PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-Q

Item 1. Financial Statements PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Balance Sheets (Unaudited) June 30, December 31, (in thousands, except per share amounts) 2022 2021 Assets Current assets Cash and cash equivalents $ 310,445 $ 460,725 Investments 588,706 583,675 Accounts receivable, net 27,058 24,241 Inventory, net 36,121 24,599 Prepaid expenses and other current assets 7,657 7,394 Short-term restricted cash 300 500 Total current assets 970,287 1,101,134 Property and equipment, net 37,957 32,504 Operating lease right-of-use assets, net 43,274 46,617 Long-term restricted cash 2,922 4,592 Intangible assets, net 410,523 410,979 Goodwill 409,974 409,974 Other long-term assets 1,205 1,170 Total assets $ 1,876,142 $ 2,006,970 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 12,883 $ 11,002 Accrued expenses 25,174 36,261 Deferred revenue, current 32,084 10,977 Operating lease liabilities, current 8,350 7,710 Other liabilities, current 5,905 5,759 Total current liabilities 84,396 71,709 Deferred revenue, non-current 1,827 25,049 Contingent consideration liability, non-current 163,216 169,717 Operating lease liabilities, non-current 45,497 49,970 Convertible senior notes, net, non-current 896,374 896,067 Other liabilities, non-current 2,946 3,471 Total liabilities 1,194,256 1,215,983 Commitments and contingencies Stockholders’ equity Preferred stock, $ 0.001 par value: Authorized 50,000 shares; No shares issued or outstanding — — Common stock, $ 0.001 par value: Authorized 1,000,000 shares; issued and outstanding 224,756 and 220,978 shares at June 30, 2022 and December 31, 2021, respectively 225 221 Additional paid-in capital 2,058,103 2,009,945 Accumulated other comprehensive loss ( 5,457 ) ( 1,087 ) Accumulated deficit ( 1,370,985 ) ( 1,218,092 ) Total stockholders’ equity 681,886 790,987 Total liabilities and stockholders’ equity $ 1,876,142 $ 2,006,970 See accompanying notes to the condensed consolidated financial statements. 3 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2022 2021 2022 2021 Revenue: Product revenue $ 30,175 $ 26,533 $ 58,419 $ 51,836 Service and other revenue 5,292 4,077 10,221 7,771 Total revenue 35,467 30,610 68,640 59,607 Cost of revenue: Cost of product revenue 15,499 13,222 30,319 25,919 Cost of service and other revenue 3,592 3,635 7,607 6,958 Amortization of intangible assets 183 — 366 — Total cost of revenue 19,274 16,857 38,292 32,877 Gross profit 16,193 13,753 30,348 26,730 Operating expense: Research and development 50,348 22,266 103,285 42,815 Sales, general and administrative 39,252 29,060 79,056 55,198 Change in fair value of contingent consideration ( 5,438 ) — ( 6,501 ) — Total operating expense 84,162 51,326 175,840 98,013 Operating loss ( 67,969 ) ( 37,573 ) ( 145,492 ) ( 71,283 ) Loss from Continuation Advances from Illumina - — - ( 52,000 ) Interest expense ( 3,681 ) ( 3,589 ) ( 7,378 ) ( 5,378 ) Other income (expense), net 256 161 ( 23 ) 225 Net loss ( 71,394 ) ( 41,001 ) ( 152,893 ) ( 128,436 ) Other comprehensive loss: Unrealized loss on investments ( 1,372 ) ( 80 ) ( 4,370 ) ( 91 ) Comprehensive loss $ ( 72,766 ) $ ( 41,081 ) $ ( 157,263 ) $ ( 128,527 ) Net loss per share: Basic $ ( 0.32 ) $ ( 0.21 ) $ ( 0.68 ) $ ( 0.65 ) Diluted $ ( 0.32 ) $ ( 0.21 ) $ ( 0.68 ) $ ( 0.65 ) Weighted average shares outstanding used in calculating net loss per share: Basic 224,499 198,568 223,400 196,690 Diluted 224,499 198,568 223,400 196,690 See accompanying notes to the condensed consolidated financial statements. ‎ 4 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Stockholders ’ Equity (Unaudited) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholders' (in thousands) Shares Amount Capital (Loss) Income Deficit Equity For the three months ended June 30, 2022 Balance at March 31, 2022 224,329 $ 224 $ 2,038,030 $ ( 4,085 ) $ ( 1,299,591 ) $ 734,578 Net loss — — — — ( 71,394 ) ( 71,394 ) Other comprehensive loss — — — ( 1,372 ) — ( 1,372 ) Issuance of common stock in conjunction with equity plans 427 1 847 — — 848 Stock-based compensation expense — — 19,226 — — 19,226 Balance at June 30, 2022 224,756 $ 225 $ 2,058,103 $ ( 5,457 ) $ ( 1,370,985 ) $ 681,886 For the three months ended June 30, 2021 Balance at March 31, 2021 198,340 $ 198 $ 1,404,585 $ 74 $ ( 1,124,304 ) $ 280,553 Net loss — — — — ( 41,001 ) ( 41,001 ) Other comprehensive loss — — — ( 80 ) — ( 80 ) Issuance of common stock in