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Item 1. Financial Statements

2023-11-03 compared with 2023-08-04 · 137 added, 84 removed, 493 unchanged (31% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

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

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

2023 December 31,

24 unchanged sentences

Deferred revenue, non-current 5,053 1,794

Contingent consideration liability, non-current 18,450 —

Operating lease liabilities, non-current 34,100 41,070

9 unchanged sentences

Authorized 1,000,000 shares;

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

issued and outstanding 258,374 and 226,505 shares at September 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 2,522,382 2,099,782

6 unchanged sentences

Condensed Consolidated Statements of Operations and Comprehensive Loss

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

Three Months Ended September 30, Nine Months Ended September 30,

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

5 unchanged sentences

Cost of service and other revenue 4,054 3,012 11,258 10,619

Amortization of intangible assets 183 183 366 366

Total cost of revenue 37,789 18,764 98,955 57,056

3 unchanged sentences

Sales, general and administrative 43,431 36,795 123,822 115,851

Merger-related expenses 8,979 — 8,979 —

Amortization of acquired intangible assets 741 — 741 —

Change in fair value of contingent consideration ( 271 ) 4,280 13,960 ( 2,221 )

3 unchanged sentences

Interest expense ( 3,588 ) ( 3,664 ) ( 10,772 ) ( 11,042 )

Other income (expense), net 8,929 256 15,796 ( 23 )

Loss before expense (benefit) from income taxes ( 69,833 ) ( 71,394 ) ( 157,848 ) ( 152,893 )

Expense (benefit) from income taxes — — — —

Other income, net 8,505 1,313 24,301 1,290

Loss before benefit from income taxes ( 77,575 ) ( 76,971 ) ( 235,423 ) ( 229,864 )

Benefit from income taxes ( 10,706 ) — ( 10,706 ) —

Net loss ( 66,869 ) ( 76,971 ) ( 224,717 ) ( 229,864 )

Other comprehensive (loss) income:

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

Other comprehensive income (loss):

Unrealized gain (loss) on investments 846 ( 803 ) 2,925 ( 5,173 )

Comprehensive loss $ ( 66,023 ) $ ( 77,774 ) $ ( 221,792 ) $ ( 235,037 )

15 unchanged sentences

(in thousands) Shares Amount

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

For the three months ended September 30, 2023

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

Net loss — — — — ( 66,869 ) ( 66,869 )

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

Other comprehensive income — — — 846 — 846

Shares issuable following milestone achievement — — 84,761 — — 84,761

Issuance of common stock in acquisition of Apton 6,121 6 76,636 — — 76,642

Issuance of common stock in connection with liquidity event bonus plan 169 — 2,111 — — 2,111

Issuance of common stock in conjunction with equity plans 1,611 2 4,560 — — 4,562

Share-based compensation expense — — 19,691 — — 19,691

Balance at September 30, 2023 258,374 $ 258 $ 2,522,382 $ ( 1,840 ) $ ( 1,757,057 ) $ 763,743

For the three months ended September 30, 2022

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

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 — — — — ( 76,971 ) ( 76,971 )

2 unchanged sentences

Share-based compensation expense — — 18,936 — — 18,936

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 September 30, 2022 225,916 $ 226 $ 2,080,581 $ ( 6,260 ) $ ( 1,447,956 ) $ 626,591

For the nine months ended September 30, 2023

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

1 unchanged sentence

Other comprehensive income — — — 2,925 — 2,925

Shares issuable following milestone achievement — — 84,761 — — 84,761

Issuance of common stock in acquisition of Apton 6,121 6 76,636 — — 76,642

Issuance of common stock in connection with liquidity event bonus plan 169 — 2,111 — — 2,111

Issuance of common stock from Underwritten Public Equity Offering, net of issuance costs 20,125 20 189,180 — — 189,200

1 unchanged sentence

Share-based compensation expense — — 55,534 — — 55,534

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 September 30, 2023 258,374 $ 258 $ 2,522,382 $ ( 1,840 ) $ ( 1,757,057 ) $ 763,743

For the nine months ended September 30, 2022

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

3 unchanged sentences

Share-based compensation expense — — 60,658 — — 60,658

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

Balance at September 30, 2022 225,916 $ 226 $ 2,080,581 $ ( 6,260 ) $ ( 1,447,956 ) $ 626,591

See accompanying notes to the condensed consolidated financial statements.

