What changed in this filing

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Item 1. Financial Statements

2022-05-06 compared with 2021-11-05 · 222 added, 384 removed, 352 unchanged (63% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

(in thousands, except per share amounts)

1 unchanged sentence

Cash and cash equivalents

Accounts receivable

Accounts receivable, net

Inventory, net

Prepaid expenses and other current assets

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Authorized 1,000,000 shares;

issued and outstanding 220,547 shares and 192,294 shares at September 30, 2021 and December 31, 2020, respectively

issued and outstanding 224,329 and 220,978 shares at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive loss

Accumulated deficit

5 unchanged sentences

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Three Months Ended September 30,

Nine Months Ended September 30,

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended March 31,

(in thousands, except per share amounts)

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Sales, general and administrative

Merger-related expenses

Change in fair value of contingent consideration

Total operating expense

Operating loss

Gain (loss) from Continuation Advances

Loss from Continuation Advances from Illumina

Interest expense

Other income (expense), net

Loss before benefit from income taxes

Benefit from income taxes

Net income (loss)

Other comprehensive income (loss):

Unrealized income (loss) on investments

Comprehensive income (loss)

Net income (loss) per share:

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

Other (expense) income, net

Other comprehensive loss:

Unrealized loss on investments

Comprehensive loss

Net loss per share:

Weighted average shares outstanding used in calculating net loss per share:

See accompanying notes to the condensed consolidated financial statements.

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(in thousands)

Income (Loss)

For the three months ended September 30, 2021

Balance at June 30, 2021

(Loss) Income

For the three months ended March 31, 2022

Balance at December 31, 2021

( 1,218,092 )

1 unchanged sentence

Issuance of common stock in conjunction with equity plans

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

Issuance of common stock in acquisition of Omniome

Stock-based compensation expense

Balance at September 30, 2021

( 1,148,763 )

For the three months ended September 30, 2020

Balance at June 30, 2020

( 1,088,096 )

Other comprehensive loss

Issuance of common stock in conjunction with equity plans

Issuance of common stock from underwritten public equity offering, net of issuance costs

Stock-based compensation expense

Balance at September 30, 2020

Balance at March 31, 2022

( 1,299,591 )

For the nine months ended September 30, 2021

For the three months ended March 31, 2021

Balance at December 31, 2020

2 unchanged sentences

Issuance of common stock in conjunction with equity plans

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

Issuance of common stock in acquisition of Omniome

Stock-based compensation expense

Balance at September 30, 2021

( 1,148,763 )

For the nine months ended September 30, 2020

Balance at December 31, 2019

( 1,066,240 )

Other comprehensive income

Adoption effect of Topic 326

Issuance of common stock in conjunction with equity plans

Issuance of common stock from underwritten public equity offering, net of issuance costs

Stock-based compensation expense

Balance at September 30, 2020

Balance at March 31, 2021

( 1,124,304 )

2 unchanged sentences

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

Cash flows from operating activities

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

Loss (gain) from Continuation Advances

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

Loss from Continuation Advances

Amortization of intangible assets

Amortization of operating lease right-of-use assets

Amortization of right-of-use assets

Amortization of debt discount and financing costs

Stock-based compensation

Amortization (accretion) from investment premium (discount)

Deferred income taxes

Amortization from investment premium

Change in the estimated fair value of contingent consideration

Loss on disposition of equipment

Changes in assets and liabilities

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Other liabilities

Deferred gain from Reverse Termination Fee

Net cash provided by (used in) operating activities

Net cash used in 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

1 unchanged sentence

Maturities of investments

Net cash used in investing activities

Net cash provided by investing activities

Cash flows from financing activities

Continuation Advances

Notes payable principal payoff

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

Net cash provided by financing activities

5 unchanged sentences

Cash and cash equivalents and restricted cash at end of period

Supplemental disclosure of non-cash investing and financing activities

Issuance of common stock in acquisition of Omniome

See accompanying notes to the condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

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

Our products address several applications based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, including human germline sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications.

Across these applications, customers use our technology in a wide range of sequencing methods, including whole genome sequencing and de novo genome assembly, long-range phasing, targeted sequencing, full-length RNA and single-cell sequencing, methylation and epigenetic characterization, and others.

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

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

In addition to our SMRT sequencing technology, we are developing a highly accurate short-read sequencing platform based on the novel Sequencing by Binding (SBB®) technology.

Upon launch, we expect SBB to address adjacent applications and complement our existing long-read sequencing technology.

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

We are a life science technology company that designs, develops, and manufactures 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 and Consolidation

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

GAAP, as set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC.

The unaudited condensed consolidated financial statements include the accounts of Pacific Biosciences and our wholly owned subsidiaries.

Certain information and footnote disclosures typically included in our audited financial statements have been condensed or omitted.

The accompanying unaudited condensed consolidated financial statements have been prepared on a consistent basis with the December 31, 2021 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state our financial position, results of operations, comprehensive income (loss), and cash flows for the period, but are not necessarily indicative of the results to be expected for the entire year or any future periods.

All intercompany transactions and balances have been eliminated.

The financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements.