conjunction with equity plans 577 1 2,967 — — 2,968 Stock-based compensation expense — — 15,805 — — 15,805 Balance at June 30, 2021 198,917 $ 199 $ 1,423,357 $ ( 6 ) $ ( 1,165,305 ) $ 258,245 For the six months ended June 30, 2022 Balance at December 31, 2021 220,978 $ 221 $ 2,009,945 $ ( 1,087 ) $ ( 1,218,092 ) $ 790,987 Net loss — — — — ( 152,893 ) ( 152,893 ) Other comprehensive loss — — — ( 4,370 ) — ( 4,370 ) Issuance of common stock in conjunction with equity plans 3,778 4 6,436 — — 6,440 Stock-based compensation expense — — 41,722 — — 41,722 Balance at June 30, 2022 224,756 $ 225 $ 2,058,103 $ ( 5,457 ) $ ( 1,370,985 ) $ 681,886 For the six months ended June 30, 2021 Balance at December 31, 2020 192,294 $ 192 $ 1,372,083 $ 85 $ ( 1,036,869 ) $ 335,491 Net loss — — — — ( 128,436 ) ( 128,436 ) Other comprehensive loss — — — ( 91 ) — ( 91 ) Issuance of common stock in conjunction with equity plans 6,623 7 25,304 — — 25,311 Stock-based compensation expense — — 25,970 — — 25,970 Balance at June 30, 2021 198,917 $ 199 $ 1,423,357 $ ( 6 ) $ ( 1,165,305 ) $ 258,245 See accompanying notes to the condensed consolidated financial statements. 5 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, (in thousands) 2022 2021 Cash flows from operating activities Net loss $ ( 152,893 ) $ ( 128,436 ) Adjustments to reconcile net loss to net cash used in operating activities Loss from Continuation Advances — 52,000 Depreciation 4,591 3,198 Amortization of intangible assets 456 — Amortization of right-of-use assets 3,412 1,591 Amortization of debt discount and financing costs 319 226 Stock-based compensation 41,722 25,970 Amortization from investment premium 1,143 1,782 Change in the estimated fair value of contingent consideration ( 6,501 ) — Loss on disposition of equipment 77 — Changes in assets and liabilities Accounts receivable ( 2,817 ) ( 3,099 ) Inventory ( 13,166 ) ( 5,030 ) Prepaid expenses and other assets ( 340 ) ( 307 ) Accounts payable 1,331 1,403 Accrued expenses ( 11,357 ) 5,560 Deferred revenue ( 2,115 ) 9,402 Operating lease liabilities ( 3,833 ) ( 2,144 ) Other liabilities 379 ( 932 ) Net cash used in operating activities ( 139,592 ) ( 38,816 ) Cash flows from investing activities Purchase of property and equipment ( 7,657 ) ( 1,970 ) Purchase of investments ( 241,086 ) ( 635,400 ) Sales of investments — 34,557 Maturities of investments 230,515 150,175 Net cash used in investing activities ( 18,228 ) ( 452,638 ) Cash flows from financing activities Continuation Advances — ( 52,000 ) Proceeds from issuance of Convertible Senior Notes, net of issuance costs — 895,536 Proceeds from issuance of common stock from equity plans 6,440 25,311 Notes payable principal payoff ( 770 ) — Other — ( 246 ) Net cash provided by financing activities 5,670 868,601 Net (decrease) increase in cash and cash equivalents and restricted cash ( 152,150 ) 377,147 Cash and cash equivalents and restricted cash at beginning of period 465,817 85,947 Cash and cash equivalents and restricted cash at end of period $ 313,667 $ 463,094 Cash and cash equivalents at end of period 310,445 459,794 Restricted cash at end of period 3,222 3,300 Cash and cash equivalents and restricted cash at end of period $ 313,667 $ 463,094 See accompanying notes to the condensed consolidated financial statements. 6 Table of Contents PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 . ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES We are a life science technology company that 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 June 30, 2022. Actual results could differ materially from these estimates. 7 Table of Contents 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. Cash equivalents may be comprised of money market funds, certificates of deposit, commercial paper, corporate bonds and notes, and government agencies’ securities. 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 U.S. government and agency securities with high credit ratings. We have established guidelines regarding diversification and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield. Concentration and Other Risks For the three months ended June 30, 2022, one customer accounted for approximately 11 % of total revenue during the period. For the six months ended June 30, 2022, no customers exceeded 10%. For the three and six months ended June 30, 2021, one customer accounted for approximately 17 % and 14 % of total revenue during the period. No other customers exceeded 10% during those periods. As of June 30, 2022, 57 % of our accounts receivable were from domestic customers, compared to 53 % as of December 31, 2021. As of June 30, 2022, one customer represented 11 % 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 that 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 first quarter of 2022, 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. 