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, 2024 December 31, 2023 Assets Current assets Cash and cash equivalents $ 77,982 $ 179,911 Investments 393,165 451,505 Accounts receivable, net 29,383 36,615 Inventory, net 65,737 56,676 Prepaid expenses and other current assets 17,277 17,040 Short-term restricted cash 690 300 Total current assets 584,234 742,047 Property and equipment, net 31,952 36,432 Operating lease right-of-use assets, net 17,344 32,593 Long-term restricted cash 1,532 2,422 Intangible assets, net 436,426 456,984 Goodwill 369,061 462,261 Other long-term assets 9,503 13,274 Total assets $ 1,450,052 $ 1,746,013 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 12,064 $ 15,062 Accrued expenses 19,183 45,708 Deferred revenue, current 17,292 16,342 Operating lease liabilities, current 10,675 9,591 Other liabilities, current 783 8,326 Total current liabilities 59,997 95,029 Deferred revenue, non-current 5,455 5,530 Contingent consideration liability, non-current 20,650 19,550 Operating lease liabilities, non-current 16,933 31,606 Convertible senior notes, net, non-current 893,144 892,243 Other liabilities, non-current 751 751 Total liabilities 996,930 1,044,709 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 273,812 and 267,744 shares at September 30, 2024 and December 31, 2023, respectively 274 268 Additional paid-in capital 2,602,592 2,539,892 Accumulated other comprehensive income 1,553 219 Accumulated deficit ( 2,151,297 ) ( 1,839,075 ) Total stockholders’ equity 453,122 701,304 Total liabilities and stockholders’ equity $ 1,450,052 $ 1,746,013 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) 2024 2023 2024 2023 Revenue: Product revenue $ 35,296 $ 51,562 $ 102,051 $ 129,871 Service and other revenue 4,671 4,129 12,739 12,293 Total revenue 39,967 55,691 114,790 142,164 Cost of Revenue: Cost of product revenue 23,278 33,551 68,808 87,147 Cost of service and other revenue 3,484 4,054 10,588 11,258 Amortization of acquired intangible assets 3,201 184 7,172 550 Loss on purchase commitment — — 998 — Total cost of revenue 29,963 37,789 87,566 98,955 Gross profit 10,004 17,902 27,224 43,209 Operating Expense: Research and development 25,516 47,514 107,456 142,626 Sales, general and administrative 43,746 43,431 133,376 123,822 Goodwill impairment — — 93,200 — Merger-related expenses — 8,979 — 8,979 Amortization of acquired intangible assets 3,649 741 13,377 741 Change in fair value of contingent consideration 1,170 ( 271 ) 1,100 13,960 Total operating expense 74,081 100,394 348,509 290,128 Operating loss ( 64,077 ) ( 82,492 ) ( 321,285 ) ( 246,919 ) Loss on extinguishment of debt — — — ( 2,033 ) Interest expense ( 3,538 ) ( 3,588 ) ( 10,655 ) ( 10,772 ) Other income, net 6,890 8,505 19,718 24,301 Loss before benefit from income taxes ( 60,725 ) ( 77,575 ) ( 312,222 ) ( 235,423 ) Benefit from income taxes — ( 10,706 ) — ( 10,706 ) Net loss ( 60,725 ) ( 66,869 ) ( 312,222 ) ( 224,717 ) Other comprehensive income: Unrealized gain on investments 2,076 846 1,334 2,925 Comprehensive loss $ ( 58,649 ) $ ( 66,023 ) $ ( 310,888 ) $ ( 221,792 ) Net loss per share: Basic $ ( 0.22 ) $ ( 0.26 ) $ ( 1.15 ) $ ( 0.90 ) Diluted $ ( 0.22 ) $ ( 0.26 ) $ ( 1.15 ) $ ( 0.90 ) Weighted average shares outstanding used in calculating net loss per share: Basic 272,915 255,001 271,631 249,082 Diluted 272,915 255,001 271,631 249,082 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) Three Months Ended September 30, 2024 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Accumulated Deficit Total Stockholders' Equity (in thousands) Shares Amount Balance at June 30, 2024 272,491 $ 272 $ 2,583,523 $ ( 523 ) $ ( 2,090,572 ) $ 492,700 Net loss — — — — ( 60,725 ) ( 60,725 ) Other comprehensive income — — — 2,076 — 2,076 Issuance of common stock in conjunction with equity plans 1,321 2 810 — — 812 Share-based compensation expense — — 18,259 — — 18,259 Balance at September 30, 2024 273,812 $ 274 $ 2,602,592 $ 1,553 $ ( 2,151,297 ) $ 453,122 Nine Months Ended September 30, 2024 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' Equity (in thousands) Shares Amount Balance at December 31, 2023 267,744 $ 268 $ 2,539,892 $ 219 $ ( 1,839,075 ) $ 701,304 Net loss — — — — ( 312,222 ) ( 312,222 ) Other comprehensive income — — — 1,334 — 1,334 Issuance of common stock in conjunction with equity plans 6,068 6 7,697 — — 7,703 Share-based compensation expense — — 55,003 — — 55,003 Balance at September 30, 2024 273,812 $ 274 $ 2,602,592 $ 1,553 $ ( 2,151,297 ) $ 453,122 Three Months Ended September 30, 2023 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity (in thousands) Shares Amount 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 Nine Months Ended September 30, 2023 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity (in thousands) Shares Amount 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 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) 2024 2023 Cash flows from operating activities Net loss $ ( 312,222 ) $ ( 224,717 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 10,932 8,487 Amortization of acquired intangible assets 