On an ongoing basis, we evaluate our significant estimates including, but not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the fair value of contingent consideration, the valuation of acquired intangible assets, the fair value of certain equity awards, the useful lives assigned to long-lived assets, the computation of provisions for income taxes, the borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities, the probability associated with variable payments under partnership development agreements, and the valuations related to our convertible senior notes.

While the extent of the potential impact of the ongoing COVID-19 pandemic on our business is highly uncertain, we considered information available related to assumptions and estimates used to determine the results reported and asset valuations as of March 31, 2022.

Actual results could differ materially from these estimates.

Cash, Cash Equivalents, and Investments

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-related.

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 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 and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield.

Concentration and Other Risks

For the three months ended March 31, 2022, two customers accounted for approximately 14 % and 11 %, respectively, of total revenue during the period.

For the three months ended March 31, 2021, one customer accounted for approximately 12 % of total revenue during the period.

No other customers exceeded 10% during those periods.

As of March 31, 2022, 56 % of our accounts receivable were from domestic customers, compared to 53 % as of December 31, 2021.

As of March 31, 2022, one customer represented 17 % of our accounts receivable, while no customer represented 10% or greater of our net accounts receivable as of December 31, 2021.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

There are no accounting standards updates (“ASUs”) that have been recently adopted.

Significant Accounting Policies

There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, however, as a result of certain changes to the standard contractual terms and conditions with customers implemented during the quarter ended March 31, 2022, we concluded a change in the application of our accounting policy, in accordance with ASC 606, was appropriate.

Specifically, we modified the standard contractual terms with customers during the current quarter, to reflect transfer of title and risk of loss and right to invoice upon delivery.

We also updated the terms of the warranty provided with the instrument to remove the service component.

As a result, the warranty is no longer a separate performance obligation and, accordingly, we accrue for the cost of the assurance warranty when revenue of the instrument is recognized.

In addition, because of technical enhancements associated with our more recent instrument releases, including the Sequel IIe systems, installation services are now distinct from the instrument itself.

Therefore, instrument revenue is now recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers.

BUSINESS ACQUISITIONS

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(“Omniome”), a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy.

In connection with the acquisition, all outstanding equity securities of Omniome were cancelled in exchange for consideration of $ 714.8 million, which consisted of approximately $ 315.7 million in cash, 8,911,580 shares of our common stock with a fair value of $ 249.4 million and contingent consideration with a fair value of $ 168.6 million.

The fair value of the 8,911,580 common shares issued was determined based on the closing market price of PacBio’s common shares on the acquisition date.

Out of the total consideration, approximately $ 18.9 million, comprised of $ 7.4 million of cash, 226,811 shares of our common stock with a fair value of $ 6.3 million, and $ 5.2 million related to contingent consideration, was accounted for as a one-time post acquisition stock-based compensation expense.

This stock-based compensation expense was due to accelerated vesting of Omniome stock awards in connection with the acquisition.

The contingent consideration of $ 200 million (composed of $ 100 million in cash and $ 100 million in shares of our common stock) is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of a nucleotide sequencing platform, comprising both an instrument and related consumables, that utilizes Omniome’s sequencing by binding technology.

In connection with the acquisition, the contingent consideration of $ 200 million (composed of $ 100 million in cash and $ 100 million in shares of our common stock) is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of a nucleotide sequencing platform, comprising both an instrument and related consumables, that utilizes 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 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 is accounted for as a liability at fair value, with changes during each reporting period recognized in our consolidated statements of operations and comprehensive income (loss).

The fair value of the contingent consideration liability is based on a scenario-based method which considers a range of possible outcomes and their assigned probabilities of occurrence.

Of the $100 million in shares of our common stock to be issued as part of the milestone, $ 4.1 million was 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.

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

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Total consideration transferred

The purchase price allocation is preliminary.

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

We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve months measurement period, if necessary.

The goodwill recognized was primarily attributable to the assembled workforce and synergies that are expected to occur from the integration of Omniome and is not deductible for income tax purposes.

We have allocated $ 400 million of the purchase price to acquired in-process research and development.

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

The IPR&D will remain on our consolidated balance sheet as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development activities.

During the development period following the acquisition, IPR&D will not be amortized, but instead will be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

We incurred costs related to the Omniome acquisition of approximately $ 11.6 million during the nine months ended September 30, 2021, which are included in merger-related costs on the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

Separately, in connection with the Omniome acquisition, on September 20, 2021, we issued and sold 11,214,953 shares of common stock in a private placement transaction at a price of $ 26.75 per share, for aggregate proceeds of approximately $ 294.8 million, net of issuance costs of approximately $ 5.2 million.

We were also required to register the private placement shares for resale with the SEC following the closing of the merger.

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented as if Omniome had been acquired as of the beginning of the comparable fiscal year prior to the year of acquisition, giving effect on a pro forma basis to the purchase accounting adjustments such as $ 11.6 million of PacBio acquisition-related costs, $ 18.9 million of stock-based compensation expense related to acceleration of certain Omniome stock options not attributable to pre-combination service, and a $ 92.2 million one-time income tax benefit from the reduction of our deferred tax asset valuation allowance resulting from the Omniome acquisition, as well as a pro forma adjustment to reflect $ 16.7 million of Omniome’s acquisition-related costs.