8 Table of Contents NOTE 2. BUSINESS ACQUISITIONS Omniome, Inc. On September 20, 2021, we completed our acquisition of Omniome, Inc. (“Omniome”), a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy. In connection with the acquisition, 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 was attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction. Upon achievement of the milestone, shares will be issued not in excess of an amount equal to 19.9 % of our outstanding shares of common stock on the date of closing (prior to the issuance of any shares issued in connection with the transaction or the related private placement), less 11,500,000 shares. 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. The acquisition was accounted for as a business combination and, accordingly, the total fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands): Cash and cash equivalents $ 15,338 Property and equipment, net 6,123 Operating lease right-of-use assets, net 18,095 In-process research and development ("IPR&D") 400,000 Goodwill 390,665 Other assets 3,203 Deferred income tax liability ( 91,814 ) Liabilities assumed ( 26,821 ) Total consideration transferred $ 714,789 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. 9 Table of Contents Circulomics, Inc. On July 20, 2021, we acquired Circulomics Inc. (“Circulomics”), a Maryland-based biotechnology company focused on delivering highly differentiated sample preparation products that enable genomic workflows. We paid $ 29.5 million in cash in exchange for all outstanding shares of common stock of Circulomics. We allocated the consideration transferred to the identifiable assets acquired and liabilities assumed based on their respective fair values at the date of the completion of the acquisition. The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands): Cash and cash equivalents $ 987 Property and equipment, net 214 Intangible assets 11,360 Goodwill 19,309 Other assets 467 Deferred income tax liability ( 2,672 ) Liabilities assumed ( 118 ) Total consideration transferred $ 29,547 NOTE 3. INVITAE COLLABORATIO N On June 24, 2022, we entered into an Amended and Restated Development and Commercialization Agreement (the “Amended and Restated Agreement”) with Invitae Corporation (“Invitae”). The Amended and Restated Agreement amended and restated the existing Development and Commercialization Agreement, effective as of January 12, 2021, as amended by Amendment No. 1 to Development and Commercialization Agreement, entered into on June 3, 2021, by and between us and Invitae (together, the “Original Agreement”). Unless otherwise agreed in writing or terminated in accordance with the Amended and Restated Agreement, the term of the Amended and Restated Agreement shall continue until June 30, 2028 (“Term”). Pursuant to the Original Agreement, Invitae provided certain funding to us to develop products relating to production-scale high-throughput sequencing (“Program Products”). If Program Products were to become commercially available, Invitae had the right to purchase the Program Products at preferred pricing. Under the Amended and Restated Agreement, we will continue to receive feedback, input and insight from Invitae in connection with the intended development of our new sequencing systems; however, such feedback will not be contractually required, and Invitae has no contractual right to participate in decisions regarding the development program for such new sequencing systems. Our development plans for such new sequencing systems will be at our discretion and pursuant to our own internal processes and programs. Invitae will not be contractually obligated to reimburse us for development costs under the Amended and Restated Agreement. There can be no assurances that the in-development sequencing systems will continue to be developed, be successfully developed or become available for commercial sale. In consideration of the non-refundable payments received from Invitae pursuant to the Original Agreement of $ 23.5 million, we will provide Invitae with