20,558 1,408 Amortization of right-of-use assets 10,912 4,940 Share-based compensation expense 55,003 55,534 Goodwill impairment 93,200 — Merger-related compensation expense — 3,395 Accretion of discount and amortization of premium on marketable securities, net ( 10,663 ) ( 10,088 ) Change in the estimated fair value of contingent consideration 1,100 13,960 Loss on extinguishment of debt — 2,033 Inventory provision 3,715 4,691 Deferred income taxes — ( 10,706 ) Other 1,002 667 Changes in assets and liabilities Accounts receivable, net 7,232 ( 11,700 ) Inventory, net ( 15,394 ) ( 22,849 ) Prepaid expenses and other assets 3,534 ( 7,287 ) Accounts payable ( 2,222 ) 1,706 Accrued expenses ( 26,665 ) 2,055 Deferred revenue 875 ( 4,867 ) Operating lease liabilities ( 9,252 ) ( 6,396 ) Contingent consideration liability — ( 732 ) Other liabilities ( 7,053 ) ( 1,147 ) Net cash used in operating activities ( 175,408 ) ( 201,613 ) Cash flows from investing activities Purchase of property and equipment ( 4,571 ) ( 6,819 ) Cash paid for purchase of Apton, net of cash acquired — ( 102 ) Purchases of investments ( 418,164 ) ( 553,748 ) Sales of investments 8,061 595 Maturities of investments 480,440 631,253 Net cash provided by investing activities 65,766 71,179 Cash flows from financing activities Proceeds from issuance of common stock under equity offerings, net of issuance costs — 189,200 Proceeds from issuance of common stock from equity plans 7,703 14,383 Payment of debt issuance costs — ( 7,325 ) Payment of contingent consideration — ( 4,368 ) Notes payable principal payoff ( 490 ) ( 1,397 ) Net cash provided by financing activities 7,213 190,493 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 102,429 ) 60,059 Cash, cash equivalents, and restricted cash at beginning of period 182,633 328,311 Cash, cash equivalents, and restricted cash at end of period $ 80,204 $ 388,370 Cash and cash equivalents at end of period 77,982 385,648 Restricted cash at end of period 2,222 2,722 Cash, cash equivalents, and restricted cash at end of period $ 80,204 $ 388,370 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 HiFi long-read sequencing technology and our Sequencing by Binding (SBB TM ) short-read sequencing technology. Our products address solutions across a broad set of applications including human genetics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Our focus is on creating some of the world's most advanced sequencing systems to provide our customers with the most complete and accurate view of genomes, transcriptomes, and epigenomes. 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, 2023 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, 2023. 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 those relating to the valuation of inventory, fair value of contingent consideration, valuation of acquired intangible assets, useful lives assigned to finite-lived assets, asset impairment assessments, computation of provisions for income taxes, and valuations related to our convertible senior notes. While the extent of the potential impact of 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, 2024. 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. We have the ability to hold, and do not intend to sell investments in unrealized loss positions before the recovery of their amortized cost bases. Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and U.S. government and agency securities with high credit ratings. We have established guidelines regarding diversification and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield. Restricted cash includes cash that is not readily available for use in the Company’s operating activities. Restricted cash is primarily comprised of cash pledged under letters of credit. Concentration and Other Risks For the three months ended September 30, 2024, one customer accounted for 10 % of total revenue during the period. For the three months ended September 30, 2023, no customer accounted for 10% or more of total revenue during the period. For the nine months ended September 30, 2024 and 2023, no customer accounted for 10% or more of total revenue during the respective periods. As of September 30, 2024, 37 % of our accounts receivable were from domestic customers, compared to 49 % as of December 31, 2023. As of September 30, 2024, no customer represented 10% or more of our net accounts receivable, while one customer represented 10 % of our net accounts receivable as of December 31, 2023. Recent Accounting Pronouncements Accounting Pronouncements Pending Adoption In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires entities to expand its existing income tax disclosures, specifically related to the rate reconciliation and income taxes paid. This authoritative guidance will be effective for us in fiscal year 2025, with early adoption permitted. The Company is currently evaluating the impact of the ASU but does not expect any material impact upon adoption. 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, 2023. 