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2023 2022

5 unchanged sentences

Amortization of right-of-use assets 4,940 5,152

Amortization of debt discount and financing costs 324 319

Share-based compensation expense 55,534 60,658

Merger-related compensation expense 3,395 —

Accretion of discount and amortization of premium on marketable securities, net ( 10,088 ) 1,069

2 unchanged sentences

Inventory provision 4,691 2,667

Loss on disposition of equipment 45 77

Deferred income taxes ( 10,706 ) —

Other 667 562

Changes in assets and liabilities

6 unchanged sentences

Operating lease liabilities ( 6,396 ) ( 5,905 )

Contingent consideration liability ( 732 ) —

Other liabilities ( 1,147 ) ( 1,700 )

2 unchanged sentences

Purchase of property and equipment ( 6,819 ) ( 11,846 )

Cash paid for purchase of Apton, net of cash acquired ( 102 ) —

Purchases of investments ( 553,748 ) ( 307,899 )

1 unchanged sentence

Maturities of investments 631,253 355,425

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

Net cash provided by investing activities 71,179 35,680

Cash flows from financing activities

2 unchanged sentences

Payment of debt issuance costs ( 7,325 ) —

Payment of contingent consideration ( 4,368 ) —

Notes payable principal payoff ( 1,397 ) ( 1,180 )

Net cash provided by financing activities 190,493 8,803

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

Net increase (decrease) in cash, cash equivalents, and restricted cash 60,059 ( 158,162 )

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

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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 June 30, 2023.

Actual results could differ materially from these estimates.

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Concentration and Other Risks

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 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.

For the three and nine months ended September 30, 2023, no customer exceeded 10% of total revenue during each of the respective periods.

For the three and nine months ended September 30, 2022, one customer accounted for approximately 13 % and 11 % of total revenue during the period.

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

As of September 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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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.

BUSINESS ACQUISITIONS

Apton Biosystems

On August 2, 2023, we acquired Apton Biosystems, Inc.

(“Apton”), a California-based genomics company focused on developing a high throughput short-read sequencer using highly differentiated optics and image processing, paired with novel clustering and chemistry (the “Apton acquisition”).

In connection with the Apton acquisition, all outstanding equity securities of Apton were cancelled in exchange for s hares of our common stock with a fair value of $ 76.6 million , cash of $ 0.2 million , and contingent consideration with a preliminary estimated fair value of $ 18.5 million .

Excluded from consideration transferred was $ 1.3 million attributable to accelerated share-based compensation expense.

The fair value of the 6,121,571 common shares issued was determined based on the closing market price of our common stock on the acquisition date.

In connection with the Apton acquisition, contingent consideration of $ 25.0 million, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock, is due upon the achievement of a milestone, defined as the achievement of $ 50.0 million in revenue associated with Apton's technology, provided that the milestone event occurs prior to the 5 -year anniversary of the closing date of the acquisition.

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 our common stock for the twenty trading days ending on and including the fifth trading day immediately prior to the occurrence of the specified milestone.

Upon achievement of the milestone, we may pay cash in lieu of our common stock to ensure that the issuance of our common stock does not exceed 19.9 % of our outstanding shares of common stock then outstanding.

The contingent consideration is accounted for as a liability at fair value, with changes during each reporting period recognized in our Consolidated Statements of Operations and Comprehensive Loss.

The fair value of the contingent consideration liability is calculated, with the assistance from a third-party valuation firm, using a Monte Carlo Simulation to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate.

We allocated the consideration transferred to the identifiable assets acquired and liabilities assumed based on preliminary estimates of their respective fair values at the date of the completion of the Apton acquisition, and such allocation is subject to adjustment for up to one year after the close of the acquisition as additional information is obtained.

The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred, based on the preliminary estimated fair values were as follows (in thousands):

Cash and cash equivalents $ 97

In-process research and development 53,000

Goodwill 53,869

Other assets, current 153

Deferred income tax liability ( 10,920 )

Liabilities assumed ( 2,191 )

Total consideration transferred $ 94,008

The purchase price allocation is preliminary, primarily due to the pending finalization of the valuation analysis and review of various tax attributes.

We continue to collect information regarding certain estimates and assumptions, including potential liabilities and contingencies.

We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve months measurement period, if necessary.

We incurred costs related to the Apton acquisition of approximately $ 9.0 million during the nine months ended September 30, 2023, which are included in merger-related expenses on the Condensed Consolidated Statement of Operations and Comprehensive Loss.