credits in connection with Invitae’s anticipated purchase of certain currently available and in-development sequencing systems (instruments and consumables). The credits will expire on June 30, 2025 (“Credit Expiration Date”). Subject to certain conditions, Invitae will also be entitled to most favored pricing for the Company’s Sequel IIe systems and certain in-development systems through the Term. 10 Table of Contents We and Invitae may terminate the Amended and Restated Agreement if the other party remains in material breach of the Amended and Restated Agreement following a cure period to remedy the material breach. The Amended and Restated Agreement is deemed a contract modification and accounted for on a prospective basis in accordance with ASC Topic 606. We will recognize proportionate amounts of the transaction price, including payments made by Invitae to us pursuant to the Original Agreement, in revenue as the remaining performance obligations are satisfied, which is when Invitae places purchase orders for certain currently available and in-development sequencing platforms and the associated goods are delivered. Any remaining unused credits will be recognized when they expire. During the three months ended June 30, 2022, Invitae purchased certain currently available instruments, for which $ 3.7 million of revenue was recognized as Product Revenue on the Condensed Consolidated Statements of Operations and Comprehensive Loss under the terms of the Amended and Restated Agreement. 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. As of June 30, 2022, $ 21.4 million of deferred revenue, current, is recorded on the Condensed Consolidated Balance Sheet relating to all future performance obligations under the Amended and Restated Agreement. NOTE 4. TERMINATION OF MERGER WITH ILLUMINA On November 1, 2018, we entered into an Agreement and Plan of Merger (as amended, the “Illumina Merger Agreement”) with Illumina, Inc. (“Illumina”) and FC Ops Corp., a wholly owned subsidiary of Illumina (“Illumina Merger Sub”). On January 2, 2020, we, Illumina and Illumina Merger Sub, entered into an agreement to terminate the Merger Agreement (the “Termination Agreement”). Continuation Advances from Illumina As part of the Termination Agreement, Illumina paid us cash payments (“Continuation Advances”) 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 a corresponding non-operating expense was recorded in the Consolidated Statements of Operations and Comprehensive (Loss) Income during the quarter ended March 31, 2021. 11 Table of Contents NOTE 5. FINANCIAL INSTRUMENTS Fair Value of Financial Instruments Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy established under GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:  Level 1: quoted prices in active markets for identical assets or liabilities;  Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and  Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively. We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities. 12 Table of Contents Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of June 30, 2022 and December 31, 2021 respectively: June 30, 2022 December 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents 102,612 207,833 — 310,445 327,315 133,410 — 460,725 Investments: Commercial paper — 120,495 — 120,495 — 187,632 — 187,632 Corporate debt securities — 46,810 — 46,810 — 8,968 — 8,968 U.S. government & agency securities — 421,401 — 421,401 — 387,075 — 387,075 Total investments — 588,706 — 588,706 — 583,675 — 583,675 Short-term restricted cash 300 — — 300 500 — — 500 Long-term restricted cash 2,922 — — 2,922 4,592 — — 4,592 Total assets measured at fair value $ 105,834 $ 796,539 $ — $ 902,373 $ 332,407 $ 717,085 $ — $ 1,049,492 Liabilities Contingent consideration $ — $ — $ 163,216 $ 163,216 $ — $ — $ 169,717 $ 169,717 Total liabilities measured at fair value $ — $ — $ 163,216 $ 163,216 $ — $ — $ 169,717 $ 169,717 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. 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 range from 10.0 % to 10.2 %. 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 $ 6.5 million decrease in liability at June 30, 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 six months ended June 30, 2022 were as follows: (in thousands) Level 3 Beginning balance as of December 31, 2021 $ 169,717 Change in estimated fair value ( 6,501 ) Ending balance as of June 30, 2022 $ 163,216 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 six months ended June 30, 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. 