The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of the consolidated results of the combined business had the acquisition actually occurred at the beginning of the fiscal year 2020 or the results of future operations of the combined business.

The following table summarizes the unaudited pro forma financial information for the periods presented (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands, except per share amounts)

Pro forma total revenue

Pro forma net loss

Pro forma net loss per share - basic and diluted

Our condensed consolidated financial statements include the results of operations for Omniome beginning September 20, 2021.

Since the date of acquisition, revenues of $ 0 and a net loss of $ 1.6 million from the acquired Omniome business have been included in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2021.

We expect to finalize the purchase price allocation within 12 months of the acquisition date.

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, which we expect to be primarily due to the review of certain tax attributes.

Circulomics, Inc.

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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, which consist of developed technology and customer relationships.

The purchase price allocation is preliminary as we continue to collect information with regard to certain estimates and assumptions.

We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve month measurement period, if necessary.

Deferred income taxes

A benefit for income taxes of $ 94.8 million for the three and nine months ended September 30, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions.

We maintain a full valuation allowance on the net deferred tax assets of our U.S.

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

INVITAE COLLABORATION

We expect to finalize the purchase price allocation within 12 months of the acquisition date.

We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve-month measurement period, if necessary, which we expect to be primarily due to the review of certain tax attributes.

INVITAE COLLABORATIO N

On January 12, 2021 we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae Corporation (“Invitae”).

Pursuant to the Development Agreement, Invitae is providing certain funding to us to develop products relating to production-scale high-throughput sequencing (“Program Products”).

If and when Program Products become commercially available for sale, Invitae may purchase the Program Products.

In addition to selling the Program Products to Invitae, we will have the right to broadly commercialize Program Products for sale to other customers.

The funding Invitae will provide to us will equal certain development costs we incur in connection with the Program Products (“Program Development Costs”).

Under the Development Agreement, we will be responsible for conducting a program to develop the Program Products, and subsequently for manufacturing the Program Products.

We will make general

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

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

As the primary benefit of its contribution, Invitae will be entitled to preferred pricing on the Program Products if and when they are available for commercial sale.

Each Program Product will have a preferential pricing period, which will not exceed four years from the date of the first delivery of that Program Product (“Preferential Pricing Period”).

During the Preferential Pricing Period for each Program Product, Invitae may purchase the Program Product at a substantially reduced margin until it has recouped a multiple of its contribution as defined in the Development Agreement.

For a specified period after the end of the Preferential Pricing Period, Invitae has the right to purchase the Program Product at a higher price, determined by a formula, than the price during the Preferential Pricing Period (“Extended Pricing Period”).

The Extended Pricing Periods will terminate early if Invitae does not meet certain volume minimums.

We and Invitae may terminate the Development Agreement if the other party remains in material breach of the Development Agreement following a cure period to remedy the material breach.

In addition, the Development Agreement includes certain other circumstances for termination by each party, including circumstances where Invitae may terminate for delays, IP concerns, our change in control, or without cause.

In certain termination circumstances, (i) we will be obligated to refund all or a portion of the development costs advanced by Invitae and/or (ii) we will owe Invitae a share of the revenue that may be generated from the sale of the Program Products to third parties if and when they are commercialized, until such time as Invitae has recouped the amounts reimbursed to us, and in certain circumstances, a mutually agreed return.

We expect to incur significant development costs over the duration of the Development Agreement.

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

We determined that the primary benefit from the arrangement to Invitae is the ability to procure the Program Products during the Preferential Pricing Period at substantial discounts.

As we expect the Program Products to be available for Invitae to purchase in the future, we concluded the arrangement is within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

In addition, Invitae is not expected to substantially benefit from the intellectual property developed under the arrangement, or benefit from other goods or services during the development period.

We are responsible for performing the research and development activities.

Accordingly, the amounts received by the Company from Invitae during the development period represent significant discounts toward future supplies of the Program Products during the Preferential Pricing Period, and will be accounted as material rights in accordance with ASC Topic 606 .

Proportionate amounts of t hese material rights will be recognized in revenue when Invitae places purchase orders for Program Products and the associated goods or services are delivered to Invitae.

To the extent the discounts are not expected to be used, they will be recognized consistent with the guidance in Topic 606 relating to breakage, in proportion to the expected purchases by Invitae.

Any remaining unused discounts will be recognized when they expire.

All amounts received from Invitae are initially deferred and accumulated in deferred revenue, non-current.

As of September 30, 2021, we have recognized payments received from Invitae of $ 16.8 million of deferred revenue, non-current, on the Condensed Consolidated Balance Sheet.

Costs incurred to develop the Program Products are research and development costs and are expensed as incurred.

There were no capitalized origination or fulfilment costs related to the arrangement with Invitae that are eligible to be capitalized.

If Program Products become commercially available, Invitae may purchase the Program Products.

We are currently renegotiating the terms of the Development Agreement.

As of March 31, 2022 and December 31, 2021, we have recognized payments received from Invitae of $ 23.5 million in deferred revenue, non-current, on the Consolidated Balance Sheet.