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 an 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 five-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 Condensed 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. The acquisition was accounted for as a business combination and, accordingly, the total fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. As of December 31, 2023, the major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands): Cash and cash equivalents $ 97 In-process research and development 55,000 Goodwill 52,287 Other assets, current 153 Deferred income tax liability ( 11,338 ) Liabilities assumed ( 2,191 ) Total consideration transferred $ 94,008 We have finalized the purchase price allocation for the Apton acquisition. There were no material adjustments from those amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. We incurred costs related to the Apton acquisition of approxim ately $ 9.0 million during the year ended December 31, 2023 . 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 $ 52.3 million, which is primarily attributable to the synergies expected to occur from the integration of Apton and is not deductible for income tax purposes. We allocated $ 55.0 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. 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. 9 Table of Contents 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. 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: September 30, 2024 December 31, 2023 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 58,703 $ 19,279 $ — $ 77,982 $ 70,172 $ 109,739 $ — $ 179,911 Investments: Commercial paper — — — — — 9,947 — 9,947 Corporate debt securities — 68,178 — 68,178 — 88,579 — 88,579 U.S. government & agency securities — 324,987 — 324,987 — 352,979 — 352,979 Total investments — 393,165 — 393,165 — 451,505 — 451,505 Short-term restricted cash 690 — — 690 300 — — 300 Long-term restricted cash 1,532 — — 1,532 2,422 — — 2,422 Total assets measured at fair value $ 60,925 $ 412,444 $ — $ 473,369 $ 72,894 $ 561,244 $ — $ 634,138 Liabilities Contingent consideration $ — $ — $ 20,650 $ 20,650 $ — $ — $ 19,550 $ 19,550 Total liabilities measured at fair value $ — $ — $ 20,650 $ 20,650 $ — $ — $ 19,550 $ 19,550 10 Table of Contents 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. We estimate the fair value of the contingent consideration liability based on the simulated revenue of the Company through the five-year anniversary of the closing date of the acquisition. As of September 30, 2024, the key input used in the determination of the fair value included projected revenues of the high-throughput short-read products and services leveraging Apton's technology. A decrease in the projected revenues would result in a decrease in the fair value of the liability. The discount rates used are the sum of the U.S. risk-free rate and the estimated subordinated credit spread for B- credit rating, which ranges from 6.7 % to 7.1 %. Changes in our estimated subordinated credit spread can result in changes in the fair value of the contingent consideration liability, where a lower credit spread may result in an increased liability valuation. Changes in the estimated fair value of the contingent consideration liability for the nine months ended September 30, 2024 were as follows: (in thousands) Level 3 Beginning balance as of December 31, 2023 $ 19,550 Change in estimated fair value 1,100 Ending balance as of September 30, 2024 $ 20,650 Changes to the fair value are recorded as change in fair value of contingent consideration in the Condensed Consolidated Statement of Operations and Comprehensive Loss. For the nine months ended September 30, 2024, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis, and our valuation techniques did not change compared to the prior year. 11 Table of Contents The following tables summarize our cash, cash equivalents, restricted cash, and investments: As of September 30, 2024 (in thousands) Amortized Cost Gross unrealized gains Gross unrealized losses Fair Value Cash and cash equivalents $ 77,980 $ 2 $ — $ 77,982 Investments: Corporate debt securities 67,563 620 ( 5 ) 68,178 U.S. government & agency securities 324,052 962 ( 27 ) 324,987 Total investments 391,615 1,582 ( 32 ) 393,165 Total cash, cash equivalents and investments $ 469,595 $ 1,584 $ ( 32 ) $ 471,147 Short-term restricted cash $ 690 $ — $ — $ 690 Long-term restricted cash $ 1,532 $ — $ — $ 1,532 As of December 31, 2023 (in thousands) Amortized Cost Gross unrealized gains Gross unrealized losses Fair Value Cash and cash equivalents $ 179,958 $ 13 $ ( 60 ) $ 179,911 Investments: Commercial paper 9,947 — — 9,947 Corporate debt securities 88,263 373 ( 57 ) 88,579 U.S. government & agency securities 353,029 478 ( 528 ) 352,979 Total investments 451,239 851 ( 585 ) 451,505 Total cash, cash equivalents and investments $ 631,197 $ 864 $ ( 645 ) $ 631,416 Short-term restricted cash $ 300 $ — $ — $ 300 Long-term restricted cash $ 2,422 $ — $ — $ 2,422 The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of September 30, 2024: (in thousands) Fair Value Due in one year or less $ 321,789 Due after one year through five years 90,655 Total $ 412,444 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 $ 6.0 million and $ 19.8 million for the three and nine months ended September 30, 2024, respectively, and $ 9.2 million and $ 25.0 million for the three and nine months ended September 30, 2023, respectively. 