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) September 30, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 385,648 $ 325,089 Investments 382,141 447,229 Accounts receivable, net 30,486 18,786 Inventory, net 68,256 50,381 Prepaid expenses and other current assets 15,466 10,289 Short-term restricted cash 300 300 Total current assets 882,297 852,074 Property and equipment, net 40,340 41,580 Operating lease right-of-use assets, net 34,610 39,763 Long-term restricted cash 2,422 2,922 Intangible assets, net 461,838 410,245 Goodwill 463,843 409,974 Other long-term assets 13,004 10,528 Total assets $ 1,898,354 $ 1,767,086 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 16,106 $ 12,028 Accrued expenses 34,660 32,596 Deferred revenue, current 22,372 30,498 Operating lease liabilities, current 9,460 8,886 Other liabilities, current 5,170 7,233 Contingent consideration liability, current 96,193 172,094 Total current liabilities 183,961 263,335 Deferred revenue, non-current 5,053 1,794 Contingent consideration liability, non-current 18,450 — Operating lease liabilities, non-current 34,100 41,070 Convertible senior notes, net, non-current 891,996 896,683 Other liabilities, non-current 1,051 1,300 Total liabilities 1,134,611 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 258,374 and 226,505 shares at September 30, 2023 and December 31, 2022, respectively 258 227 Additional paid-in capital 2,522,382 2,099,782 Accumulated other comprehensive loss ( 1,840 ) ( 4,765 ) Accumulated deficit ( 1,757,057 ) ( 1,532,340 ) Total stockholders’ equity 763,743 562,904 Total liabilities and stockholders’ equity $ 1,898,354 $ 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 September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2023 2022 2023 2022 Revenue: Product revenue $ 51,562 $ 27,509 $ 129,871 $ 85,928 Service and other revenue 4,129 4,802 12,293 15,023 Total revenue 55,691 32,311 142,164 100,951 Cost of Revenue: Cost of product revenue 33,735 15,752 87,697 46,437 Cost of service and other revenue 4,054 3,012 11,258 10,619 Total cost of revenue 37,789 18,764 98,955 57,056 Gross profit 17,902 13,547 43,209 43,895 Operating Expense: Research and development 47,514 47,092 142,626 150,377 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 ) Total operating expense 100,394 88,167 290,128 264,007 Operating loss ( 82,492 ) ( 74,620 ) ( 246,919 ) ( 220,112 ) Loss on extinguishment of debt — — ( 2,033 ) — Interest expense ( 3,588 ) ( 3,664 ) ( 10,772 ) ( 11,042 ) 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 income (loss): Unrealized gain (loss) on investments 846 ( 803 ) 2,925 ( 5,173 ) Comprehensive loss $ ( 66,023 ) $ ( 77,774 ) $ ( 221,792 ) $ ( 235,037 ) Net loss per share: Basic $ ( 0.26 ) $ ( 0.34 ) $ ( 0.90 ) $ ( 1.03 ) Diluted $ ( 0.26 ) $ ( 0.34 ) $ ( 0.90 ) $ ( 1.03 ) Weighted average shares outstanding used in calculating net loss per share: Basic 255,001 225,123 249,082 223,981 Diluted 255,001 225,123 249,082 223,981 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 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 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 Net loss — — — — ( 76,971 ) ( 76,971 ) Other comprehensive loss — — — ( 803 ) — ( 803 ) Issuance of common stock in conjunction with equity plans 1,160 1 3,542 — — 3,543 Share-based compensation expense — — 18,936 — — 18,936 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 Net loss — — — — ( 224,717 ) ( 224,717 ) 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 Issuance of common stock in conjunction with equity plans 5,454 5 14,378 — — 14,383 Share-based compensation expense — — 55,534 — — 55,534 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 Net loss — — — — ( 229,864 ) ( 229,864 ) Other comprehensive loss — — — ( 5,173 ) — ( 5,173 ) Issuance of common stock in conjunction with equity plans 4,938 5 9,978 — — 9,983 Share-based compensation expense — — 60,658 — — 60,658 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. 5 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (in thousands) 2023 2022 Cash flows from operating activities Net loss $ ( 224,717 ) $ ( 229,864 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 8,487 6,937 Amortization of intangible assets 1,408 685 Amortization of right-of-use assets 4,940 5,152 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 Change in the estimated fair value of contingent consideration 13,960 ( 2,221 ) Loss on extinguishment of debt 2,033 — Inventory provision 4,691 2,667 Deferred income taxes ( 10,706 ) — Other 667 562 Changes in assets and liabilities Accounts receivable, net ( 11,700 ) 1,485 Inventory ( 22,849 ) ( 23,367 ) Prepaid expenses and other assets ( 7,287 ) ( 5,685 ) Accounts payable 1,706 1,511 Accrued expenses 2,055 ( 11,054 ) Deferred revenue ( 4,867 ) ( 3,575 ) Operating lease liabilities ( 6,396 ) ( 5,905 ) Contingent consideration liability ( 732 ) — Other liabilities ( 1,147 ) ( 1,700 ) Net cash used in operating activities ( 201,613 ) ( 202,645 ) Cash flows from investing activities 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 ) Sales of investments 595 — Maturities of investments 631,253 355,425 Net cash provided by investing activities 71,179 35,680 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 14,383 9,983 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 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 Cash, cash equivalents, and restricted cash at end of period $ 388,370 $ 307,655 Cash and cash equivalents at end of period 385,648 304,433 Restricted cash at end of period 2,722 3,222 Cash, cash equivalents, and restricted cash at end of period $ 388,370 $ 307,655 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 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. 