TERMINATION OF MERGER WITH ILLUMINA

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Continuation Advances from Illumina

As part of the Termination Agreement, Illumina paid us cash payments (“Continuation Advances”) of $ 18.0 million during the fourth quarter of 2019 and $ 34.0 million during the first quarter of 2020.

We recorded the $ 34.0 million as part of other income in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2020.

As part of the Termination Agreement, Illumina paid us cash payments (“Continuation Advances”) totaling $ 52.0 million.

Up to the full $ 52.0 million of Continuation Advances paid to us were repayable without interest to Illumina if, within two years of March 31, 2020, we entered into, or consummated a Change of Control Transaction or raised at least $ 100 million in a single equity or debt financing (that may have multiple closings), with the amount repayable dependent on the amount raised by us.

Resulting from the issuance and sale of $ 900 million of 1.50 % Convertible Senior Notes due February 15, 2028 , $ 52.0 million of Continuation Advances were paid without interest to Illumina in February 2021 and recorded as other expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021.

Please refer to Note 5.

Summary of Significant Accounting Policies for the accounting treatment of the Continuation Advances.

Reverse Termination Fee from Illumina

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

Pursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we entered into a definitive agreement providing for, or consummated, a Change of Control Transaction, then we may have been required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction.

As indicated in ASC 450, Contingencies , a gain contingency usually is not recognized in the financial statements until the period in which all contingencies are resolved and the gain is realizable.

As such, we deferred the gain from the Reverse Termination Fee from Illumina until the date when the associated contingency lapsed.

On October 1, 2020, the contingency clauses lapsed and we recorded the $ 98.0 million as a part of other income in the fourth quarter of 2020.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements, which include the accounts of Pacific Biosciences and the accounts of our wholly-owned subsidiaries, have been prepared in accordance with U.S.

generally accepted accounting principles (“GAAP”).

Certain information and footnote disclosures typically included in our audited financial statements have been condensed or omitted.

The accompanying unaudited condensed consolidated financial statements have been prepared on a consistent basis with the December 31, 2020 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state our financial position, results of operations, comprehensive income (loss), and cash flows for the period, but are not necessarily indicative of the results to be expected for the entire year or any future periods.

All intercompany transactions and balances have been eliminated.

The financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020.

We are subject to risks and uncertainties as a result of the novel coronavirus pandemic (“COVID-19”).

The extent of the impact of the COVID-19 pandemic on our business is highly uncertain as responses to the pandemic can change quickly and information is continuing to evolve, including the effects of the Delta variant.

We considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of September 30, 2021.

Use of Estimates

On an ongoing basis, management evaluates its significant estimates including, but not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the fair value of contingent consideration, the valuation of acquired intangible assets, the fair value of certain equity awards, the useful lives assigned to long-lived assets, the computation of provisions for income taxes, the borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities, and the valuations related to our convertible senior notes.

Actual results could differ materially from these estimates.

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 a corresponding non-operating expense was recorded in the Consolidated Statements of Operations and Comprehensive (Loss) Income during the quarter ended March 31, 2021.

FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

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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 September 30, 2021 and December 31, 2020 respectively:

September 30, 2021

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of March 31, 2022 and December 31, 2021 respectively:

March 31, 2022

December 31, 2021

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government & agency securities

Treasury security

Treasury securities

Total cash and cash equivalents

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Total assets measured at fair value

Continuation Advances

Contingent consideration

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We classify contingent consideration, which was incurred in connection with the acquisition of Omniome, within Level 3 as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value.

We estimate the fair value of the contingent consideration liability by discounting the probability-weighted outcomes to present value using an estimate of our borrowing rate and the risk-free rate.

The potential outcomes of milestone achievement dates are within the period from December 31, 2022 to June 30, 2025, with the highest probability of achieving the milestone in the middle of this period.

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 CCC+ and B- credit rating, which ranges from 4.3 % to 4.8 %.

As of December 31, 2020, we classified the Continuation Advances, which were incurred in connection with the Illumina Merger Agreement and were subject to repayment under certain circumstances, as a financial liability and were reported at fair value.

The estimated fair value of the liability related to the Continuation Advances was determined using Level 3 inputs, or significant unobservable inputs.

Management assessed the fair value of this financial instrument to be zero at December 31, 2020.

We were first approached by SB Northstar LP during the quarter ended March 31, 2021 regarding a potential convertible debt transaction.

As discussed further below in Note 8.

Convertible Senior Notes , in February 2021, we entered into an investment agreement with SB Northstar LP for the issuance and sale of $ 900 million of 1.50 % Convertible Senior Notes due February 15, 2028.

As a result, $ 52.0 million of Continuation Advances were repaid without interest to Illumina in February 2021 and recorded as other expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021.

There was no further liability exposure for Continuation Advances as of September 30, 2021.

For the quarter ended September 30, 2021, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis and our valuation techniques did not change compared to the prior year.

As discussed above, we recorded a contingent consideration liability in connection with our acquisition of Omniome during the quarter ended September 30, 2021.

