FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2023

Investments, All Other Investments [Abstract]

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis (in thousands):


	September 30, 2023								December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	196,621	$	189,027	$	—	$	385,648	$	137,636	$	187,453	$	—	$	325,089
Investments:
Commercial paper	—		16,771		—		16,771		—		127,302		—		127,302
Corporate debt securities	—		75,853		—		75,853		—		49,491		—		49,491
U.S. government & agency securities	—		289,517		—		289,517		—		270,436		—		270,436
Total investments	—		382,141		—		382,141		—		447,229		—		447,229

Short-term restricted cash	300		—		—		300		300		—		—		300
Long-term restricted cash	2,422		—		—		2,422		2,922		—		—		2,922
Total assets measured at fair value	$	199,343	$	571,168	$	—	$	770,511	$	140,858	$	634,682	$	—	$	775,540

Liabilities
Contingent consideration	$	—	$	—	$	18,450	$	18,450	$	—	$	—	$	172,094	$	172,094
Total liabilities measured at fair value	$	—	$	—	$	18,450	$	18,450	$	—	$	—	$	172,094	$	172,094

We classify contingent consideration, which was incurred in connection with the acquisition of Apton, within Level 3, as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value. Estimates and assumptions used in the Monte Carlo simulation include risk-adjusted forecasted revenues for products and services leveraging Apton's technology and an estimated credit spread.

On September 20, 2023, we achieved the commercial milestone in connection with the acquisition of Omniome. Consequently, former Omniome securityholders were entitled to receive as milestone consideration, among other things, an aggregate of approximately $100.9 million in cash and approximately 9.0 million shares of our common stock, representing $95.9 million divided by the volume-weighted average of the trading prices of our common stock for the twenty trading days ending with and including the trading day that was two days immediately prior to the achievement of the milestone. The $95.9 million represents the $100.0 million that was to be paid in shares of our common stock offset by $4.1 million attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction, pursuant to the terms of the Omniome merger agreement.

Following the achievement of the commercial milestone, $5.1 million of the contingent consideration was paid during the three and nine months ended September 30, 2023. Additionally, as the shares payable pursuant to the commercial milestone became fixed, and the contingency was resolved, the value attributable to the shares to be issued of $84.8 million was reclassified to additional paid-in capital on the Condensed Consolidated Balance Sheets. Such shares were issued to the former Omniome securityholders and the remainder of the cash payment was in October 2023. The remaining liability balance attributable to the achievement of the commercial milestone in September 2023 of $96.2 million is included in contingent consideration liability, current, in the Condensed Consolidated Balance Sheets as of September 30, 2023.

As a result of the achievement of the milestone, the contingent consideration liability incurred in connection with the acquisition of Omniome was no longer considered a Level 3 liability at September 30, 2023. There were no other transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis for the nine months ended September 30, 2023, and our valuation techniques did not change compared to the prior year.

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


	Level 3
Beginning balance as of December 31, 2022	$	172,094
Additions	18,450
Change in estimated fair value	13,960
Achievement of milestone	$	(186,054)
Ending balance as of September 30, 2023	$	18,450

Changes to the fair value are recorded as change in fair value of contingent consideration in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

The following tables summarize our cash, cash equivalents and investments (in thousands):


	As of September 30, 2023
	Amortized Cost		Gross unrealized gains		Gross unrealized losses		Fair Value

Cash and cash equivalents	385,619		29		—		385,648
Investments:
Commercial paper	16,771		—		—		16,771
Corporate debt securities	76,161		3		(311)		75,853
U.S. government & agency securities	291,078		7		(1,568)		289,517
Total investments	384,010		10		(1,879)		382,141
Total cash, cash equivalents and investments	$	769,629	$	39	$	(1,879)	$	767,789

Short-term restricted cash	$	300	$	—	$	—	$	300
Long-term restricted cash	$	2,422	$	—	$	—	$	2,422


	As of December 31, 2022
	Amortized Cost		Gross unrealized gains		Gross unrealized losses		Fair Value

Cash and cash equivalents	325,144		6		(61)		325,089
Investments:
Commercial paper	127,626		9		(333)		127,302
Corporate debt securities	49,998		—		(507)		49,491
U.S. government & agency securities	274,315		1		(3,880)		270,436
Total investments	451,939		10		(4,720)		447,229
Total cash, cash equivalents and investments	$	777,083	$	16	$	(4,781)	$	772,318

Short-term restricted cash	$	300	$	—	$	—	$	300
Long-term restricted cash	$	2,922	$	—	$	—	$	2,922

The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of September 30, 2023 (in thousands):


	Fair Value
Due in one year or less	$	498,366
Due after one year through five years	72,802
Total	$	571,168

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

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