net increase (decrease) in cash, cash equivalents, and restricted cash 28,745 ( 31,761 )

Net decrease in cash, cash equivalents, and restricted cash ( 116,302 ) ( 152,150 )

Cash, cash equivalents, and restricted cash at beginning of period 328,311 465,817

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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 focus is on providing our customers with advanced sequencing solutions 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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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.

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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.

For the three months ended June 30, 2023, one customer accounted for approximately 10 % of total revenue during the period.

For the three months ended June 30, 2022, one customer accounted for approximately 11 % of total revenue during the period.

For the six months ended June 30, 2023 and 2022, no customers accounted for approximately 10% or greater of total revenue during the respective periods.

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.

As of June 30, 2023, 45 % of our accounts receivable were from domestic customers, compared to 57 % as of December 31, 2022.

As of June 30, 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

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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

June 30, 2023 December 31, 2022

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

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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.

The potential outcomes of milestone achievement dates are within the period from September 30, 2023 to June 30, 2024.

A decrease in the probability of an earlier scenario within this range would result in a decrease in the fair value of the liability.

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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.

Changes in the estimated fair value of the contingent consideration liability for the three months ended March 31, 2023 were as follows (in thousands):

Changes in the estimated fair value of the contingent consideration liability for the six months ended June 30, 2023 were as follows (in thousands):

Beginning balance as of December 31, 2022 $ 172,094

Change in estimated fair value 14,231

Ending balance as of March 31, 2023 $ 184,350

Ending balance as of June 30, 2023 $ 186,325

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.

In August 2023, we commenced customer shipments of the Onso short-read sequencing instrument, with shipments of related consumables expected to occur later in August 2023.

The milestone payment associated with PacBio’s acquisition of Omniome will be triggered once both the Onso instrument and related consumables have shipped to one customer.

For the six months ended June 30, 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.

The following tables summarize our cash, cash equivalents and investments (in thousands):

As of March 31, 2023

As of June 30, 2023

Cash and cash equivalents 209,279 17 ( 9 ) 209,287

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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):

The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of June 30, 2023 (in thousands):

Due in one year or less $ 652,574

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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

As of June 30, 2023 As of December 31, 2022

(in years) Gross

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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

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.

As of June 30, 2023, we had a total of $ 30.0 million of deferred revenue, $ 25.0 million of which was recorded as deferred revenue, current, and primarily relates to future performance obligations under the Amended and Restated Agreement with Invitae Corporation ("Invitae") and deferred service contract revenues.

The deferred revenue, non-current balance of $ 5.0 million primarily relates to future performance obligations under the Amended and Restated Agreement with Invitae and deferred service contract revenues and is scheduled to be recognized in the next 6 years.

The deferred revenue, non-current balance includes $ 3.0 million that was reclassified from deferred revenue, current to deferred revenue, non-current following receipt of a non-cancellable order from Invitae during the three months ended June 30, 2023 for partial utilization of the available credits, which is expected to be recognized in revenue after 12 months from June 30, 2023.

Revenue recorded in the three and six months ended June 30, 2023 includes $ 4.5 million and $ 8.0 million, respectively, that was included in deferred revenue as of December 31, 2022, of which $ 2.1 million was product revenue recognized from the partial utilization of available credits by Invitae during the three and six months ended June 30, 2023.

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

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Changes in the reserve for product warranties were as follows for the periods indicated (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Balance at beginning of period $ 1,624 $ 1,174 $ 1,651 $ 594

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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.

As of June 30, 2023, the carrying value of term loans outstanding was $ 1.4 million, recorded as part of other liabilities, current on the Condensed Consolidated Balance Sheet.

The interest expense was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 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):

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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”).

2030 Convertible Senior Notes

In June, 2023, we entered into a privately negotiated exchange agreement with a holder of our outstanding 1.50 % Convertible Senior Notes due 2028 (the “2028 Notes”), pursuant to which we issued $ 441.0 million in aggregate principal amount of our 1.375 % Convertible Senior Notes due 2030 (the “2030 Notes”) in exchange for $ 441.0 million principal amount of the 2028 Notes (the “Exchange Transaction”), pursuant to exemptions from registration under the Securities Act of 1933, as amended, and the rules and regulations thereunder.

The 2030 Notes were issued on June 30, 2023.

The 2030 Notes are governed by an indenture (the “2030 Indenture”) between the Company and U.S.

Bank Trust Company, National Association, as trustee.

The 2030 Notes bear interest at a rate of 1.375 % per annum.

Interest on the 2030 Notes is payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 2023.

The 2030 Notes will mature on December 15, 2030, subject to earlier conversion, redemption or repurchase.