Net Income (Loss) per Share

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

Diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and potential shares assuming the dilutive effect of the convertible senior notes, using the if-converted method, and outstanding stock options, restricted stock units and common stock issuable pursuant to our employee stock purchase plan, or ESPP, using the treasury stock method.

The following table presents the calculation of the basic and diluted net income (loss) per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except per share amounts):

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

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

Net income (loss) per share, basic

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

Weighted average stock options

Weighted average restricted stock units

Weighted average shares issuable pursuant to ESPP

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

Net income (loss) per share, diluted

The following outstanding shares issuable upon conversion of the convertible senior notes, common stock options, restricted stock units (“RSUs”), with time-based vesting, RSUs with performance-based vesting and ESPP shares expected to be purchased, were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect.

Stockholders’ Equity for detailed information on RSUs with time-based vesting and RSUs with performance-based vesting.

Three Months Ended September 30,

Nine Months Ended September 30,

risk-free rate and the estimated subordinated credit spread for B- and B credit rating, which range from 5.7 % to 6.7 %.

An increase in the discount rates used can also result in the decrease in the fair value of liability, which was the primary factor in the $ 1.1 million decrease in liability at March 31, 2022.

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 three months ended March 31, 2022 were as follows:

(in thousands)

Shares issuable upon conversion of convertible senior notes

Options to purchase common stock

RSUs with time-based vesting

RSUs with performance-based vesting

Concentration and Other Risks

For the three and nine months ended September 30, 2021, Gene Company Limited accounted for approximately 17 % and 15 %, respectively, of our total revenue during the period with no other customer exceeding 10% during those periods.

For the three and nine months ended September 30, 2020, Gene Company Limited accounted for approximately 18 % and 14 %, respectively, of our total revenue with no other customer exceeding 10% during those periods.

Gene Company Limited is our primary distributor in China.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

This guidance simplifies the accounting for convertible instruments primarily by eliminating the existing cash conversion and beneficial conversion models within Subtopic 470-20, which will result in fewer embedded conversion options being accounted for separately from the debt host.

The guidance also amends and simplifies the calculation of earnings per share relating to convertible instruments.

This guidance is effective for annual periods beginning after December 15, 2021, including interim periods within that reporting period, excluding smaller reporting companies.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within that reporting period, using either a full or modified retrospective approach.

We adopted ASU 2020-06 on January 1, 2021.

Because we had no convertible instruments within the scope of ASU 2020-06 at the time of adoption, there was no impact of adoption on our condensed consolidated financial statements.

In February 2021 we issued $ 900 million of 1.50 % Convertible Senior Notes due February 15, 2028 , as described in Note 8.

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

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740 ):

Simplifying the Accounting for Income Taxes .

This ASU simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications.

The standard is effective for our annual reporting periods beginning after December 15, 2020, including interim reporting periods within those fiscal years.

We adopted ASU 2019-12 on January 1, 2021, and the adoption did not have a material impact on our condensed consolidated financial statements.

Significant Accounting Policies

Except for the adoption of ASU 2020-06 as discussed above and in Note 8 .

Convertible Senior Notes and the accounting for the acquisition of Omniome and Circulomics as described in Note 2.

Business Acquisitions and Note 7.

Balance Sheet Components , there have been no new or material changes to the significant accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

CASH, CASH EQUIVALENTS AND INVESTMENTS

The following tables summarize our cash, cash equivalents and investments as of September 30, 2021 and December 31, 2020 (in thousands):

As of September 30, 2021

Beginning balance as of December 31, 2021

Change in estimated fair value

Ending balance as of March 31, 2022

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

For the three months ended March 31, 2022, 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.

The following tables summarize our cash, cash equivalents and investments as of March 31, 2022 and December 31, 2021 (in thousands):

As of March 31, 2022

(in thousands)

Cash and cash equivalents:

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government & agency securities

Treasury securities

Total cash and cash equivalents

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As of December 31, 2021

(in thousands)

Cash and cash equivalents:

2 unchanged sentences

government & agency securities

Treasury security

Total cash and cash equivalents

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Long-term restricted cash:

The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of September 30, 2021 (in thousands):

The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of March 31, 2022:

(in thousands)

Due in one year or less

Due after one year through 5 years

Due after one year through five years

Total investments

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Short-term Restricted Cash

As of September 30, 2021, the short-term restricted cash balance of $ 0.5 million was comprised of security deposits for the credit cards of employees.

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

In connection with the acquisition of Omniome in September 2021, we acquired $ 0.2 million of short-term restricted cash consisting of a security deposit for credit cards of Omniome employees.

As of September 30, 2021 and December 31, 2020, our inventory consisted of the following components:

September 30,

As of March 31, 2022 and December 31, 2021, the short-term restricted cash balance was $ 0.5 million, which was comprised of security deposits for the credit cards of employees.

Inventory, net

As of March 31, 2022 and December 31, 2021, our inventory, net, consisted of the following components:

(in thousands)

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Subsequently, pursuant to the terms of the O’Brien Lease, beginning on May 1, 2019, the amount of the letter of credit was reduced by $ 0.5 million each year thereafter on May 1.