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 September 30, 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 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 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. 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. 8 Table of Contents 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. 9 Table of Contents NOTE 3. 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 • 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. 10 Table of Contents 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): September 30, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 196,621 $ 189,027 $ — $ 385,648 $ 137,636 $ 187,453 $ — $ 325,089 Investments: Commercial paper — 16,771 — 16,771 — 127,302 — 127,302 Corporate debt securities — 75,853 — 75,853 — 49,491 — 49,491 U.S. government & agency securities — 289,517 — 289,517 — 270,436 — 270,436 Total investments — 382,141 — 382,141 — 447,229 — 447,229 Short-term restricted cash 300 — — 300 300 — — 300 Long-term restricted cash 2,422 — — 2,422 2,922 — — 2,922 Total assets measured at fair value $ 199,343 $ 571,168 $ — $ 770,511 $ 140,858 $ 634,682 $ — $ 775,540 Liabilities Contingent consideration $ — $ — $ 18,450 $ 18,450 $ — $ — $ 172,094 $ 172,094 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 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): 11 Table of Contents Level 3 Beginning balance as of December 31, 2022 $ 172,094 Additions 18,450 Change in estimated fair value 13,960 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. 12 Table of Contents The following tables summarize our cash, cash equivalents and investments (in thousands): As of September 30, 2023 Amortized Cost Gross unrealized gains Gross unrealized losses Fair Value Cash and cash equivalents 385,619 29 — 385,648 Investments: Commercial paper 16,771 — — 16,771 Corporate debt securities 76,161 3 ( 311 ) 75,853 U.S. government & agency securities 291,078 7 ( 1,568 ) 289,517 Total investments 384,010 10 ( 1,879 ) 382,141 Total cash, cash equivalents and investments $ 769,629 $ 39 $ ( 1,879 ) $ 767,789 Short-term restricted cash $ 300 $ — $ — $ 300 Long-term restricted cash $ 2,422 $ — $ — $ 2,422 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 September 30, 2023 (in thousands): Fair Value Due in one year or less $ 498,366 Due after one year through five years 72,802 Total $ 571,168 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. 13 Table of Contents NOTE 4. BALANCE SHEET COMPONENTS Inventory, net Our inventory, net, consisted of the following components (in thousands): September 30, 2023 December 31, 2022 Purchased materials $ 23,333 $ 24,139 Work in process 27,883 14,062 Finished goods 17,040 12,180 Inventory, net $ 68,256 $ 50,381 Intangible Assets and Goodwill 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. 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 September 30, 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 $ 411,179 $ ( 2,341 ) $ 408,838 $ 11,179 $ ( 1,039 ) $ 10,140 Customer relationships 2 360 ( 360 ) — 360 ( 255 ) 105 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): Remainder of 2023 $ 6,854 2024 27,412 2025 27,412 2026 27,412 2027 27,412 2028 and thereafter 292,337 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. 14 Table of Contents 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. We performed our annual assessment for goodwill impairment in the second quarter of 2023, noting no impairment. Deferred Revenue 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 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 . 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Balance at beginning of period $ 2,862 $ 1,609 $ 1,651 $ 594 Additions charged to cost of product revenue 2,825 779 5,675 2,644 Repairs and replacements ( 1,722 ) ( 622 ) ( 3,361 ) ( 1,472 ) Balance at end of period $ 3,965 $ 1,766 $ 3,965 $ 1,766 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 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. 15 Table of Contents The following table presents the future principal payments on the term loans (in thousands): Remainder of 2023 $ 444 2024 490 Total $ 934 NOTE 5. CONVERTIBLE SENIOR 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. 16 Table of Contents 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 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 %. 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): September 30, 2023 December 31, 2022 Principal amount $ 441,000 $ — Unamortized debt premium 542 — Unamortized debt issuance costs ( 7,093 ) — Net carrying amount $ 434,449 $ — 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 $ — 17 Table of Contents 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. 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. Bank National Association, as trustee. The 2028 Notes bear interest at a rate of 1.50 % per annum. Interest on the 2028 Notes is payable semi-annually in arrears on February 15 and August 15 and commenced on August 15, 2021. The 2028 Notes will mature on February 15, 2028, subject to earlier conversion, redemption or repurchase. 