13 Table of Contents The following tables summarize our cash, cash equivalents and investments as of June 30, 2022 and December 31, 2021: As of June 30, 2022 Gross Gross Amortized unrealized unrealized Fair (in thousands) Cost gains losses Value Cash and cash equivalents 310,508 8 ( 71 ) 310,445 Investments: Commercial paper 120,899 — ( 404 ) 120,495 Corporate debt securities 47,083 — ( 273 ) 46,810 U.S. government & agency securities 426,118 70 ( 4,787 ) 421,401 Total investments 594,100 70 ( 5,464 ) 588,706 Total cash, cash equivalents and investments $ 904,608 $ 78 $ ( 5,535 ) $ 899,151 Short-term restricted cash $ 300 $ — $ — $ 300 Long-term restricted cash $ 2,922 $ — $ — $ 2,922 As of December 31, 2021 Gross Gross Amortized unrealized unrealized Fair (in thousands) Cost gains losses Value Cash and cash equivalents 460,731 — ( 5 ) 460,725 Investments: Commercial paper 187,705 — ( 73 ) 187,632 Corporate debt securities 8,964 9 ( 5 ) 8,968 U.S. government & agency securities 388,088 1 ( 1,014 ) 387,075 Total investments 584,757 10 ( 1,092 ) 583,675 Total cash, cash equivalents and investments $ 1,045,488 $ 10 $ ( 1,097 ) $ 1,044,400 Short-term restricted cash $ 500 $ — $ — $ 500 Long-term restricted cash $ 4,592 $ — $ — $ 4,592 The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of June 30, 2022: (in thousands) Fair Value Due in one year or less $ 687,193 Due after one year through five years 109,346 Total investments $ 796,539 14 Table of Contents Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties. NOTE 6. BALANCE SHEET COMPONENTS Short-term Restricted Cash As of June 30, 2022 and December 31, 2021, the short-term restricted cash balance was $ 0.3 million and $ 0.5 million, respectively, which was comprised of security deposits for the credit cards of employees. Inventory, net As of June 30, 2022 and December 31, 2021, our inventory, net, consisted of the following components: June 30, December 31, (in thousands) 2022 2021 Purchased materials $ 15,451 $ 7,993 Work in process 12,808 8,611 Finished goods 7,862 7,995 Inventory $ 36,121 $ 24,599 Long-term Restricted Cash For our facility located at 1305 O’Brien Drive, Menlo Park, California (the “O’Brien Lease”), we were required to establish a letter of credit for the benefit of the landlord and to submit $ 4.5 million as a deposit for the letter of credit in October 2015. Subsequently, pursuant to the terms of the O’Brien Lease, beginning on May 1, 2019, the amount of the letter of credit was reduced by $ 0.5 million each year thereafter on May 1. As such, $ 2.5 million and $ 3.0 million was recorded in long-term restricted cash related to the O’Brien Lease in the Condensed Consolidated Balance Sheets as of June 30, 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. Long-term restricted cash related to this facility was $ 0 and $ 1.6 million in the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, we had an additional $ 0.4 million in long-term restricted cash primarily related to a letter of credit established for a facility lease. Intangible Assets and Goodwill Intangible assets include acquired in-process research and development (IPR&D) of $ 400 million as a result of the Omniome acquisition in September 2021. The IPR&D will remain on our consolidated balance sheet as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development activities. During the development period following the acquisition, IPR&D will not be amortized, but instead will be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Upon completion of the development, we will begin to amortize the asset over the life of the product, or record an impairment charge if the asset is determined to be impaired. In addition to IPR&D, we had the following definite-lived intangible assets from business acquisitions (in thousands, except years): As of June 30, 2022 As of December 31, 2021 Estimated Gross Net Gross Net Useful Life Carrying Accumulated Carrying Carrying Accumulated Carrying (in years) Amount Amortization Amount Amount Amortization Amount Developed technology 15 $ 11,000 $ ( 672 ) $ 10,328 $ 11,000 $ ( 306 ) $ 10,694 Customer relationships 2 360 ( 165 ) 195 360 ( 75 ) 285 Total $ 11,360 $ ( 837 ) $ 10,523 $ 11,360 $ ( 381 ) $ 10,979 15 Table of Contents The estimated future amortization expense of acquisition-related intangible assets with definite lives