PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-Q

Item 1. Financial Statements PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Balance Sheets (Unaudited) September 30, December 31, (in thousands, except per share amounts) 2021 2020 Assets Current assets Cash and cash equivalents $ 425,388 $ 81,611 Investments 654,502 237,203 Accounts receivable 23,946 16,837 Inventory 18,276 14,230 Prepaid expenses and other current assets 7,193 4,870 Short-term restricted cash 500 836 Total current assets 1,129,805 355,587 Property and equipment, net 31,119 24,899 Operating lease right-of-use assets, net 45,862 29,951 Long-term restricted cash 4,560 3,500 Intangible assets, net 411,206 — Goodwill 411,533 — Other long-term assets 70 43 Total assets $ 2,034,155 $ 413,980 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 4,960 $ 3,579 Accrued expenses 30,820 17,350 Deferred revenue, current 9,773 8,722 Operating lease liabilities, current 7,128 4,332 Other liabilities, current 2,927 4,519 Total current liabilities 55,608 38,502 Deferred revenue, non-current 18,447 1,568 Contingent consideration liability, non-current 168,574 — Operating lease liabilities, non-current 49,954 37,667 Convertible senior notes, net, non-current 895,915 — Other liabilities, non-current 4,850 752 Total liabilities 1,193,348 78,489 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 220,547 shares and 192,294 shares at September 30, 2021 and December 31, 2020, respectively 221 192 Additional paid-in capital 1,989,322 1,372,083 Accumulated other comprehensive income 27 85 Accumulated deficit ( 1,148,763 ) ( 1,036,869 ) Total stockholders’ equity 840,807 335,491 Total liabilities and stockholders’ equity $ 2,034,155 $ 413,980 See accompanying notes to the condensed consolidated financial statements. 4 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2021 2020 2021 2020 Revenue: Product revenue $ 30,502 $ 15,749 $ 82,338 $ 41,798 Service and other revenue 4,385 3,333 12,156 9,959 Total revenue 34,887 19,082 94,494 51,757 Cost of revenue: Cost of product revenue 15,530 9,228 41,449 22,874 Cost of service and other revenue 3,870 2,790 10,828 7,718 Amortization of intangible assets 123 — 123 — Total cost of revenue 19,523 12,018 52,400 30,592 Gross profit 15,364 7,064 42,094 21,165 Operating expense: Research and development 27,508 16,467 70,323 46,727 Sales, general and administrative 31,606 14,772 86,804 54,846 Merger-related expenses 30,726 — 30,726 — Total operating expense 89,840 31,239 187,853 101,573 Operating loss ( 74,476 ) ( 24,175 ) ( 145,759 ) ( 80,408 ) Gain (loss) from Continuation Advances — — ( 52,000 ) 34,000 Interest expense ( 3,673 ) — ( 9,051 ) ( 267 ) Other income (expense), net ( 133 ) 467 92 1,143 Loss before benefit from income taxes ( 78,282 ) ( 23,708 ) ( 206,718 ) ( 45,532 ) Benefit from income taxes ( 94,824 ) — ( 94,824 ) — Net income (loss) 16,542 ( 23,708 ) ( 111,894 ) ( 45,532 ) Other comprehensive income (loss): Unrealized income (loss) on investments 33 ( 125 ) ( 58 ) 113 Comprehensive income (loss) $ 16,575 $ ( 23,833 ) $ ( 111,952 ) $ ( 45,419 ) Net income (loss) per share: Basic $ 0.08 $ ( 0.14 ) $ ( 0.56 ) $ ( 0.29 ) Diluted $ 0.08 $ ( 0.14 ) $ ( 0.56 ) $ ( 0.29 ) Weighted average shares outstanding used in computing net income (loss) per share Basic 202,194 166,862 198,545 158,195 Diluted 215,127 166,862 198,545 158,195 See accompanying notes to the condensed consolidated financial statements. ‎ 5 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Stockholders ’ Equity (Unaudited) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholders' (in thousands) Shares Amount Capital Income (Loss) Deficit Equity For the three months ended September 30, 2021 Balance at June 30, 2021 198,917 $ 199 $ 1,423,357 $ ( 6 ) $ ( 1,165,305 ) $ 258,245 Net income — — — — 16,542 16,542 Other comprehensive income — — — 33 — 33 Issuance of common stock in conjunction with equity plans 1,503 2 4,809 — — 4,811 Issuance of common stock in Private Placement, net of issuance costs 11,215 11 294,834 — — 294,845 Issuance of common stock in acquisition of Omniome 8,912 9 237,875 — — 237,884 Stock-based compensation expense — — 28,447 — — 28,447 Balance at September 30, 2021 220,547 $ 221 $ 1,989,322 $ 27 $ ( 1,148,763 ) $ 840,807 For the three months ended September 30, 2020 Balance at June 30, 2020 154,318 $ 154 $ 1,129,091 $ 243 $ ( 1,088,096 ) $ 41,392 Net loss — — — — ( 23,708 ) ( 23,708 ) Other comprehensive loss — — — ( 125 ) — ( 125 ) Issuance of common stock in conjunction with equity plans 3,274 3 13,344 — — 13,347 Issuance of common stock from underwritten public equity offering, net of issuance costs 22,345 23 93,575 — — 93,598 Stock-based compensation expense — — 4,992 — — 4,992 Balance at September 30, 2020 179,937 $ 180 $ 1,241,002 $ 118 $ ( 1,111,804 ) $ 129,496 For the nine months ended September 30, 2021 Balance at December 31, 2020 192,294 $ 192 $ 1,372,083 $ 85 $ ( 1,036,869 ) $ 335,491 Net loss — — — — ( 111,894 ) ( 111,894 ) Other comprehensive loss — — — ( 58 ) — ( 58 ) Issuance of common stock in conjunction with equity plans 8,126 9 30,113 — — 30,122 Issuance of common stock in Private Placement, net of issuance costs 11,215 11 294,834 — — 294,845 Issuance of common stock in acquisition of Omniome 8,912 9 237,875 — — 237,884 Stock-based compensation expense — — 54,417 — — 54,417 Balance at September 30, 2021 220,547 $ 221 $ 1,989,322 $ 27 $ ( 1,148,763 ) $ 840,807 For the nine months ended September 30, 2020 Balance at December 31, 2019 153,119 $ 153 $ 1,120,999 $ 5 $ ( 1,066,240 ) $ 54,917 Net loss — — — — ( 45,532 ) ( 45,532 ) Other comprehensive income — — — 113 — 113 Adoption effect of Topic 326 — — — — ( 32 ) ( 32 ) Issuance of common stock in conjunction with equity plans 4,473 4 14,170 — — 14,174 Issuance of common stock from underwritten public equity offering, net of issuance costs 22,345 23 93,575 — — 93,598 Stock-based compensation expense — — 12,258 — — 12,258 Balance at September 30, 2020 179,937 $ 180 $ 1,241,002 $ 118 $ ( 1,111,804 ) $ 129,496 See accompanying notes to the condensed consolidated financial statements 6 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (in thousands) 2021 2020 Cash flows from operating activities Net loss $ ( 111,894 ) $ ( 45,532 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Loss (gain) from Continuation Advances 52,000 ( 34,000 ) Depreciation 4,943 4,827 Amortization of intangible assets 154 — Amortization of operating lease right-of-use assets 2,403 2,127 Amortization of debt discount and financing costs 381 129 Stock-based compensation 54,417 12,258 Amortization (accretion) from investment premium (discount) 3,107 ( 141 ) Deferred income taxes ( 94,824 ) — Changes in assets and liabilities Accounts receivable ( 6,871 ) 3,428 Inventory ( 5,453 ) ( 2,988 ) Prepaid expenses and other assets ( 1 ) 216 Accounts payable 196 ( 2,955 ) Accrued expenses 10,267 1,646 Deferred revenue 17,930 ( 818 ) Operating lease liabilities ( 3,231 ) ( 2,791 ) Other liabilities ( 2,996 ) 360 Deferred gain from Reverse Termination Fee — 98,000 Net cash provided by (used in) operating activities ( 79,472 ) 33,766 Cash flows from investing activities Purchase of property and equipment ( 3,089 ) ( 972 ) Cash paid for purchase of Circulomics, net of cash acquired ( 28,560 ) — Cash paid for purchase of Omniome, net of cash acquired ( 291,233 ) — Purchase of investments ( 857,421 ) ( 234,555 ) Sales of investments 212,734 — Maturities of investments 223,285 114,700 Net cash