PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission, or the SEC, on February 28, 2023, or our Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and you should not place undue reliance on our forward-looking statements. We do not assume any obligation to update any forward-looking statements. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. Our Management’s Discussion and Analysis (MD&A) is organized into the following sections: • Overview and Outlook • Results of Operations • Liquidity and Capital Resources • Critical Accounting Policies and Estimates • Recent Accounting Pronouncements • Off Balance Sheet Arrangements Overview and Outlook About PacBio We are a premier 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 solutions and our emerging Sequencing by Binding ("SBB") short-read sequencing solution. Our products address solutions across a broad set of research 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. As of September 30, 2023, our commercial team consisted of approximately 208 employees, including 64 quota-carrying representatives, many with advanced degrees in biology and significant experience in the genomics industry. Strategic Objectives Our 2023 strategic objectives are to: • Drive rapid adoption of Revio TM by converting existing Sequel ® II/IIe customers and attracting new PacBio customers • Demonstrate Onso’s extraordinary level of accuracy in the field and show how it can transform research in needle-in-haystack applications 25 Table of Contents • Progress development of ultra-high-throughput and benchtop long-read sequencers and next generation SBB TM short-read sequencer • Leverage current infrastructure to drive toward positive cash flow • Expand partnerships across ecosystem and workflow to drive customer adoption of SBB short-read sequencing and HiFi long-read sequencing We will continue to leverage our commercial organization and significantly improve our products' efficiency and usability to seek to reach a broader customer base. We believe the commercial investments we have recently made will further help drive growth in our business. To increase the adoption of HiFi sequencing, we have various development programs in progress to expand our product portfolio, increase the throughput, and improve the usability of our existing sequencing solutions. We continue to focus on programs to accelerate new platform launches in the near to mid-term as well as increase applications for our technologies. In October 2022, we announced Revio, our new HiFi long-read sequencing system. We began taking orders in the fourth quarter of 2022 and commenced commercial Revio shipments in the first quarter of 2023. To address the oncology research markets with a highly differentiated alternative to existing third-party short-read sequencing products already on the market, we also progressed development of and, subsequent to the quarter ended June 30, 2023, commercialized Onso TM , our SBB short-read platform. We began taking orders in the first quarter of 2023, and in August 2023, we commenced customer shipments of the Onso short-read sequencing instrument. We continue to believe that with the capabilities of our HiFi chemistry and SMRT TM technology, we can be a market leader in whole-genome clinical sequencing. Leading institutions have adopted our products to study rare and inherited disease. We believe the market opportunity for clinical sequencing is significant and could drive substantial revenue growth for us. We plan to continue to pursue collaborations where the technologies being developed or applications being considered extend beyond whole-genome clinical sequencing. Collaborative arrangements add to the awareness of our products and service offerings and may drive new applications for use of our technology. Financial Overview Key highlights of the nine months ended September 30, 2023 consolidated financial results include the following: • Revenue increased $41.2 million, or 41%, to $142.2 million for the nine months ended September 30, 2023, as compared to $101.0 million for the nine months ended September 30, 2022. Revenue was comprised of $85.3 million in instrument revenue, $44.6 million in consumables revenue and $12.3 million in service and other revenue for the nine months ended September 30, 2023. The increase was primarily driven by the launch of Revio in the first quarter of 2023, which is sold at a higher average selling price than our previous Sequel II and IIe platforms. We ended the quarter with an installed base of 129 Revio systems. • Gross profit as a percentage of revenue (gross margin) was 30% for the nine months ended September 30, 2023, compared to 43% for the nine months ended September 30, 2022. Gross margin declined due in part to instrument mix, as Revio instruments sold during the nine months ended September 30, 2023 had a lower margin primarily due to loyalty discounts provided and higher initial manufacturing costs, including warranty costs, as well as adjustments of approximately $3.5 million recognized in the first quarter of 2023 primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due to the product transition to Revio. Our gross margin in future periods will depend on several factors, including new product transitions and offerings, strategic product pricing; product mix as a result of higher-margin consumables; supply chain constraints and inflation increasing the costs of raw materials; manufacturing capacity and production volumes impacting the cost of inventory; warranty costs; freight costs; and excess or obsolete inventories. 