is estimated as follows: (in thousands) Remainder of 2022 $ 457 2023 838 2024 733 2025 733 2026 733 2027 and thereafter 7,029 Total $ 10,523 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. We performed our annual assessment for goodwill impairment in the second quarter of 2022, noting no impairment. Deferred revenue As of June 30, 2022, we had a total of $ 33.9 million of deferred revenue, $ 32.1 million of which was recorded as deferred revenue, current, and primarily relates to future performance obligations under the Amended and Restated Agreement with Invitae as described in Note 3. Invitae Collaboration in Part I, Item 1 of this Quarterly Report on Form 10-Q. The deferred revenue, non-current balance of $ 1.8 million primarily relates to deferred service contract revenues and is scheduled to be recognized in the next 5 years. Revenue recorded in the six months ended June 30, 2022 includes $ 9.2 million of previously deferred revenue that was included in deferred revenue as of December 31, 2021. Contract assets as of June 30, 2022 and December 31, 2021 were not material. As of June 30, 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. Product Warranties We generally provide a one-year warranty on instruments. In addition, we provide a limited warranty on consumables. At the time revenue is recognized, an accrual is established for estimated warranty costs based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue. There were no material changes in estimates for the periods presented below. Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Balance at beginning of period $ 1,174 $ 179 $ 594 $ 161 Additions charged to cost of product revenue 912 412 1,865 615 Repairs and replacements ( 477 ) ( 320 ) ( 850 ) ( 505 ) Balance at end of period $ 1,609 $ 271 $ 1,609 $ 271 Term loans In connection with the acquisition of Omniome, we acquired $ 1.3 million in short-term debt and $ 3.0 million in long-term debt relating to a term loan facility that Omniome obtained in April 2020. Borrowings on the term loan facility were used to fund Omniome’s purchases of equipment, which serves as collateral. Each term loan has a term of 43 16 Table of Contents months and bears a fixed interest rate of approximately 17 % annually. The fee for the elective option to prepay all, but not less than all, of the borrowed amounts at any time after the 24 th month and before the 43 rd month after the commencement date, is 4 % of the outstanding loan balance. Payments are made in equal monthly installments including principal and interest. The following table presents the future principal payments on the term loans: (in thousands) Remainder of 2022 $ 838 2023 1,842 2024 490 Total $ 3,170 NOTE 7. 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. 17 Table of Contents 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 June 30, 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: June 30, December 31, (in thousands) 2022 2021 Principal amount $ 900,000 $ 900,000 Unamortized debt issuance costs ( 3,626 ) ( 3,933 ) Net carrying amount $ 896,374 $ 896,067 For the three and six months ended June 30, 2022, interest expense for the Notes was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Contractual interest expense $ 3,375 $ 3,375 $ 6,750 $ 5,063 Amortization of debt issuance costs 154 151 307 227 Total interest expense $ 3,529 $ 3,526 $ 7,057 $ 5,290 As of June 30, 2022, the estimated fair value (Level 2) of the Notes was $ 559.8 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. 18 Table of Contents NOTE 8. COMMITMENTS AND CONTINGENCIES The Company has entered into various operating lease agreements, primarily relating to our corporate offices. See Note 8 – Commitments and Contingencies , subsection titled “Leases”, in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2021 for information regarding the Company’s maturity of lease liabilities under its lease agreements. Contingencies We may become involved in legal proceedings, claims and assessments from time to time in the ordinary course of business. We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Legal U.S. District Court Proceedings On September 26, 2019, Personal Genomics of Taiwan, Inc. (“PGI”) filed a complaint in the U.S. District Court for the District of Delaware against us for patent infringement (C.A. No. 19-cv-1810) (the “PGI District Court matter”). The matter from this complaint is based on PGI’s U.S. Patent No. 7,767,441 (the “‘441 Patent”). We plan to vigorously defend in this matter. On November 20, 2019, we filed our answer to the complaint, denying infringement and seeking a declaratory judgement of invalidity of the ‘441 Patent. On June 22, 2020, we filed a petition requesting institution of an inter-partes review (IPR) to the Patent Trial and Appeals Board (the “Board”) at the United States Patent Office requesting the Board to find a set of claims in the ‘441 Patent invalid. On June 27, 2020, we filed a second petition requesting institution of an IPR requesting the Board to find another set of claims in the ‘441 Patent invalid. The two petitions (the “PacBio IPR Petitions”) requesting IPRs assert that all of the claims relevant to the PGI complaint are invalid. On January 19, 2021, the Board ordered that both PacBio IPR Petitions are instituted on all grounds presented. On 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 On May 12, 2020, PGI filed a complaint in the Wuhan Intermediate People’s Court in China alleging infringement of one or more claims of China patent No. CN101743321B (the “CN321 Patent”), which is related to the ‘441 Patent. 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. On December 1, 2021, PGI filed an appeal with the Beijing IP Court, contesting the CNIPA decision. We filed a petition with the Wuhan Intermediate People’s court requesting dismissal of the infringement action based on the CNIPA invalidation decision, and PGI filed a petition to withdraw its complaint. The Wuhan Intermediate People’s court granted PGI’s petition and dismissed the infringement action in May 2022. Other Proceedings From time to time, we may also be involved in a variety of other claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes, employment and other matters that 19 Table of Contents arise in the normal course of our business. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. We record a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We currently do not believe that the ultimate outcome of any of the matters described above is probable or reasonably estimable, or that these matters will have a material adverse effect on our business; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of litigation and settlement costs, diversion of management resources and other factors. Indemnification Pursuant to Delaware law and agreements entered into with each of our directors and officers, we may have obligations, under certain circumstances, to hold harmless and indemnify each of our directors and officers against losses suffered or incurred by the indemnified party in connection with their service to us, and judgements, fines, settlements and expenses related to claims arising against such directors and officers to the fullest extent permitted under Delaware law, our bylaws and our certificate of incorporation. We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between such third parties and us in connection with such fundraising efforts. To the extent that any such indemnification obligations apply to the lawsuits described above, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification obligations has been recorded as of June 30, 2022 and December 31, 2021. N OTE 9. STOCKHOLDERS’ EQUITY Equity Plans 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. 20 Table of Contents On May 25, 2022, stockholders approved an amendment to the 2020 Plan and we reserved an additional 18,000,000 shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan. As of June 30, 2022, we had 19.5 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 for the six months ended June 30, 2022 (in thousands, except per share amounts): Stock Options Outstanding Weighted Number average of shares Exercise price exercise price Outstanding at December 31, 2021 12,159 $ 1.16 – 46.37 $ 11.38 Granted 4,611 4.61 – 16.58 10.65 Exercised ( 421 ) 1.16 – 8.90 4.21 Canceled ( 1,050 ) 2.47 – 46.37 23.98 Outstanding at June 30, 2022 15,299 $ 1.16 – 46.37 $ 10.67 Performance-based Stock Options The following table summarizes stock option activity for performance-based awards for the six months ended June 30, 2022 (in thousands, except per share amounts): Stock Options Outstanding Weighted Number average of shares Exercise price exercise price Outstanding at December 31, 2021 304 $ 4.71 – 4.90 $ 4.71 Granted — — — Exercised — — — Canceled ( 1 ) 4.71 – 4.90 4.75 Outstanding at June 30, 2022 303 $ 4.71 – 4.90 $ 4.71 For the three and