12 Table of Contents NOTE 4. BALANCE SHEET COMPONENTS Inventory, net Our inventory, net, consisted of the following components: (in thousands) September 30, 2024 December 31, 2023 Purchased materials $ 30,697 $ 20,168 Work in process 18,292 23,436 Finished goods 16,748 13,072 Inventory, net $ 65,737 $ 56,676 Goodwill and Intangible Assets Goodwill 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 2024, as of the beginning of April 2024, noting no impairment. Based primarily on the sustained decrease in our stock price during the second quarter and overall market capitalization as of the end of the second quarter of 2024 as well as other factors, we concluded that there was an indicator that it was more likely than not that the fair value of the reporting unit was less than its carrying amount that required an interim impairment test be performed on goodwill. As a result of the interim impairment test performed as of June 30, 2024, we concluded that the carrying amount of the entity-level reporting unit exceeded fair value and recorded a $ 93.2 million goodwill impairment charge. The impairment charge is included in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2024. The decline in the fair value of the reporting unit below its carrying value in the second quarter of 2024 resulted primarily from the decline in our stock price and changes in the timing of expected future cash flows as compared to our initial long-term plan due to continued impact of longer than expected median sales cycles resulting from various factors. We performed our impairment test using a combination of an income and a market approach to determine the fair value of goodwill. The income approach utilized estimated discounted cash flows, while the market approach utilized comparable company information. Significant assumptions used in the income approach included revenue growth expectations and a selected discount rate of 12.0 %. The discount rate was based on the weighted average cost of capital, determined using market, industry data, and related risk factors. The assessment is a level 3 measurement due to its reliance on certain unobservable inputs and significant management judgment. The assumptions used were inherently subject to uncertainty and small changes in these assumptions could have had a significant impact on the concluded value. An increase of 100 basis points to the discount rate used in our assessment would have resulted in additional goodwill impairment of approximately $ 85 million. The assessed fair value was deemed reasonable based on a market capitalization reconciliation and a supportable control premium. As a result of the impairment, the carrying value of goodwill now approximates fair value. Changes in our future operating results, cash flows, share price, market capitalization or discount rates used when conducting future goodwill impairment tests could affect the estimated fair value of goodwill and may result in additional impairment charges in the future. Changes to goodwill during the nine months ended September 30, 2024 were as follows: (in thousands) Balance as of December 31, 2023 $ 462,261 Impairment ( 93,200 ) Balance as of September 30, 2024 $ 369,061 13 Table of Contents Intangible Assets Intangible assets include acquired IPR&D of $ 55.0 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 is not amortized, but instead is 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 amortize the asset over the life of the product or record an impairment charge if the asset is determined to be impaired. We performed our annual assessment of IPR&D in the third quarter of 2024 noting no impairment. In addition to IPR&D, finite-lived intangible assets included the following: As of September 30, 2024 As of December 31, 2023 (in thousands, except years) 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 $ ( 29,753 ) $ 381,426 $ 411,179 $ ( 9,195 ) $ 401,984 Customer relationships 2 360 ( 360 ) — 360 ( 360 ) — Total $ 411,539 $ ( 30,113 ) $ 381,426 $ 411,539 $ ( 9,555 ) $ 401,984 The estimated future amortization expense of intangible assets with definite lives is as follows: (in thousands) Remainder of 2024 $ 6,853 2025 27,412 2026 27,412 2027 27,412 2028 27,412 2029 and thereafter 264,925 Total $ 381,426 Amortization of acquired 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. For developed technology intangible assets that are utilized in both revenue generating activities and in research and development activities, we allocate the amortization expense between cost of revenue and operating expenses. The finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives. We review finite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Deferred Revenue As of September 30, 2024, we had a total of $ 22.8 million of deferred revenue, $ 17.3 million of which was recorded as deferred revenue, current, and $ 5.5 million of which was recorded as deferred revenue, non-current, which primarily relates to deferred service contract revenues and is scheduled to be recognized in the next five years . Revenue recorded in the three and nine months ended September 30, 2024 includes $ 4.8 million and $ 10.2 million, respectively, that was included in deferred revenue as of December 31, 2023. 