The 2030 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company.

The 2030 Notes are convertible into shares of our common stock based on an initial conversion rate of 46.5116 shares of common stock per $1,000 principal amount of the 2030 Notes (which is equal to an initial conversion price of $ 21.50 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions.

Upon conversion of the 2030 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.

On or after June 20, 2028, the 2030 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 2030 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.

Upon the occurrence of a Fundamental Change (as defined in the 2030 Indenture), the holders of the 2030 Notes may require that we repurchase all or part of the principal amount of the 2030 Notes at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date, and all unpaid interest from the fundamental change repurchase date thereon, but excluding, the maturity date.

The 2030 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2030 Notes under the 2030 Indenture.

The 2030 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 2030 Notes at a rate equal to (i) 0.25 % per annum of the principal amount of the 2030 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 2030 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 2030 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 2030 Notes shall be subject to acceleration as provided for in the 2030 Indenture.

The 2030 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 2030 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2030 Notes were not issued at a substantial premium;

therefore, the 2030 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 2030 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 such 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.

The Exchange Transaction was accounted for as an extinguishment driven by the change in fair value of the embedded conversion option.

We recorded a loss on extinguishment of debt of approximately $ 2.0 million in connection with the Exchange Transaction during the three and six months ended June 30, 2023, which represents the difference between the fair value and the principal amount of the 2030 Notes of the debt at the modification date, plus unamortized debt issuance costs of $ 1.5 million related to the respective portion of the 2028 Notes.

We incurred issuance costs related to the 2030 Notes of approximately $ 7.2 million, which were recorded as debt issuance costs and are presented as a reduction to the 2030 Notes on our Consolidated Balance Sheets and are amortized to interest expense using the effective interest method over the term of the 2030 Notes, resulting in an effective interest rate of 1.6 %.

We also paid accrued but unpaid interest of $ 2.5 million on the 2028 Notes in connection with the Exchange Transaction on June 30, 2023.

We did not receive any cash proceeds from the Exchange Transaction.

In exchange for issuing the 2030 Notes pursuant to the Exchange Transaction, we received and cancelled the exchanged 2028 Notes.

Following the closing of the Exchange Transaction, $ 459.0 million in aggregate principal amount of 2028 Notes remained outstanding with terms unchanged.

The net carrying amount of the liability for the 2030 Notes is included as convertible senior notes, net, non-current in the Condensed Consolidated Balance Sheets as follows (in thousands):

2023 December 31,

Principal amount $ 441,000 $ —

Unamortized debt premium 560 —

Unamortized debt issuance costs ( 7,232 ) —

Net carrying amount $ 434,328 $ —

For the three and six months ended June 30, 2023 and 2022, interest expense for the 2030 Notes was not material.

As of June 30, 2023, the estimated fair value (Level 2) of the 2030 Notes was $ 441.6 million.

The fair value of the 2030 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.

2028 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 $ 900.0 million in aggregate principal amount of the 2028 Notes.

The 2028 Notes were issued on February 16, 2021.

As discussed above, in June 2023 we completed an exchange of $ 441.0 million in aggregate principal amount of our 2028 Notes for $ 441.0 million aggregate principal amount of the 2030 Notes, leaving approximately $ 459.0 million in aggregate principal amount of 2028 Notes outstanding

The 2028 Notes are governed by an indenture (the “2028 Indenture”) between the Company and U.S.

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The 2028 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by 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.

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 of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions.

Upon conversion of the 2028 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.

On or after February 20, 2026, the 2028 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 2028 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.

Upon the occurrence of a Fundamental Change (as defined in the 2028 Indenture), the holders of the 2028 Notes may require that we repurchase all or part of the principal amount of the 2028 Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date.

The 2028 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2028 Notes under the 2028 Indenture.

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The requirement to repurchase the 2028 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.

However, given the low probability of such 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

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):

We incurred issuance costs related to the 2028 Notes of approximately $ 4.5 million, which were recorded as debt issuance costs and are presented as a reduction to the 2028 Notes on our Consolidated Balance Sheets and are amortized to interest expense using the effective interest method over the term of the 2028 Notes, resulting in an effective interest rate of 1.6 %.

The net carrying amount of the liability for the 2028 Notes is included as convertible senior notes, net, non-current in the Condensed Consolidated Balance Sheets as follows (in thousands):

2023 December 31,

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Net carrying amount $ 457,467 $ 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,

For the three and six months ended June 30, 2023 and 2022, interest expense for the 2028 Notes was as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Contractual interest expense $ 3,319 $ 3,375 $ 6,694 $ 6,750

1 unchanged sentence

Total interest expense $ 3,474 $ 3,529 $ 7,005 $ 7,057

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.

