What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-28 compared with 2022-02-28 · 314 added, 389 removed, 721 unchanged (49% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

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Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Independent Registered Public Accounting F irm

To the Stockholders and the Board of Directors of Pacific Biosciences of California, Inc.

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

Critical Audit Matters

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

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

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

Business combinations - Valuation of intangible assets

Description of the Matter

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

and Circulomics, Inc.

The transactions were accounted for as business combinations.

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

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

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

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

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

How We Addressed the Matter in Our Audit

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

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

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

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

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

Revenue recognition - Estimation of standalone selling price

Critical Audit Matter

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

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

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

Revenue recognition - Identification of performance obligations and allocation of contract consideration

Description of the Matter

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

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

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

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

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

For the year ended December 31, 2022, the Company recognized revenue of $128.3 million, including $108.7 million of product revenue, which consists primarily of instrument sales and related consumables.

As described in Note 1 to the consolidated financial statements, instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, training, and consumables.

For bundled arrangements, the Company identifies a performance obligation for each promise to transfer, to the customer, a product or service that is distinct.

The consideration for bundled arrangements is allocated between each performance obligation based on its individual standalone selling price, which is estimated by the Company, using historical sales data, as well as management judgment.

The Company enters into, or periodically modifies, revenue contracts with non-standard terms, requiring management to evaluate whether these non-standard terms represent a performance obligation.

For example, the Company may offer specified discounts on current components of the bundled arrangements and on future purchase options, for which historical information may not be available.

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

Auditing management’s identification of the performance obligations and the resulting determination of the allocation of contract consideration in certain contracts involved a higher degree of judgment due to the subjective nature of identifying certain performance obligations and the related determination of standalone selling price when it is not based on historical information.

How We Addressed the Matter in Our Audit

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

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

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

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

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

We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls addressing management’s identification of performance obligations and allocation of contract consideration, including standalone selling price determination.

Our audit procedures included, among others, reading executed contracts for a sample of arrangements and evaluating whether terms of the contracts (including specified discounts on current and future purchase options) resulted in additional performance obligations.

Additionally, we tested the completeness and accuracy of the information used in management’s allocation of contract consideration, including the data incorporated in underlying calculations to determine standalone selling price.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2011.

Redwood City, California

San Mateo, California

February 28, 2023

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Accounts receivable, net

Inventory, net

Prepaid expenses and other current assets

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Other liabilities, current

Contingent consideration liability, current

Total current liabilities

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Additional paid-in capital

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss

Accumulated deficit

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Amortization of intangible assets

Loss on purchase commitment

Total cost of revenue

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Net (loss) income per share:

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

Weighted average shares outstanding used in calculating

‎ net (loss) income per share

See accompanying notes to the consolidated financial statements.

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(in thousands)

(Loss) Income

Balance at December 31, 2018

Other comprehensive gain

Issuance of common stock in conjunction with equity plans

Stock-based compensation expense

Income (Loss)

Balance at December 31, 2019

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

Stock-based compensation expense

Share-based compensation expense

Balance at December 31, 2020

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Issuance of common stock in acquisition of Omniome

Stock-based compensation expense

Share-based compensation expense

Balance at December 31, 2021

( 1,218,092 )

Other comprehensive loss

Issuance of common stock in conjunction with equity plans

Share-based compensation expense

Balance at December 31, 2022

( 1,532,340 )

See accompanying notes to the consolidated financial statements.

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Amortization of debt discount and financing costs

Stock-based compensation

Loss from derivative

Amortization (accretion) from investment premium (discount)

Share-based compensation

Amortization of premium and accretion of discount on marketable securities, net

Change in the estimated fair value of contingent consideration

Inventory provision

Loss on disposition of equipment

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Changes in assets and liabilities

Accounts receivable

Accounts receivable, net

Inventory, net

Prepaid expenses and other assets

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Purchase of property and equipment

Purchase of intangible assets

Cash paid for purchase of Circulomics, net of cash acquired

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Maturities of investments

Net cash (used in) provided by in investing activities

Net cash provided by (used in) in investing activities

Cash flows from financing activities

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Net cash provided by financing activities

Net increase in cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash at beginning of period

Cash and cash equivalents and restricted cash at end of period

Net (decrease) increase in cash, cash equivalents, and restricted cash

Cash, cash equivalents, and restricted cash at beginning of period

Cash, cash equivalents, and restricted cash at end of period

Cash and cash equivalents at end of period

Restricted cash at end of period

Cash and cash equivalents and restricted cash at end of period

Cash, cash equivalents, and restricted cash at end of period

Supplemental disclosure of cash flow information

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Business Overview

We are a premier life science technology company that is designing, developing and manufacturing advanced sequencing solutions to help scientists and clinical researchers resolve genetically complex problems.

