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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________
Form 10-Q
_____________________________________________________________________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
Or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to            
Commission File Number 001-34899
_____________________________________________________________________________________________
Logo 1.jpg
Pacific Biosciences of California, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________________________________________________________
Delaware16-1590339
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1305 O’Brien Drive
Menlo Park, CA
94025
(Address of principal executive offices)(Zip Code)
(650) 521-8000
(Registrant’s telephone number, including area code)
_____________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per sharePACBThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer o
Non-accelerated fileroSmaller reporting companyo
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares outstanding of the issuer’s common stock as of October 31, 2023: 267,443,887.


TABLE OF CONTENTS
PAGE No.
2

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except per share amounts)September 30,
2023
December 31,
2022
Assets
Current assets
Cash and cash equivalents $385,648 $325,089 
Investments 382,141 447,229 
Accounts receivable, net30,486 18,786 
Inventory, net68,256 50,381 
Prepaid expenses and other current assets 15,466 10,289 
Short-term restricted cash300 300 
Total current assets 882,297 852,074 
Property and equipment, net 40,340 41,580 
Operating lease right-of-use assets, net 34,610 39,763 
Long-term restricted cash2,422 2,922 
Intangible assets, net461,838 410,245 
Goodwill463,843 409,974 
Other long-term assets 13,004 10,528 
Total assets $1,898,354 $1,767,086 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $16,106 $12,028 
Accrued expenses 34,660 32,596 
Deferred revenue, current 22,372 30,498 
Operating lease liabilities, current9,460 8,886 
Other liabilities, current 5,170 7,233 
Contingent consideration liability, current96,193 172,094 
Total current liabilities 183,961 263,335 
Deferred revenue, non-current 5,053 1,794 
Contingent consideration liability, non-current18,450  
Operating lease liabilities, non-current 34,100 41,070 
Convertible senior notes, net, non-current891,996 896,683 
Other liabilities, non-current 1,051 1,300 
Total liabilities 1,134,611 1,204,182 
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.001 par value:
Authorized 50,000 shares; No shares issued or outstanding
  
Common stock, $0.001 par value:
Authorized 1,000,000 shares; issued and outstanding 258,374 and 226,505 shares at September 30, 2023 and December 31, 2022, respectively
258 227 
Additional paid-in capital 2,522,382 2,099,782 
Accumulated other comprehensive loss(1,840)(4,765)
Accumulated deficit (1,757,057)(1,532,340)
Total stockholders’ equity 763,743 562,904 
Total liabilities and stockholders’ equity $1,898,354 $1,767,086 
See accompanying notes to the condensed consolidated financial statements.
3

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)2023202220232022
Revenue:
Product revenue $51,562 $27,509 $129,871 $85,928 
Service and other revenue 4,129 4,802 12,293 15,023 
Total revenue 55,691 32,311 142,164 100,951 
Cost of Revenue:
Cost of product revenue 33,735 15,752 87,697 46,437 
Cost of service and other revenue 4,054 3,012 11,258 10,619 
Total cost of revenue 37,789 18,764 98,955 57,056 
Gross profit 17,902 13,547 43,209 43,895 
Operating Expense:
Research and development 47,514 47,092 142,626 150,377 
Sales, general and administrative 43,431 36,795 123,822 115,851 
Merger-related expenses 8,979  8,979  
Amortization of acquired intangible assets741  741  
Change in fair value of contingent consideration(271)4,280 13,960 (2,221)
Total operating expense 100,394 88,167 290,128 264,007 
Operating loss (82,492)(74,620)(246,919)(220,112)
Loss on extinguishment of debt  (2,033) 
Interest expense (3,588)(3,664)(10,772)(11,042)
Other income, net 8,505 1,313 24,301 1,290 
Loss before benefit from income taxes(77,575)(76,971)(235,423)(229,864)
Benefit from income taxes(10,706) (10,706) 
Net loss(66,869)(76,971)(224,717)(229,864)
Other comprehensive income (loss):
Unrealized gain (loss) on investments 846 (803)2,925 (5,173)
Comprehensive loss$(66,023)$(77,774)$(221,792)$(235,037)
Net loss per share:
Basic $(0.26)$(0.34)$(0.90)$(1.03)
Diluted $(0.26)$(0.34)$(0.90)$(1.03)
Weighted average shares outstanding used in calculating net loss per share:
Basic 255,001225,123249,082223,981
Diluted 255,001225,123249,082223,981
See accompanying notes to the condensed consolidated financial statements.
4