used in investing activities ( 744,284 ) ( 120,827 ) Cash flows from financing activities Continuation Advances ( 52,000 ) 34,000 Notes payable principal payoff — ( 16,000 ) Proceeds from issuance of Convertible Senior Notes, net of issuance costs 895,536 — Proceeds from issuance of common stock under equity offerings, net of issuance costs 294,846 93,788 Proceeds from issuance of common stock from equity plans 30,121 14,174 Other ( 246 ) — Net cash provided by financing activities 1,168,257 125,962 Net increase in cash and cash equivalents and restricted cash 344,501 38,901 Cash and cash equivalents and restricted cash at beginning of period 85,947 33,627 Cash and cash equivalents and restricted cash at end of period $ 430,448 $ 72,528 Cash and cash equivalents at end of period $ 425,388 $ 69,028 Restricted cash at end of period 5,060 3,500 Cash and cash equivalents and restricted cash at end of period $ 430,448 $ 72,528 Supplemental disclosure of non-cash investing and financing activities Issuance of common stock in acquisition of Omniome $ 237,884 $ — See accompanying notes to the condensed consolidated financial statements. 7 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1. OVERVIEW We design, develop and manufacture sequencing systems to help scientists and clinical researchers resolve genetically complex problems. Our products address several applications based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, including human germline sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Across these applications, customers use our technology in a wide range of sequencing methods, including whole genome sequencing and de novo genome assembly, long-range phasing, targeted sequencing, full-length RNA and single-cell sequencing, methylation and epigenetic characterization, and others. Our technology provides high accuracy, long reads, uniform coverage, and the ability to detect epigenetic changes simultaneously. PacBio® sequencing systems, including consumables and software, offer a simple and fast end-to-end workflow for SMRT sequencing. In addition to our SMRT sequencing technology, we are developing a highly accurate short-read sequencing platform based on the novel Sequencing by Binding (SBB®) technology. Upon launch, we expect SBB to address adjacent applications and complement our existing long-read sequencing technology. References in this report to “PacBio,” “we,” “us,” the “Company,” and “our” refer to Pacific Biosciences of California, Inc. and its consolidated subsidiaries. NOTE 2. BUSINESS ACQUISITIONS Omniome, Inc. On September 20, 2021, we completed our acquisition of Omniome, Inc. (“Omniome”), a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy. In connection with the acquisition, all outstanding equity securities of Omniome were cancelled in exchange for consideration of $ 714.8 million, which consisted of approximately $ 315.7 million in cash, 8,911,580 shares of our common stock with a fair value of $ 249.4 million and contingent consideration with a fair value of $ 168.6 million. The fair value of the 8,911,580 common shares issued was determined based on the closing market price of PacBio’s common shares on the acquisition date. Out of the total consideration, approximately $ 18.9 million, comprised of $ 7.4 million of cash, 226,811 shares of our common stock with a fair value of $ 6.3 million, and $ 5.2 million related to contingent consideration, was accounted for as a one-time post acquisition stock-based compensation expense. This stock-based compensation expense was due to accelerated vesting of Omniome stock awards in connection with the acquisition. The contingent consideration of $ 200 million (composed of $ 100 million in cash and $ 100 million in shares of our common stock) is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of a nucleotide sequencing platform, comprising both an instrument and related consumables, that utilizes Omniome’s sequencing by binding technology. The number of shares of stock to be issued will be determined using 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 is two days immediately prior to the achievement of the milestone. Of the $100 million in shares of our common stock to be issued as part of the milestone, $ 4.1 million is attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction. The total consideration transferred for the acquisition is as follows (in thousands): Total cash paid $ 315,703 Fair value of share consideration 249,435 Fair value of contingent consideration 168,574 Less: Stock-based compensation expense excluded from consideration transferred ( 18,923 ) Total consideration transferred $ 714,789 8 Table of Contents 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 income (loss). The fair value of the contingent consideration liability is based on a scenario-based method which considers a range of possible outcomes and their assigned probabilities of occurrence. The potential outcomes are discounted to present value at a discount rate equal to the sum of the term-matched risk-free-interest rate plus PacBio’s credit spread. 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. 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 $ 15,338 Property and equipment, net 6,123 Operating lease right-of-use assets, net 18,095 In-process research and development ("IPR&D") 400,000 Goodwill 392,224 Other assets 3,203 Deferred income tax liability ( 93,373 ) Liabilities assumed ( 26,821 ) Total consideration transferred $ 714,789 The purchase price allocation is preliminary. We continue to collect information with regard to 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. The goodwill recognized was primarily attributable to the assembled workforce and synergies that are expected to occur from the integration of Omniome and is not deductible for income tax purposes. We have allocated $ 400 million of the purchase price to acquired in-process research and development. 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. 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. We incurred costs related to the Omniome acquisition of approximately $ 11.6 million during the nine months ended September 30, 2021, which are included in merger-related costs on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). Separately, in connection with the Omniome acquisition, on September 20, 2021, we issued and sold 11,214,953 shares of common stock in a private placement transaction at a price of $ 26.75 per share, for aggregate proceeds of approximately $ 294.8 million, net of issuance costs of approximately $ 5.2 million. We were also required to register the private placement shares for resale with the SEC following the closing of the merger. The following unaudited pro forma financial information presents combined results of operations for each of the periods presented as if Omniome had been acquired as of the beginning of the comparable fiscal year prior to the year of acquisition, giving effect on a pro forma basis to the purchase accounting adjustments such as $ 11.6 million of PacBio acquisition-related costs, $ 18.9 million of stock-based compensation expense related to acceleration of certain Omniome stock options not attributable to pre-combination service, and a $ 92.2 million one-time income tax benefit from the reduction of our deferred tax asset valuation allowance resulting from the Omniome acquisition, as well as a pro forma adjustment to reflect $ 16.7 million of Omniome’s acquisition-related costs. The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of the consolidated results of the combined business had the acquisition actually occurred at the beginning of the fiscal year 2020 or the results of future operations of the combined business. 