14 Table of Contents 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. Warranties are recorded as part of accrued expenses on the Condensed Consolidated Balance Sheets and warranty expense is recorded as a component of cost of product revenue in the Condensed Consolidated Statements of Operations and Comprehensive Loss. 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: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Balance at beginning of period $ 3,462 $ 2,862 $ 4,681 $ 1,651 Additions charged to cost of product revenue 1,414 2,825 4,787 5,675 Repairs and replacements ( 1,610 ) ( 1,722 ) ( 6,202 ) ( 3,361 ) Balance at end of period $ 3,266 $ 3,965 $ 3,266 $ 3,965 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. As of September 30, 2024, no amounts were outstanding on the term loans. Interest expense was not material for the three and nine months ended September 30, 2024, and was included as part of interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss. 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. 15 Table of Contents Upon the occurrence of a Fundamental Change (as defined in the 2030 Indenture), the holders of the 2030 Notes may require that we repurchase all or part of the principal amount of the 2030 Notes at a purchase price equal to 100 % of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date, and all unpaid interest from the fundamental change repurchase date thereon, but excluding, the maturity date. The 2030 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2030 Notes under the 2030 Indenture. The 2030 Indenture also includes customary covenants for convertible notes of this type. To the extent we elect, the sole remedy for an event of default relating to our failure to comply with certain of our reporting obligations shall, for the first 360 calendar days after the occurrence of such an event of default, consist exclusively of the right to receive additional interest on the 2030 Notes at a rate equal to (i) 0.25 % per annum of the principal amount of the 2030 Notes outstanding for each day during the first 180 calendar days of the 360 -day period after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived) and (ii) 0.50 % per annum of the principal amount of the 2030 Notes outstanding for each day from, and including, the 181 st calendar day to, and including, the 360 th calendar day after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived as provided for in the 2030 Indenture). On the 361 st day after such event of default (if the event of default relating to our failure to comply with its obligations is not cured or waived prior to such 361 st day), the 2030 Notes shall be subject to acceleration as provided for in the 2030 Indenture. The 2030 Notes are accounted for in accordance with the authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. Under ASU 2020-06, the guidance requires that debt with an embedded conversion feature is accounted for in its entirety as a liability and no portion of the proceeds from the issuance of the convertible debt instrument is accounted for as attributable to the conversion feature unless the conversion feature is required to be accounted for separately as an embedded derivative or the conversion feature results in a substantial premium. The conversion feature of the 2030 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2030 Notes were not issued at a substantial premium; therefore, the 2030 Notes are accounted for in their entirety as a liability. Because we may elect to settle any conversions entirely in shares, and because settlement in shares is the default settlement method, the liability is classified as non-current. The requirement to repurchase the 2030 Notes, including unpaid interest to the maturity date in the event of a Fundamental Change, is considered a put option for certain periods requiring bifurcation under ASC 815 – Derivatives and Hedging. However, given the low probability of such a Fundamental Change occurring during the applicable periods, the value of the embedded derivative is immaterial. The additional interest feature in the event of our failure to comply with certain reporting obligations is also considered an embedded derivative requiring bifurcation under ASC 815. However, due to the nature and terms of the reporting obligations, the value of the embedded derivative is immaterial. The Exchange Transaction was accounted for as an extinguishment driven by the change in fair value of the embedded conversion option. We recorded a loss on extinguishment of debt of approximately $ 2.0 million in connection with the Exchange Transaction during the year ended December 31, 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 Condensed Consolidated Balance Sheets. The debt issuance costs 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. 