As such, $ 3.0 million and $ 3.5 million was recorded in long-term restricted cash related to the O’Brien Lease in the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively.

As such, $ 3.0 million was recorded in long-term restricted cash related to the O’Brien Lease in the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, 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.

At March 31, 2022, we had an additional $ 0.4 million in long-term restricted cash primarily related to lease deposits.

Intangible Assets and Goodwill

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

We capitalize IPR&D as an indefinite-lived intangible asset and either begin to amortize it over the life of the product upon commercialization or record an impairment charge if the project is abandoned.

In addition to IPR&D, we had the following definite-lived intangible assets from business acquisitions as of September 30, 2021 (in thousands, except years):

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.

Upon completion of the development, we will begin to amortize the asset over the life of the product, or record an impairment charge if the asset is determined to be impaired.

In addition to IPR&D, we had the following definite-lived intangible assets from business acquisitions (in thousands, except years):

As of March 31, 2022

As of December 31, 2021

Developed technology

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(in thousands)

Remainder of 2022

2027 and thereafter

We review definite-lived intangible assets for impairment on an annual basis or when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.

We review definite-lived intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.

Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment.

Changes to goodwill during the nine months ended September 30, 2021 were as follows (in thousands):

Balance as of December 31, 2020

Acquisition of Omniome

Acquisition of Circulomics

Balance as of September 30, 2021

We had no indicators of impairment related to goodwill during the three months ended March 31, 2022.

Deferred revenue

As of September 30, 2021, we had a total of $ 28.2 million of deferred revenue, $ 9.8 million of which was recorded as deferred revenue, current and primarily relates to deferred service contract revenues to be recognized over the next year and the remaining $ 18.4 million was recorded as deferred revenue, non-current.

Of the deferred revenue, non-current balance, $ 16.8 million relates to payments received under the Invitae collaboration described in Note 3 and $ 1.6 million primarily relates to deferred service contract revenues and is scheduled to be recognized in the next 5 years.

Revenue recorded in the nine months ended September 30, 2021 includes $ 7.4 million of previously deferred revenue that was included in deferred revenue, current as of December 31, 2020.

Contract assets as of September 30, 2021 and December 31, 2020 were not material.

As of September 30, 2021, we had a total of $ 0.7 million of deferred commissions included in prepaid expenses and other current assets which is recognized as sales, general and administrative expense as the related revenue is recognized.

As of March 31, 2022, we had a total of $ 38.0 million of deferred revenue, $ 12.7 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 $ 25.2 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 described in Note 3.

Invitae Collaboration in Part I, Item 1 of this Quarterly Report on Form 10-Q and $ 1.7 million primarily relates to deferred service contract revenues and is scheduled to be recognized in the next 5 years.

Revenue recorded in the three months ended March 31, 2022 includes $ 4.0 million of previously deferred revenue that was included in deferred

revenue, current as of December 31, 2021.

Contract assets as of March 31, 2022 and December 31, 2021 were not material.

As of March 31, 2022, we had a total of $ 0.6 million of deferred commissions included in prepaid expenses and other current assets which is recognized as sales, general and administrative expense as the related revenue is recognized.

Costs to obtain a contract are expensed as incurred if the amortization period would have been a year or less.

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Payments are made in equal monthly installments including principal and interest.

The following table presents the future principal payments on the term loans (in thousands):

The following table presents the future principal payments on the term loans:

(in thousands)

Remainder of 2022

CONVERTIBLE SENIOR NOTES

On February 9, 2021, we entered into an investment agreement (the “Investment Agreement”) with SB Northstar LP (the “Purchaser”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to the Purchaser of $ 900 million in aggregate principal amount of our 1.50 % Convertible Senior Notes due February 15, 2028 (the “Notes”).

The Notes were issued on February 16, 2021 .

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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 Condensed Consolidated Balance Sheets and are amortized to interest expense using the effective interest method over the term of the Notes, resulting in an effective interest rate of 1.6 %.

As of September 30, 2021, the net carrying amount of the liability for the Notes is recorded as convertible senior notes, net in the Condensed Consolidated Balance Sheets as follows (in thousands):

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 March 31, 2022 and December 31, 2021, the net carrying amount of the liability for the Notes is recorded as convertible senior notes, net, in the Condensed Consolidated Balance Sheets as follows (in thousands):

(in thousands)

Principal amount

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Net carrying amount

For the three and nine months ended September 30, 2021, interest expense for the Notes was as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30, 2021

For the three months ended March 31, 2022, interest expense for the Notes was as follows (in thousands):

Three Months Ended March 31,

(in thousands)

Contractual interest expense

1 unchanged sentence

Total interest expense

As of September 30, 2021, the estimated fair value (Level 2) of the Notes was $ 886.5 million.

As of March 31, 2022, the estimated fair value (Level 2) of the Notes was $ 654.3 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

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

In connection with the acquisition of Omniome, we acquired $ 18.1 million in right-of-use assets and liabilities on our Condensed Consolidated Balance Sheets.

The operating lease right-of-use assets and liabilities are calculated as the present value of remaining minimum lease payments over the remaining lease term using our estimated secured incremental borrowing rates at the commencement date.