Merger-related expenses include $ 2.8 million relating to a liquidity event bonus plan that was treated as a separate transaction and included the issuance of 168,621 shares of common stock that were issued with a fair value of $ 2.1 million based on the closing market price of our common stock on the acquisition date.

As a result, the total shares issued in connection with the Apton acquisition were 6.3 million shares of common stock.

The excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill.

We recognized goodwill of $ 53.9 million, based on preliminary estimates, which is primarily attributable to the synergies expected to occur from the integration of Apton and is not deductible for income tax purposes.

We preliminarily allocated $ 53.0 million of the purchase price to acquired in-process research and development ("IPR&D").

The fair value of the IPR&D was determined, with the assistance of a third-party valuation firm, using an income approach based on a forecast of expected future cash flows.

Expected future cash flows utilize significant assumptions such as assumed revenue growth, discount rate and obsolescence factors.

FINANCIAL INSTRUMENTS

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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):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

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Total liabilities measured at fair value $ — $ — $ 18,450 $ 18,450 $ — $ — $ 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 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.

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 10.1 % 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.

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

We classify contingent consideration, which was incurred in connection with the acquisition of Apton, 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.

Estimates and assumptions used in the Monte Carlo simulation include risk-adjusted forecasted revenues for products and services leveraging Apton's technology and an estimated credit spread.

On September 20, 2023, we achieved the commercial milestone in connection with the acquisition of Omniome.

Consequently, former Omniome securityholders were entitled to receive as milestone consideration, among other things, an aggregate of approximately $ 100.9 million in cash and approximately 9.0 million shares of our common stock, representing $ 95.9 million divided by the volume-weighted average of the trading prices of our common stock for the twenty trading days ending with and including the trading day that was two days immediately prior to the achievement of the milestone.

The $ 95.9 million represents the $ 100.0 million that was to be paid in shares of our common stock offset by $ 4.1 million attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction, pursuant to the terms of the Omniome merger agreement.

Following the achievement of the commercial milestone, $ 5.1 million of the contingent consideration was paid during the three and nine months ended September 30, 2023.

Additionally, as the shares payable pursuant to the commercial milestone became fixed, and the contingency was resolved, the value attributable to the shares to be issued of $ 84.8 million was reclassified to additional paid-in capital on the Condensed Consolidated Balance Sheets.

Such shares were issued to the former Omniome securityholders and the remainder of the cash payment was in October 2023.

The remaining liability balance attributable to the achievement of the commercial milestone in September 2023 of $ 96.2 million is included in contingent consideration liability, current, in the Condensed Consolidated Balance Sheets as of September 30, 2023.

As a result of the achievement of the milestone, the contingent consideration liability incurred in connection with the acquisition of Omniome was no longer considered a Level 3 liability at September 30, 2023.

There were no other transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis for the nine months ended September 30, 2023, and our valuation techniques did not change compared to the prior year.

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

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

Additions 18,450

Change in estimated fair value 13,960

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

Achievement of milestone $ ( 186,054 )

Ending balance as of September 30, 2023 $ 18,450

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.

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 June 30, 2023

As of September 30, 2023

Cash and cash equivalents 385,619 29 — 385,648

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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 June 30, 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 September 30, 2023 (in thousands):

Due in one year or less $ 498,366

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Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

Investment income included in other income, net on the Condensed Consolidated Statement of Operations and Comprehensive Loss was $ 9.2 million and $ 25.0 million for the three and nine months ended September 30, 2023, respectively, and $ 2.8 million and $ 4.3 million for the three and nine months ended September 30, 2022, respectively.

BALANCE SHEET COMPONENTS

1 unchanged sentence

Our inventory, net, consisted of the following components (in thousands):

September 30,

2023 December 31,

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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.

Intangible assets include acquired in-process research and development ("IPR&D") of $ 53.0 million as a result of the Apton acquisition in August 2023.

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.

2 unchanged sentences

In addition to IPR&D, definite-lived intangible assets included the following (in thousands, except years):

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

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

(in years) Gross

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Total $ 411,539 $ ( 2,701 ) $ 408,838 $ 11,539 $ ( 1,294 ) $ 10,245

The developed technology as of September 30, 2023 includes the completed IPR&D from the Omniome acquisition that was completed in September 2023.

The estimated future amortization expense of intangible assets with definite lives is as follows (in thousands):

2 unchanged sentences

Total $ 408,838

Amortization of intangible assets is included within our cost of revenue if the costs and expenses related to the intangible assets are attributable to revenue generating activities.