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
(Loss) Income
Accumulated
Deficit
Total
Stockholders'
Equity
(in thousands)SharesAmount
For the three months ended September 30, 2023
Balance at June 30, 2023250,473$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 Apton6,1216 76,636 — — 76,642 
Issuance of common stock in connection with liquidity event bonus plan169— 2,111 — — 2,111 
Issuance of common stock in conjunction with equity plans1,6112 4,560 — — 4,562 
Share-based compensation expense— 19,691 — — 19,691 
Balance at September 30, 2023258,374$258 $2,522,382 $(1,840)$(1,757,057)$763,743 
For the three months ended September 30, 2022
Balance at June 30, 2022224,756$225 $2,058,103 $(5,457)$(1,370,985)$681,886 
Net loss— — — (76,971)(76,971)
Other comprehensive loss— — (803)— (803)
Issuance of common stock in conjunction with equity plans1,1601 3,542 — — 3,543 
Share-based compensation expense— 18,936 — — 18,936 
Balance at September 30, 2022225,916$226 $2,080,581 $(6,260)$(1,447,956)$626,591 
For the nine months ended September 30, 2023
Balance at December 31, 2022226,505$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 Apton6,1216 76,636 — — 76,642 
Issuance of common stock in connection with liquidity event bonus plan169— 2,111 — — 2,111 
Issuance of common stock from Underwritten Public Equity Offering, net of issuance costs20,12520 189,180 — — 189,200 
Issuance of common stock in conjunction with equity plans5,4545 14,378 — — 14,383 
Share-based compensation expense— 55,534 — — 55,534 
Balance at September 30, 2023258,374$258 $2,522,382 $(1,840)$(1,757,057)$763,743 
For the nine months ended September 30, 2022
Balance at December 31, 2021220,978$221 $2,009,945 $(1,087)$(1,218,092)$790,987 
Net loss— — — (229,864)(229,864)
Other comprehensive loss— — (5,173)— (5,173)
Issuance of common stock in conjunction with equity plans4,9385 9,978 — — 9,983 
Share-based compensation expense— 60,658 — — 60,658 
Balance at September 30, 2022225,916$226 $2,080,581 $(6,260)$(1,447,956)$626,591 
See accompanying notes to the condensed consolidated financial statements.
5

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
(in thousands)20232022
Cash flows from operating activities
Net loss$(224,717)$(229,864)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation 8,487 6,937 
Amortization of intangible assets1,408 685 
Amortization of right-of-use assets4,940 5,152 
Share-based compensation expense55,534 60,658 
Merger-related compensation expense3,395  
Accretion of discount and amortization of premium on marketable securities, net(10,088)1,069 
Change in the estimated fair value of contingent consideration13,960 (2,221)
Loss on extinguishment of debt2,033  
Inventory provision4,691 2,667 
Deferred income taxes(10,706) 
Other667 562 
Changes in assets and liabilities
Accounts receivable, net(11,700)1,485 
Inventory(22,849)(23,367)
Prepaid expenses and other assets (7,287)(5,685)
Accounts payable 1,706 1,511 
Accrued expenses 2,055 (11,054)
Deferred revenue (4,867)(3,575)
Operating lease liabilities(6,396)(5,905)
Contingent consideration liability(732) 
Other liabilities (1,147)(1,700)
Net cash used in operating activities (201,613)(202,645)
Cash flows from investing activities
Purchase of property and equipment (6,819)(11,846)
Cash paid for purchase of Apton, net of cash acquired(102) 
Purchases of investments (553,748)(307,899)
Sales of investments 595  
Maturities of investments 631,253 355,425 
Net cash provided by investing activities 71,179 35,680 
Cash flows from financing activities
Proceeds from issuance of common stock under equity offerings, net of issuance costs189,200  
Proceeds from issuance of common stock from equity plans14,383 9,983 
Payment of debt issuance costs(7,325) 
Payment of contingent consideration(4,368) 
Notes payable principal payoff(1,397)(1,180)
Net cash provided by financing activities 190,493 8,803 
Net increase (decrease) in cash, cash equivalents, and restricted cash60,059 (158,162)
Cash, cash equivalents, and restricted cash at beginning of period 328,311 465,817 
Cash, cash equivalents, and restricted cash at end of period $388,370 $307,655 
Cash and cash equivalents at end of period 385,648 304,433 
Restricted cash at end of period 2,722 3,222 
Cash, cash equivalents, and restricted cash at end of period $388,370 $307,655 
See accompanying notes to the condensed consolidated financial statements.
6

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
We are a life science technology company that is designing, developing, and manufacturing advanced sequencing solutions that enable scientists and clinical researchers to improve their understanding of the genome and ultimately, resolve genetically complex problems. Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality, and completeness, which include our existing HiFi long-read sequencing technology and our emerging short-read Sequencing by Binding (SBBTM) technology. Our products address solutions across a broad set of applications including human genomics, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Our focus is on providing our customers with advanced sequencing solutions with higher throughput and improved workflows that we believe will enable dramatic advancements in routine healthcare. Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations ("CROs"), pharmaceutical companies, and agricultural companies.
References in this report to “PacBio,” “we,” “us,” the “Company,” and “our” refer to Pacific Biosciences of California, Inc. and its consolidated subsidiaries.
Basis of Presentation and Consolidation
Our unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, as set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. The unaudited condensed consolidated financial statements include the accounts of Pacific Biosciences and our wholly owned subsidiaries. Certain information and footnote disclosures typically included in our audited financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on a consistent basis with the December 31, 2022 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state our financial position, results of operations, comprehensive loss, and cash flows for the period, but are not necessarily indicative of the results to be expected for the entire year or any future periods. All intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
The financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. On an ongoing basis, we evaluate our significant estimates including, but not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the fair value of contingent consideration, the valuation of acquired intangible assets, the fair value of certain equity awards, the useful lives assigned to long-lived assets, the computation of provisions for income taxes, the borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities, the probability associated with variable payments under partnership development agreements, and the valuations related to our convertible senior notes. While the extent of the potential impact of the current macroeconomic conditions on our business is highly uncertain, we considered information available related to assumptions and estimates used to determine the results reported and asset valuations as of September 30, 2023. Actual results could differ materially from these estimates.
Cash, Cash Equivalents, Restricted Cash and Investments
We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash equivalents may be comprised of money market funds, certificates of deposit, commercial paper, corporate bonds and notes, and government agencies’ securities.
7