9 Table of Contents The following table summarizes the unaudited pro forma financial information for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2021 2020 2021 2020 Pro forma total revenue $ 34,887 $ 19,082 $ 94,494 $ 51,757 Pro forma net loss $ ( 54,802 ) $ ( 38,473 ) $ ( 213,715 ) $ ( 42,892 ) Pro forma net loss per share - basic and diluted $ ( 0.25 ) $ ( 0.21 ) $ ( 0.97 ) $ ( 0.24 ) Our condensed consolidated financial statements include the results of operations for Omniome beginning September 20, 2021. Since the date of acquisition, revenues of $ 0 and a net loss of $ 1.6 million from the acquired Omniome business have been included in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2021. Circulomics, Inc. On July 20, 2021, we acquired Circulomics Inc. (“Circulomics”), a Maryland-based biotechnology company focused on delivering highly differentiated sample preparation products that enable genomic workflows. We paid $ 29.5 million in cash in exchange for all outstanding shares of common stock of Circulomics. We allocated the consideration transferred to the identifiable assets acquired and liabilities assumed based on their respective fair values at the date of the completion of the acquisition. 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 $ 987 Property and equipment, net 214 Intangible assets 11,360 Goodwill 19,309 Other assets 467 Deferred income tax liability ( 2,672 ) Liabilities assumed ( 118 ) Total consideration transferred $ 29,547 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 $ 19.3 million, which is primarily attributable to the synergies expected from capabilities in extraction and sample preparation and is not deductible for income tax purposes. We recorded $ 11.4 million for the fair value of acquired intangible assets, which consist of developed technology and customer relationships. The purchase price allocation is preliminary as we continue to collect information with regard to certain estimates and assumptions. We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve month measurement period, if necessary. Deferred income taxes A benefit for income taxes of $ 94.8 million for the three and nine months ended September 30, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not utilize our deferred tax assets. NOTE 3. INVITAE COLLABORATION On January 12, 2021 we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae Corporation (“Invitae”). Pursuant to the Development Agreement, Invitae is providing certain funding to us to develop products relating to production-scale high-throughput sequencing (“Program Products”). If and when Program Products become commercially available for sale, Invitae may purchase the Program Products. In addition to selling the Program Products to Invitae, we will have the right to broadly commercialize Program Products for sale to other customers. The funding Invitae will provide to us will equal certain development costs we incur in connection with the Program Products (“Program Development Costs”). Under the Development Agreement, we will be responsible for conducting a program to develop the Program Products, and subsequently for manufacturing the Program Products. We will make general 10 Table of Contents decisions regarding the development program jointly with Invitae but we are responsible for all research and development activities. The entire development program is expected to last approximately sixty months , but may be shorter or longer. As the primary benefit of its contribution, Invitae will be entitled to preferred pricing on the Program Products if and when they are available for commercial sale. Each Program Product will have a preferential pricing period, which will not exceed four years from the date of the first delivery of that Program Product (“Preferential Pricing Period”). During the Preferential Pricing Period for each Program Product, Invitae may purchase the Program Product at a substantially reduced margin until it has recouped a multiple of its contribution as defined in the Development Agreement. For a specified period after the end of the Preferential Pricing Period, Invitae has the right to purchase the Program Product at a higher price, determined by a formula, than the price during the Preferential Pricing Period (“Extended Pricing Period”). The Extended Pricing Periods will terminate early if Invitae does not meet certain volume minimums. We and Invitae may terminate the Development Agreement if the other party remains in material breach of the Development Agreement following a cure period to remedy the material breach. In addition, the Development Agreement includes certain other circumstances for termination by each party, including circumstances where Invitae may terminate for delays, IP concerns, our change in control, or without cause. In certain termination circumstances, (i) we will be obligated to refund all or a portion of the development costs advanced by Invitae and/or (ii) we will owe Invitae a share of the revenue that may be generated from the sale of the Program Products to third parties if and when they are commercialized, until such time as Invitae has recouped the amounts reimbursed to us, and in certain circumstances, a mutually agreed return. We expect to incur significant development costs over the duration of the Development Agreement. There can be no assurances that the development program will be successful or that the Program Products will become ready for commercial sale. We determined that the primary benefit from the arrangement to Invitae is the ability to procure the Program Products during the Preferential Pricing Period at substantial discounts. As we expect the Program Products to be available for Invitae to purchase in the future, we concluded the arrangement is within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. In addition, Invitae is not expected to substantially benefit from the intellectual property developed under the arrangement, or benefit from other goods or services during the development period. We are responsible for performing the research and development activities. Accordingly, the amounts received by the Company from Invitae during the development period represent significant discounts toward future supplies of the Program Products during the Preferential Pricing Period, and will be accounted as material rights in accordance with ASC Topic 606 . Proportionate amounts of t hese material rights will be recognized in revenue when Invitae places purchase orders for Program Products and the associated goods or services are delivered to Invitae. To the extent the discounts are not expected to be used, they will be recognized consistent with the guidance in Topic 606 relating to breakage, in proportion to the expected purchases by Invitae. Any remaining unused discounts will be recognized when they expire. All amounts received from Invitae are initially deferred and accumulated in deferred revenue, non-current. As of September 30, 2021, we have recognized payments received from Invitae of $ 16.8 million of deferred revenue, non-current, on the Condensed Consolidated Balance Sheet. Costs incurred to develop the Program Products are research and development costs and are expensed as incurred. There were no capitalized origination or fulfilment costs related to the arrangement with Invitae that are eligible to be capitalized. NOTE 4. TERMINATION OF MERGER WITH ILLUMINA On November 1, 2018, we entered into an Agreement and Plan of Merger (as amended, the “Illumina Merger Agreement”) with Illumina, Inc. (“Illumina”) and FC Ops Corp., a wholly owned subsidiary of Illumina (“Illumina Merger Sub”). On January 2, 2020, we, Illumina and Illumina Merger Sub, entered into an agreement to terminate the Merger Agreement (the “Termination Agreement”). Continuation Advances from Illumina As part of the Termination Agreement, Illumina paid us cash payments (“Continuation Advances”) of $ 18.0 million during the fourth quarter of 2019 and $ 34.0 million during the first quarter of 2020. We recorded the $ 34.0 million as part of other income in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2020. 11 Table of Contents Up to the full $ 52.0 million of Continuation Advances paid to us were repayable without interest to Illumina if, within two years of March 31, 2020, we entered into, or consummated a Change of Control Transaction or raised at least $ 100 million in a single equity or debt financing (that may have multiple closings), with the amount repayable dependent on the amount raised by us. Resulting from the issuance and sale of $ 900 million of 1.50 % Convertible Senior Notes due February 15, 2028 , $ 52.0 million of Continuation Advances were paid without interest to Illumina in February 2021 and recorded as other expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021. Please refer to Note 5. Summary of Significant Accounting Policies for the accounting treatment of the Continuation Advances. Reverse Termination Fee from Illumina As part of the Termination Agreement, Illumina paid us a $ 98.0 million termination fee (the “Reverse Termination Fee”), from which we paid our financial advisor associated fees of $ 6.0 million in April 2020. Pursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we entered into a definitive agreement providing for, or consummated, a Change of Control Transaction, then we may have been required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction. As indicated in ASC 450, Contingencies , a gain contingency usually is not recognized in the financial statements until the period in which all contingencies are resolved and the gain is realizable. As such, we deferred the gain from the Reverse Termination Fee from Illumina until the date when the associated contingency lapsed. On October 1, 2020, the contingency clauses lapsed and we recorded the $ 98.0 million as a part of other income in the fourth quarter of 2020. NOTE 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation The accompanying unaudited condensed consolidated financial statements, which include the accounts of Pacific Biosciences and the accounts of our wholly-owned subsidiaries, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). 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, 2020 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 income (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. 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, 2020. COVID-19 We are subject to risks and uncertainties as a result of the novel coronavirus pandemic (“COVID-19”). The extent of the impact of the COVID-19 pandemic on our business is highly uncertain as responses to the pandemic can change quickly and information is continuing to evolve, including the effects of the Delta variant. We considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of September 30, 2021. 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, management evaluates its 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, and the valuations related to our convertible senior notes. Actual results could differ materially from these estimates. 12 Table of Contents 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. 13 Table of Contents Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of September 30, 2021 and December 31, 2020 respectively: September 30, 2021 December 31, 2020 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents: Cash and money market funds $ 364,020 $ — $ — $ 364,020 $ 43,040 $ — $ — $ 43,040 Commercial paper — 61,368 — 61,368 — 32,537 — 32,537 U.S. government & agency securities — — — — — 170 — 170 U.S. Treasury security — — — — — 5,864 — 5,864 Total cash and cash equivalents 364,020 61,368 — 425,388 43,040 38,571 — 81,611 Investments: Commercial paper — 255,817 — 255,817 — 112,644 — 112,644 Corporate debt securities — 13,595 — 13,595 — 17,456 — 17,456 U.S. government & agency securities — 385,090 — 385,090 — 107,103 — 107,103 Total investments — 654,502 — 654,502 — 237,203 — 237,203 Short-term restricted cash: Cash 500 — — 500 836 — — 836 Long-term restricted cash: Cash 4,560 — — 4,560 3,500 — — 3,500 Total assets measured at fair value $ 369,080 $ 715,870 $ — $ 1,084,950 $ 47,376 $ 275,774 $ — $ 323,150 Liabilities Continuation Advances $ — $ — $ — $ — $ — $ — $ — $ — Contingent consideration — — 168,574 168,574 — — — — Total liabilities measured at fair value $ — $ — $ 168,574 $ 168,574 $ — $ — $ — $ — We classify contingent consideration, which was incurred in connection with the acquisition of Omniome, 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. We estimate the fair value of the contingent consideration liability by discounting the probability-weighted outcomes to present value using an estimate of our borrowing rate and the risk-free rate. The potential outcomes of milestone achievement dates are within the period from December 31, 2022 to June 30, 2025, with the highest probability of achieving the milestone in the middle of this period. The discount rates used are the sum of the U.S. risk-free rate and the estimated subordinated credit spread for CCC+ and B- credit rating, which ranges from 4.3 % to 4.8 %. As of December 31, 2020, we classified the Continuation Advances, which were incurred in connection with the Illumina Merger Agreement and were subject to repayment under certain circumstances, as a financial liability and were reported at fair value. The estimated fair value of the liability related to the Continuation Advances was determined using Level 3 inputs, or significant unobservable inputs. Management assessed the fair value of this financial instrument to be zero at December 31, 2020. We were first approached by SB Northstar LP during the quarter ended March 31, 2021 regarding a potential convertible debt transaction. As discussed further below in Note 8. Convertible Senior Notes , in February 2021, we entered into an investment agreement with SB Northstar LP for the issuance and sale of $ 900 million of 1.50 % Convertible Senior Notes due February 15, 2028. As a result, $ 52.0 million of Continuation Advances were repaid without interest to Illumina in February 2021 and recorded as other expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021. There was no further liability exposure for Continuation Advances as of September 30, 2021. For the quarter ended September 30, 2021, 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. As discussed above, we recorded a contingent consideration liability in connection with our acquisition of Omniome during the quarter ended September 30, 2021. 14 Table of Contents Net Income (Loss) per Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (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 stock options, restricted stock units and common stock issuable pursuant to our employee stock purchase plan, or ESPP, using the treasury stock method. The following table presents the calculation of the basic and diluted net income (loss) per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Numerator: Net income (loss) $ 16,542 $ ( 23,708 ) $ ( 111,894 ) $ ( 45,532 ) Denominator: Basic Weighted average shares used in computing net income (loss) per share, basic 202,194 166,862 198,545 158,195 Net income (loss) per share, basic $ 0.08 $ ( 0.14 ) $ ( 0.56 ) $ ( 0.29 ) Diluted Weighted average shares used in computing net income (loss) per share, basic 202,194 166,862 198,545 158,195 Add: Weighted average stock options 7,754 — — — Add: Weighted average restricted stock units 3,598 — — — Add: Weighted average shares issuable pursuant to ESPP 1,581 — — — Weighted average shares used in computing net income (loss) per share, diluted 215,127 166,862 198,545 158,195 Net income (loss) per share, diluted $ 0.08 $ ( 0.14 ) $ ( 0.56 ) $ ( 0.29 ) The following outstanding shares issuable upon conversion of the convertible senior notes, common stock options, restricted stock units (“RSUs”), with time-based vesting, RSUs with performance-based vesting and ESPP shares expected to be purchased, were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect. See Note 10. Stockholders’ Equity for detailed information on RSUs with time-based vesting and RSUs with performance-based vesting. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Shares issuable upon conversion of convertible senior notes 20,690 — 17,203 — Options to purchase common stock 2,326 19,921 12,703 19,921 RSUs with time-based vesting 2,006 5,971 6,835 5,971 RSUs with performance-based vesting — 94 — 94 ESPP shares 126 2,890 1,564 2,890 Concentration and Other Risks For the three and nine months ended September 30, 2021, Gene Company Limited accounted for approximately 17 % and 15 %, respectively, of our total revenue during the period with no other customer exceeding 10% during those periods. For the three and nine months ended September 30, 2020, Gene Company Limited accounted for approximately 18 % and 14 %, respectively, of our total revenue with no other customer exceeding 10% during those periods. Gene Company Limited is our primary distributor in China. 15 Table of Contents Recent Accounting Pronouncements Recently Adopted Accounting Standards In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This guidance simplifies the accounting for convertible instruments primarily by eliminating the existing cash conversion and beneficial conversion models within Subtopic 470-20, which will result in fewer embedded conversion options being accounted for separately from the debt host. The guidance also amends and simplifies the calculation of earnings per share relating to convertible instruments. This guidance is effective for annual periods beginning after December 15, 2021, including interim periods within that reporting period, excluding smaller reporting companies. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within that reporting period, using either a full or modified retrospective approach. We adopted ASU 2020-06 on January 1, 2021. Because we had no convertible instruments within the scope of ASU 2020-06 at the time of adoption, there was no impact of adoption on our condensed consolidated financial statements. In February 2021 we issued $ 900 million of 1.50 % Convertible Senior Notes due February 15, 2028 , as described in Note 8. Convertible Senior Notes , which are accounted for under ASU 2020-06. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740 ): Simplifying the Accounting for Income Taxes . This ASU simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. The standard is effective for our annual reporting periods beginning after December 15, 2020, including interim reporting periods within those fiscal years. We adopted ASU 2019-12 on January 1, 2021, and the adoption did not have a material impact on our condensed consolidated financial statements. Significant Accounting Policies Except for the adoption of ASU 2020-06 as discussed above and in Note 8 . Convertible Senior Notes and the accounting for the acquisition of Omniome and Circulomics as described in Note 2. Business Acquisitions and Note 7. Balance Sheet Components , there have been no new or material changes to the significant accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 16 Table of Contents NOTE 6. CASH, CASH EQUIVALENTS AND INVESTMENTS The following tables summarize our cash, cash equivalents and investments as of September 30, 2021 and December 31, 2020 (in thousands): As of September 30, 2021 Gross Gross Amortized unrealized unrealized Fair Cost gains losses Value Cash and cash equivalents: Cash and money market funds $ 364,020 $ — $ — $ 364,020 Commercial paper 61,369 — ( 1 ) 61,368 U.S. government & agency securities — — — — Total cash and cash equivalents 425,389 — ( 1 ) 425,388 Investments: Commercial paper 255,817 8 ( 8 ) 255,817 Corporate debt securities 13,564 31 — 13,595 U.S. government & agency securities 385,092 52 ( 54 ) 385,090 Total investments 654,473 91 ( 62 ) 654,502 Total cash, cash equivalents and investments $ 1,079,862 $ 91 $ ( 63 ) $ 1,079,890 Short-term restricted cash: Cash $ 500 $ — $ — $ 500 Long-term restricted cash: Cash $ 4,560 $ — $ — $ 4,560 As of December 31, 2020 Gross Gross Amortized unrealized unrealized Fair Cost gains losses Value Cash and cash equivalents: Cash and money market funds $ 43,040 $ — $ — $ 43,040 Commercial paper 32,538 — ( 1 ) 32,537 U.S. government & agency securities 170 — — 170 U.S. Treasury security 5,864 — — 5,864 Total cash and cash equivalents 81,612 — ( 1 ) 81,611 Investments: Commercial paper 112,648 4 ( 8 ) 112,644 Corporate debt securities 17,360 96 — 17,456 U.S. government & agency securities 107,109 6 ( 12 ) 107,103 Total investments 237,117 106 ( 20 ) 237,203 Total cash, cash equivalents and investments $ 318,729 $ 106 $ ( 21 ) $ 318,814 Short-term restricted cash: Cash $ 836 $ — $ — $ 836 Long-term restricted cash: Cash $ 3,500 $ — $ — $ 3,500 The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of September 30, 2021 (in thousands): Fair Value Due in one year or less $ 404,995 Due after one year through 5 years 310,875 Total investments $ 715,870 Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties. 17 Table of Contents NOTE 7. BALANCE SHEET COMPONENTS Short-term restricted cash As of September 30, 2021, the short-term restricted cash balance of $ 0.5 million was comprised of security deposits for the credit cards of employees. As of December 31, 2020, the short-term restricted cash balance of $ 0.8 million was comprised of $ 0.5 million for a customer deposit and $ 0.3 million for a security deposit for the credit cards of employees. In connection with the acquisition of Omniome in September 2021, we acquired $ 0.2 million of short-term restricted cash consisting of a security deposit for credit cards of Omniome employees. Inventory As of September 30, 2021 and December 31, 2020, our inventory consisted of the following components: September 30, December 31, (in thousands) 2021 2020 Purchased materials $ 5,511 $ 3,531 Work in process 8,762 6,651 Finished goods 4,003 4,048 Inventory $ 18,276 $ 14,230 Long-term restricted cash For our facility located at 1305 O’Brien Drive, Menlo Park, California (the “O’Brien Lease”), we were required to establish a letter of credit for the benefit of the landlord and to submit $ 4.5 million as a deposit for the letter of credit in October 2015. Subsequently, pursuant to the terms of the O’Brien Lease, beginning on May 1, 2019, the amount of the letter of credit was reduced by $ 0.5 million each year thereafter on May 1. As such, $ 3.0 million and $ 3.5 million was recorded in long-term restricted cash related to the O’Brien Lease in the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively. In connection with the acquisition of Omniome in September 2021, we acquired $ 1.6 million of long-term restricted cash related to a letter of credit established for a facility lease. Intangible assets and goodwill Intangible assets include acquired in-process research and development (IPR&D) of $400 million as a result of the Omniome acquisition in September 2021. We capitalize IPR&D as an indefinite-lived intangible asset and either begin to amortize it over the life of the product upon commercialization or record an impairment charge if the project is abandoned. In addition to IPR&D, we had the following definite-lived intangible assets from business acquisitions as of September 30, 2021 (in thousands, except years): Estimated Gross Net Useful Life Carrying Accumulated Carrying (in years) Amount Amortization Amount Developed technology 15 $ 11,000 $ ( 123 ) $ 10,877 Customer relationships 2 360 ( 31 ) 329 Total $ 11,360 $ ( 154 ) $ 11,206 18 Table of Contents The estimated future amortization expense of acquisition-related intangible assets with definite lives is estimated as follows: (in thousands) 2021 $ 227 2022 913 2023 838 2024 733 2025 733 2026 and thereafter 7,762 Total $ 11,206 We review definite-lived intangible assets for impairment on an annual basis or when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. Changes to goodwill during the nine months ended September 30, 2021 were as follows (in thousands): Balance as of December 31, 2020 $ - Acquisition of Omniome 392,224 Acquisition of Circulomics 19,309 Balance as of September 30, 2021 $ 411,533 Deferred revenue As of September 30, 2021, we had a total of $ 28.2 million of deferred revenue, $ 9.8 million of which was recorded as deferred revenue, current and primarily relates to deferred service contract revenues to be recognized over the next year and the remaining $ 18.4 million was recorded as deferred revenue, non-current. Of the deferred revenue, non-current balance, $ 16.8 million relates to payments received under the Invitae collaboration described in Note 3 and $ 1.6 million primarily relates to deferred service contract revenues and is scheduled to be recognized in the next 5 years. Revenue recorded in the nine months ended September 30, 2021 includes $ 7.4 million of previously deferred revenue that was included in deferred revenue, current as of December 31, 2020. Contract assets as of September 30, 2021 and December 31, 2020 were not material. As of September 30, 2021, we had a total of $ 0.7 million of deferred commissions included in prepaid expenses and other current assets which is recognized as sales, general and administrative expense as the related revenue is recognized. Costs to obtain a contract are expensed as incurred if the amortization period would have been a year or less. Term loans In connection with the acquisition of Omniome, we acquired $1.3 million in short-term debt and $3.0 million in long-term debt relating to a term loan facility that Omniome obtained in April 2020. Borrowings on the term loan facility were used to fund Omniome’s purchases of equipment, which serves as collateral. Each term loan has a term of 43 months and bears a fixed interest rate of approximately 17% annually. The fee for the elective option to prepay all, but not less than all, of the borrowed amounts at any time after the 24 th month and before the 43 rd month after the commencement date, is 4% of the outstanding loan balance. Payments are made in equal monthly installments including principal and interest. The following table presents the future principal payments on the term loans (in thousands): Remainder of 2021 $ 361 2022 1,608 2023 1,842 2024 490 Total $ 4,301 19 Table of Contents NOTE 8. 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 million in aggregate principal amount of our 1.50 % Convertible Senior Notes due February 15, 2028 (the “Notes”). The Notes were issued on February 16, 2021 . The Notes are governed by an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at a rate of 1.50 % per annum. Interest on the Notes is payable semi-annually in arrears on February 15 and August 15 and commenced on August 15, 2021. The Notes will mature on February 15, 2028 , subject to earlier conversion, redemption or repurchase. The 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 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 Notes (which is equal to an initial conversion price of $ 43.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash. On or after February 20, 2026, the 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 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. With certain exceptions, upon a change of control of the Company or the failure of our common stock to be listed on certain stock exchanges (a “Fundamental Change”), the holders of the Notes may require that we repurchase all or part of the principal amount of the Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date. The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture. The 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 Notes at a rate equal to (i) 0.25 % per annum of the principal amount of the 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 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 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 Notes shall be subject to acceleration as provided for in the Indenture. The 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 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the Notes were not issued at a premium; therefore, the 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 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 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. 20 Table of Contents We incurred issuance costs related to the Notes of approximately $ 4.5 million, which were recorded as debt issuance cost and are presented as a reduction to the Notes on our Condensed Consolidated Balance Sheets and are amortized to interest expense using the effective interest method over the term of the Notes, resulting in an effective interest rate of 1.6 %. As of September 30, 2021, the net carrying amount of the liability for the Notes is recorded as convertible senior notes, net in the Condensed Consolidated Balance Sheets as follows (in thousands): Principal amount $ 900,000 Unamortized debt issuance costs ( 4,085 ) Net carrying amount $ 895,915 For the three and nine months ended September 30, 2021, interest expense for the Notes was as follows (in thousands): Three Months Ended Nine Months Ended September 30, 2021 September 30, 2021 Contractual interest expense $ 3,375 $ 8,438 Amortization of debt issuance costs 152 379 Total interest expense $ 3,527 $ 8,817 As of September 30, 2021, the estimated fair value (Level 2) of the Notes was $ 886.5 million. The fair value of the Notes is estimated using a pricing model that is primarily affected by the trading price of our common stock and market interest rates. NOTE 9. COMMITMENTS AND CONTINGENCIES Leases We record an operating lease right-of-use assets and liabilities on our Condensed Consolidated Balance Sheets for all leases with a term of more than 12 months. In connection with the acquisition of Omniome, we acquired $ 18.1 million in right-of-use assets and liabilities on our Condensed Consolidated Balance Sheets. The operating lease right-of-use assets and liabilities are calculated as the present value of remaining minimum lease payments over the remaining lease term using our estimated secured incremental borrowing rates at the commencement date. Lease payments included in the measurement of the lease liability comprise the base rent per the term of the Lease. Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments, such as common area maintenance fees, recognized in the period incurred. 21 Table of Contents The following table presents information as to the amount and timing of cash flows arising from our operating leases as of September 30, 2021: Maturity of Lease Liabilities Amount Years ending December 31, (in thousands) Remainder of 2021 $ 2,714 2022 11,030 2023 11,163 2024 11,401 2025 11,689 Thereafter 21,941 Total undiscounted operating lease payments 69,938 Less: imputed interest ( 12,856 ) Present value of operating lease liabilities $ 57,082 Balance Sheet Classification Operating lease liabilities, current $ 7,128 Operating lease liabilities, non-current 49,954 Total operating lease liabilities $ 57,082 We use our incremental borrowing rate to determine the present value of lease payments, as the implicit rates in our leases are not readily determinable. The weighted average discount rate used to measure our operating lease liabilities was 6.8 %. The weighted average remaining lease term for our operating leases as of September 30, 2021 was 6.0 years. Cash Flows Cash paid for amounts included in the present value of operating lease liabilities was $ 1.8 million and $ 5.5 million, respectively, for the three and nine months ended September 30, 2021 and included in operating cash flow. Operating Lease Costs Operating lease costs were $ 1.6 million and $ 4.7 million, respectively, for the three and nine months ended September 30 of both 2021 and 2020. 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. Legal U.S. District Court Proceedings On March 15, 2017, we filed a complaint in the U.S. District Court for the District of Delaware against ONT Inc. for patent infringement (C.A. No. 17-cv-275) (the “275 Action”). The complaint is based on our U.S. Patent No. 9,546,400 (the “’400 Patent”) which covers novel methods for nanopore sequencing of nucleic acid molecules using the signals from multiple monomeric units. We are seeking remedies including injunctive relief, damages and costs. On August 23, 2018, we filed an amended complaint, adding allegations of willful infringement and adding ONT Ltd. as a defendant in the 275 Action, which was granted on August 15, 2019. On September 25, 2017, we filed a second complaint in the U.S. District Court for the District of Delaware against ONT Inc. for patent infringement (C.A. No. 17-cv-1353) (the “1353 Action”). The complaint is based on our U.S. Patent No. 9,678,056 (the “’056 Patent”) and U.S. Patent No. 9,738,929. We are seeking remedies including injunctive relief, damages and costs. On March 28, 2018, we added a claim for infringement of our U.S. Patent No. 9,772,323 (the “’323 Patent”). On August 23, 2018 we filed an amended complaint, adding allegations of willful infringement and adding ONT Ltd. as a defendant in the 1353 Action, which was granted on August 15, 2019. 22 Table of Contents A trial for the U.S. District Court matters was held from March 9 through March 18, 2020. The jury determined that ONT Inc. and ONT Ltd. infringed the ‘056 Patent, the ‘400 Patent, and the ‘323 Patent, but the jury declined to find these patents valid based on enablement and, in the case of the ’056 Patent, written description and indefiniteness. The jury declined to find valid or infringed U.S. Patent No. 9,738,929. Our appeal of the decision to the U.S. Court of Appeals for the Federal Circuit was denied on May 11, 2021. Unrelated to the preceding matters, on September 26, 2019, Personal Genomics of Taiwan, Inc. (“PGI”) filed a complaint in the U.S. District Court for the District of Delaware against us for patent infringement (C.A. No. 19-cv-1810) (the “PGI District Court matter”). The matter from this complaint is based on PGI’s U.S. Patent No. 7,767,441 (the “‘441 Patent”). We plan to vigorously defend in this matter. On November 20, 2019, we filed our answer to the complaint, denying infringement and seeking a declaratory judgement of invalidity of the ‘441 Patent. On June 22, 2020, we filed a petition requesting institution of an inter-partes review (IPR) to the Patent Trial and Appeals Board (the “Board”) at the United States Patent Office requesting the Board to find a set of claims in the ‘441 Patent invalid. On June 27, 2020, we filed a second petition requesting institution of an IPR requesting the Board to find another set of claims in the ‘441 Patent invalid. The two petitions (the “PacBio IPR Petitions”) requesting IPRs assert that all of the claims relevant to the PGI complaint are invalid. On January 19, 2021, the Board ordered that both PacBio IPR Petitions are instituted on all grounds presented. On August 19, 2020, the court ordered a stay of the PGI District Court matter based on a joint stipulation by the parties. With the institution of the PacBio IPR Petitions described above, pursuant to the joint stipulation, the matter is now stayed pending a final written decision on the IPRs. Proceedings in China On May 12, 2020, PGI filed a complaint in the Wuhan Intermediate People’s Court in China alleging infringement of one or more claims of China patent No. CN101743321B (the “CN321 Patent”), which is related to the ‘441 Patent. We were served on January 20, 2021 and plan to vigorously defend in this matter. On November 23, 2020 we filed an Invalidation Petition at the China National Intellectual Property Administration (CNIPA) demonstrating the invalidity of the claims in the CN321 Patent on grounds of insufficient disclosure, and the lack of support, essential technical features, clarity, novelty, and inventiveness. A hearing in the invalidation proceeding at the CNIPA was held on April 29, 2021. On September 2, 2021, the CNIPA issued its decision on the Invalidation Petition and determined that all claims (1-61) of the CN321 patent were invalid. We have filed a petition with the Wuhan Intermediate People’s court requesting dismissal of the infringement action, which we anticipate will be granted. Other Proceedings From time to time, we may also be involved in a variety of other claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes, employment and other matters that arise in the normal course of our business. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. We record a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We currently do not believe that the ultimate outcome of any of the matters described above 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. 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, 2021. 23 Table of Contents NOTE 10. STOCKHOLDERS’ EQUITY Equity Plans At March 31, 2020, we had three active equity compensation plans: the 2010 Equity Incentive Plan (“2010 Plan”), the 2010 Outside Director Equity Incentive Plan (“2010 Director Plan”) and the 2010 Employee Stock Purchase Plan (“ESPP”). Our 2010 Plan and 2010 Director Plan expired on July 29, 2020. On August 4, 2020, stockholders approved our new 2020 Equity Incentive Plan (the “2020 Plan”) and reserved 11,000,000 shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan. On December 2, 2020, the Board of Directors (the “Board”) adopted the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”) and reserved 2,500,000 shares of our common stock for issuance pursuant to equity awards granted under the Inducement Plan. On April 18, 2021, the Board amended the Inducement Plan to reserve an additional 750,000 shares of our common stock for issuance pursuant to equity awards granted under the Inducement Plan. On September 20, 2021, in connection with the acquisition of Omniome, we adopted the Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”). Under the Omniome Merger Agreement, each unvested option to purchase Omniome common stock, granted under the Omniome Plan held by employees continuing with us, were assumed by PacBio and converted into an option to purchase shares of our common stock. The terms and conditions of the converted options are substantially the same (including vesting and exercisability), except that (A) the assumed options cover shares of PacBio’s common stock; (B) the number of shares of our common stock subject to the assumed option is equal to the product of (i) the number of shares of Omniome common stock subject to the corresponding unvested option, multiplied by (ii) the exchange ratio (as defined below), with any resulting fractional share rounded down to the nearest whole share; and (C) the exercise price per share of the assumed options is equal to the quotient of (i) the exercise price per share of the corresponding unvested option to purchase shares of Omniome common stock, divided by (ii) the exchange ratio (as defined below), with any resulting fractional cent rounded up to the nearest whole cent. The exchange ratio was equal to 0.259204639 . We reserved 2,494,128 shares of our common stock for issuance pursuant to equity awards under the Omniome Plan. Stock Options Time-based stock options The following table summarizes stock option activity for time-based awards under all our stock option plans for the nine months ended September 30, 2021 (in thousands, except per share amounts): Stock Options Outstanding Weighted Number average of shares Exercise price exercise price Outstanding at December 31, 2020 14,638 $ 1.16 – 20.90 $ 5.53 Granted 2,329 23.39 – 46.37 34.40 Assumed Omniome options 339 2.05 – 4.90 4.43 Exercised ( 4,406 ) 1.16 – 15.98 5.37 Canceled ( 501 ) 2.54 – 46.37 5.28 Outstanding at September 30, 2021 12,399 $ 1.16 – 46.37 $ 10.99 24 Table of Contents Performance-based stock options The following table summarizes stock option activity for performance-based awards under all our stock option plans for the nine months ended September 30, 2021 (in thousands, except per share amounts): Stock Options Outstanding Weighted Number average of shares Exercise price exercise price Outstanding at December 31, 2020 — $ — $ — Granted — — — Assumed Omniome options 304 4.71 - 4.90 4.71 Exercised — — — Canceled — — — Outstanding at September 30, 2021 304 $ 4.71 - 4.90 $ 4.71 For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 23.0 million and $ 29.0 million, respectively, related to options. Restricted Stock Units (“RSUs”) Time-based RSUs The following table summarizes the time-based RSUs activity for the nine months ended September 30, 2021 (in thousands, except per share amounts): Weighted average Number grant date of shares fair value Outstanding at December 31, 2020 5,919 $ 5.25 Granted 3,030 37.92 Released ( 1,759 ) 4.83 Forfeited ( 355 ) 14.05 Outstanding at September 30, 2021 6,835 $ 19.39 For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 7.7 million and $ 19.6 million, respectively, for time-based RSUs. Performance-based RSUs The following table summarizes the performance-based RSUs (“PSUs”) activity for the nine months ended September 30, 2021 (in thousands, except per share amounts): Weighted average Number grant date of shares fair value Outstanding at December 31, 2020 94 $ 2.63 Granted — — Released — — Forfeited ( 94 ) 2.63 Outstanding at September 30, 2021 — $ — For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 0 for the performance-based RSUs. As of September 30, 2021, we had a total of 7.1 million shares of common stock available for future issuance under the 2020 Plan, the Inducement Plan and the Omniome Plan. 25 Table of Contents Employee Stock Purchase Plan (“ESPP”) Shares issued under our ESPP were 1,913,968 and 834,677 during the nine months ended September 30, 2021 and 2020, respectively. In January 2021, an additional 3.8 million shares were reserved under the ESPP. As of September 30, 2021, 7,810,673 shares of our common stock remain available for issuance under our ESPP. For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 5.1 million and $ 13.1 million, respectively, for the ESPP. Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Cost of revenue $ 1,837 $ 735 $ 4,734 $ 1,714 Research and development 5,162 2,105 12,519 5,297 Sales, general and administrative 9,897 2,152 25,613 5,247 Merger-related expenses - stock-settled 6,349 — 6,349 — Merger-related expenses - milestone 5,202 — 5,202 — Stock-based compensation 28,447 4,992 54,417 12,258 Merger-related expenses - cash-settled 7,373 — 7,373 — Total stock-based compensation $ 35,820 $ 4,992 $ 61,790 $ 12,258 W e estimate the fair value of employee stock options on the grant date using the Black-Scholes option pricing model. The estimated fair value of employee stock options is amortized on a straight-line basis over the requisite service period of the awards. The assumptions used for the specified periods and the resulting estimates of weighted-average fair value per share for shares to be issued upon exercise of our stock options were as follows: Three Months Ended September 30, Nine Months Ended September 30, Stock Option 2021 2020 2021 2020 Expected term in years 2.1 - 4.6 5.1 2.1 - 4.6 5.1 Expected volatility 67 % - 80 % 71 % 67 % - 80 % 57 % - 71 % Risk-free interest rate 0.05 % – 0.71 % 0.30 % 0.05 % – 0.74 % 0.3 % - 1.2 % Dividend yield — — — — Weighted average grant date fair value per share $ 5.97 $ 3.85 $ 15.63 $ 3.82 We estimate the value of employee stock purchase rights on the grant date using the Black-Scholes option pricing model. The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock to be issued under the ESPP were as follows: Three Months Ended September 30, Nine Months Ended September 30, ESPP 2021 2020 2021 2020 Expected term in years 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0 Expected volatility 67 % 71 % 67 % - 68 % 57 % - 71 % Risk-free interest rate 0.06 % - 0.20 % 0.1 % 0.06 % - 0.20 % 0.1 % - 1.0 % Dividend yield — — — — Weighted average fair value per share $ 16.73 $ 3.13 $ 25.07 $ 1.87 26 Table of Contents NOTE 11. REVENUE A summary of our revenue by geographic location for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 North America $ 19,368 $ 8,971 $ 45,872 $ 25,189 Europe (including the Middle East and Africa) 6,347 4,339 21,166 11,925 Asia Pacific 9,172 5,772 27,456 14,643 Total $ 34,887 $ 19,082 $ 94,494 $ 51,757 A summary of our revenue by category for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Instrument revenue $ 15,926 $ 7,727 $ 45,147 $ 20,685 Consumable revenue 14,576 8,022 37,191 21,113 Product revenue 30,502 15,749 82,338 41,798 Service and other revenue 4,385 3,333 12,156 9,959 Total revenue $ 34,887 $ 19,082 $ 94,494 $ 51,757 27 Table of Contents