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

Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments, such as common area maintenance fees, recognized in the period incurred.

The following table presents information as to the amount and timing of cash flows arising from our operating leases as of September 30, 2021:

Maturity of Lease Liabilities

Years ending December 31,

(in thousands)

Remainder of 2021

Total undiscounted operating lease payments

imputed interest

Present value of operating lease liabilities

Balance Sheet Classification

Operating lease liabilities, current

Operating lease liabilities, non-current

Total operating lease liabilities

We use our incremental borrowing rate to determine the present value of lease payments, as the implicit rates in our leases are not readily determinable.

The weighted average discount rate used to measure our operating lease liabilities was 6.8 %.

The weighted average remaining lease term for our operating leases as of September 30, 2021 was 6.0 years.

Cash paid for amounts included in the present value of operating lease liabilities was $ 1.8 million and $ 5.5 million, respectively, for the three and nine months ended September 30, 2021 and included in operating cash flow.

Operating Lease Costs

Operating lease costs were $ 1.6 million and $ 4.7 million, respectively, for the three and nine months ended September 30 of both 2021 and 2020.

The Company has entered into various operating lease agreements, primarily relating to our corporate offices.

See Note 8 – Commitments and Contingencies , subsection titled “Leases”, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2021 for information regarding the Company’s maturity of lease liabilities under its lease agreements.

Contingencies

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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) (the “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) (the “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 the ’056 Patent, written description and indefiniteness.

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

Our appeal of the decision to the U.S.

Court of Appeals for the Federal Circuit was denied on May 11, 2021.

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

On September 26, 2019, Personal Genomics of Taiwan, Inc.

(“PGI”) filed a complaint in the U.S.

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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 September 2, 2021, the CNIPA issued its decision on the Invalidation Petition and determined that all claims (1-61) of the CN321 patent were invalid.

We have filed a petition with the Wuhan Intermediate People’s court requesting dismissal of the infringement action, which we anticipate will be granted.

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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To the extent that any such indemnification obligations apply to the lawsuits described above, any associated expenses incurred are included within the related accrued litigation expense amounts.

No additional liability associated with such indemnification obligations has been recorded as of September 30, 2021.

No additional liability associated with such indemnification obligations has been recorded as of March 31, 2022 and December 31, 2021.

STOCKHOLDERS’ EQUITY

At March 31, 2020, we had three active equity compensation plans:

the 2010 Equity Incentive Plan (“2010 Plan”), the 2010 Outside Director Equity Incentive Plan (“2010 Director Plan”) and the 2010 Employee Stock Purchase Plan (“ESPP”).

Our 2010 Plan and 2010 Director Plan expired on July 29, 2020.

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

On December 2, 2020, the Board of Directors (the “Board”) adopted the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”) and reserved 2,500,000 shares of our common stock for issuance pursuant to equity awards granted under the Inducement Plan.

On April 18, 2021, the Board amended the Inducement Plan to reserve an additional 750,000 shares of our common stock for issuance pursuant to equity awards granted under the Inducement Plan.

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.

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We reserved 2,494,128 shares of our common stock for issuance pursuant to equity awards under the Omniome Plan.

As of March 31, 2022, we had 1.2 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan.

Stock Options

Time-based Stock Options

The following table summarizes stock option activity for time-based awards under all our stock option plans for the nine months ended September 30, 2021 (in thousands, except per share amounts):

The following table summarizes stock option activity for time-based awards under all our stock option plans for the three months ended March 31, 2022 (in thousands, except per share amounts):

Stock Options Outstanding

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10.18 – 16.58

Assumed Omniome options

Outstanding at September 30, 2021

Outstanding at March 31, 2022

Performance-based Stock Options

The following table summarizes stock option activity for performance-based awards under all our stock option plans for the nine months ended September 30, 2021 (in thousands, except per share amounts):

The following table summarizes stock option activity for performance-based awards under all our stock option plans for the three months ended March 31, 2022 (in thousands, except per share amounts):

Stock Options Outstanding

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Outstanding at December 31, 2021

Assumed Omniome options

Outstanding at September 30, 2021

For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 23.0 million and $ 29.0 million, respectively, related to options.

Outstanding at March 31, 2022

For the three months ended March 31, 2022, we recognized stock-based compensation expense of $ 7.5 million related to time-based and performance-based options.

Restricted Stock Units (“RSUs”)

Time-based RSUs

The following table summarizes the time-based RSUs activity for the nine months ended September 30, 2021 (in thousands, except per share amounts):

Weighted average

Outstanding at December 31, 2020

Outstanding at September 30, 2021

For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 7.7 million and $ 19.6 million, respectively, for time-based RSUs.

Performance-based RSUs

The following table summarizes the performance-based RSUs (“PSUs”) activity for the nine months ended September 30, 2021 (in thousands, except per share amounts):

The following table summarizes the time-based RSU activity for the three months ended March 31, 2022 (in thousands, except per share amounts):

Weighted average

Outstanding at December 31, 2021

Outstanding at September 30, 2021

For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 0 for the performance-based RSUs.