We classify our investments in debt securities as available-for sale and report the investments at fair value in current assets. We evaluate our available-for-sale investments in unrealized loss positions and assess whether the unrealized loss is credit-related. Unrealized gains and losses that are not credit-related are recognized in accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses, expected credit losses, as well as interest income, on available-for-sale securities are also reported in other income (expense), net. The cost used in the determination of gains and losses of securities sold is based on the specific identification method. The cost of marketable securities is adjusted for the amortization of premiums and discounts to expected maturity. Premium and discount amortization is recorded in other income (expense), net.
Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and U.S. government and agency securities with high credit ratings. We have established guidelines regarding diversification and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield.
Restricted cash includes cash that is not readily available for use in the Company’s operating activities. Restricted cash is primarily comprised of cash pledged under letters of credit.
Concentration and Other Risks
For the three and nine months ended September 30, 2023, no customer exceeded 10% of total revenue during each of the respective periods. For the three and nine months ended September 30, 2022, one customer accounted for approximately 13% and 11% of total revenue during the period.
As of September 30, 2023, 45% of our accounts receivable were from domestic customers, compared to 57% as of December 31, 2022. As of September 30, 2023, no customer represented 10% or greater of our accounts receivable, while one customer represented approximately 10% of our net accounts receivable as of December 31, 2022.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In October 2021, the FASB issued Accounting Standards Update ("ASU") No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU provides specific guidance on how to recognize contract assets and contract liabilities related to revenue contracts with customers acquired in a business combination. This amendment improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. We adopted this ASU on January 1, 2023. The adoption of this guidance did not have a material effect on our consolidated financial statements.
Significant Accounting Policies
There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

NOTE 2. BUSINESS ACQUISITIONS
Apton Biosystems
On August 2, 2023, we acquired Apton Biosystems, Inc. (“Apton”), a California-based genomics company focused on developing a high throughput short-read sequencer using highly differentiated optics and image processing, paired with novel clustering and chemistry (the “Apton acquisition”).
In connection with the Apton acquisition, all outstanding equity securities of Apton were cancelled in exchange for shares of our common stock with a fair value of $76.6 million, cash of $0.2 million, and contingent consideration with a preliminary estimated fair value of $18.5 million. Excluded from consideration transferred was $1.3 million attributable to accelerated share-based compensation expense. The fair value of the 6,121,571 common shares issued was determined based on the closing market price of our common stock on the acquisition date.
8

In connection with the Apton acquisition, contingent consideration of $25.0 million, which we may elect to pay in cash, shares of our common stock or a combination of cash and shares of our common stock, is due upon the achievement of a milestone, defined as the achievement of $50.0 million in revenue associated with Apton's technology, provided that the milestone event occurs prior to the 5-year anniversary of the closing date of the acquisition. At this time, the number of shares, if any, to be issued in connection with the achievement of the specified milestone is not known and will be calculated based on the daily volume-weighted average price of our common stock for the twenty trading days ending on and including the fifth trading day immediately prior to the occurrence of the specified milestone. Upon achievement of the milestone, we may pay cash in lieu of our common stock to ensure that the issuance of our common stock does not exceed 19.9% of our outstanding shares of common stock then outstanding.
The contingent consideration is accounted for as a liability at fair value, with changes during each reporting period recognized in our Consolidated Statements of Operations and Comprehensive Loss. The fair value of the contingent consideration liability is calculated, with the assistance from a third-party valuation firm, using a Monte Carlo Simulation to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate.
We allocated the consideration transferred to the identifiable assets acquired and liabilities assumed based on preliminary estimates of their respective fair values at the date of the completion of the Apton acquisition, and such allocation is subject to adjustment for up to one year after the close of the acquisition as additional information is obtained. The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred, based on the preliminary estimated fair values were as follows (in thousands):
Cash and cash equivalents$97 
In-process research and development53,000 
Goodwill53,869 
Other assets, current153 
Deferred income tax liability(10,920)
Liabilities assumed(2,191)
Total consideration transferred$94,008 
The purchase price allocation is preliminary, primarily due to the pending finalization of the valuation analysis and review of various tax attributes. We continue to collect information regarding certain estimates and assumptions, including potential liabilities and contingencies. We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve months measurement period, if necessary.
We incurred costs related to the Apton acquisition of approximately $9.0 million during the nine months ended September 30, 2023, which are included in merger-related expenses on the Condensed Consolidated Statement of Operations and Comprehensive Loss. Merger-related expenses include $2.8 million relating to a liquidity event bonus plan that was treated as a separate transaction and included the issuance of 168,621 shares of common stock that were issued with a fair value of $2.1 million based on the closing market price of our common stock on the acquisition date. As a result, the total shares issued in connection with the Apton acquisition were 6.3 million shares of common stock.
The excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill. We recognized goodwill of $53.9 million, based on preliminary estimates, which is primarily attributable to the synergies expected to occur from the integration of Apton and is not deductible for income tax purposes. We preliminarily allocated $53.0 million of the purchase price to acquired in-process research and development ("IPR&D"). The fair value of the IPR&D was determined, with the assistance of a third-party valuation firm, using an income approach based on a forecast of expected future cash flows. Expected future cash flows utilize significant assumptions such as assumed revenue growth, discount rate and obsolescence factors.
9

NOTE 3. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy established under GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.
We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.
The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities.
10