26 Table of Contents • Loss from operations increased $26.8 million, or 12%, to $246.9 million for the nine months ended September 30, 2023, as compared to $220.1 million for the nine months ended September 30, 2022, driven primarily by an increase of $26.1 million of operating expenses, including a $8.0 million increase in sales, general and administrative expenses, a $9.0 million increase in merger-related expenses, a $0.7 million increase in amortization of acquired intangible assets, and a $16.2 million increase in the change in the fair value of the contingent consideration, partially offset by a $7.8 million decrease in research and development expenses, and a decline in gross profit of $0.7 million. • Cash, cash equivalents, and short-term investments were $767.8 million at September 30, 2023, which represents a 1% decrease compared to the balance at December 31, 2022. Macroeconomic dynamics including rising inflation, global supply chain constraints, volatile capital markets, competition, and fluctuating exchange rates have adversely impacted our customers and lengthened customer sales cycles. These factors could continue to impact our revenues and results of operations throughout the remainder of 2023; however, the size and duration of these impacts is uncertain, and as a result, we cannot reasonably estimate the future impact to our operations and financial results. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic and other macroeconomic factors on our business. Recent Developments Apton Merger Agreement 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, among other things, issued to holders of Apton’s outstanding equity interests approximately 6.3 million shares of our common stock. Additionally, subject to the terms and conditions of the Merger Agreement and the achievement of $50.0 million in revenue associated with a high throughput sequencer using Apton's technology, former holders of Apton's outstanding equity interests will also be entitled to receive $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. 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 shares 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. 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 our common stock then outstanding. 27 Table of Contents Results of Operations Comparison of the Three Months Ended September 30, 2023 and 2022 (in thousands, except percentages) Three Months Ended September 30, 2023 2022 $ Change % Change Revenue: Product revenue $ 51,562 $ 27,509 $ 24,053 87 % Service and other revenue 4,129 4,802 (673) (14) % Total revenue 55,691 32,311 23,380 72 % Cost of Revenue: Cost of product revenue 33,735 15,752 17,983 114 % Cost of service and other revenue 4,054 3,012 1,042 35 % Total cost of revenue 37,789 18,764 19,025 101 % Gross profit 17,902 13,547 4,355 32 % Operating Expense: Research and development 47,514 47,092 422 1 % Sales, general and administrative 43,431 36,795 6,636 18 % Merger-related expenses 8,979 — 8,979 100 % Amortization of acquired intangible assets 741 — 741 100 % Change in fair value of contingent consideration (271) 4,280 (4,551) (106) % Total operating expense 100,394 88,167 12,227 14 % Operating loss (82,492) (74,620) (7,872) 11 % Interest expense (3,588) (3,664) 76 (2) % Other income, net 8,505 1,313 7,192 548 % Loss before benefit from income taxes (77,575) (76,971) (604) 1 % Benefit from income taxes (10,706) — (10,706) 100 % Net loss $ (66,869) $ (76,971) $ 10,102 (13 %) Revenue Revenue increased $23.4 million, or 72%, to $55.7 million for the three months ended September 30, 2023, as compared to $32.3 million for the three months ended September 30, 2022. Instrument revenue increased $23.3 million, or 203%, to $34.7 million for the three months ended September 30, 2023, as compared to $11.4 million for the three months ended September 30, 2022, primarily due to the sale of 52 Revio systems during the three months ended September 30, 2023 compared to 34 Sequel IIe systems during the three months ended September 30, 2022, as well as Revio's higher average selling price as compared to the Sequel IIe platform. We continue to expect the installed base of Revio instruments to grow, reflecting customer demand for the new product. As a result of this product launch, we anticipate installed base and sales volumes of Sequel II/IIe to continue to decline compared to prior periods. We commenced the shipment of Onso products during the three months ended September 30, 2023 and expect the installed base to continue to grow. Consumables revenue increased $0.8 million, or 5%, to $16.9 million for the three months ended September 30, 2023, as compared to $16.1 million for the three months ended September 30, 2022. The increase in consumable sales was primarily due to higher Revio consumables sales attributable to the growth in the Revio instrument installed base, partially offset by a decline in Sequel II and IIe consumables as customers transition to the new platform. We expect Revio consumable sales to increase as the installed base grows. While we expect to see a decline in Sequel II and IIe consumable sales resulting from the product transition, there is uncertainty as to the rate at which these sales will decline. 