As of September 30, 2021, we had a total of 7.1 million shares of common stock available for future issuance under the 2020 Plan, the Inducement Plan and the Omniome Plan.

Outstanding at March 31, 2022

For the three months ended March 31, 2022, we recognized stock-based compensation expense of $ 11.9 million related to restricted stock units.

Employee Stock Purchase Plan (“ESPP”)

Shares issued under our ESPP were 1,913,968 and 834,677 during the nine months ended September 30, 2021 and 2020, respectively.

In January 2021, an additional 3.8 million shares were reserved under the ESPP.

As of September 30, 2021, 7,810,673 shares of our common stock remain available for issuance under our ESPP.

For the three and nine months ended September 30, 2021, we recognized stock-based compensation expense of $ 5.1 million and $ 13.1 million, respectively, for the ESPP.

Shares issued under our ESPP were 1,316,923 and 983,180 during the three months ended March 31, 2022 and 2021, respectively.

In February 2022, an additional 4.0 million shares were reserved under the ESPP.

As of March 31, 2022, 10,493,750 shares of our common stock remain available for issuance under our ESPP.

For the three months ended March 31, 2022, we recognized stock-based compensation expense of $ 3.3 million related to our ESPP.

Stock-Based Compensation

The following table summarizes stock-based compensation expense (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of revenue

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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

W e estimate the fair value of employee stock options on the grant date using the Black-Scholes option pricing model.

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

The assumptions used for the specified periods and the resulting estimates of weighted-average fair value per share for shares to be issued upon exercise of our stock options were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Total stock-based compensation expense

Determining Fair Value

We estimate the fair value of stock 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 RSUs granted is the closing price of our shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting period.

For shares purchased under our ESPP, we estimate the grant-date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model.

We estimate forfeitures of stock options, RSUs and shares purchased under our ESPP which is utilized to determine the compensation expense to be recorded over the requisite service period.

 Expected Term - The expected term used in the Black-Scholes valuation method represents the period that the stock options are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock options and vesting schedules.

 Expected Volatility - The expected volatility used in the Black-Scholes valuation method is derived from the implied volatility related to our share price over the expected term.

 Expected Dividend - We have never paid dividends on our shares and, accordingly, the dividend yield percentage is zero for all periods.

 Risk-Free Interest Rate - The risk-free interest rate used in the Black-Scholes valuation method is the implied yield currently available on U.S.

Treasury constant maturities issued with a term equivalent to the expected terms.

Stock Options

We estimated the fair value of employee stock options using the Black-Scholes option pricing model.

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

When determining the current share prices underlying the stock options for calculating the grant-date fair value, we reference the observable market prices of our stock.

For three months ended March 31, 2022 and 2021, the fair value of employee stock options was estimated using the following weighted average assumptions:

Three Months Ended March 31,

Expected term in years

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Risk-free interest rate

0.05 % – 0.71 %

0.05 % – 0.74 %

0.3 % - 1.2 %

Dividend yield

Weighted average grant date fair value per share

We estimate the value of employee stock purchase rights on the grant date using the Black-Scholes option pricing model.

The assumptions used for the specified reporting periods and the resulting estimates of weighted-average fair value per share for stock to be issued under the ESPP were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

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

For three months ended March 31, 2022 and 2021, the fair value of shares to be issued under the ESPP was estimated using the following assumptions:

Three Months Ended March 31,

Expected term in years

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0.07 % - 0.13 %

0.1 % - 1.0 %

Dividend yield

Weighted average fair value per share

A summary of our revenue by geographic location for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

North America

Weighted average grant date fair value per share

NET LOSS PER SHARE

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

Diluted net loss per share is computed using the weighted average number of shares of common stock outstanding and potential shares assuming the dilutive effect of the convertible senior notes, using the if-converted method, and outstanding stock options, restricted stock units and common stock issuable pursuant to our employee stock purchase plan, or ESPP, using the treasury stock method.

The following table presents the calculation of the basic and diluted net loss per share amounts presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts):

Three Months Ended March 31,

Weighted average shares used in computing basic net loss

Basic net loss per share

Weighted average shares used in computing diluted net loss per share

Diluted net loss per share

The following outstanding shares issuable upon conversion of the convertible senior notes, common stock options, restricted stock units (“RSUs”), with time-based vesting and performance-based vesting and ESPP shares expected to be purchased, were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect.

Stockholders’ Equity in Part I, Item 1 of this Quarterly Report on Form 10-Q for detailed information on RSUs with time-based vesting and RSUs with performance-based vesting.

Three Months Ended March 31,

(in thousands)

Shares issuable upon conversion of convertible senior notes

Options to purchase common stock

These potentially dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share.

Therefore, the weighted-average number of shares of common stock outstanding used to calculate both basic and diluted net loss per share is the same.

A summary of our revenue by geographic location for the three months ended March 31, 2022 and 2021 is as follows (in thousands):

Three Months Ended March, 31

(in thousands)

Europe (including the Middle East and Africa)

A summary of our revenue by category for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

A summary of our revenue by category for the three months ended March 31, 2022 and 2021 is as follows (in thousands):

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

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-Q

Item 1. Financial Statements