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis (in thousands):
September 30, 2023December 31, 2022
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets
Cash and cash equivalents $196,621 $189,027 $ $385,648 $137,636 $187,453 $ $325,089 
Investments:
Commercial paper  16,771  16,771  127,302  127,302 
Corporate debt securities  75,853  75,853  49,491  49,491 
U.S. government & agency securities 289,517  289,517  270,436  270,436 
Total investments  382,141  382,141  447,229  447,229 
Short-term restricted cash300   300 300   300 
Long-term restricted cash2,422   2,422 2,922   2,922 
Total assets measured at fair value $199,343 $571,168 $ $770,511 $140,858 $634,682 $ $775,540 
Liabilities
Contingent consideration$ $ $18,450 $18,450 $ $ $172,094 $172,094 
Total liabilities measured at fair value $ $ $18,450 $18,450 $ $ $172,094 $172,094 
We classify contingent consideration, which was incurred in connection with the acquisition of Apton, within Level 3, as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value. Estimates and assumptions used in the Monte Carlo simulation include risk-adjusted forecasted revenues for products and services leveraging Apton's technology and an estimated credit spread.
On September 20, 2023, we achieved the commercial milestone in connection with the acquisition of Omniome. Consequently, former Omniome securityholders were entitled to receive as milestone consideration, among other things, an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock, representing $95.9 million divided by the volume-weighted average of the trading prices of our common stock for the twenty trading days ending with and including the trading day that was two days immediately prior to the achievement of the milestone. The $95.9 million represents the $100.0 million that was to be paid in shares of our common stock offset by $4.1 million attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction, pursuant to the terms of the Omniome merger agreement.
Following the achievement of the commercial milestone, $5.1 million of the contingent consideration was paid during the three and nine months ended September 30, 2023. Additionally, as the shares payable pursuant to the commercial milestone became fixed, and the contingency was resolved, the value attributable to the shares to be issued of $84.8 million was reclassified to additional paid-in capital on the Condensed Consolidated Balance Sheets. Such shares were issued to the former Omniome securityholders and the remainder of the cash payment was in October 2023. The remaining liability balance attributable to the achievement of the commercial milestone in September 2023 of $96.2 million is included in contingent consideration liability, current, in the Condensed Consolidated Balance Sheets as of September 30, 2023.
As a result of the achievement of the milestone, the contingent consideration liability incurred in connection with the acquisition of Omniome was no longer considered a Level 3 liability at September 30, 2023. There were no other transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis for the nine months ended September 30, 2023, and our valuation techniques did not change compared to the prior year.
Changes in the estimated fair value of the contingent consideration liability for the nine months ended September 30, 2023 were as follows (in thousands):
11

Level 3
Beginning balance as of December 31, 2022$172,094 
Additions18,450 
Change in estimated fair value13,960 
Achievement of milestone$(186,054)
Ending balance as of September 30, 2023$18,450 
Changes to the fair value are recorded as change in fair value of contingent consideration in the Condensed Consolidated Statement of Operations and Comprehensive Loss.


12

The following tables summarize our cash, cash equivalents and investments (in thousands):
As of September 30, 2023
Amortized
Cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
Value
Cash and cash equivalents385,619 29  385,648 
Investments:
Commercial paper 16,771   16,771 
Corporate debt securities 76,161 3 (311)75,853 
U.S. government & agency securities291,078 7 (1,568)289,517 
Total investments 384,010 10 (1,879)382,141 
Total cash, cash equivalents and investments $769,629 $39 $(1,879)$767,789 
Short-term restricted cash$300 $— $— $300 
Long-term restricted cash$2,422 $— $— $2,422 
As of December 31, 2022
Amortized
Cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
Value
Cash and cash equivalents325,144 6 (61)325,089 
Investments:
Commercial paper127,626 9 (333)127,302 
Corporate debt securities49,998  (507)49,491 
U.S. government & agency securities274,315 1 (3,880)270,436 
Total investments451,939 10 (4,720)447,229 
Total cash, cash equivalents and investments$777,083 $16 $(4,781)$772,318 
Short-term restricted cash$300 $— $— $300 
Long-term restricted cash$2,922 $— $— $2,922 

The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of September 30, 2023 (in thousands):
Fair Value
Due in one year or less $498,366 
Due after one year through five years 72,802 
Total$571,168 
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
Investment income included in other income, net on the Condensed Consolidated Statement of Operations and Comprehensive Loss was $9.2 million and $25.0 million for the three and nine months ended September 30, 2023, respectively, and $2.8 million and $4.3 million for the three and nine months ended September 30, 2022, respectively.
13

NOTE 4. BALANCE SHEET COMPONENTS
Inventory, net
Our inventory, net, consisted of the following components (in thousands):
September 30,
2023
December 31,
2022
Purchased materials$23,333 $24,139 
Work in process27,883 14,062 
Finished goods17,040 12,180 
Inventory, net$68,256 $50,381 
Intangible Assets and Goodwill
Intangible assets include acquired in-process research and development ("IPR&D") of $53.0 million as a result of the Apton acquisition in August 2023. The IPR&D will remain on our Consolidated Balance Sheet as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development activities. During the development period following the acquisition, IPR&D will not be amortized, but instead will be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Upon completion of the development, we will begin to amortize the asset over the life of the product or record an impairment charge if the asset is determined to be impaired.
In addition to IPR&D, definite-lived intangible assets included the following (in thousands, except years):
As of September 30, 2023As of December 31, 2022
Estimated
Useful Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Developed technology15$411,179 $(2,341)$408,838 $11,179 $(1,039)$10,140 
Customer relationships2360 (360) 360 (255)105 
Total$411,539 $(2,701)$408,838 $11,539 $(1,294)$10,245 
The developed technology as of September 30, 2023 includes the completed IPR&D from the Omniome acquisition that was completed in September 2023.
The estimated future amortization expense of intangible assets with definite lives is as follows (in thousands):
Remainder of 2023$6,854 
202427,412 
202527,412 
202627,412 
202727,412 
2028 and thereafter292,337 
Total$408,838 
Amortization of intangible assets is included within our cost of revenue if the costs and expenses related to the intangible assets are attributable to revenue generating activities. Amortization expense for intangible assets that are not directly related to sales generating activities are amortized to operating expenses. The definite-lived intangible assets are amortized using the straight-line method over their estimated useful lives.
We review definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.
14