We are a life science technology company that is designing, developing, and manufacturing advanced sequencing solutions that enable scientists and clinical researchers to improve their understanding of the genome and ultimately, 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 products address solutions across a broad set of applications including human genomics, 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.

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and its consolidated subsidiaries.

Basis of Presentation

Basis of Presentation and Consolidation

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

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All intercompany transactions and balances have been eliminated.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Use of Estimates

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

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

While the extent of the potential impact of the current macroeconomic conditions and 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 December 31, 2022.

Actual results could differ materially from these estimates.

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

Cash, Cash Equivalents, and Investments

Cash, Cash Equivalents, Restricted Cash, 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-

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.

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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.

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 Credit Risks

Restricted cash includes cash that is not readily available for use in the Company’s operating activities.

Restricted cash is primarily comprised of cash pledged under letters of credit.

Concentration and Other Risks

Financial instruments that potentially subject us to credit risk consist principally of interest-bearing investments and trade receivables.

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Treasury and U.S.

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

Government Agencies, or other securities fully backed by U.S.

Treasury or Government agencies.

We have not experienced significant credit losses from financial institutions.

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

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

We perform credit evaluations of our customers’ financial condition and, generally, require no collateral from our customers.

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

The allowance for credit losses is based on our assessment of the collectability of customer accounts.

We regularly review our trade receivable including consideration of factors such as historical experience, the age of the accounts receivable balances, customer creditworthiness, customer industry, and current and forecasted economic conditions that may affect a customer’s ability to pay.

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

For the years ended December 31, 2021, 2020 and 2019, one customer, Gene Company Limited, accounted for approximately 13 %, 14 % and 17 % our total revenue, respectively.

For the years ended December 31, 2022, 2021, and 2020, one customer accounted for approximately 12 %, 13 %, and 14 % of our total revenue, respectively.

As of December 31, 2022 and 2021, 57 % and 53 % of our accounts receivable were from domestic customers, respectively.

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

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

As of December 31, 2022, one customer represented approximately 10% of our net accounts receivable.

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

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

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

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

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

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

Cost is determined using the first-in, first-out (“FIFO”) method.

Inventory, Net

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out (“FIFO”) method.

Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete balances.

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Property and Equipment, Net

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

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

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

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

Transfers of assets between property and equipment, net, and inventory are transferred at standard cost and recognized at carrying value.

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

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Furniture and fixtures

Impairment of Tangible Long-Lived Assets

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

Fair value is estimated based on discounted future cash flows.

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

To date, we have not recorded any impairment charges.

Operating Leases

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

Goodwill and Intangible Assets

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

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

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

Business Combinations

Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition.

These valuations require us to make estimates and assumptions, especially with respect to intangible assets.

We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill.

Costs that we incur to complete the business combination, such as legal and other professional fees, are expensed as they are incurred.

In connection with certain acquisitions, contingent consideration can be earned by the sellers upon completion of certain future performance milestones.

In these cases, a liability is recorded on the acquisition date for an estimate of the acquisition date fair value of the contingent consideration.

These estimates require significant management judgment, including probabilities of achieving certain future milestones.

Changes in the fair value of the contingent consideration subsequent to the acquisition date are recognized in operating expense in our consolidated statements of operations and comprehensive (loss) income.

If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements.

During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

We record these adjustments to the provisional amounts with a corresponding offset to goodwill.

Any adjustments identified after the measurement period are recorded in the consolidated statements of income.

Goodwill, Intangible Assets, and Other Long-Lived Assets

Assets acquired, including intangible assets and capitalized in-process research and development (“IPR&D”), and liabilities assumed are measured at fair value as of the acquisition date.

Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of the net assets acquired.

Intangible assets acquired in a business combination that are used for IPR&D activities are considered indefinite lived until the completion or abandonment of the associated research and development efforts.

Upon reaching the end of the relevant research and development project (i.e., upon commercialization), the IPR&D asset is amortized over its estimated useful life.

If the relevant research and development project is abandoned, the IPR&D asset is expensed in the period of abandonment.

Goodwill and IPR&D are not amortized;

however, they are reviewed for impairment at least annually.

We perform annual impairment testing of goodwill in the second quarter of each year and IPR&D in the fourth quarter of each year, or more frequently if indicators of potential impairment exist.

We perform our goodwill impairment analysis at the reporting unit level.