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 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. 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. The 2028 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 2028 Notes at a rate equal to (i) 0.25 % per annum of the principal amount of the 2028 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 2028 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 2028 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 2028 Notes shall be subject to acceleration as provided for in the 2028 Indenture. The 2028 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 2028 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2028 Notes were not issued at a premium; therefore, the 2028 Notes are accounted for in their entirety as a liability. 18 Table of Contents 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 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 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 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): September 30, 2023 December 31, 2022 Principal amount $ 459,000 $ 900,000 Unamortized debt issuance costs ( 1,453 ) ( 3,317 ) Net carrying amount $ 457,547 $ 896,683 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 Contractual interest expense $ 1,721 $ 3,375 $ 8,415 $ 10,125 Amortization of debt issuance costs 80 154 392 462 Total interest expense $ 1,801 $ 3,529 $ 8,807 $ 10,587 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. NOTE 6. 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. 19 Table of Contents 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 expense amounts. No additional liability associated with such indemnification obligations has been recorded as of September 30, 2023 and December 31, 2022. N OTE 7. 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 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 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. 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 . 20 Table of Contents 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 332 12.11 Exercised ( 929 ) 4.70 Canceled ( 810 ) 18.05 Outstanding at September 30, 2023 13,211 $ 10.60 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 ( 251 ) 4.71 Canceled ( 4 ) 4.71 Outstanding at September 30, 2023 3 $ 4.74 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. 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): 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 6,970 564 9.71 9.43 Vested ( 2,538 ) — 14.19 — Forfeited ( 1,008 ) ( 23 ) 14.73 9.43 Outstanding at September 30, 2023 11,959 541 $ 12.23 $ 9.43 Employee Stock Purchase Plan (“ESPP”) 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 September 30, 2023, 12.2 million shares of our common stock remain available for issuance under our ESPP. 21 Table of Contents Share-Based Compensation The following table summarizes share-based compensation expense (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cost of revenue $ 1,125 $ 934 $ 4,251 $ 3,680 Research and development 6,182 7,519 18,310 24,232 Sales, general and administrative 12,384 10,483 32,973 32,746 Total share-based compensation expense $ 19,691 $ 18,936 $ 55,534 $ 60,658 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 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. The fair value of employee stock options was estimated using the following assumptions: Nine Months Ended September 30, 2023 2022 Expected term in years 4.9 4.6 Expected volatility 78 % 70 % — 76 % Risk-free interest rate 3.73% - 4.21% 0.41 % — 3.66 % Dividend yield — — Weighted average grant date fair value per share $ 7.89 $ 5.93 22 Table of Contents The fair value of shares to be issued under the ESPP was estimated using the following assumptions: Nine Months Ended September 30, 2023 2022 Expected term in years 0.5 — 2.0 0.5 — 2.0 Expected volatility 79 % — 97 % 70 % — 97 % Risk-free interest rate 4.87 % — 5.47 % 0.60 % — 3.51 % Dividend yield — — Weighted average grant date fair value per share $ 5.34 $ 4.28 NOTE 8. 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. 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Numerator: Net loss $ ( 66,869 ) $ ( 76,971 ) $ ( 224,717 ) $ ( 229,864 ) Denominator: Basic Weighted average shares used in computing basic net loss 255,001 225,123 249,082 223,981 Basic net loss per share $ ( 0.26 ) $ ( 0.34 ) $ ( 0.90 ) $ ( 1.03 ) Diluted Weighted average shares used in computing diluted net loss per share 255,001 225,123 249,082 223,981 Diluted net loss per share $ ( 0.26 ) $ ( 0.34 ) $ ( 0.90 ) $ ( 1.03 ) 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Shares issuable upon conversion of convertible senior notes 31,063 20,690 31,063 20,690 Equity Awards 28,100 28,087 28,100 28,087 23 Table of Contents NOTE 9. REVENUE A summary of our revenue by geographic location is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Americas $ 28,978 $ 16,743 $ 71,480 $ 57,547 Europe, Middle East and Africa 10,994 5,997 29,594 17,432 Asia-Pacific 15,719 9,571 41,090 25,972 Total $ 55,691 $ 32,311 $ 142,164 $ 100,951 A summary of our revenue by category is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Instrument revenue $ 34,694 $ 11,442 $ 85,317 $ 42,611 Consumable revenue 16,868 16,067 44,554 43,317 Product revenue 51,562 27,509 129,871 85,928 Service and other revenue 4,129 4,802 12,293 15,023 Total revenue $ 55,691 $ 32,311 $ 142,164 $ 100,951 24 Table of Contents