We had goodwill of $463.8 million as of September 30, 2023, which preliminarily increased by $53.9 million, due to the Apton acquisition, of which $10.9 million relates to a deferred income tax liability, as compared to $410.0 million as of December 31, 2022. Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. We performed our annual assessment for goodwill impairment in the second quarter of 2023, noting no impairment.
Deferred Revenue
As of September 30, 2023, we had a total of $27.5 million of deferred revenue, $22.4 million of which was recorded as deferred revenue, current, and primarily relates to future performance obligations under the Amended and Restated Agreement with Invitae Corporation ("Invitae") and deferred service contract revenues. The deferred revenue, non-current balance of $5.1 million primarily relates to future performance obligations under the Amended and Restated Agreement with Invitae and deferred service contract revenues and is scheduled to be recognized in the next 5 years. The deferred revenue, non-current balance includes $3.0 million that was reclassified from deferred revenue, current to deferred revenue, non-current following receipt of a non-cancellable order from Invitae during the nine months ended September 30, 2023 for partial utilization of the available credits, which is expected to be recognized in revenue after 12 months from September 30, 2023. Revenue recorded in the three and nine months ended September 30, 2023 includes $3.7 million and $11.7 million, respectively, that was included in deferred revenue as of December 31, 2022, of which $2.1 million and $4.2 million was included in product revenue recognized from the partial utilization of available credits by Invitae during the three and nine months ended September 30, 2023, respectively. Refer to Note 3 – Invitae Collaboration, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for more information.
Product Warranties
We generally provide a one-year warranty on instruments. In addition, we provide a limited warranty on consumables. At the time revenue is recognized, an accrual is established for estimated warranty costs based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue. There were no material changes in estimates for the periods presented below.
Changes in the reserve for product warranties were as follows for the periods indicated (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Balance at beginning of period$2,862 $1,609 $1,651 $594 
Additions charged to cost of product revenue2,825 779 5,675 2,644 
Repairs and replacements(1,722)(622)(3,361)(1,472)
Balance at end of period$3,965 $1,766 $3,965 $1,766 
Term loans
In connection with the acquisition of Omniome, we acquired $1.3 million in short-term debt and $3.0 million in long-term debt relating to a term loan facility that Omniome obtained in April 2020. Borrowings on the term loan facility were used to fund Omniome’s purchases of equipment, which serves as collateral. Each term loan has a term of 43 months and bears a fixed interest rate of approximately 17% annually. The fee for the elective option to prepay all, but not less than all, of the borrowed amounts at any time after the 24th month and before the 43rd month after the commencement date, is 4% of the outstanding loan balance. Payments are made in equal monthly installments including principal and interest.
As of September 30, 2023, the carrying value of term loans outstanding was $0.9 million, recorded as part of other liabilities, current on the Condensed Consolidated Balance Sheet. The interest expense was $0.1 million and $0.2 million for the three and nine months ended September 30, 2023, which was included as part of interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss.
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The following table presents the future principal payments on the term loans (in thousands):
Remainder of 2023$444 
2024490 
Total$934 