We have one reporting unit, which aligns with our reporting structure and availability of discrete financial information.

During the goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair values of our reporting unit is less than the carrying amount, including goodwill.

The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and our overall financial performance.

If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary.

Otherwise, we proceed to compare the estimated fair value of the reporting unit with the carrying value, including goodwill.

If the carrying amount of the reporting unit exceeds the fair value, we record an impairment loss based on the difference.

We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative goodwill impairment test.

During the IPR&D impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D is less than the carrying amount.

The qualitative factors include, but are not limited to, macroeconomic conditions, industry-specific conditions, and company-specific conditions.

If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of the IPR&D is less than the carrying amount, then no additional assessment is deemed necessary.

Otherwise, we proceed to compare the estimated fair value of the IPR&D with the carrying value.

If the carrying amount of the IPR&D exceeds the fair value, we record an impairment loss based on the difference.

We may elect to bypass the qualitative assessment in a period and proceed to perform the quantitative impairment test.

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

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

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

Short-term Restricted Cash

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

Long-term Restricted Cash

Under the lease agreement for our corporate offices, we were required to establish a letter of credit for the benefits of the landlord and to submit $ 4.5 million as a deposit for the letter of credit in October 2015.

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

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

In connection with the acquisition of Omniome in September 2021, we acquired $ 1.6 million of long-term restricted cash related to a letter of credit established for a facility lease.

If indicators of impairment exist, an impairment test is performed to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows.

If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value.

Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to the net book value, significant changes in the ability of a particular asset to generate positive cash flows for our strategic business objectives, and the pattern of utilization of a particular asset.

Revenue Recognition

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

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

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

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

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

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

Additionally, our instrument sale arrangements generally include a one-year period of service.

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

For such bundled arrangements, we account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

Our customers cannot benefit from our instrument systems without installation, and installation can only be performed by us or qualified distributors.

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

Installation services are considered distinct from the instrument.

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

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

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

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

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

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

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

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

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

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

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

Certain of our agreements provide options to customers which can be exercised at a future date, such as the option to purchase our product at discounted prices, among others.

In accounting for customer options, we determine whether an option is a material right and this requires us to exercise significant judgment.

If a contract provides the customer an option

to acquire additional goods or services at a discount that exceeds the range of discounts that we typically give for that product or service for the same class of customer, or if the option provides the customer certain additional goods or services for free, the option may be considered a material right.

If the contract gives the customer the option to acquire additional goods or services at their normal standalone selling prices, we would likely determine that the option is not a material right and, therefore, account for it as a separate performance obligation when the customer exercises the option.

If the standalone selling price of the option is not directly observable, an estimated standalone selling price is utilized which considers adjustments for discounts that the customer could receive without exercising the option and the likelihood that the option will be exercised.

We may also utilize the alternative approach to estimate the standalone selling price, available pursuant to the applicable accounting guidance, to the extent we conclude the applicable criteria for using the alternative approach has been met.

We update the transaction price for expected consideration, subject to constraint, each reporting period if our estimate of future goods to be ordered by customers change.

Additionally, we generally provide a one-year warranty on instruments .

W e accrue the cost of the assurance warranty when revenue of the instrument is recognized.

Employee sales commissions are generally recorded as selling, general, and administrative expense when incurred as the amortization period for such costs, if capitalized, would have been one year or less.

Cost of Revenue

Cost of revenue reflects the direct cost of product components, third-party manufacturing services, and our internal manufacturing overhead and customer service infrastructure costs incurred to produce, deliver, maintain, and support our instruments, consumables, and services.

There are no incremental costs associated with our contractual revenue;

all product development costs are reflected in research and development expense.

Manufacturing overhead is predominantly comprised of labor and facility costs.

We determine and capitalize manufacturing overhead into inventory based on a standard cost model that approximates actual costs.

We capitalize manufacturing overhead into inventory based on a standard cost model that approximates actual costs.

Service costs include the direct costs of components used in support, repair and maintenance of customer instruments as well as the cost of personnel, materials, shipping and support infrastructure necessary to support our installed customer base.

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

However, we defer and capitalize non-refundable advance payments made for research and development activities until the related goods are received or the related services are rendered.

We defer and capitalize non-refundable advance payments made for research and development activities until the related goods are received or the related services are rendered.

Credit Losses

We adopted Topic 326 on January 1, 2020.

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

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

Trade accounts receivable

The allowance for credit losses is based on our assessment of the collectability of customer accounts.

We regularly review the allowance by considering factors such as the age of the accounts receivable balances, customer creditworthiness, customer industry, and current and forecasted economic conditions that may affect a customer’s ability to pay.