Amortization expense for intangible assets that are not directly related to sales generating activities are amortized to operating expenses.

The definite-lived intangible assets are amortized using the straight-line method over their estimated useful lives.

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.

We had goodwill of $ 463.8 million as of September 30, 2023, which preliminarily increased by $ 53.9 million, due to the Apton acquisition, of which $ 10.9 million relates to a deferred income tax liability, as compared to $ 410.0 million as of December 31, 2022.

Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment.

1 unchanged sentence

Deferred Revenue

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.

As of September 30, 2023, we had a total of $ 27.5 million of deferred revenue, $ 22.4 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 $ 5.1 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 5 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.

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 nine months ended September 30, 2023 for partial utilization of the available credits, which is expected to be recognized in revenue after 12 months from September 30, 2023.

Revenue recorded in the three and nine months ended September 30, 2023 includes $ 3.7 million and $ 11.7 million, respectively, that was included in deferred revenue as of December 31, 2022, of which $ 2.1 million and $ 4.2 million was included in product revenue recognized from the partial utilization of available credits by Invitae during the three and nine months ended September 30, 2023, respectively.

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 .

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Payments are made in equal monthly installments including principal and interest.

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.

As of September 30, 2023, the carrying value of term loans outstanding was $ 0.9 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 nine months ended September 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):

Remainder of 2023 $ 444

Total $ 1,420

CONVERTIBLE SENIOR NOTES

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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 recorded a loss on extinguishment of debt of approximately $ 2.0 million in connection with the Exchange Transaction during the nine months ended September 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 $ 7.3 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 %.

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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):

September 30,

2023 December 31,

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Net carrying amount $ 434,449 $ —

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.

For the three and nine months ended September 30, 2023 and 2022, interest expense for the 2030 Notes was as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Contractual interest expense $ 1,516 $ — $ 1,516 $ —

Amortization of debt issuance costs 229 — 229 —

Total interest expense $ 1,745 $ — $ 1,745 $ —

As of September 30, 2023, the estimated fair value (Level 2) of the 2030 Notes was $ 356.6 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.

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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):

September 30,

2023 December 31,

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Net carrying amount $ 457,547 $ 896,683

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

2 unchanged sentences

Total interest expense $ 1,801 $ 3,529 $ 8,807 $ 10,587

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

As of September 30, 2023, the estimated fair value (Level 2) of the 2028 Notes was $ 358.6 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.

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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.

No additional liability associated with such indemnification obligations has been recorded as of September 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 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.

As of September 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 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.

As of September 30, 2023, we had 12.3 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.

9 unchanged sentences

Canceled ( 810 ) 18.05

Outstanding at June 30, 2023 13,562 $ 10.57

Outstanding at September 30, 2023 13,211 $ 10.60

Performance-based Stock Options

5 unchanged sentences

Canceled ( 4 ) 4.71

Outstanding at June 30, 2023 3 $ 4.74

Outstanding at September 30, 2023 3 $ 4.74

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

8 unchanged sentences

Forfeited ( 1,008 ) ( 23 ) 14.73 9.43

Outstanding at June 30, 2023 12,643 564 $ 12.03 $ 9.43

Outstanding at September 30, 2023 11,959 541 $ 12.23 $ 9.43

Employee Stock Purchase Plan (“ESPP”)

Shares issued under our ESPP were 1,052,908 and 1,316,923 during the six months ended June 30, 2023 and 2022, respectively.

Shares issued under our ESPP wer e 1,735,058 and 1,878,168 during the nine months ended September 30, 2023 and 2022, respectively.

In February 2023, an additional 4.0 million shares were reserved under the ESPP.

As of June 30, 2023, 12.9 million shares of our common stock remain available for issuance under our ESPP.

As of September 30, 2023, 12.2 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

16 unchanged sentences

The fair value of employee stock options was estimated using the following assumptions:

Six Months Ended June 30,

Nine Months Ended September 30,

Expected term in years 4.9 4.6

1 unchanged sentence

Risk-free interest rate 3.73% - 4.21%

0.41 % — 3.66 %

Dividend yield — —

1 unchanged sentence

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

Six Months Ended June 30,

Nine Months Ended September 30,

Expected term in years 0.5 — 2.0

9 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

6 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

1 unchanged sentence

Equity Awards 28,100 28,087 28,100 28,087

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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

4 unchanged sentences

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

4 unchanged sentences

Total revenue $ 55,691 $ 32,311 $ 142,164 $ 100,951

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