NOTE 5. CONVERTIBLE SENIOR NOTES
2030 Convertible Senior Notes
In June 2023, we entered into a privately negotiated exchange agreement with a holder of our outstanding 1.50% Convertible Senior Notes due 2028 (the “2028 Notes”), pursuant to which we issued $441.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due 2030 (the “2030 Notes”) in exchange for $441.0 million principal amount of the 2028 Notes (the “Exchange Transaction”), pursuant to exemptions from registration under the Securities Act of 1933, as amended, and the rules and regulations thereunder. The 2030 Notes were issued on June 30, 2023.
The 2030 Notes are governed by an indenture (the “2030 Indenture”) between the Company and U.S. Bank Trust Company, National Association, as trustee. The 2030 Notes bear interest at a rate of 1.375% per annum. Interest on the 2030 Notes is payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 2023. The 2030 Notes will mature on December 15, 2030, subject to earlier conversion, redemption or repurchase.
The 2030 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2030 Notes are convertible into shares of our common stock based on an initial conversion rate of 46.5116 shares of common stock per $1,000 principal amount of the 2030 Notes (which is equal to an initial conversion price of $21.50 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2030 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.
On or after June 20, 2028, the 2030 Notes will be redeemable by the Company in the event that the closing sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the redemption notice at a redemption price of 100% of the principal amount of such 2030 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.
Upon the occurrence of a Fundamental Change (as defined in the 2030 Indenture), the holders of the 2030 Notes may require that we repurchase all or part of the principal amount of the 2030 Notes at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date, and all unpaid interest from the fundamental change repurchase date thereon, but excluding, the maturity date.
The 2030 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2030 Notes under the 2030 Indenture. The 2030 Indenture also includes customary covenants for convertible notes of this type.
To the extent we elect, the sole remedy for an event of default relating to our failure to comply with certain of our reporting obligations shall, for the first 360 calendar days after the occurrence of such an event of default, consist exclusively of the right to receive additional interest on the 2030 Notes at a rate equal to (i) 0.25% per annum of the principal amount of the 2030 Notes outstanding for each day during the first 180 calendar days of the 360-day period after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived) and (ii) 0.50% per annum of the principal amount of the 2030 Notes outstanding for each day from, and including, the 181st calendar day to, and including, the 360th 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 361st 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 361st day), the 2030 Notes shall be subject to acceleration as provided for in the 2030 Indenture.
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The 2030 Notes are accounted for in accordance with the authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. Under ASU 2020-06, the guidance requires that debt with an embedded conversion feature is accounted for in its entirety as a liability and no portion of the proceeds from the issuance of the convertible debt instrument is accounted for as attributable to the conversion feature unless the conversion feature is required to be accounted for separately as an embedded derivative or the conversion feature results in a substantial premium. The conversion feature of the 2030 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2030 Notes were not issued at a substantial premium; therefore, the 2030 Notes are accounted for in their entirety as a liability. Because we may elect to settle any conversions entirely in shares, and because settlement in shares is the default settlement method, the liability is classified as non-current.
The requirement to repurchase the 2030 Notes, including unpaid interest to the maturity date in the event of a Fundamental Change, is considered a put option for certain periods requiring bifurcation under ASC 815 – Derivatives and Hedging. However, given the low probability of such a Fundamental Change occurring during the applicable periods, the value of the embedded derivative is immaterial.
The additional interest feature in the event of our failure to comply with certain reporting obligations is also considered an embedded derivative requiring bifurcation under ASC 815. However, due to the nature and terms of the reporting obligations, the value of the embedded derivative is immaterial.
The Exchange Transaction was accounted for as an extinguishment driven by the change in fair value of the embedded conversion option. We recorded a loss on extinguishment of debt of approximately $2.0 million in connection with the Exchange Transaction during the nine months ended September 30, 2023, which represents the difference between the fair value and the principal amount of the 2030 Notes of the debt at the modification date, plus unamortized debt issuance costs of $1.5 million related to the respective portion of the 2028 Notes.
We incurred issuance costs related to the 2030 Notes of approximately $7.3 million, which were recorded as debt issuance costs and are presented as a reduction to the 2030 Notes on our Consolidated Balance Sheets and are amortized to interest expense using the effective interest method over the term of the 2030 Notes, resulting in an effective interest rate of 1.6%. We also paid accrued but unpaid interest of $2.5 million on the 2028 Notes in connection with the Exchange Transaction on June 30, 2023.
We did not receive any cash proceeds from the Exchange Transaction. In exchange for issuing the 2030 Notes pursuant to the Exchange Transaction, we received and cancelled the exchanged 2028 Notes. Following the closing of the Exchange Transaction, $459.0 million in aggregate principal amount of 2028 Notes remained outstanding with terms unchanged.
The net carrying amount of the liability for the 2030 Notes is included as convertible senior notes, net, non-current in the Condensed Consolidated Balance Sheets as follows (in thousands):
September 30,
2023
December 31,
2022
Principal amount$441,000 $ 
Unamortized debt premium542  
Unamortized debt issuance costs(7,093) 
Net carrying amount$434,449 $ 
For the three and nine months ended September 30, 2023 and 2022, interest expense for the 2030 Notes was as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Contractual interest expense$1,516 $ $1,516 $ 
Amortization of debt issuance costs229  229  
Total interest expense$1,745 $ $1,745 $ 