16 Table of Contents 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, 2024 December 31, 2023 Principal amount $ 441,000 $ 441,000 Unamortized debt premium 471 524 Unamortized debt issuance costs ( 6,197 ) ( 6,907 ) Net carrying amount $ 435,274 $ 434,617 Interest expense for the 2030 Notes was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Contractual interest expense $ 1,516 $ 1,516 $ 4,565 $ 1,516 Amortization of debt issuance costs 237 229 712 229 Total interest expense $ 1,753 $ 1,745 $ 5,277 $ 1,745 As of September 30, 2024, the estimated fair value (Level 2) of the 2030 Notes was $ 347.1 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 (“SBN”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to SBN 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. 17 Table of Contents 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. 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 Condensed Consolidated Balance Sheets. The debt issuance costs 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, 2024 December 31, 2023 Principal amount $ 459,000 $ 459,000 Unamortized debt issuance costs ( 1,130 ) ( 1,374 ) Net carrying amount $ 457,870 $ 457,626 Interest expense for the 2028 Notes was as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Contractual interest expense $ 1,721 $ 1,721 $ 5,163 $ 8,415 Amortization of debt issuance costs 81 80 243 392 Total interest expense $ 1,802 $ 1,801 $ 5,406 $ 8,807 18 Table of Contents As of September 30, 2024, the estimated fair value (Level 2) of the 2028 Notes was $ 399.1 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. As discussed below under Note 11. Subsequent Events , on November 7, 2024, we entered into an exchange agreement with SBN, pursuant to which we have agreed to exchange the remaining approximately $ 459.0 million in aggregate principal amount of 2028 Notes outstanding for $ 200.0 million aggregate principal amount of notes due August 15, 2029 as well as the issuance of 20,451,570 shares of common stock and $ 50.0 million of cash. NOTE 6. RESTRUCTURING During the nine months ended September 30, 2024, we implemented an expense reduction initiative that included workforce reductions, the closing of our San Diego office, and other actions to reduce annualized run-rate operating expenses. A summary of the pre-tax restructuring charges are as follows: (in thousands) Three Months Ended September 30, 2024 Cumulative amount incurred to date Employee separation costs $ — $ 10,051 Other costs 6,701 14,678 Total restructuring charges (1) $ 6,701 $ 24,729 (1) For the three months ended September 30, 2024, $ 6.9 million was recorded in sales, general and administrative expense. Cumulative charges incurred to date include $ 14.4 million in sales, general and administrative expense; $ 5.9 million in research and development expense; and $ 4.4 million in cost of revenue. Cumulative charges incurred to date include employee separation costs comprised of approximately $ 5.5 million related to salaries, wages and other employee benefits paid to terminated employees pursuant to the Worker Adjustment and Retraining Notification (WARN) Act and approximately $ 4.5 million of severance costs. Other costs in the three months ended September 30, 2024 and cumulative charges incurred to date are primarily related to accelerated amortization and depreciation of $ 5.1 million and $ 8.1 million respectively, for the right-of-use asset, leasehold improvements, and furniture and fixtures relating to the abandonment of the San Diego office. We also incurred cumulative charges to date for excess inventory of $ 3.6 million primarily relating to a decrease in internal demand resulting from the expense reduction initiatives which were recognized in cost of product revenues. The accelerated amortization and depreciation, which was recognized in sales, general and administrative expense, was determined as a result of the Company's change in estimate pertaining to its remaining useful life of the San Diego office utilizing the estimated date on which it planned to abandon the San Diego office. The lease liability pertaining to the San Diego office was also remeasured during the three months ended June 30, 2024 resulting in a reduction in the operating lease liability balance of $ 4.4 million, which was offset against the right-of-use asset on the Condensed Consolidated Balance Sheets. We fully exited our San Diego office in September 2024. 19 Table of Contents A summary of the liabilities related to the restructuring is as follows: (in thousands) Employee Separation Costs Other Costs Total Expense recorded in YTD 2024 $ 10,051 $ 2,321 $ 12,372 Cash paid during YTD 2024 ( 10,008 ) ( 2,049 ) ( 12,057 ) Amount recorded in current liabilities as of September 30, 2024 $ 43 $ 272 $ 315 Estimated total restructuring costs to still be incurred $ — $ 2,074 $ 2,074 The table above excludes noncash activities and amounts incurred relating to the San Diego office lease liability. The ending balance of the San Diego office lease liability as of September 30, 2024 is $ 3.4 million, and is included in operating lease liabilities, current on the Condensed Consolidated Balance Sheets. The other restructuring costs are expected to be incurred and paid by the end of 2025. NOTE 7. 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, 2023 for information regarding the Company’s maturity of lease liabilities under its lease agreements. Contingencies We may become involved in legal proceedings, claims and assessments from time to time in the ordinary course of business. We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We do not believe that the ultimate outcome of any such pending matters is probable or reasonably estimable, or that these matters will have a material adverse effect on our business; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of litigation and settlement costs, diversion of management resources, and other factors. Please see subsection titled Legal Proceedings, in Part II, Item 1 of this Quarterly Report on Form 10-Q. Indemnification Pursuant to Delaware law and agreements entered into with each of our directors and officers, we may have obligations, under certain circumstances, to hold harmless and indemnify each of our directors and officers against losses suffered or incurred by the indemnified party in connection with their service to us, and judgements, fines, settlements and expenses related to claims arising against such directors and officers to the fullest extent permitted under Delaware law, our bylaws and our certificate of incorporation. We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between such third parties and us in connection with such fundraising efforts. To the extent that any such indemnification obligations apply to the lawsuits described above, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification obligations has been recorded as of September 30, 2024 and December 31, 2023. 20 Table of Contents N OTE 8. STOCKHOLDERS’ EQUITY Equity Plans As of September 30, 2024, 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. On June 18, 2024, stockholders approved an amendment to the 2020 Plan, and we reserved an additional 20 million shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan. As of September 30, 2024, we had 26.1 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, 2023 for more information on the Company's equity plans . 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, 2023 13,011 $ 10.63 Granted 493 1.99 Exercised ( 515 ) 3.15 Canceled ( 1,474 ) 9.35 Expired ( 287 ) 5.70 Outstanding at September 30, 2024 11,228 $ 10.88 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 is based on performance relative to specified revenue targets and continued employment through the vesting period. These PSU shares are issuable following the third year of the performance 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: Restricted Stock Units (RSU) Performance Stock Units (PSU) Weighted average grant date fair value (shares in thousands) RSU PSU Outstanding at December 31, 2023 11,308 541 $ 12.06 $ 9.43 Granted 12,604 — 5.04 — Vested ( 3,647 ) — 12.33 — Forfeited ( 4,523 ) ( 39 ) 8.33 9.43 Outstanding at September 30, 2024 15,742 502 $ 7.45 $ 9.43 Employee Stock Purchase Plan (“ESPP”) Shares issued under our ESPP wer e 1,906,529 and 1,735,058 durin g the nine months ended September 30, 2024 and 2023, respectively. In the first quarter of 2024, an additional 4.0 million shares were reserved under the ESPP. As of September 30, 2024, 14.3 million shares of our common stock remain avai lable for issuance under our ESPP. 21 Table of Contents Share-Based Compensation The following table summarizes share-based compensation expense: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Cost of revenue $ 1,229 $ 1,125 $ 4,466 $ 4,251 Research and development 4,740 6,182 15,119 18,310 Sales, general and administrative 12,290 12,384 35,418 32,973 Total share-based compensation expense $ 18,259 $ 19,691 $ 55,003 $ 55,534 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, considering 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. 22 Table of Contents The fair value of employee stock options was estimated using the following assumptions: Nine Months Ended September 30, 2024 2023 Expected term in years 4.9 4.9 Expected volatility 81 % - 93 % 78 % Risk-free interest rate 3.48 % - 4.32 % 3.73 % - 4.21 % Dividend yield — — Weighted average grant date fair value per share $ 1.40 $ 7.89 The fair value of shares to be issued under the ESPP was estimated using the following assumptions: Nine Months Ended September 30, 2024 2023 Expected term in years 0.5 — 2.0 0.5 — 2.0 Expected volatility 81 % — 118 % 79 % - 97 % Risk-free interest rate 3.88 % — 5.27 % 4.87 % — 5.47 % Dividend yield — — Weighted average grant date fair value per share $ 1.53 $ 5.34 NOTE 9. 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: Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2024 2023 2024 2023 Numerator: Net loss $ ( 60,725 ) $ ( 66,869 ) $ ( 312,222 ) $ ( 224,717 ) Denominator: Basic Weighted average shares used in computing basic net loss per share 272,915 255,001 271,631 249,082 Basic net loss per share $ ( 0.22 ) $ ( 0.26 ) $ ( 1.15 ) $ ( 0.90 ) Diluted Weighted average shares used in computing diluted net loss per share 272,915 255,001 271,631 249,082 Diluted net loss per share $ ( 0.22 ) $ ( 0.26 ) $ ( 1.15 ) $ ( 0.90 ) 23 Table of Contents 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: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Shares issuable upon conversion of convertible senior notes 31,063 31,063 31,063 31,063 Equity Awards 36,496 28,100 36,496 28,100 See Note 2. Business Acquisitions for detailed information on contingently issuable shares due upon achievement of a milestone. See Note 8. Stockholders’ Equity for detailed information on equity awards. NOTE 10. REVENUE A summary of our revenue by geographic location is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Americas $ 20,107 $ 28,978 $ 58,542 $ 71,480 Europe, Middle East and Africa 9,119 10,994 24,497 29,594 Asia-Pacific 10,741 15,719 31,751 41,090 Total $ 39,967 $ 55,691 $ 114,790 $ 142,164 A summary of our revenue by category is as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Instrument revenue $ 16,788 $ 34,694 $ 50,491 $ 85,317 Consumable revenue 18,508 16,868 51,560 44,554 Product revenue 35,296 51,562 102,051 129,871 Service and other revenue 4,671 4,129 12,739 12,293 Total revenue $ 39,967 $ 55,691 $ 114,790 $ 142,164 NOTE 11. SUBSEQUENT EVENTS 2028 Convertible Senior Notes Exchange On November 7, 2024, we entered into an exchange agreement with SBN, pursuant to which we have agreed to exchange the remaining approximately $ 459.0 million in aggregate principal amount of 2028 Notes outstanding for $ 200.0 million aggregate principal amount of notes due August 15, 2029 (the “2029 Notes”) as well as the issuance of 20,451,570 shares of common stock (the “Exchange Shares”) and $ 50.0 million of cash. The exchange and issuances are expected to close on or about November 21, 2024 (the “Closing Date”). The 2029 Notes, the Exchange Shares, and shares of common stock issuable upon conversion of the 2029 Notes are subject to certain lock-up restrictions for a six-month period (the “Lock-Up Period”) beginning on the Closing Date of the Exchange Transaction; the lock-up restrictions will terminate immediately prior to the consummation of any change in control of the Company. Upon any conversion of the 2029 Notes, SBN will not be entitled to be issued a number of shares of the Company’s common stock which would cause SBN's beneficial ownership of common stock to exceed either 9.9 % of the total number of issued and outstanding shares of common stock or 9.9 % of the combined voting power of all of the securities of the Company, in each case, following such conversion. 24 Table of Contents The 2029 Notes will be governed by an indenture (the “2029 Indenture”) between the Company and U.S. Bank Trust Company, National Association, as trustee. The 2029 Notes will bear interest at a rate of 1.50 % per annum. Interest on the 2029 Notes will be payable semi-annually in arrears on February 15 and August 15 and will commence on the Closing Date. The 2029 Notes will mature on August 15, 2029, subject to earlier conversion, redemption or repurchase. The 2029 Notes will be convertible at the option of the holder at any time from the expiration of the Lock-Up Period until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2029 Notes will be convertible into shares of our common stock based on an initial conversion rate of 204.5157 shares of common stock per $1,000 principal amount of the 2029 Notes (which is equal to an initial conversion price of $ 4.89 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 2029 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 August 20, 2027, the 2029 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 2029 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. Upon the occurrence of a Fundamental Change (as defined in the 2029 Indenture), the holders of the 2029 Notes may require that we repurchase all or part of the principal amount of the 2029 Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date. The 2029 Notes will be subject to certain debt and lien covenants as well as springing guarantees, in each case, the terms of which will to be set forth in a second letter agreement between the Company and SBN to be entered into in connection with the Indenture. The 2029 Indenture will include customary “events of default,” which may result in the acceleration of the maturity of the 2029 Notes under the 2029 Indenture. The 2029 Indenture will also include 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 will, 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 2029 Notes at a rate equal to (i) 0.25 % per annum of the principal amount of the 2029 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 2029 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 2029 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 2029 Notes will be subject to acceleration as will be provided for in the 2029 Indenture. 25 Table of Contents