28 Table of Contents Service and other revenue decreased $0.7 million, or 14%, to $4.1 million for the three months ended September 30, 2023, as compared to $4.8 million for the three months ended September 30, 2022, primarily due to the change in our terms of the warranty provided with the instrument during the first quarter of 2022 to remove the service component. As a result, the warranty is no longer a separate performance obligation and, accordingly, we accrue for the cost of the assurance warranty when revenue of the instrument is recognized, and no longer recognize a component of the instrument revenue in service and other revenue over the warranty period. Service revenue also declined as customers transition to the Revio, which includes a first-year warranty, and opt not to renew their Sequel II/IIe plans. We expect service revenue to continue to decline during the remainder of the year as we anticipate customers transitioning their service contracts to Revio following the standard warranty period, with fewer customers renewing Sequel and Sequel II/IIe service contracts. Cost of Revenue, Gross Profit and Gross Margin Cost of product revenue increased $18.0 million, or 114%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The cost of product revenue increased primarily due to an increase in system placements and higher overall product costs on the Revio platform, including warranty costs, as compared to the Sequel II and IIe platforms. Cost of revenue included share-based compensation expense of $1.1 million and $0.9 million during the three months ended September 30, 2023 and 2022, respectively. Gross profit increased $4.4 million, or 32%, to $17.9 million for the three months ended September 30, 2023, compared to $13.5 million for the three months ended September 30, 2022. Gross margin was 32% for the three months ended September 30, 2023, compared to gross margin of 42% for the three months ended September 30, 2022. The decrease in gross margin was due in part to instrument mix, as Revio instruments sold during the quarter had higher initial manufacturing and warranty costs, in addition to charges for scrap inventory. Gross margin could fluctuate depending on the pace at which Sequel II/IIe consumable revenue declines, Revio consumable revenue ramps, manufacturing efficiencies and warranty costs improve, as well as fluctuations in average selling prices. Research and Development Expense Research and development expense increased by $0.4 million, or 1%, to $47.5 million for the three months ended September 30, 2023, compared to $47.1 million for the three months ended September 30, 2022. The increase was primarily driven by an increase in personnel expenses, in part due to the Apton acquisition, offset by the transition of Revio from development to commercialization. Research and development expense included share-based compensation expense of $6.2 million and $7.5 million during the three months ended September 30, 2023 and 2022, respectively. Sales, General and Administrative Expense Sales, general and administrative expense increased by $6.6 million, or 18%, to $43.4 million for the three months ended September 30, 2023, compared to $36.8 million for the three months ended September 30, 2022. The increase was primarily driven by an increase in sales and marketing related personnel expenses in connection with the Revio and Onso product launches and as we continue to grow our commercial footprint. Sales, general, and administrative expense included share-based compensation expense of $12.4 million and $10.5 million during the three months ended September 30, 2023 and 2022, respectively. Merger-Related Expenses Merger-related expenses of $9.0 million during the three months ended September 30, 2023 consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition. We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services. Amortization of Acquired Intangible Assets Amortization of acquired intangible assets of $0.7 million during the three months ended September 30, 2023 consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities. 29 Table of Contents Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration of $0.3 million during the three months ended September 30, 2023, represents the final remeasurement impact of the contingent consideration liability that became due upon the achievement of the milestone resulting from the Omniome acquisition, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology. As a result of the milestone achievement in September 2023, 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. Interest Expense Interest expense for the three months ended September 30, 2023, was $3.6 million compared to $3.7 million for the three months ended September 30, 2022 and was primarily comprised of interest on the convertible senior notes. Other Income, Net Other income, net for the three months ended September 30, 2023, was $8.5 million compared to $1.3 million for the three months ended September 30, 2022. The $7.2 million increase was primarily due to investment income due to higher yields on investments. Benefit from Income Taxes A deferred income tax benefit of $10.7 million for the three months ended September 30, 2023, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2023. 30 Table of Contents Comparison of the Nine Months Ended September 30, 2023 and 2022 (in thousands, except percentages) Nine Months Ended September 30, 2023 2022 $ Change % Change Revenue: Product revenue $ 129,871 $ 85,928 $ 43,943 51 % Service and other revenue 12,293 15,023 (2,730) (18) % Total revenue 142,164 100,951 41,213 41 % Cost of Revenue: Cost of product revenue 87,697 46,437 41,260 89 % Cost of service and other revenue 11,258 10,619 639 6 % Total cost of revenue 98,955 57,056 41,899 73 % Gross profit 43,209 43,895 (686) (2 %) Operating Expense: Research and development 142,626 150,377 (7,751) (5) % Sales, general and administrative 123,822 115,851 7,971 7 % Merger-related expenses 8,979 — 8,979 100 % Amortization of acquired intangible assets 741 — 741 100 % Change in fair value of contingent consideration 13,960 (2,221) 16,181 (729) % Total operating expense 290,128 264,007 26,121 10 % Operating loss (246,919) (220,112) (26,807) 12 % Loss on extinguishment of debt (2,033) — (2,033) 100 % Interest expense (10,772) (11,042) 270 (2) % Other income, net 24,301 1,290 23,011 1784 % Loss before benefit from income taxes (235,423) (229,864) (5,559) 2 % Benefit from income taxes (10,706) — (10,706) 100 % Net loss $ (224,717) $ (229,864) $ 5,147 (2 %) Revenue Revenue increased $41.2 million, or 41%, to $142.2 million for the nine months ended September 30, 2023, as compared to $101.0 million for the nine months ended September 30, 2022. Instrument revenue increased $42.7 million, or 100%, to $85.3 million for the nine months ended September 30, 2023, as compared to $42.6 million for the nine months ended September 30, 2022, primarily due to the sale of 129 Revio systems that have a higher average selling price as compared to the Sequel II/IIe platform. We expect the installed base of Revio instruments to grow, reflecting customer demand for the new product. As a result of this new product launch, we anticipate installed base and sales volumes of Sequel II/IIe to continue to decline compared to recent quarters. We commenced the shipment of Onso products during the nine months ended September 30, 2023 and expect the installed base to continue to grow. Consumables revenue increased $1.3 million, or 3%, to $44.6 million for the nine months ended September 30, 2023, as compared to $43.3 million for the nine months ended September 30, 2022. The increase in consumable sales was primarily due to higher Revio consumables sales attributable to the growth in the Revio instrument installed base, partially offset by a decline in Sequel consumables as customers transition to the new platform. 31 Table of Contents Service and other revenue decreased $2.7 million, or 18%, to $12.3 million for the nine months ended September 30, 2023, as compared to $15.0 million for the nine months ended September 30, 2022, primarily due to the change in our terms of the warranty provided with the instrument during the first quarter of 2022 to remove the service component. As a result, the warranty is no longer a separate performance obligation and, accordingly, we accrue for the cost of the assurance warranty when revenue of the instrument is recognized, and no longer recognize a component of the instrument revenue in service and other revenue over the warranty period. Service revenue also declined as customers transition to the Revio, which includes a first-year warranty, and opt not to renew their Sequel II/IIe plans. We expect service revenue to continue to decline during the remainder of the year as we anticipate customers transitioning their service contracts to Revio following the standard warranty period, with fewer customers renewing Sequel and Sequel II/IIe service contracts. Cost of Revenue, Gross Profit and Gross Margin Cost of product revenue increased $41.3 million, or 89%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The cost of product revenue increased primarily due to an increase in system placements and higher overall product costs on the Revio platform, including warranty costs, as well as adjustments of approximately $3.5 million recognized during the first quarter of 2023 primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due to the product transition to Revio. Cost of revenue included share-based compensation expense of $4.3 million and $3.7 million during the nine months ended September 30, 2023 and 2022, respectively. Gross profit decreased $0.7 million, or 2%, to $43.2 million for the nine months ended September 30, 2023, compared to $43.9 million for the nine months ended September 30, 2022. Gross margin was 30% for the nine months ended September 30, 2023, compared to gross margin of 43% for the nine months ended September 30, 2022. The decrease in gross margin was due in part to instrument mix, as Revio instruments sold during the period had a lower margin primarily due to loyalty discounts provided and higher initial manufacturing costs, including warranty costs, in addition to charges for scrap inventory, as well as adjustments of approximately $3.5 million recognized during the first quarter of 2023 primarily relating to excess consumables inventory resulting from a faster-than-expected decline in demand of Sequel II/IIe consumables due to the product transition to Revio. Gross margin could fluctuate depending on the pace at which Sequel II/IIe consumable revenue declines, Revio consumable revenue ramps, manufacturing efficiencies and warranty costs improve, as well as fluctuations in average selling prices. Research and Development Expense Research and development expense decreased by $7.8 million, or 5%, to $142.6 million for the nine months ended September 30, 2023, compared to $150.4 million for the nine months ended September 30, 2022. The decrease was primarily driven by the transition of Revio from development to commercialization. Research and development expense included share-based compensation expense of $18.3 million and $24.2 million during the nine months ended September 30, 2023 and 2022, respectively. Sales, General and Administrative Expense Sales, general and administrative expense increased by $8.0 million, or 7%, to $123.8 million for the nine months ended September 30, 2023, compared to $115.9 million for the nine months ended September 30, 2022. The increase in sales, general, and administrative expense was primarily driven by an increase in marketing expenses in connection with product launches and increased sales and marketing headcount as we continue to grow our commercial footprint. Sales, general, and administrative expense included share-based compensation expense of $33.0 million and $32.7 million during the nine months ended September 30, 2023 and September 30, 2022, respectively. Merger-Related Expenses Merger-related expenses of $9.0 million during the nine months ended September 30, 2023 consist of $4.9 million of transaction costs arising from the acquisition of Apton, $2.8 million of compensation expense resulting from the liquidity event bonus plan in connection with the Apton acquisition, and $1.3 million of share-based compensation expense resulting from the acceleration of certain equity awards in connection with the Apton acquisition. We recognized $1.3 million of share-based compensation expense for the acceleration that was not attributable to pre-combination services. 32 Table of Contents Amortization of Acquired Intangible Assets Amortization of acquired intangible assets of $0.7 million during the nine months ended September 30, 2023 consists of amortization expense attributable to acquired intangible assets that are not directly related to sales generating activities. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration of $14.0 million during the nine months ended September 30, 2023, represents the remeasurement impact of the contingent consideration liability that was due upon the achievement of a milestone, defined as the first commercial shipment to a customer of both an instrument and related consumables, utilizing SBB technology. The increase in contingent consideration liability was primarily due to the passage of time and changes in the discount rates and probabilities of milestone achievement. As a result of the milestone achievement in September 2023, 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. Loss on Extinguishment of Debt Loss on extinguishment of debt of $2.0 million during the nine months ended September 30, 2023, represents the loss resulting from the difference in the fair value of the 2030 Notes and the principal, in addition to the write-off of the unamortized debt issuance costs on the portion of the 2028 Notes that were exchanged as part of the debt modification during the nine months ended September 30, 2023. Interest Expense Interest expense for the nine months ended September 30, 2023, was $10.8 million compared to $11.0 million for the nine months ended September 30, 2022 and was primarily comprised of interest on the convertible senior notes. Other Income, Net Other income, net for the nine months ended September 30, 2023, was $24.3 million compared to $1.3 million for the nine months ended September 30, 2022. The $23.0 million increase was primarily due to investment income. Benefit from Income Taxes A deferred income tax benefit of $10.7 million for the nine months ended September 30, 2023, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Apton acquisition. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2023. Liquidity and Capital Resources As of September 30, 2023, we had cash, cash equivalents and investments of $767.8 million compared to $772.3 million as of December 31, 2022. We believe that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements beyond the next 12 months from the date of filing of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023. Our primary sources of liquidity, other than our holdings of cash, cash equivalents, and investments, has primarily been through the issuance of debt or equity securities, together with cash flow from operating activities. We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis, and as a result, we may require additional capital resources to execute our strategic initiatives to grow our business. 33 Table of Contents Factors that may affect our capital needs include, but are not limited to, the pace of adoption of our products, which affects the sales of our products and services; our ability to obtain new collaboration and customer arrangements and maintain existing collaborations and arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the purchase of patent licenses; manufacturing costs; service costs; the impact of product quality; litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; costs of developing new and enhanced products; acquisitions of complementary businesses, technologies or assets; achievement of milestones in connection with acquisitions; and other factors. There can be no assurance that funds will be available on favorable terms, or at all. Contingent Consideration In connection with the acquisition of Omniome in the third quarter of 2021, we entered into an arrangement where we are obligated to pay approximately $200.0 million in cash and equity dependent upon the achievement of a milestone event upon the first commercial shipment of products developed from our acquired sequencing solution. See Note 2 – Business Acquisitions, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for further information. In August 2023, we commenced customer shipments of the Onso short-read sequencing instrument. The milestone payment associated with PacBio’s acquisition of Omniome was triggered in September 2023 once both the Onso instrument and related consumables had been shipped to one customer. Consequently, we paid the former Omniome securityholders milestone consideration of an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock in October 2023. In connection with the acquisition of Apton, we entered into an arrangement where we are obligated to pay former holders of Apton's outstanding equity interests $25.0 million upon the achievement of $50 million in revenue associated with a high throughput sequencer using Apton's technology, provided that the milestone event occurs prior to the 5-year anniversary of the closing date of the acquisition, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock. See Note 2. Business Acquisitions in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Summary of Cash Flows Nine Months Ended September 30, (in thousands) 2023 2022 Cash used in operating activities $ (201,613) $ (202,645) Cash provided by investing activities 71,179 35,680 Cash provided by financing activities 190,493 8,803 Net increase (decrease) in cash, cash equivalents and restricted cash $ 60,059 $ (158,162) Operating Activities Our primary uses of cash in operating activities include the development of future products and product enhancements, manufacturing, and support functions related to our sales, general and administrative activities. Cash used in operating activities for the nine months ended September 30, 2023 of $201.6 million was due primarily to a $224.7 million net loss that included non-cash items such as share-based compensation of $55.5 million, change in estimated fair value of contingent consideration of $14.0 million, depreciation expense of $8.5 million, amortization of right-of-use assets of $4.9 million, inventory provisions of $4.7 million, merger-related compensation expense of $3.4 million, and loss on extinguishment of debt of $2.0 million. This was offset by deferred income taxes of $10.7 million, the accretion of discount and amortization of premium on marketable securities, net of $10.1 million, and $51.2 million in net changes to operating assets and liabilities. Cash flow impact from changes in net operating assets and liabilities was primarily driven by increases in inventory, accounts receivable and prepaid and other assets, as well as decreases in operating lease liabilities, deferred revenue, other liabilities and the contingent consideration liability. These uses of cash were partially offset by an increase in accrued expenses and accounts payable. 34 Table of Contents Cash used in operating activities for the nine months ended September 30, 2022, of $202.6 million was due primarily to a $229.9 million net loss that included non-cash items such as share-based compensation of $60.7 million, depreciation expense of $6.9 million, amortization of right-of-use assets of $5.2 million, inventory provisions of $2.7 million, amortization of premium and accretion of discount on marketable securities, net of $1.1 million, partially offset by a $2.2 million decrease in liability due to the change in estimated fair value of contingent consideration, and a net cash outflow due to $48.3 million in net changes to operating assets and liabilities. Cash flow impact from changes in net operating assets and liabilities was primarily driven by increases in inventory and prepaid and other assets, as well as decreases in accrued expenses, operating lease liabilities, deferred revenue and other liabilities. These uses of cash were partially offset by a decrease in accounts receivable and an increase in accounts payable. Investing Activities Our investing activities consist primarily of capital expenditures and investment purchases, sales, and maturities. Cash provided by investing activities for the nine months ended September 30, 2023, was due to $631.8 million of maturities and sales of investments offset by $553.7 million in purchases of investments, $6.8 million in purchases of property and equipment, and $0.1 million of cash paid for the Apton acquisition, net of cash acquired. Our investing activities consist primarily of capital expenditures and investment purchases, sales and maturities. Cash provided by investing activities for the nine months ended September 30, 2022, was due to $355.4 million of maturities and sales of investments offset by $307.9 million in purchases of investments, and $11.8 million in purchases of property and equipment. Financing Activities Cash provided by financing activities during the nine months ended September 30, 2023 primarily resulted from $189.2 million in net proceeds related to the issuance of common stock from the underwritten public equity offering and $14.4 million from the issuance of common stock through our equity compensation plans partially offset by $7.3 million from the payment of debt issuance costs and $4.4 million from the payment of contingent consideration. Cash provided by financing activities during the nine months ended September 30, 2022 primarily resulted from proceeds of $10.0 million from the issuance of common stock through our equity compensation plans partially offset by $1.2 million of principal payoff of notes. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with the rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our critical accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022. Recent Accounting Pronouncements Please see Note 1. Organization and Significant Accounting Policies , subsection titled “Recent Accounting Pronouncements”, in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding applicable recent accounting pronouncements. Off-Balance Sheet Arrangements As of September 30, 2023, we did not have any off-balance sheet arrangements. 35 Table of Contents In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract, any defective products supplied by us, or any acts or omissions, or willful misconduct, committed by us or any of our employees, agents or representatives. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. 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 us and such third parties in connection with such fundraising efforts. To the extent that such indemnification obligations apply to the lawsuits described in Note 6. Commitments and Contingencies in Part I, Item 1 of this Quarterly Report on Form 10-Q, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification agreements has been recorded as of September 30, 2023.