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As of September 30, 2023, the estimated fair value (Level 2) of the 2030 Notes was $356.6 million. The fair value of the 2030 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.
2028 Convertible Senior Notes
On February 9, 2021, we entered into an investment agreement (the “Investment Agreement”) with SB Northstar LP (the “Purchaser”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to the Purchaser of $900.0 million in aggregate principal amount of the 2028 Notes. The 2028 Notes were issued on February 16, 2021. As discussed above, in June 2023 we completed an exchange of $441.0 million in aggregate principal amount of our 2028 Notes for $441.0 million aggregate principal amount of the 2030 Notes, leaving approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding.
The 2028 Notes are governed by an indenture (the “2028 Indenture”) between the Company and U.S. Bank National Association, as trustee. The 2028 Notes bear interest at a rate of 1.50% per annum. Interest on the 2028 Notes is payable semi-annually in arrears on February 15 and August 15 and commenced on August 15, 2021. The 2028 Notes will mature on February 15, 2028, subject to earlier conversion, redemption or repurchase.
The 2028 Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2028 Notes are convertible into shares of our common stock based on an initial conversion rate of 22.9885 shares of common stock per $1,000 principal amount of the 2028 Notes (which is equal to an initial conversion price of $43.50 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2028 Notes, we may elect to settle such conversion obligation in shares of our common stock, cash or a combination of shares of our common stock and cash.
On or after February 20, 2026, the 2028 Notes will be redeemable by the Company in the event that the closing sale price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the redemption notice at a redemption price of 100% of the principal amount of such 2028 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.
Upon the occurrence of a Fundamental Change (as defined in the 2028 Indenture), the holders of the 2028 Notes may require that we repurchase all or part of the principal amount of the 2028 Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date.
The 2028 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2028 Notes under the 2028 Indenture. The 2028 Indenture also includes customary covenants for convertible notes of this type.
To the extent we elect, the sole remedy for an event of default relating to our failure to comply with certain of our reporting obligations shall, for the first 360 calendar days after the occurrence of such an event of default, consist exclusively of the right to receive additional interest on the 2028 Notes at a rate equal to (i) 0.25% per annum of the principal amount of the 2028 Notes outstanding for each day during the first 180 calendar days of the 360-day period after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived) and (ii) 0.50% per annum of the principal amount of the 2028 Notes outstanding for each day from, and including, the 181st calendar day to, and including, the 360th 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 361st 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 361st 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.
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Because we may elect to settle any conversions entirely in shares, and because settlement in shares is the default settlement method, the liability is classified as non-current.
The requirement to repurchase the 2028 Notes, including unpaid interest to the maturity date in the event of a Fundamental Change, is considered a put option for certain periods requiring bifurcation under ASC 815 – Derivatives and Hedging. However, given the low probability of such a Fundamental Change occurring during the applicable periods, the value of the embedded derivative is immaterial.
The additional interest feature in the event of our failure to comply with certain reporting obligations is also considered an embedded derivative requiring bifurcation under ASC 815. However, due to the nature and terms of the reporting obligations, the value of the embedded derivative is immaterial.
We incurred issuance costs related to the 2028 Notes of approximately $4.5 million, which were recorded as debt issuance costs and are presented as a reduction to the 2028 Notes on our Consolidated Balance Sheets and are amortized to interest expense using the effective interest method over the term of the 2028 Notes, resulting in an effective interest rate of 1.6%.
The net carrying amount of the liability for the 2028 Notes is included as convertible senior notes, net, non-current in the Condensed Consolidated Balance Sheets as follows (in thousands):
September 30,
2023
December 31,
2022
Principal amount$459,000 $900,000 
Unamortized debt issuance costs(1,453)(3,317)
Net carrying amount$457,547 $896,683 
For the three and nine months ended September 30, 2023 and 2022, interest expense for the 2028 Notes was as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Contractual interest expense$1,721 $3,375 $8,415 $10,125 
Amortization of debt issuance costs80 154 392 462 
Total interest expense$1,801 $3,529 $8,807 $10,587 
As of September 30, 2023, the estimated fair value (Level 2) of the 2028 Notes was $358.6 million. The fair value of the 2028 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements, primarily relating to our corporate offices. See Note 8 – Commitments and Contingencies, subsection titled “Leases”, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for information regarding the Company’s maturity of lease liabilities under its lease agreements.
Contingencies
We may become involved in legal proceedings, claims and assessments from time to time in the ordinary course of business. We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
We do not believe that the ultimate outcome of any such pending matters is probable or reasonably estimable, or that these matters will have a material adverse effect on our business; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of litigation and settlement costs, diversion of management resources, and other factors.
Please see subsection titled Legal Proceedings, in Part II, Item 1 of this Quarterly Report on Form 10-Q.
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Indemnification
Pursuant to Delaware law and agreements entered into with each of our directors and officers, we may have obligations, under certain circumstances, to hold harmless and indemnify each of our directors and officers against losses suffered or incurred by the indemnified party in connection with their service to us, and judgements, fines, settlements and expenses related to claims arising against such directors and officers to the fullest extent permitted under Delaware law, our bylaws and our certificate of incorporation. We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between such third parties and us in connection with such fundraising efforts. To the extent that any such indemnification obligations apply to the lawsuits described above, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification obligations has been recorded as of September 30, 2023 and December 31, 2022.
NOTE 7. STOCKHOLDERS’ EQUITY
Underwritten Public Equity Offering
In January 2023, we entered into an underwriting agreement, relating to the public offering of 17.5 million shares of our common stock, $0.001 par value per share, at a price to the public of $10.00 per share. Under the terms of the underwriting agreement, we also granted the underwriters a 30-day option to purchase up to an additional 2.6 million shares of our common stock, which was subsequently exercised in full, and the offering, including the sale of shares of common stock subject to the underwriters' option, closed in January 2023. In total, we sold 20.1 million shares of our common stock. We paid a commission equal to 5.75% of the gross proceeds from the sale of shares of our common stock. The total net proceeds to us from the offering after deducting the underwriting discount were approximately $189.7 million, excluding approximately $0.5 million of offering expenses.
Refer to Note 10 – Stockholders' Equity, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for more information on the Company's underwritten public equity offerings and private placement of common stock.
Equity Plans
As of September 30, 2023, the Company had share-based compensation awards outstanding under the 2020 Equity Incentive Plan (the “2020 Plan”), the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”), the 2021 adopted Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”) and the 2010 Employee Stock Purchase Plan, from which we issued equity awards and employee stock.
As of September 30, 2023, we had 12.3 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan. Shares remaining and available for future issuance reflect shares that may become eligible to vest upon the achievement of maximum targets for certain equity awards.
Refer to Note 10 – Stockholders' Equity, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2022 for more information on the Company's equity plans.
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Stock Options
Time-based Stock Options
The following table summarizes stock option activity for time-based awards (shares in thousands):
Number
of shares
Weighted
average
exercise price
Outstanding at December 31, 202214,618$10.60 
Granted 33212.11 
Exercised (929)4.70 
Canceled (810)18.05 
Outstanding at September 30, 202313,211$10.60 
Performance-based Stock Options
The following table summarizes stock option activity for performance-based awards (shares in thousands):
Number
of shares
Weighted
average
exercise price
Outstanding at December 31, 2022258$4.71 
Granted  
Exercised (251)4.71 
Canceled (4)4.71 
Outstanding at September 30, 20233$4.74 
Restricted Stock Units (“RSU”) and Performance Stock Units ("PSU")
We issue RSUs for which the respective shares vest when the requisite service period is achieved. We issue PSUs for which the number of shares issuable in the third year of the performance period based on performance relative to specified revenue targets and continued employment through the vesting period. Maximum achievement of the revenue goal under the PSUs will result in up to 200% of the target number of shares subject to the PSUs to become eligible to vest, while not meeting the minimum achievement of the revenue goal under the PSUs will result in no shares subject to the PSUs becoming eligible to vest. The following table summarizes the time-based RSUs and PSUs activity (shares in thousands):
Restricted Stock Units (RSU)Performance Stock Units (PSU)Weighted average grant date
fair value
RSUPSU
Outstanding at December 31, 20228,535 $15.16 $ 
Granted6,9705649.71 9.43 
Vested(2,538) 14.19  
Forfeited(1,008)(23)14.73 9.43 
Outstanding at September 30, 202311,959541$12.23 $9.43 
Employee Stock Purchase Plan (“ESPP”)
Shares issued under our ESPP were 1,735,058 and 1,878,168 during the nine months ended September 30, 2023 and 2022, respectively. In February 2023, an additional 4.0 million shares were reserved under the ESPP. As of September 30, 2023, 12.2 million shares of our common stock remain available for issuance under our ESPP.
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Share-Based Compensation
The following table summarizes share-based compensation expense (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Cost of revenue$1,125 $934 $4,251 $3,680 
Research and development 6,182 7,519 18,310 24,232 
Sales, general and administrative12,384 10,483 32,973 32,746 
Total share-based compensation expense$19,691 $18,936 $55,534 $60,658 
Determining Fair Value
We estimate the fair value of stock options granted using the Black-Scholes valuation method and a single option award approach. When determining the current share prices underlying the stock options for calculating the grant-date fair value, we reference the observable market prices of our stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair market value of RSUs and PSUs granted is the closing price of our shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting period. For shares purchased under our ESPP, we estimate the grant-date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. We estimate forfeitures of stock options, RSUs and shares purchased under our ESPP which is utilized to determine the compensation expense to be recorded over the requisite service period.
Expected Term - The expected term used in the Black-Scholes valuation method represents the period that the stock options are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock options and vesting schedules.
Expected Volatility - The expected volatility used in the Black-Scholes valuation method is derived from the implied volatility related to our share price over the expected term.
Expected Dividend - We have never paid dividends on our shares and, accordingly, the dividend yield percentage is zero for all periods.
Risk-Free Interest Rate - The risk-free interest rate used in the Black-Scholes valuation method is the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected terms.
The fair value of employee stock options was estimated using the following assumptions:
Nine Months Ended September 30,
20232022
Expected term in years4.94.6
Expected volatility 78%
70% — 76%
Risk-free interest rate
 3.73% - 4.21%
0.41% — 3.66%
Dividend yield
Weighted average grant date fair value per share$7.89$5.93