As of June 30, 2023, the estimated fair value (Level 2) of the 2028 Notes was $ 388.0 million.

The fair value of the 2028 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.

COMMITMENTS AND CONTINGENCIES

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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

expense amounts.

No additional liability associated with such indemnification obligations has been recorded as of March 31, 2023 and December 31, 2022.

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 expense amounts.

No additional liability associated with such indemnification obligations has been recorded as of June 30, 2023 and December 31, 2022.

STOCKHOLDERS’ EQUITY

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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 .

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.

At June 30, 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.

As of June 30, 2023, we had 12.2 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan.

Shares remaining and available for future issuance reflect shares that may become eligible to vest upon the achievement of maximum targets for certain equity awards.

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 .

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Outstanding at December 31, 2022 14,618 $ 10.60

Granted 232 11.94

Exercised ( 707 ) 4.76

Canceled ( 581 ) 18.99

Outstanding at March 31, 2023 14,006 $ 10.55

Outstanding at June 30, 2023 13,562 $ 10.57

Performance-based Stock Options

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Canceled ( 4 ) 4.71

Outstanding at March 31, 2023 24 $ 4.71

Outstanding at June 30, 2023 3 $ 4.74

Restricted Stock Units (“RSU”) and Performance Stock Units ("PSU")

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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.

Maximum achievement of the revenue goal under the PSUs will result in up to 200 % of the target number of shares subject to the PSUs to become eligible to vest, while not meeting the minimum achievement of the revenue goal under the PSUs will result in no shares subject to the PSUs becoming eligible to vest.

The following table summarizes the time-based RSUs and PSUs activity (shares in thousands):

4 unchanged sentences

Forfeited ( 687 ) — 16.89 —

Outstanding at March 31, 2023 12,771 564 $ 12.07 $ 9.43

Outstanding at June 30, 2023 12,643 564 $ 12.03 $ 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.

Shares issued under our ESPP were 1,052,908 and 1,316,923 during the six months ended June 30, 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.

As of June 30, 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,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Cost of revenue $ 1,177 $ 988 $ 3,126 $ 2,746

6 unchanged sentences

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

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.

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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,

Six Months Ended June 30,

Expected term in years 4.9 4.6

3 unchanged sentences

Weighted average grant date fair value per share $ 7.76 $ 6.05

T he fair value of shares to be issued under the ESPP was estimated using the following assumptions:

Three Months Ended March 31,

The fair value of shares to be issued under the ESPP was estimated using the following assumptions:

Six Months Ended June 30,

Expected term in years 0.5 — 2.0

8 unchanged sentences

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,

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net loss $ ( 69,833 ) $ ( 71,394 ) $ ( 157,848 ) $ ( 152,893 )

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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,

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Shares issuable upon conversion of convertible senior notes 31,063 20,690 31,063 20,690

Equity Awards 29,773 25,925 29,773 25,925

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.

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.

A summary of our revenue by geographic location is as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Americas $ 23,960 $ 21,722 $ 43,031 $ 40,804

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A summary of our revenue by category is as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Instrument revenue $ 29,923 $ 15,619 $ 50,623 $ 31,169

3 unchanged sentences

Total revenue $ 47,573 $ 35,467 $ 86,473 $ 68,640

SUBSEQUENT EVENTS

On August 2, 2023, we entered into an agreement and plan of reorganization (the “Merger Agreement”), pursuant to which we acquired Apton Biosystems, Inc., a privately held genomics company (“Apton”).

The transaction closed on August 2, 2023.

Pursuant to the Merger Agreement, upon the closing of the acquisition, we will, among other things, issue to holders of Apton’s outstanding equity interests (“Apton Securityholders”) approximately 6.3 million shares of the Company’s common stock, par value $ 0.001 per share (“Common Stock”).

Additionally, subject to the terms and conditions of the Merger Agreement and the achievement of $ 50 million in revenue associated with a high throughput sequencer using Apton's technology, Apton Securityholders will also be entitled to receive $ 25.0 million, which we may elect to pay in cash, shares of Common Stock or a combination of cash and shares of Common Stock.

At this time, the number of shares, if any, to be issued in connection with the achievement of the specified milestone is not known, and will be calculated based on the daily volume-weighted average price of the Common Stock for the twenty trading days ending on and including the fifth trading day immediately prior to the occurrence of the specified milestone.

Under the terms of the Merger Agreement, we may pay cash in lieu of Common Stock to ensure that the issuance of Common Stock as contemplated by the Merger Agreement does not exceed 19.9 % of the shares of Common Stock then outstanding.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements