What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-02-26 · 546 added, 379 removed, 564 unchanged (62% of the section changed)

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Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive I ncome (Loss)

Consolidated Statements of Operations and Comprehensive (Loss) Income

Consolidated Statements of Stockholders’ Equity

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We have audited the accompanying consolidated balance sheets of Pacific Biosciences of California, Inc.

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss) , stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive (loss) income , stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

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Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue recognition – Non-standard revenue contracts

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Business combinations - Valuation of intangible assets

Description of the Matter

As described in Note 2 to the consolidated financial statements, the Company completed its acquisitions of Omniome, Inc.

and Circulomics, Inc.

The transactions were accounted for as business combinations.

As a result of the acquisitions, the Company recorded goodwill of $410.0 million and intangible assets of $411.4 million.

Auditing the Company’s accounting for the acquisitions was challenging because the determination of the fair value of the identified intangible assets, which principally consisted of in-process research and development (IPR&D), required management to make subjective estimates and assumptions.

The Company used an income approach to measure the intangible assets.

The valuation of the intangible assets is subject to higher estimation uncertainty due to management’s judgments in determining significant assumptions that included assumed revenue growth and obsolescence factors.

Changes in these significant assumptions could have a significant effect on the fair value of the intangible assets.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls addressing the identified audit risks.

For example, we tested controls over management’s review of the significant assumptions used to develop the fair value estimates of the intangible assets.

We also tested management’s controls to validate that data used in the fair value estimates were complete and accurate.

To test the estimated fair value of the intangible assets, we performed audit procedures that included, among others, evaluating the Company’s valuation models with the assistance of valuation specialists, performing sensitivity analyses to determine which assumptions had the greatest impact on the overall determination of value, and testing the completeness and accuracy of the underlying data used to develop the assumptions.

We also evaluated the assumptions by comparing them to market and economic trends, historical results of the Company’s business and other guideline companies within the same industry.

Revenue recognition - Estimation of standalone selling price

Description of the Matter

As described in Note 1 to the consolidated financial statements, the Company's instrument is generally sold in a bundled arrangement and commonly includes the instrument, instrument accessories, installation, one-year period of service, training, and consumables.

The Company enters into non-standard sales arrangements for which significant discounts may be offered on the different components of the bundled arrangements and for which historical information for similar sales may not be available.

As part of the Company's identification of performance obligations and the resulting determination of the allocation of contract consideration, the Company considers if these discounts represent a material right when compared to the estimated standalone selling prices, and therefore a performance obligation to be included in the allocation of the contract value.

The Company also estimates the standalone selling price of each performance obligation to determine the allocation of consideration.

To estimate the selling price of each performance obligation, the Company uses historical sales data, as well as management judgment.

Auditing the Company's estimated standalone selling price, their determination of whether there are material rights that represent performance obligations and the resulting allocation of the contract value for non-standard sales arrangements is complex and required a higher level of judgment due to the level of estimation and subjectivity in establishing the standard selling price of each performance obligation.

The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price.

The Company estimates the standalone selling price of each performance obligation using average selling prices over a 12-month period combined with an assessment of current market conditions.

If the standalone selling price is not directly observable, then the Company estimates the standalone selling price by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices and other observable inputs.

Auditing the Company's estimated standalone selling price is complex and required a higher level of judgment due to the level of estimation and subjectivity in establishing the standard selling price for products that are not sold separately.

How We Addressed the Matter in Our Audit

We tested the completeness of the identified performance obligations and tested the accuracy of the allocation of the total contract consideration among the identified performance obligations.

In order to do this, our audit procedures included, among others, evaluating the accuracy and completeness of the underlying data used in management's calculation of the standard selling price for each performance obligation by agreeing the data to historical transactions and contract pricing for backlog orders.

We tested the identification of performance obligations and the allocation of contract consideration using the standard selling price of each performance obligation for a sample of arrangements by reading the contracts with the customers and evaluating whether terms of the contracts (including future purchase options) resulted in material rights.

We also performed sensitivity analyses of significant assumptions to evaluate the changes in revenue recognized for the period under audit that would result from changes in the Company's estimated standard selling price for the performance obligations.

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls addressing the identified audit risks.

For example, we tested controls over the process to determine the standalone selling price of each performance obligation.

We also tested management’s controls to validate that data used were complete and accurate.

We tested management’s calculation of the standalone selling price by evaluating the completeness and accuracy of the underlying data used in management's calculation by agreeing the data to historical transactions and contract pricing for backlog orders.

/s/ Ernst & Young LLP

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Cash and cash equivalents

Accounts receivable

Accounts receivable, net

Prepaid expenses and other current assets

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Long-term restricted cash

Intangible assets, net

Other long-term assets

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Operating lease liabilities, current

Notes payable, current

Other liabilities, current

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Deferred revenue, non-current

Contingent consideration liability, non-current

Operating lease liabilities, non-current

Convertible senior notes, net, non-current

Other liabilities, non-current

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Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

Accumulated deficit

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Consolidated Statements of Operations and Comprehensive (Loss) Income

Years Ended December 31,

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Cost of service and other revenue

Amortization of intangible assets

Total cost of revenue

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Sales, general and administrative

Merger-related expenses

Change in fair value of contingent consideration

Total operating expense

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Gain from Reverse Termination Fee from Illumina

Gain from Continuation Advances from Illumina

(Loss)/Gain from Continuation Advances from Illumina

Interest expense

Other income, net

Net income (loss)

Other comprehensive income (loss):

Unrealized gain (loss) on investments

Comprehensive income (loss)

Net income (loss) per share:

Weighted average shares outstanding used in calculating net income (loss) per share

(Loss) income before benefit from income taxes

Benefit from income taxes

Net (loss) income

Other comprehensive (loss) income:

Unrealized (loss) gain on investments

Comprehensive (loss) income

Net (loss) income per share:

Weighted average shares outstanding used in calculating net (loss) income per share

See accompanying notes to the consolidated financial statements.

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(in thousands)

Income (Loss)

(Loss) Income

Balance at December 31, 2018

Other comprehensive income (loss)

ASC606 adoption effect

Other comprehensive gain

Issuance of common stock in conjunction with equity plans

Issuance of common stock from Underwritten Public Equity Offerings, net of issuance costs

Stock-based compensation expense

Balance at December 31, 2019

Other comprehensive income (loss)

( 1,066,240 )

Other comprehensive gain

ASC326 adoption effect

Issuance of common stock in conjunction with equity plans

Issuance of common stock from Underwritten Public Equity Offerings, net of issuance costs

Stock-based compensation expense

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( 1,036,869 )

Other comprehensive income (loss)

ASC326 adoption effect

Other comprehensive loss

Issuance of common stock in conjunction with equity plans

Issuance of common stock from Underwritten Public Equity Offerings, net of issuance costs

Issuance of common stock in Private Placement, net of issuance costs

Issuance of common stock in acquisition of Omniome

Stock-based compensation expense

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Cash flows from operating activities

Net income (loss)

Net (loss) income

Adjustments to reconcile net loss to net cash used in operating activities

Gain from Continuation Advances from Illumina

Loss (gain) from Continuation Advances

Amortization of intangibles

Amortization of right-of-use assets

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Stock-based compensation

(Gain) loss from derivative

Amortization and accretion for investment premium (discount)

Loss from derivative

Amortization (accretion) from investment premium (discount)

Change in the estimated fair value of contingent consideration

Loss on disposition of equipment

Deferred income taxes

Changes in assets and liabilities

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Other liabilities

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

Cash flows from investing activities

Purchase of property and equipment

Cash paid for purchase of Circulomics, net of cash acquired

Cash paid for purchase of Omniome, net of cash acquired

Purchase of investments

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Maturities of investments

Net cash provided by (used in) in investing activities

Net cash (used in) provided by in investing activities

Cash flows from financing activities

Continuation Advances from Illumina

Continuation Advances

Proceeds from issuance of Convertible Senior Notes, net of issuance costs

Proceeds from issuance of common stock under equity offerings, net of issuance costs

Proceeds from issuance of common stock from equity plans

Notes payable principal payoff

Proceeds from issuance of common stock from underwritten public equity offerings, net of issuance costs

Net cash provided by financing activities

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Property and equipment transferred to inventory

Right-of-use asset and liability additions and modifications

Issuance of common stock in acquisition of Omniome

See accompanying notes to the consolidated financial statements.

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Notes to Consolidated Financial Statements

We design, develop and manufacture sequencing systems to help scientists resolve genetically complex problems.

Based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, our products enable:

de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures;

full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes;

targeted sequencing to more comprehensively characterize genetic variations;

and real-time kinetic information for epigenome characterization.

Our technology provides high accuracy, ultra-long reads, uniform coverage and the ability to simultaneously detect epigenetic changes.

PacBio® sequencing systems, including associated consumables and software, provide a simple and fast end-to-end workflow for SMRT sequencing.

Our current products include the Sequel II and Sequel IIe instruments and SMRT Cell 8M, which when used together are capable of sequencing up to approximately eight million DNA molecules simultaneously, and the previous generation Sequel instrument and Sequel SMRT Cell 1M, which when used together are capable of sequencing up to approximately one million DNA molecules simultaneously.

In October 2020, we launched the Sequel IIe System, which has increased computational capacity, and is designed to enable customers to generate PacBio HiFi reads more efficiently.

Our research and development efforts are focused on developing new products and further improving our existing products including continuing chemistry and sample preparation improvements to increase throughput and expand our supported applications.

By providing access to genetic information that was previously inaccessible, we enable scientists to confidently increase their understanding of biological systems.

The names “Pacific Biosciences,” “PacBio,” “SMRT,” “SMRTbell,” “Sequel” and our logo are our trademarks.

TERMINATION OF MERGER WITH ILLUMINA

On November 1, 2018, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Illumina, Inc.

(“Illumina”) and FC Ops Corp., a wholly owned subsidiary of Illumina (“Merger Subsidiary”).

On January 2, 2020, we, Illumina and Merger Subsidiary, 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 and $ 18.0 million as a part of other income in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2020 and 2019, respectively.

Please refer to “Note 4.

Financial Instruments” for the accounting treatment of the Continuation Advances.

Up to the full $ 52.0 million of Continuation Advances paid to us are repayable without interest to Illumina if, within two years of March 31, 2020, we enter into, or consummate a Change of Control Transaction or raise 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.

Please see “Note 11.

Subsequent Events” for additional information.

Reverse Termination Fee from Illumina

As part of the Termination Agreement, Illumina paid us a $ 98.0 million termination fee (“Reverse Termination Fee”), from which we paid our financial advisor associated fees of $ 6.0 million in April 2020.

We recorded the $ 6.0 million of associated fees we paid to our financial advisor in the “Sales, general and administrative” expense line in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 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.

If such Change of Control Transaction was not consummated by the two year anniversary of the execution of the definitive agreement for such Change of Control Transaction, then we would not have been required to repay the Reverse Termination Fee.

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 consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2020.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Business Overview

We are a premier life science technology company that is designing, developing and manufacturing advanced sequencing solutions to help scientists and clinical researchers 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 (SBB ® ) technology.

Our products address solutions across a broad set of applications including human germline sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications.

Our focus is on providing our customers with advanced sequencing technologies 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

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S.

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All intercompany transactions and balances have been eliminated.

Translation adjustments resulting from translating foreign subsidiaries’ results of operations and assets and liabilities into U.S.

dollars are immaterial for all periods presented.

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 rapidly evolving.

We considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of December 31, 2020.

Use of Estimates

The preparation of financial statements in conformity with U.S.

GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements.

Our estimates include, but are not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the valuation of a financing derivative and long-term notes, the probability of repaying the Continuation Advances and Reverse Termination Fee to Illumina, the valuation and recognition of share-based compensation, the expected renewal period for service contracts to derive the amortization period for capitalized commissions, the useful lives assigned to long-lived assets, the recognition and measurement of current and deferred income tax assets, along with the assessment of recoverability and the determination of the internal borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities.

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 impact of the COVID-19 pandemic on our business is highly uncertain, we considered the impact on our assumptions and estimates used to determine the results reported and asset valuations as of December 31, 2021.

Actual results could differ materially from these estimates.

Reclassifications

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation with no effect on previously reported net loss, comprehensive loss, cash flows or stockholders’ equity.

Accounting Changes

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“Topic 326”), which replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost.

We adopted Topic 326 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment to the opening balance of retained earnings/accumulated deficit to be recognized on the date of adoption with prior periods not restated.

The adoption of Topic 326 did not have a material impact on our financial statements and our bad debt expense was immaterial as of December 31, 2020.

Functional Currency

dollar is the functional currency of our international operations.

We remeasure foreign subsidiaries monetary assets and liabilities to the U.S.

dollar and record net gains or losses from remeasurement in other income, net, in the consolidated statement of operations and comprehensive (loss) income.

Cash, Cash Equivalents, and Investments

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

We have designated all investments as available-for-sale and therefore, such investments are reported at fair value, with unrealized gains and losses recognized in accumulated other comprehensive income (loss) (“OCI”) in stockholders’ equity.

We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.

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-

Unrealized gains and losses that are not credit-related are recognized in accumulated other comprehensive (loss) income 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, 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 included in other income, net.

Realized gains and losses, as well as interest income, on available-for-sale securities are also included in other income, net.

The cost of securities sold is based on the specific identification method.

We include all of our available-for-sale securities in current assets.

Premium and discount amortization is recorded in other income, net.

Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and US government and agency securities with high credit ratings.

We have established guidelines regarding diversification of its investments and their maturities with the objectives of maintaining safety and liquidity, while maximizing yield.

We have established guidelines regarding diversification and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield.

Concentration and Credit Risks

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The counterparties to the agreements relating to our investment securities consist of various major corporations, financial institutions, municipalities and government agencies of high credit standing.

We perform periodic evaluations of the relative credit standing of these financial institutions.

In addition, we perform periodic evaluations of the relative credit quality of its investments.

All of our investments are subject to a periodic impairment review.

We recognize an impairment charge when a decline in the fair value of our investments below the cost basis is judged to be other-than-temporary.

Factors considered in determining whether a loss is temporary include the length of time and the extent to which an investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the investee, the extent of the loss related to credit of the issuer, the expected cash flows from the security, our intent to sell the security and whether or not we will be required to sell the security before the recovery of its amortized cost.

For the years ended December 31, 2020, 2019 and 2018, we did no t have any impairment charges on our investments as it is more likely than not that we will recover their amortized cost basis upon sale or maturity.

At December 31, 2021, most of our cash was deposited with U.S.

financial institutions.

Our investment policy generally restricts the amount of credit exposure to any one issuer.

There is no limit to the percentage of the portfolio that may be maintained in securities issued by the U.S.

Treasury and U.S.

Government Agencies, or other securities fully backed by US Treasury or Government agencies.

We have not experienced significant credit losses from financial institutions.

Our trade receivables are derived from net revenue to customers and distributors located in the United States and other countries.

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As of December 31, 2021 and 2020, 53 % and 43 % of our accounts receivable were from domestic customers, respectively.

As of December 31, 2021, no customer represented 10% of greater of our net accounts receivable.

As of December 31, 2020, two customers, Berry Genomics Co., Ltd and Gene Company Limited, represented approximately 15 % and 12 % of our net accounts receivable, respectively.

As of December 31, 2019, customer, Gene Company Limited, represented approximately 11 % of our net accounts receivable.

We currently purchase several key parts and components used in the manufacture of our products from a limited number of suppliers.

Generally, we have been able to obtain an adequate supply of such parts and components.

However, an extended interruption in the supply of parts and components currently obtained from our suppliers could adversely affect our business and consolidated financial statements.

Generally, we have been able to obtain an adequate supply of such parts and components but in certain instances have incurred additional costs to secure supply constrained materials.

An extended interruption in the supply of parts and components currently obtained from our suppliers could adversely affect our business and consolidated financial statements.

Inventories are stated at the lower of average cost or net realizable value.

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Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs while determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories.

We enter into inventory purchases and commitments so that we can meet future shipment schedules based on forecasted demand for our products.

We make inventory purchases and commitments to meet future shipment schedules based on forecasted demand for our products.

The business environment in which we operate is subject to rapid changes in technology and customer demand.

We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration, and quality issues.

Based on our analysis, we record adjustments to inventory for potentially excess, obsolete, or impaired goods, when appropriate, in order to report inventory at net realizable value.

Based on our analysis, we record adjustments to inventory for potentially excess, obsolete, or impaired goods, when appropriate, to report inventory at net realizable value.

Inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates.

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Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation and any impairment charges.

Depreciation is computed using the straight-line method over the estimated useful life of the asset, generally two years to three years for computer equipment, three years to five years for software, three years to seven years for furniture and fixtures and three years to five years for lab equipment.

Property and equipment are stated at cost, reviewed regularly for impairment charges, and depreciated over the estimated useful lives of the assets, using the straight-line method.

Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the related asset.

Major improvements are capitalized, while maintenance and repairs are expensed as incurred.

Impairment of Long-Lived Assets

Estimated useful lives of the major classes of property and equipment are as follows:

Estimated Useful Lives

Leasehold improvements

3 to 10 years

Lab equipment

Computer equipment

Computer software

Furniture and fixtures

Impairment of Tangible Long-Lived Assets

We periodically review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is impaired or the estimated useful lives are no longer appropriate.

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If indicators of impairment exist and the undiscounted projected cash flows associated with such assets are less than the carrying amount of the asset, an impairment loss is recorded to write the asset down to its estimated fair value.

To date, we have no t recorded any impairment charges.

To date, we have not recorded any impairment charges.

Operating Leases

We lease administrative, manufacturing and laboratory facilities under operating leases.

Lease agreements may include rent holidays, rent escalation clauses and tenant improvement allowances.

We recognize scheduled rent increases on a straight-line basis over the lease term beginning with the date we take possession of the leased space.

Leasehold improvements are capitalized at cost and depreciated over the shorter of their expected useful life or the life of the lease.

On January 1, 2019, we adopted ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the consolidated balance sheet.

Operating lease assets and liabilities are reflected within “Operating lease right-of-use assets, net”, “Operating lease liabilities, current” and “Operating lease liabilities, non-current” on the consolidated balance sheets.

These assets and liabilities are recognized at the commencement date based on the present value of remaining minimum lease payments over the lease term using our estimated secured incremental borrowing rates at the effective date of January 1, 2019.

Leases with terms of 12 months or less are expensed on a straight-line basis over the term and are not recorded in the consolidated balance sheets.

We record operating lease right-of-use assets and liabilities on our Consolidated Balance Sheets for all leases with a term of more than 12 months.

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 fixed rent per the term of the Lease.

Operating lease expense 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.

Goodwill and Intangible Assets

We perform annual impairment testing of goodwill and in-process research and development project (“IPR&D”) in the second quarter of each year, or more frequently if indicators of potential impairment exist.

We capitalize IPR&D assets and will begin to amortize the asset over the life of the product upon commercialization or record an impairment charge if the project is abandoned.

We also capitalize finite-lived intangibles assets and amortize them on a straight-line basis over the estimated useful lives.

Finite-lived intangibles assets include our acquired developed technology and customer relationships.

We regularly review the carrying amount and useful lives of our finite-lived assets to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives.

Short-term Restricted Cash

At December 31, 2020 the short-term restricted cash balance of $ 0.8 million was comprised of $ 0.5 million of a customer deposit and $ 0.3 million of the security deposit for the credit cards for employees.

At December 31, 2021, the short-term restricted cash balance of $ 0.5 million consisted of security deposits for employee credit cards .

Long-term Restricted Cash

Under the lease agreement for our corporate offices, we were required to establish a letter of credit for the benefits 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, on May 1, 2019 the $ 4.5 million in restricted cash was reduced to $ 4.0 million and on May 1, 2020 the $ 4.0 million in restricted cash was reduced to $ 3.5 million.

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 Consolidated Balance Sheets as of December 31, 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.

Revenue Recognition

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Product revenue primarily consists of sales of our instruments and related consumables.

service and other revenue primarily consists of revenue earned from product maintenance agreements.

Service and other revenue consists primarily of revenue earned from product maintenance agreements.

We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable.

Revenues are recognized when control of the promised goods or services is transferred to our customers or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Taxes we collect concurrent with revenue-producing activities are excluded from revenue.

Our instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, installation, training, and consumables.

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As a result, the system and installation are considered to be a single performance obligation recognized after installation is completed except for sales to qualified distributors, in which case the system is distinct and recognized when control has transferred to the distributor which typically occurs upon shipment.

The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price (“SSP”).

The SSP is determined based on observable prices at which we separately sell the products and services.

If a SSP is not directly observable, then we will estimate the SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices and other observable inputs.

The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price.

We determine the best estimate of standalone selling price using average selling prices over a 12-month period combined with an assessment of current market conditions.

If the standalone selling price is not directly observable, then we will estimate the SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices and other observable inputs.

We recognize revenues as performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer.

Our revenue arrangements generally do not provide a right of return.

Contract liabilities and contract assets - Contract liabilities consist of deferred revenue.

We record deferred revenues when cash payments are received or due in advance of our performance for product maintenance agreements.

Deferred revenue is recognized over the related performance period, generally one year to three years , on a straight-line basis as we are standing ready to provide services and a time-based measure of progress best reflects the satisfaction of the performance obligation.

Other practical expedients and exemptions - Customers generally are invoiced upon acceptance of the system, which is also the start of the one year service period.

As such, there is typically not more than a one year difference between the receipt of cash and the provision of services.

Therefore, we apply the practical expedient and do not account for any potential significant financing benefit.

However, it is noted that some customers will pre-order extended service periods at the time of the initial system sale.

These customers may choose to make quarterly or annual payments or prepay multiple years of service upfront but there is no pricing difference between these different payment options.

As such, no significant financing component is believed to exist with any of our existing arrangements.

Revenue is recorded net of discounts, distributor commissions, and sales taxes collected on behalf of governmental authorities.

We record deferred revenues when cash payments are received or due in advance of our performance.

Deferred revenue for instrument service contracts is recognized over the related performance period, generally one year to five years, on a straight-line basis as we are standing ready to provide services and a time-based measure of progress best reflects the satisfaction of the performance obligation.

Cost of Revenue

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Research and Development

Research and development expense consists primarily of expenses for personnel engaged in the development of our SMRT Sequencing technology, the design and development of our future products and current product enhancements.

These expenses also include prototype-related expenditures, development equipment and supplies, facilities costs and other related overhead.

Research and development expense consists primarily of expenses for personnel engaged in the development of our core technology, the design and development of our future products and current product enhancements.

These expenses also include prototype-related expenditures, development equipment and supplies, partner development costs, facilities costs and other related overhead.

We expense research and development costs during the period in which the costs are incurred.

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We adopted Topic 326 on January 1, 2020.

The adoption of Topic 326 did not have a material impact on our financial statements and our bad debt expense was immaterial as of December 31, 2020.

The adoption of Topic 326 did not have a material impact on our financial statements and our bad debt expense was immaterial as of the years ended December 31, 2020 and 2021.

Trade accounts receivable - The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts.

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Available-for-sale debt securities - Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and US government and agency securities.

We regularly review the securities in an unrealized loss position and evaluate the current expected credit loss by considering factors such as significance of loss, historical experience, market data, issuer-specific factors, and current economic conditions and concluded that an allowance for credit losses was not required as of December 31, 2020.

Although we have historically not experienced significant credit losses, our exposure to credit losses may increase if our customers are adversely affected by changes in economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors.

The unrealized losses on our investments are mainly attributable to government securities, including U.S.

government and U.S.

agency bond securities, impacted by movements in market rates and not due to issuer credit ratings.

We have the ability to hold and do not intend to sell the investments in unrealized loss positions before the recovery of their amortized cost bases.

Although we have historically not experienced significant credit losses, our exposure to credit losses may increase if our customers are adversely affected by changes in economic pressures or uncertainty associated with local or global economic recessions, disruptions associated with the evolution of the COVID-19 pandemic, or other customer-specific factors.

We account for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax bases of our assets and liabilities and the amounts reported in the financial statements.

In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards.

The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.

A full valuation allowance is provided against our net deferred tax assets as it is more likely than not that the deferred tax assets will not be fully realized.

We review our positions taken relative to income taxes.

To the extent our tax positions are more likely than not going to result in additional taxes, we would accrue the estimated amount of tax related to such uncertain positions.

We regularly review our positions taken relative to income taxes.

To the extent our tax positions are more likely than not going to result in additional taxes, we accrue the estimated amount of tax related to such uncertain positions.

Stock-based Compensation

We account for share-based payments using a fair-value based method for costs related to all share-based payments, including stock options, restricted stock units, and stock issued under our employee stock purchase plan (“ESPP”).

We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.

See Note 8 for further information regarding stock-based compensation.

Other Comprehensive Income (loss)

Other comprehensive income (loss) is comprised of unrealized gains (losses) on our investment securities.

We estimate the fair value of share-based payment awards that are stock options and issued under our ESPP on the date of grant using an option-pricing model.

Stockholders’ Equity for further information regarding stock-based compensation.

Other Comprehensive (Loss) Income

Other comprehensive (loss) income is comprised of unrealized gains (losses) on our investment securities.

Shipping and Handling

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Recent Accounting Pronouncements

Recently Issued Accounting Standards

In August 2020, the FASB issued ASU No.

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):

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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 are currently evaluating the impact of the provisions of this guidance on our consolidated financial statements.

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 consolidated financial statements.

In February 2021, we issued $900 million of 1.50% Convertible Senior Notes due February 15, 2028, as described in Note 7.

Convertible Senior Notes , which are accounted for under ASU 2020-06.

In December 2019, the FASB issued ASU No.

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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 will be effective for our annual reporting periods beginning after December 15, 2020, including interim reporting periods within those fiscal years.

We have evaluated the effect that this guidance will have on our Consolidated Financial Statements and determined it will not have a material impact.

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13 Financial Instruments - Credit Losses (Topic 326):

The adoption of Topic 326 did not have a material impact on our financial statements and our bad debt expense was immaterial as of December 31, 2020.

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 consolidated financial statements.

Accounting Pronouncements Pending Adoption

In October 2021, the FASB issued 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.

This authoritative guidance will be effective for us in the first quarter of 2023, with early adoption permitted.

We are currently evaluating the effect of this new guidance on our consolidated financial statements.

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 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.

In addition, 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.

Total consideration transferred for the acquisition is as follows (in thousands):

Total cash paid

Fair value of share consideration

Fair value of contingent consideration

Stock-based compensation expense excluded from consideration transferred

Total consideration transferred

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 SBB 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 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) Income.

The fair value of the contingent consideration liability, with the assistance from a third-party valuation firm, 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

Property and equipment, net

Operating lease right-of-use assets, net

In-process research and development ("IPR&D")

Deferred income tax liability

Liabilities assumed

Total consideration transferred

The purchase price allocation is preliminary.

We continue to collect information regarding certain estimates and assumptions, including potential liabilities and contingencies.

We will recognize adjustments to the preliminary amounts with a corresponding adjustment to goodwill in the reporting period in which the adjustments to the preliminary amounts are determined over a period not to exceed twelve months.

During the year ended December 31, 2021, we recorded a measurement period adjustment of $ 1.6 million to decrease goodwill and a corresponding $ 0.4 million to decrease the deferred tax liability on the Consolidated Balance Sheet, and a $ 1.2 million decrease to our benefit from income taxes on the Consolidated Statements of Operations and Comprehensive (Loss) Income.

The measurement period adjustment was due to new information that became available to us upon the completion of the IRC Section 382 Tax Study, where we identified additional net operating losses that are available to us from acquired assets.

Refer to Note 9.

Income Taxes for more information.

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 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.

Expected future cash flows utilize significant assumptions such as assumed revenue growth, discount rate and obsolescence factors.

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 $ 12.0 million during the twelve months ended December 31, 2021, which are included in merger-related costs on the Consolidated Statement of Operations and Comprehensive (Loss) Income.

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 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 $ 12.0 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 $ 91.0 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.

The following table summarizes the unaudited pro forma financial information:

Years Ended December 31,

(in thousands, except per share amounts)

Pro forma total revenue

Pro forma net (loss) income

Pro forma net (loss) income per share - basic and diluted

Our 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 $ 15.6 million from the acquired Omniome business have been included in our Consolidated Statement of Operations and Comprehensive (Loss) Income for the twelve months ended December 31, 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

Property and equipment, net

Intangible assets

Deferred income tax liability

Liabilities assumed

Total consideration transferred

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, of which $ 11.0 million consists of developed technology.

The fair value of the developed technology was determined, with the assistance from a third-party valuation firm, using an income approach based on a forecast of expected future cash flows.

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.

INVITAE COLLABORATION ARRANGEMENT

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 Program Products become commercially available, 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.

Under the Development Agreement, Invitae is funding 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 Program Products, and subsequently for manufacturing the Program Product.

We jointly make general decisions regarding the development program with Invitae but we are responsible for research and development activities.

The development program is expected to last approximately sixty months but may be shorter or longer.

The primary benefit of the arrangement to Invitae is preferred pricing on the Program Products.

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, we are obligated to sell the Program Product at a substantial discount to Invitae until a multiple of the contribution received from Invitae is repaid.

For a specified period after the end of the Preferential Pricing Period, we have arranged to sell the Program Product to Invitae at a higher price, as 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 and certain other circumstances by each party, including circumstances where Invitae may terminate for delays, intellectual property 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 paid to us, and in certain circumstances, a mutually agreed return.

We have incurred and 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.

The contract is accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers as the primary benefit from the arrangement to Invitae is the ability to procure the Program Products during the Preferential Pricing Period at substantial discounts.

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 will recognize proportionate amounts of t he material right in revenue as the performance obligations are satisfied, which is when Invitae places purchase orders for Program Products and the associated goods or services are delivered.

Discounts that are not expected to be used 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 December 31, 2021, we have recognized payments received from Invitae of $ 23.5 million in deferred revenue, non-current, on the 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.

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 and $ 18.0 million as non-operating income in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended December 31, 2020 and 2019, respectively.

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 a non-operating expense in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

Please refer to Note 1.

Organization and 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.

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 non-operating income in the fourth quarter of 2020.

FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

The fair value hierarchy established under U.S.

GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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:

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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.

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.

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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 December 31, 2020 and 2019, respectively (in thousands):

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of December 31, 2021 and December 31, 2020 respectively:

December 31, 2021

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Total assets measured at fair value

Financing Derivative

Continuation advances

Contingent consideration

Total liabilities measured at fair value

Estimated fair value of the Financing Derivative liability

The estimated fair value of the Financing Derivative liability (as defined in the “Notes payable, current” section in “Note 5.

Balance Sheet Components”) was determined using Level 3 inputs, or significant unobservable inputs.

Changes to the estimated fair value of the Financing Derivative are recorded in “Other income, net” in the consolidated statements of operations and comprehensive loss.

The estimated fair value of the Financing Derivative was determined by comparing the difference between the fair value of the promissory notes from the debt facility that we entered into during the first quarter of 2013 with and without the Financing Derivative by calculating the respective present values from future cash flows using a 6.5 % discount rate at December 31, 2019.

The estimated fair value of the Financing Derivative as of December 31, 2019 was $ 0 .

In February 2020, upon maturity of the promissory notes , the Financing Derivative was extinguished.

Refer to the “Notes payable, current” section in “Note 5.

Balance Sheet Components” for a detailed description and valuation approach.

Estimated fair value of the Continuation Advances liability

In accordance with the terms of the Merger Agreement, we received Continuation Advances of $ 34.0 million and $ 18.0 million from Illumina during the year ended December 31, 2020 and 2019, respectively.

We determined that the Continuation Advances, which are subject to repayment under certain circumstances as discussed below, constitute a financial liability.

The fair value option was elected for the financial liability because management believes that among all measurement methods allowed by Accounting Standards Codification, or ASC, 825, Financial Instruments , the fair value option would most fairly represent the value of such a financial liability.

Management applied the income approach to estimate the fair value of this financial liability.

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.

On a quarterly basis, 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.

A decrease in the probability of an earlier scenario within this range would result in a decrease in the fair value of the liability.

The discount rates used are the sum of the U.S.

risk-free rate and the estimated subordinated credit spread for B- and B credit rating, which ranges from 4.8 % to 5.5 %.

Changes in our estimated subordinated credit spread can result in changes in the fair value of the contingent consideration liability, where a lower credit spread may result in an increased liability valuation.

Changes in the estimated fair value of the contingent consideration liability for the year ended December 31, 2021 were as follows:

(in thousands)

Beginning balance as of January 1, 2021

Acquisition of Omniome

Change in estimated fair value

Ending balance as of December 31, 2021

Changes to the fair value are recorded as the Change in fair value of contingent consideration in the Consolidated Statement of Operations and Comprehensive (Loss) Income.

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 estimated that there would be no future cash outflows associated with this financial instrument because the probabilities of either of the following events occurring and requiring repayment to Illumina were evaluated as being remote as of December 31, 2020 and December 31, 2019:

 we enter into a Change of Control Transaction within two years following March 31, 2020;

 we raise $ 100 million or more in a single equity or debt financing (that may have multiple closings) within two years following March 31, 2020.

As a result, the estimated fair value of the liability associated with the contingent repayment of the Continuation Advances received was assessed to be zero as of December 31, 2020 and 2019, respectively, with a resulting non-operating gain of $ 34.0 million and $ 18.0 million recorded as “Gain from Continuation Advances from Illumina” for the year ended December 31, 2020 and 2019, respectively.

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 7.

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 a non-operating expense in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

There was no further liability exposure for Continuation Advances as of December 31, 2021.

For the year ended December 31, 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 year ended December 31, 2021.

Cash, Cash Equivalents and Investments

The following table summarizes our cash, cash equivalents and investments as of December 31, 2020 and 2019 (in thousands):

The following table summarizes our cash, cash equivalents and investments as of December 31, 2021 and 2020:

As of December 31, 2021

(in thousands)

Cash and cash equivalents:

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government & agency securities

Treasury security

Total cash and cash equivalents

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As of December 31, 2020

(in thousands)

Cash and cash equivalents:

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Commercial paper

government & agency securities

Treasury security

Total cash and cash equivalents

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Corporate debt securities

government & agency securities

Total investments

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The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of December 31, 2021:

(in thousands)

Due in one year or less

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Total investments

Our marketable debt investments are classified as current based on the nature of the investments and their availability for use in current operations.

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

BALANCE SHEET COMPONENTS

Short-term restricted cash

As of December 31, 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.

As of December 31, 2021 and 2020, our inventory consisted of the following components:

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Depreciation expense during the years ended December 31, 2021, 2020 and 2019 was $ 7.2 million, $ 6.4 million and $ 7.3 million, respectively.

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.

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.

Goodwill and intangible assets

Goodwill arises from business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired.

The fair values of net tangible assets and intangible assets acquired are based upon preliminary valuations and our estimates and assumptions are subject to change within the measurement period (potentially up to one year from the acquisition date).

The following table presents the changes in the carrying amount of goodwill for the periods indicated (in thousands):

Balance as of December 31, 2020

Acquisition of Omniome

Acquisition of Circulomics

Balance as of December 31, 2021

Acquired Intangible Assets

Intangible assets include acquired in-process research and development (IPR&D) of $ 400 million as a result of the Omniome acquisition in September 2021.

In addition to IPR&D, we had the following acquired definite-lived intangible assets as of December 31, 2021 (in thousands, except years):

Developed technology

Customer relationships

Amortization expense of intangibles was $ 0.4 million for the year ended December 31, 2021.

We had no amortization expense of intangibles for the years ended December 31, 2020 and 2019.

The estimated future amortization expense of acquisition-related intangible assets with definite lives is estimated as follows (in thousands):

2027 and thereafter

Accrued Expenses

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Accrued product development costs

Accrued Tenant Improvements for Menlo Park building

Accrued interest payable

Inventory accrual

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Deferred Revenue

As of December 31, 2020, we had a total of $ 10.3 million of deferred revenue from our service contracts, $ 8.7 million of which was recorded as “Deferred revenue, current” to be recognized over the next year and the remaining $ 1.6 million was recorded as “Deferred revenue, non-current” to be recognized in the next 3 years.

Revenue recorded in the year ended December 31, 2020 includes $ 7.6 million, respectively, of previously deferred revenue that was included in “Deferred revenue, current” as of December 31, 2019.

As of December 31, 2021, we had a total of $ 36.0 million of deferred revenue, $ 11.0 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 $ 25.0 million was recorded as deferred revenue, non-current.

Of the deferred revenue, non-current balance, $ 23.5 million relates to payments received under the Invitae collaboration and $ 1.5 million primarily relates to deferred service contract revenues and is scheduled to be recognized in the next 5 years.

Revenue recorded in the year ended December 31, 2021 includes $ 8.6 million of previously deferred revenue that was included in “Deferred revenue, current” as of December 31, 2020.

Contract assets as of December 31, 2021 and December 31, 2020 were not material.

As of December 31, 2021, we had a total of $ 0.7 million of deferred commissions included in “Prepaid expenses and other current assets” which is recognized as the related revenue is recognized.

Additionally, as a practical expedient, we expense costs to obtain a contract as incurred if the amortization period would have been a year or less.

Notes payable, current

As of December 31, 2019, a balance of $ 16.0 million aggregate principal amount of debt remained outstanding under the debt agreement with Deerfield entered into in February 2013 and was presented as “Notes payable, current” on the consolidated balance sheet as of December 31, 2019.

In February 2020, upon the maturity of the debt agreement, we repaid the remaining outstanding principal of $ 16.0 million and interest.

Financing Derivative

A number of features embedded in the promissory notes required accounting for them as a derivative, including the indemnification of certain withholding taxes and the acceleration of debt upon (i) a qualified financing, (ii) an event of default, (iii) a Major Transaction (as such term is defined in the Facility Agreement), and (iv) the exercise of the warrant via offset to the debt principal.

These features represent a single derivative (the “Financing Derivative”) that was bifurcated from the debt instrument and accounted for as a liability at fair value, with changes in fair value between reporting periods recorded in other income (expense), net.

The estimated fair value of the Financing Derivative was determined by comparing the difference between the fair value of the promissory notes with and without the Financing Derivative by calculating the respective present values from future cash flows using a 6.5 % discount rate at December 31, 2019.

The estimated fair value of the Financing Derivative as of December 31, 2019 was $ 0 .

In February 2020, after we repaid the remaining outstanding principal of $ 16.0 million and interest to Deerfield, the related Financing Derivative expired.

Additionally, as a practical expedient, we expense costs to obtain a contract as incurred if the amortization period would ha ve been a year or less.

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.

As of December 31, 2021, the carrying value of term loans outstanding was $ 3.9 million.

The related long-term portion of $ 2.3 million was recorded as part of “Other liabilities, non-current” and the short-term portion of $ 1.6 million was recorded as part of “Other liabilities, current” on the Consolidated Balance Sheet.

The interest expense was $ 0.2 million for the year ended December 31, 2021, which was included as part of interest expense in the Consolidated Statement of Operations and Comprehensive (Loss) Income.

As of December 31, 2021, the future principal payments remaining on term loans was the following:

(in thousands)

Other liabilities, current

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Other liabilities, current

Pursuant to the terms of the then-in-process Merger Agreement with Illumina, offerings under our 2010 ESPP were suspended after the completion of the purchase period ended March 1, 2019, resulting in the balance for “Accrued ESPP” being $ 0 as of December 31, 2019.

After the merger with Illumina was terminated in January 2020, we began offerings under the ESPP again starting with the offering period beginning March 1, 2020.

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 (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.

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 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 December 31, 2021, the net carrying amount of the liability for the Notes is recorded as convertible senior notes, net in the Consolidated Balance Sheets as follows (in thousands):

Principal amount

Unamortized debt issuance costs

Net carrying amount

For the year ended December 31, 2021, interest expense for the Notes was as follows (in thousands):

Contractual interest expense

Amortization of debt issuance costs

Total interest expense

As of December 31, 2021, the estimated fair value (Level 2) of the Notes was $ 787.5 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.

COMMITMENTS AND CONTINGENCIES

In July 2015 we entered into a lease agreement with respect to our facility located at 1305 O’Brien Drive, Menlo Park, California.

The term of the O’Brien Lease is one hundred thirty-two ( 132 ) months.

In December 2016, we entered into an amendment to the O’Brien Lease which defined the commencement date of the lease to be October 25, 2016, notwithstanding that such substantial completion did not occur until the first quarter of 2017.

Base monthly rent was abated for the first six (6) months of the lease term and thereafter was $ 540,000 per month during the first year of the lease term, with specified annual increases thereafter until reaching $ 711,000 per month during the last twelve (12) months of the lease term.

If the rent is not received within five days of the due date, there will be an additional sum equal to 5 % of the amount overdue as a late charge.

Any amount not paid within 10 days after receipt of landlord’s written notice will bear interest from the date due until paid, at the lesser rate of (1) the prime rate of interest as published in the Wall Street Journal, plus 2 % or (2) the maximum rate allowed by law, in addition to the late payment charge.

We were required to establish a letter of credit for the benefits of the landlord and to submit $ 4.5 million as a deposit for the letter of credit in October 2015.

We record operating lease right-of-use assets and liabilities on our 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 Consolidated Balance Sheets.

Lease payments included in the measurement of the lease liability comprise the fixed rent per the term of the Lease.

All of our leases are operating leases.

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We evaluate renewal and termination options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors.

The weighted average remaining lease term for our operating leases as of December 31, 2020 was 6.8 years.

The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate.

The incremental borrowing rate for our leases is determined based on lease term and currency in which lease payments are made, adjusted for impacts of collateral.

The weighted average discount rate used to measure our operating lease liabilities as of December 31, 2020 was 7.9 %.

The following table presents information as to the amount and timing of cash flows arising from our operating leases as of December 31 , 2021:

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Total operating lease liabilities

Cash paid for amounts included in the present value of operating lease liabilities was $ 7.2 million and $ 7.0 million for the year ended December 31, 2020 and 2019, respectively and were included in operating cash flow.

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 6.7 %.

The weighted average remaining lease term for our operating leases as of December 31, 2021 was 5.7 years.

Cash paid for amounts included in the present value of operating lease liabilities was $ 8.2 million and $ 7.2 million for the years ended December 31, 2021 and 2020, respectively and were included in operating cash flow.

Operating Lease Costs

Operating lease costs were $ 6.2 million and $ 6.2 million for the year ended December 31, 2020 and 2019, respectively.

For both 2020 and 2019 the operating lease costs primarily related to our operating leases, but also included immaterial amounts for variable leases.

Operating lease costs were $ 7.2 million and $ 6.2 million for the years ended December 31, 2021 and 2020, respectively.

For both 2021 and 2020 the total lease costs primarily related to our operating leases, but also included immaterial amounts for variable leases.

Contingencies

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We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

Legal Proceedings

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.

17-cv-275 (“275 Action”)).

The complaint is based on our U.S.

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.

17-cv-1353 (“1353 Action”)).

The complaint is based on our U.S.

9,678,056 (the “’056 Patent”) and U.S.

We are seeking remedies including injunctive relief, damages and costs.

On March 28, 2018, we added a claim for infringement of our U.S.

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.

A trial for the U.S.

District Court matters was held from March 9 through March 18, 2020.

The jury determined that ONT Inc.

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 claim one of the ’056 Patent, written description and indefiniteness.

The jury declined to find valid or infringed U.S.

We are pursuing an appeal of the decision at the U.S.

Court of Appeals for the Federal Circuit.

Unrelated to the preceding matters, on September 26, 2019, Personal Genomics of Taiwan, Inc.

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.

The matter from this complaint (the “PGI District Court matter”) is based on PGI’s U.S.

19-cv-1810) (the “PGI District Court matter”).

The matter from this complaint is based on PGI’s U.S.

7,767,441 (the “‘441 Patent”).

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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 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 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.

On January 18, 2022, the Board issued decisions on the two IPRs.

In one IPR, all challenged claims were found unpatentable including PGI’s core device claims.

In the second IPR, the board did not find the disputed claims unpatentable.

We are appealing the decision in the second IPR to the U.S.

Court of Appeals for the Federal Circuit.

On August 19, 2020, the court ordered a stay of the PGI District Court matter based on a joint stipulation by the parties pending a final written decision on the IPRs.

Following the final decision on the IPRs described above, on February 2, 2022, the judge ordered that the PGI District Court matter be reopened.

We plan to vigorously defend against the remaining claims.

Proceedings in China

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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.

On December 1, 2021, PGI filed an appeal with the Beijing IP Court, contesting the CNIPA decision.

Other Proceedings

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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 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.

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.

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State tax rate, net of federal benefit

Stock-based compensation

Change in valuation allowance

Stock-based compensation

Merger Expenses

Deferred income taxes reflect the net tax effects of loss and credit carry forwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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At December 31, 2021, we maintained a full valuation allowance against all of our deferred tax assets which totaled $ 366.9 million, including net operating loss carryforwards and research and development credits of $ 378.0 million and $ 60.7 million, respectively.

Due to uncertainties surrounding the realization of deferred tax assets through future taxable income, we have provided a full valuation allowance and, therefore, have not recognized any benefits from net operating losses and other deferred tax assets.

A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred income tax assets will not be realized.

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In evaluating our ability to recover our deferred income tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations.

Accordingly, we have provided a full valuation allowance against our net deferred tax assets as of December 31, 2020 and 2019, respectively.

A deferred income tax benefit of $ 93.6 million for the year ended December 31, 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 valuation allowance on the net deferred tax assets of our U.S.

entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets.

Accordingly, this benefit from income taxes is reflected on our Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

For the year ended December 31, 2021, our valuation allowance increased to $ 366.9 million, primarily because of an increase in our net operating losses, credits and acquisition of deferred tax assets that were fully offset by a valuation allowance.

For the year ended December 31, 2020, our valuation allowance increased to $ 300.5 million, primarily because of an increase in our net operating losses and tax credits offset by a decrease to our stock-based compensation deferred tax asset.

For the year ended December 31, 2019, our valuation allowance increased to $ 298.7 million, primarily because of an increase to our net operating losses, tax credits and changes in book to tax timing differences.

As of December 31, 2020, we had a net operating loss carryforward for federal income tax purposes of approximately $ 913.9 million, $ 755.9 million of which will begin to expire after 2024 and through 2037 , and $ 158.0 million of which do not expire.

We had a total state net operating loss carryforward of approximately $ 634.3 million, which have expiration dates of 2025 and beyond.

As of December 31, 2021, we had a net operating loss carryforward for federal income tax purposes of approximately $ 1,491.3 million, of which $ 774.9 million will begin to expire in 2024 if not utilized.

We had a total state net operating loss carryforward of approximately $ 997.4 million, which are subject to annual expirations.

Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change of ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions.

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Balance as of December 31, 2020

Decrease in balance related to tax positions taken in prior year

Increase in balance related to tax positions taken in prior year

Increase in balance related to tax positions taken during current year

Balance as of December 31, 2021

Decrease in balance related to tax positions taken in prior years of $ 17.3 million in 2020 relates to the fact that we completed a research and development credit study in 2020 and adjusted our associated uncertain tax position accordingly for the 2004-2019 tax years.

Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

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We are not currently under examination by income tax authorities in any jurisdiction.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Securities Act (CARES Act) was signed into law in the US in March 2020.

The CARES Act adjusted a number of provisions in the tax code, including the calculation and eligibility of certain deductions and the treatment of net operating losses and tax credits.

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the year ended December 31, 2020, or to our net deferred tax assets as of December 31, 2020.

California Assembly Bill 85 (AB 85) was signed into law in June 2020.

The legislation suspends the use of California Net Operating Loss deductions for 2020, 2021, and 2022 for certain taxpayers and imposes a limitation on the use of certain California Tax Credits for 2020, 2021, and 2022.

The carryover periods for Net Operating Loss deductions disallowed by this provision will be extended.

Given the Company’s net operating loss position in the current year, the new legislation will not impact the current year provision.

The Company will continue to monitor possible California net operating loss and credit limitations in future periods.

On December 27, 2020, the U.S.

government enacted the Consolidated Appropriations Act, 2021, which enhances and expands certain provisions of the CARES Act.

This legislative act did not have a material impact on the Company’s consolidated financial results.

On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic.

The American Rescue Plan includes, among other things, provisions relating to PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis.

Under ASC 740, the effects of new legislation are recognized upon enactment.

Accordingly, the American Rescue Plan is effective beginning in the quarter that includes March 11, 2021.

These provisions did not have a material impact on the Company’s Consolidated Financial Statements.

STOCKHOLDERS’ EQUITY

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In August 2020, we entered into an underwriting agreement, relating to the public offering of 19,430,000 shares of our common stock, $ 0.001 par value per share, at a price to the public of $ 4.47 per share.

Under the terms of the underwriting agreement, we also granted the underwriters a 30 -day option to purchase up to an additional 2,914,500 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 August 2020.

subject to the underwriters’ option, closed in August 2020.

In total, we sold 22.3 million shares of our common stock.

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The total net proceeds to us from the two offerings, after deducting the underwriting commission and offering expenses, were approximately $ 187.2 million.

For the year ended December 31, 2018, we issued 30.6 million shares of our common stock through our two underwritten public offerings with an average offering price of $ 3.38 per share.

The total net proceeds to us from the two offerings, after deducting the underwriting commissions and offering expenses, were approximately $ 97.5 million.

As of December 31, 2019, we had two active equity plans:

1) the 2010 Equity Incentive Plan (the “2010 Plan”) and 2) the 2010 Outside Director Equity Incentive Plan (the “2010 Director Plan”), both of which we adopted upon the effectiveness of our initial public offering in October 2010.

Pursuant to the terms of the then-in-process Merger Agreement with Illumina, offerings under our 2010 ESPP were suspended after the completion of the purchase period ended March 1, 2019.

After the merger with Illumina was terminated in January 2020, we began offerings under the ESPP again starting with the offering period beginning March 1, 2020.

As of June 30, 2020, in total, we had three active equity compensation plans:

the 2010 Plan, the 2010 Director Plan and the 2010 ESPP.

On July 29, 2020 our 2010 Plan and 2010 Director Plan expired.

On August 4, 2020, stockholders approved our new 2020 Equity Incentive Plan (the “2020 plan”) and reserved 11,000,000 shares of the Company’s 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 the Company’s common stock for issuance pursuant to equity awards granted under the Inducement Plan.

Private Placement of Common Stock

On July 19, 2021, in connection with the Omniome acquisition, we entered into a purchase agreement with certain qualified institutional buyers and institutional accredited investors, pursuant to which we agreed to sell an aggregate of 11,214,953 shares of common stock, at a price of $ 26.75 per share, for aggregate gross proceeds of approximately $ 300 million.

The transaction closed on September 20, 2021.

We registered the private placement shares for resale following the closing of the merger.

The 2020 Equity Incentive Plan (the “2020 Plan”), the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”) and the 2021 adopted Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc.

(the “Omniome Plan”) allow for the issuance of stock options, restricted units and awards and performance-based awards.

On August 4, 2020, stockholders approved 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 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 and November 22, 2021, the Board amended the Inducement Plan to reserve an additional 750,000 and 360,000 shares, respectively.

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.

2020 Equity Incentive Plan

Under the 2020 Plan, with the approval of the Compensation Committee of the Board of Directors, we may grant equity-based awards, including non-statutory stock options, restricted stock units (“RSUs”), restricted stock, stock appreciation rights, performance shares and performance units.

Under the 2020 Plan, with the approval of the Board of Directors or the Compensation Committee of the Board of Directors, we may grant equity-based awards, including non-statutory stock options, restricted stock units (“RSUs”), restricted stock, stock appreciation rights, performance shares and performance units.

Stock options granted under the 2020 Plan may be either incentive stock options (“ I SOs”) within the meaning of Internal Revenue code Section 422 or non-qualified stock options (“NSOs”).

Stock options under the 2020 Plan may be granted with a term of up to ten years and at prices no less than the fair market value of our common stock on the date of grant.

To date, stock options granted to existing employees generally vest over four years on a monthly basis and stock options granted to new employee vest at a rate of 25 % upon the first anniversary of the vesting commencement date and 1/48th per month thereafter, in each case, subject to continued service with us through the applicable vesting dates.

Inducement Plan

Under the Inducement Plan, with the approval of the Compensation Committee of the Board of Directors, we may grant equity-based awards, including non-statutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units, and its terms are substantially similar to the 2020 Plan, including with respect to treatment of equity awards in the event of a “merger” or “change in control” as defined under the Inducement Plan, but with such other terms and conditions intended to comply with the NASDAQ Inducement Award exception.

To date, stock options granted to existing employees generally vest over four years on a monthly basis and stock options granted to new employees vest at a rate of 25% upon the first anniversary of the vesting commencement date and 1/48th per month thereafter, in each case, subject to continued service with us through the applicable vesting dates.

2020 Inducement Equity Incentive Plan

Under the Inducement Plan, with the approval of the Board of Directors or the Compensation Committee of the Board of Directors, we may grant equity-based awards, including non-statutory stock options, restricted stock units, restricted stock, stock appreciation rights, performance shares and performance units.

The terms of the Inducement Plan are substantially similar to the 2020 Plan, including with respect to treatment of equity awards in the event of a “merger” or “change in control” as defined under the Inducement Plan, but with such other terms and conditions intended to comply with the NASDAQ Inducement Award exception.

In accordance with Rule 5635(c)(4) of the NASDAQ Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the Company or in connection with a merger or acquisition, to the extent permitted by Rule 5635(c)(3) of the NASDAQ Listing Rules.

As of December 31, 2020, we had an aggregate of 10.3 million shares remained available for future issuance under the 2020 Plan and Inducement Plan.

As of December 31, 2021, we had 8.1 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan.

Stock Options

The following table summarizes stock option activity for all of our stock option plans for the year ended December 31, 2020 (in thousands, except per share amounts):

Time-based stock options

The following table summarizes time-based stock option activity for all of our equity compensation plans for the year ended December 31, 2021 (in thousands, except per share amounts):

Stock Options Outstanding

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exercise price

Balances, December 31, 2019

Options granted

Options exercised

Options canceled

Balances, December 31, 2020

The expired options during the year ended December 31, 2020 totaled 2.4 million with exercise prices ranging from $ 1.16 to $ 16.00 and a weighted average exercise price per share of $ 8.49 .

The following table summarizes information with respect to stock options outstanding and exercisable under the plans at December 31, 2020:

Outstanding at December 31, 2020

23.06 – 46.37

Assumed Omniome options

Outstanding at December 31, 2021

The expired options during the year ended December 31, 2021 totaled 0.02 million with exercise prices ranging from $ 2.54 to $ 46.37 per share and a weighted average exercise price per share of $ 9.80 .

Performance-based stock options

The following table summarizes performance-based stock option activity for all of our equity compensation plans for the year ended December 31, 2021 (in thousands, except per share amounts):

Stock Options Outstanding

Exercise price

exercise price

Outstanding at December 31, 2020

Assumed Omniome options

Outstanding at December 31, 2021

The following table summarizes information with respect to stock options outstanding and exercisable under our equity compensation plans at December 31, 2021:

Options Outstanding

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41.73 - 46.37

33.03 – 36.70

The aggregate intrinsic value of the outstanding and exercisable options presented in the table above totaled $ 147.9 million and $ 121.4 million, respectively.

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The total intrinsic value of stock options exercised during the years ended December 31, 2021, 2020 and 2019 was $ 146.1 million, $ 63.1 million and $ 2.6 million, respectively.

The weighted-average grant-date fair value of all options granted with exercise prices equal to fair market value was $ 4.14 in 2020, $ 0 in 2019, $ 1.50 in 2018 determined by the Black-Scholes option valuation method.

There were no options granted with exercise prices lower than fair market value in 2020, 2019 and 2018.

The weighted-average grant-date fair value of all options granted with exercise prices equal to fair market value was $ 18.36 in 2021 and $ 4.14 in 2020 determined by the Black-Scholes option valuation method.

No stock options were granted in 2019.

Time-based RSUs

Each RSU represents one equivalent share of our common stock to be awarded after satisfying the applicable continued service-based vesting criteria over a specified period.

Each RSU represents one equivalent share of our common stock to be issued after satisfying the applicable continued service-based vesting criteria over a specified period.

These RSUs vest over four years at a rate of 25 % annually.

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Unvested RSUs outstanding at December 31, 2021

For the years ended December 31, 2020, 2019 and 2018, we recognized compensation expense of $ 7.7 million, $ 4.9 and $ 0.2 million, respectively, related to time-based RSUs.

Performance-based RSUs

Starting 2018 the Compensation Committee of the Board of Directors approved awards of RSUs with performance-based vesting under the 2010 Plan to certain employees.

Each RSU represents one equivalent share of our common stock to be awarded upon vesting at the end of the performance periods, if specific performance goals set by the Compensation Committee of the Board of Directors are achieved.

No RSUs with performance-based vesting will vest if the performance goals are not met.

The fair value of these RSUs is based on the closing price of our common stock on the date of grant.

We make a quarterly probability assessment as to whether the performance goals will be achieved.

Changes in our assessment of the probability of vesting results in adjustments to stock-based compensation, which may include either a cumulative catch-up of expense or a reduction of expense depending on whether the likelihood of vesting has increased or decreased, that is recognized in the period such determination is made.

The RSUs do not entitle participants to the rights of holders of common stock, such as voting rights, until the shares are issued.

RSUs that are expected to vest are net of estimated future forfeitures.

The Compensation Committee of the Board of Directors approved awards of RSUs with performance-based vesting under the 2010 Plan to certain employees which expired on July 29, 2020.

Performance-based RSUs are governed under the 2020 Plan.

The following table summarizes the performance-based RSUs activity for the year ended December 31, 2021 (in thousands, except per share amounts):

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2010 Employee Stock Purchase Plan

We adopted the ESPP in October 2010.

Our ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods.

As of December 31, 2021, a total of 21.5 million shares of our common stock have been reserved for issuance under our 2010 Employee Stock Purchase Plan (ESPP).

The ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods.

Each offering period will generally consist of four purchase periods, each purchase period being approximately six months .

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If the stock price at the end of the purchase period is lower than the stock price at the beginning of the offering period, that offering period will then be terminated and new offering period comes to place.

The ESPP provides for an annual increase to the shares available for issuance at the beginning of each calendar year equal to 2 % of the common shares then outstanding.

The ESPP provides for an annual increase to the shares available for issuance at the beginning of each fiscal year equal to the lessor of 2 % of the common shares then outstanding, 4,000,000 shares, or an amount determined by the ESPP’s administrator.

Pursuant to the terms of the then-in-process Merger Agreement with Illumina, offerings under our 2010 ESPP were suspended after the completion of the purchase period ended March 1, 2019.

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Sales, general and administrative

Merger-related expenses - stock-settled

Merger-related expenses - milestone

Stock-based compensation

Merger-related expenses - cash-settled

Total stock-based compensation expense

As of both December 31, 2020 and 2019, $ 0.3 million of stock-based compensation cost was capitalized in inventory on our consolidated balance sheets, respectively.

As of December 31, 2021 and 2020, $ 0.9 million and $ 0.3 million of stock-based compensation cost was capitalized in inventory on our consolidated balance sheets, respectively.

The tax benefit of stock-based compensation expense was immaterial for the years ended December 31, 2021, 2020 and 2019.

Determining Fair Value

We estimate the fair value of share options granted using the Black-Scholes valuation method and a single option award approach.

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 RSU awards 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 Employee Stock Purchase Plan, or ESPP, we estimate the grant-date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model.

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.

Stock Options

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The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards.

For the year ended December 31, 2019, we did no t grant any stock option.

For the year ended December 31, 2019, we did no t grant any stock options.

When determining the current share prices underlying the stock options for calculating the grant-date fair value, we reference observable market prices of similar or identical instruments in active markets.

For the years ended December 31, 2021, 2020 and 2019, the fair value of employee stock options was estimated using the following weighted average assumptions:

Years Ended December 31,

Expected term (years)

Expected term in years

Expected volatility

Risk-free interest rate

0.05 % – 1.10 %

Dividend yield

We recorded stock-based compensation expense for stock options of $ 6.2 million, $ 11.0 million and $ 15.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, $ 9.9 million of total unrecognized compensation expense related to stock options was expected to be recognized over a weighted-average period of 3 years.

Weighted average grant date fair value per share

Cash received from option exercises for the years ended December 31, 2021, 2020 and 2019 was $ 25.4 million, $ 43.9 million and $ 5.9 million, respectively.

We estimated the fair value of shares to be issued under the ESPP using the Black-Scholes option pricing model.

For the years ended December 31, 2020, 2019 and 2018, weighted average fair value at grant date for shares to be issued under the ESPP was $ 1.68 , $ 0 and $ 1.47 , respectively.

We estimate the fair value of shares to be issued under the ESPP using the Black-Scholes option pricing model.

For the years ended December 31, 2021, 2020 and 2019, the fair value of shares to be issued under the ESPP was estimated using the following assumptions:

Years Ended December 31,

Expected term (years)

Expected term in years

Expected volatility

Risk-free interest rate

0.1 % - 0.2 %

Dividend yield

We recorded stock-based compensation expense for ESPP of $ 3.4 million, $ 0.5 million and $ 6.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Weighted average grant date fair value per share

Cash received through the ESPP for the years ended December 31, 2021, 2020 and 2019 was $ 6.4 million, $ 2.4 million and $ 2.7 million, respectively.

NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share and diluted net income (loss) per share are presented for the three years presented.

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 outstanding stock options, restricted stock units and common stock issuable pursuant to our ESPP, using the treasury stock method.

The following table presents the calculation of weighted average shares of common stock used in the computations of basic and diluted net income (loss) per share amounts presented in the accompanying consolidated statements of operations and comprehensive income (loss) (in thousands, except per share amounts):

As of December 31, 2021, $ 122.9 million of total unrecognized compensation expense related to stock options, restricted stock and ESPP shares was expected to be recognized over a weighted-average period of 2.9 years.

NET (LOSS) INCOME PER SHARE

Basic net (loss) income per share and diluted net (loss) income per share are presented for the three years presented.

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period.

Diluted net (loss) income per share is computed using the weighted average number of shares of common stock outstanding and potential shares assuming the dilutive effect of outstanding stock options, restricted stock units and common stock issuable pursuant to our ESPP, using the treasury stock method.

The following table presents the calculation of weighted average shares of common stock used in the computations of basic and diluted net (loss) income per share amounts presented in the accompanying consolidated statements of operations and comprehensive (loss) income (in thousands, except per share amounts):

Years Ended December 31,

Net income (Loss)

Weighted average shares used in computing basic net income (loss) per share

Basic net income (loss) per share

Net (loss) income

Weighted average shares used in computing basic net income (loss) per share

Basic net (loss) income per share

Weighted average shares used in computing basic net (loss) income per share

weighted average stock options

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weighted average common stock issuable pursuant to our ESPP

Weighted average shares used in computing diluted net income (loss) per share

Diluted net income (loss) per share

The following options outstanding, time-based RSUs, performance-based RSUs and ESPP shares to purchase common stock 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:

Weighted average shares used in computing diluted net (loss) income per share

Diluted net (loss) income per share

The following shares issuable upon conversion of convertible senior notes, options outstanding, time-based RSUs, performance-based RSUs and ESPP shares to purchase common stock 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:

Years Ended December 31,

(in thousands)

Shares issuable upon conversion of convertible senior notes

Options to purchase common stock

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RSUs with performance-based vesting

Common stock issuable pursuant to our ESPP

SEGMENT AND GEOGRAPHIC INFORMATION

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A summary of our revenue by category for the years ended December 31, 2021, 2020 and 2019 is as follows:

Year Ended December 31,

Years Ended December 31,

(in thousands)

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Total revenue

SUBSEQUENT EVENTS

Invitae Collaboration

On January 12, 2021 we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae Corporation (“Invitae”), to begin development of a production-scale high-throughput sequencing platform, leveraging the power of PacBio’s highly accurate HiFi sequencing to expand Invitae’s whole genome testing capabilities.

In connection with the development of the Program Products, Invitae will provide to the Company amounts equal to certain development costs incurred by the Company.

Under the Development Agreement, we will be primarily responsible for conducting a development program to develop the Program Products pursuant to a schedule and budget.

We will make decisions regarding the development program jointly with Invitae.

The development program is expected to last approximately sixty months , but may be shorter or longer.

The Program Products will be sold to Invitae as they are developed and we have the right to broadly commercialize Program Products with other customers.

As a 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.

During the initial period of preferred pricing for each Program Product, Invitae may purchase the Program Product at a substantially reduced margin until it has recouped a mutually agreed multiple of its contribution.

Subsequently, for up to three years after the initial period of preferred pricing, Invitae has the right to purchase the Program Product at a higher price within a specified price range.

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, 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 generated from the sale of the Program Products 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 collaboration agreement in 2021.

We are still evaluating the accounting impact of the agreement, including whether the funding received by the Company from Invitae represents discounts toward future supplies, funding of development efforts, or a combination of both.

There can be no assurances that the development program will be successful or that the Program Platform will become ready for commercial sale.

Issuance and Sale of 1.50% Convertible Senior Notes due February 15, 2028

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 the Company’s 1.50 % Convertible Senior Notes due February 15, 2028 (the “Notes”).

The Notes were issued on February 16, 2021.

Issuance of Convertible Notes

The Notes are expected to be governed by an indenture (the “Indenture”) between the Company and U.S.

Bank National Association, as trustee (the “Trustee”).

The Notes will 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 commencing 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 will be convertible into shares of the Company’s 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.

On or after February 20, 2026, the Notes will be redeemable by the Company in the event that the closing sale price of the Company’s 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 the Company provides the redemption notice at a redemption price of 100 % of the principal amount of such Notes, plus accrued and unpaid interest to, but excluding, the redemption date.

With certain exceptions, upon a change of control of the Company or the failure of the Company’s common stock to be listed on certain stock exchanges (a “Fundamental Change”), the holders of the Notes may require that the Company repurchase all or part of the principal amount of the Notes at a purchase price of par plus unpaid interest to, but excluding, the maturity date.

The Indenture will include customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture.

The Indenture will also include customary covenants for convertible notes of this type.

Standstill Obligations

Pursuant to the Investment Agreement, the Purchaser has agreed, subject to certain exceptions, that from the Closing and until the earliest of (i) the three year anniversary of the Closing, (ii) the effective date of a change of control of the Company and (iii) 90 days after the date on which none of the members of the Purchaser or its affiliates beneficially own any Notes or shares of the Company’s common stock received upon conversion of the Notes (the “Standstill Period”), the Purchaser will not, among other things:

(i) make, or in any way participate in any “proxy contest” or other solicitation of proxies, (ii) form, join, influence or in any way participate in a voting trust or similar arrangement, (iii) acquire any securities of the Company if, immediately after such acquisition, the Purchaser or its affiliates would collectively own in the aggregate more than 19.99 % of the then outstanding voting securities of the Company, (iv) sell, transfer or otherwise dispose of any voting securities of the Company to any person who is (or will become upon consummation of such sale, transfer or other disposition) a beneficial owner of 10 % or more of the outstanding voting securities of the Company, (v) propose or seek to effect any tender or exchange offer, merger or other business combination involving the Company, or make any public statement with respect to such transaction, (vi) call or seek to call any meeting of stockholders or other referendum or consent solicitation, or (vii) take action to control or influence the Board of Directors or management of the Company.

Transfer Restrictions;

Registration Rights

The Investment Agreement restricts the Purchaser’s ability to transfer the Notes and the Company’s common stock issuable or issued upon conversion of the Notes and enter into any hedging or other agreement that transfers the economic consequences of ownership of the Notes or the Company’s common stock issuable or issued upon conversion of the Notes, subject to certain exceptions specified in the Investment Agreement and summarized below.

Except as described below, prior to the earlier of (i) the one year anniversary of the Closing or (ii) immediately prior to the consummation of a change of control of the Company, the Purchaser will be restricted from transferring or entering into any hedging or other agreement that transfers the economic consequences of ownership of the Notes or the Company’s common stock issuable or issued upon conversion of the Notes.

Exceptions include:

(A) transfers to affiliates, (B) transfers to the Company or any of its subsidiaries, (C) transfers to a third party where the net proceeds of such sale are solely used to satisfy a margin call or repay a permitted loan or (D) transfers in connection with certain merger and acquisition events.

Subject to certain limitations, the Investment Agreement provides the Purchaser and any lender of a permitted loan to the Purchaser or its affiliates with certain registration rights for the shares of the Company’s common stock issuable or issued upon conversion of the Notes.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data