six months ended June 30, 2022, we recognized stock-based compensation expense of $ 7.0 million and $ 14.5 million, respectively, related to time-based and performance-based options. Restricted Stock Units (“RSUs”) The following table summarizes the time-based RSU activity for the six months ended June 30, 2022 (in thousands, except per share amounts): Weighted average Number grant date of shares fair value Outstanding at December 31, 2021 7,392 $ 19.78 Granted 3,948 11.22 Vested ( 2,026 ) 14.90 Forfeited ( 922 ) 21.46 Outstanding at June 30, 2022 8,392 $ 16.75 For the three and six months ended June 30, 2022, we recognized stock-based compensation expense of $ 9.7 million and $ 21.6 million, respectively, related to restricted stock units. 21 Table of Contents Employee Stock Purchase Plan (“ESPP”) Shares issued under our ESPP were 1,316,923 and 983,180 during the six months ended June 30, 2022 and 2021, respectively. In February 2022, an additional 4.0 million shares were reserved under the ESPP. As of June 30, 2022, 10,493,750 shares of our common stock remain available for issuance under our ESPP. For the three and six months ended June 30, 2022, we recognized stock-based compensation expense of $ 2.3 million and $ 5.6 million, respectively, related to our ESPP. Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cost of revenue $ 988 $ 1,906 $ 2,746 $ 2,898 Research and development 7,748 4,310 16,713 7,357 Sales, general and administrative 10,283 9,589 22,263 15,715 Total stock-based compensation expense $ 19,019 $ 15,805 $ 41,722 $ 25,970 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 the three and six months ended June 30, 2022 and 2021, the fair value of employee stock options was estimated using the following weighted average assumptions: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Expected term in years 4.6 4.6 4.6 4.6 22 Table of Contents Expected volatility 72 % 70 % 70 % - 72 % 68 % - 70 % Risk-free interest rate 2.77 % 0.74 % 1.76 % - 2.77 % 0.50 % - 0.74 % Dividend yield — — — — Weighted average grant date fair value per share $ 3.26 $ 14.54 $ 6.05 $ 18.86 ESPP We estimate the fair value of shares to be issued under the ESPP using the Black-Scholes option pricing model. For the three and six months ended June 30, 2022 and 2021, the fair value of shares to be issued under the ESPP was estimated using the following assumptions: Six Months Ended June 30, 2022 2021 Expected term in years 0.5 – 2.0 0.5 - 2.0 Expected volatility 70 % 68 % Risk-free interest rate 0.60 % – 1.31 % 0.07 % - 0.13 % Dividend yield — — Weighted average grant date fair value per share $ 5.42 $ 29.26 ‎ 23 Table of Contents NOTE 10. 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Numerator: Net loss $ ( 71,394 ) $ ( 41,001 ) $ ( 152,893 ) $ ( 128,436 ) Denominator: Basic Weighted average shares used in computing basic net loss 224,499 198,568 223,400 196,690 Basic net loss per share $ ( 0.32 ) $ ( 0.21 ) $ ( 0.68 ) $ ( 0.65 ) Diluted Weighted average shares used in computing diluted net loss per share 224,499 198,568 223,400 196,690 Diluted net loss per share $ ( 0.32 ) $ ( 0.21 ) $ ( 0.68 ) $ ( 0.65 ) 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. See Note 9. 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 June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Shares issuable upon conversion of convertible senior notes 20,690 20,690 20,690 20,690 Options to purchase common stock 15,602 12,335 15,602 12,335 RSUs 8,392 6,820 8,392 6,820 ESPP shares 1,931 2,336 1,931 2,336 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. As described in Note 2. Business Acquisition s in Part I, Item 1 of this Quarterly Report on Form 10-Q, the contingently issuable shares would be due upon the achievement of a milestone. 24 Table of Contents NOTE 11. REVENUE A summary of our revenue by geographic location for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Americas $ 21,722 $ 14,347 $ 40,804 $ 26,504 Europe, Middle East and Africa 5,735 6,494 11,435 14,819 Asia-Pacific 8,010 9,769 16,401 18,284 Total $ 35,467 $ 30,610 $ 68,640 $ 59,607 A summary of our revenue by category for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Instrument revenue $ 15,619 $ 14,282 $ 31,169 $ 29,221 Consumable revenue 14,556 12,251 27,250 22,615 Product revenue 30,175 26,533 58,419 51,836 Service and other revenue 5,292 4,077 10,221 7,771 Total revenue $ 35,467 $ 30,610 $ 68,640 $ 59,607 ‎ 25 Table of Contents