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The fair value of shares to be issued under the ESPP was estimated using the following assumptions:
Nine Months Ended September 30,
20232022
Expected term in years
0.52.0
0.52.0
Expected volatility
79% — 97%
70% — 97%
Risk-free interest rate
4.87% — 5.47%
0.60% — 3.51%
Dividend yield
Weighted average grant date fair value per share$5.34$4.28

NOTE 8. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and potential shares assuming the dilutive effect of the convertible senior notes, using the if-converted method, and outstanding equity awards using the treasury stock method.
The following table presents the calculation of the basic and diluted net loss per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Numerator:
Net loss$(66,869)$(76,971)$(224,717)$(229,864)
Denominator:
Basic
Weighted average shares used in computing basic net loss255,001225,123249,082223,981
Basic net loss per share$(0.26)$(0.34)$(0.90)$(1.03)
Diluted
Weighted average shares used in computing diluted net loss per share255,001225,123249,082223,981
Diluted net loss per share$(0.26)$(0.34)$(0.90)$(1.03)
The following shares issuable upon conversion of the convertible senior notes and outstanding equity awards were excluded from the computation of diluted net loss per share for the periods presented because the effect of including such shares would have been antidilutive (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Shares issuable upon conversion of convertible senior notes31,06320,69031,06320,690
Equity Awards28,10028,08728,10028,087


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NOTE 9. REVENUE
A summary of our revenue by geographic location is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Americas$28,978 $16,743 $71,480 $57,547 
Europe, Middle East and Africa10,994 5,997 29,594 17,432 
Asia-Pacific15,719 9,571 41,090 25,972 
Total $55,691 $32,311 $142,164 $100,951 
A summary of our revenue by category is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Instrument revenue$34,694 $11,442 $85,317 $42,611 
Consumable revenue16,868 16,067 44,554 43,317 
Product revenue51,562 27,509 129,871 85,928 
Service and other revenue4,129 4,802 12,293 15,023 
Total revenue$55,691 $32,311 $142,164 $100,951 


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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 RevioTM 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
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Progress development of ultra-high-throughput and benchtop long-read sequencers and next generation SBBTM 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 OnsoTM, 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 SMRTTM 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.

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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.

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Results of Operations
Comparison of the Three Months Ended September 30, 2023 and 2022

(in thousands, except percentages)Three Months Ended September 30,
20232022