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

We regularly review the securities in an unrealized loss position and evaluate the current expected credit loss by considering factors such as significance of loss, historical experience, market data, issuer-specific factors, and current economic conditions and concluded that an allowance for credit losses was immaterial as of December 31, 2021.

Credit loss expense was immaterial for the years ended December 31, 2022 and 2021.

Available-for-sale debt securities

Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and U.S.

government and agency securities.

We regularly assess whether our securities in an unrealized loss position are credit related.

The credit-related portion of unrealized losses, and any subsequent improvements, are recorded in interest income.

Unrealized losses that are not credit related are included in accumulated other comprehensive income.

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

government and U.S.

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

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

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

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

Stock-based Compensation

Share-based Compensation

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

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

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

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

Other Comprehensive (Loss) Income

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

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

Shipping and Handling

Costs related to shipping and handling are included in cost of revenues for all periods presented.

Earnings per Share

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

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

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 consolidated financial statements.

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

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

In December 2019, the FASB issued ASU No.

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 consolidated financial statements.

There are no accounting standards updates (“ASUs”) that have been recently adopted and are applicable to our consolidated financial statements .

Accounting Pronouncements Pending Adoption

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This amendment improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination.

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

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

This authoritative guidance will be effective for us in the first quarter of 2023.

The adoption of this guidance is not expected to have a material effect on our consolidated financial statements.

BUSINESS ACQUISITIONS

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On September 20, 2021, we completed our acquisition of Omniome, Inc.

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

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

(“Omniome”), a San Diego-based company, to obtain their proprietary short-read DNA sequencing platform capable of delivering high accuracy (the “Omniome acquisition”).

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

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

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

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

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

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 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 that 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.

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

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Fair value of contingent consideration

Stock-based compensation expense excluded from consideration transferred

Share-based compensation expense excluded from consideration transferred

Total consideration transferred

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

Of the $ 100 million in shares of our common stock to be issued as part of the milestone, $ 4.1 million is attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction.

The contingent consideration is accounted for as a liability at fair value, with changes during each reporting period recognized in our Consolidated Statements of Operations and Comprehensive (Loss) Income.

The fair value of the contingent consideration liability, with the assistance from a third-party valuation firm, is based on a scenario-based method which considers a range of possible outcomes and their assigned probabilities of occurrence.

The potential outcomes are discounted to present value at a discount rate equal to the sum of the term-matched risk-free-interest rate plus PacBio’s credit spread.

The acquisition was accounted for as a business combination and, accordingly, the total fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date.

The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands):

As of December 31, 2021, 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

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Total consideration transferred

The purchase price allocation is preliminary.

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

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

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

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

Refer to Note 9.

Income Taxes for more information.

Refer to Note 9 – Income Taxes , in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2021 for more information.

There were no measurement period adjustments recorded in the year ended December 31, 2022.

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

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

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

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

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

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

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

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

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

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented as if Omniome had been acquired as of the beginning of the comparable fiscal year prior to the year of acquisition, giving effect on a pro forma basis to the purchase accounting adjustments such as $ 12.0 million of PacBio acquisition-related costs, $ 18.9 million of stock-based compensation expense related to acceleration of certain Omniome stock options not attributable to pre-combination service, and a $ 91.0 million one-time income tax benefit from the reduction of our deferred tax asset valuation allowance resulting from the Omniome acquisition, as well as a pro forma adjustment to reflect $ 16.7 million of Omniome’s acquisition-related costs.

The unaudited pro forma information presented below is for

informational purposes only and is not necessarily indicative of the consolidated results of the combined business had the acquisition actually occurred at the beginning of the fiscal year 2020 or the results of future operations of the combined business.

No significant merger-related costs were incurred during the twelve months ended December 31, 2022.

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 2020, giving effect on a pro forma basis to the purchase accounting adjustments such as $ 12.0 million of PacBio acquisition-related costs, $ 18.9 million of share-based compensation expense related to acceleration of certain Omniome stock options not attributable to pre-combination service, and a $ 91.0 million one-time income tax benefit from the reduction of our deferred tax asset valuation allowance resulting from the Omniome acquisition, as well as a pro forma adjustment to reflect $ 16.7 million of Omniome’s acquisition-related costs.

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

The following table summarizes the unaudited pro forma financial information:

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

Since the date of acquisition, revenues of $ 0 and a net loss of $ 15.6 million from the acquired Omniome business have been included in our Consolidated Statement of Operations and Comprehensive (Loss) Income for the twelve months ended December 31, 2021.

Revenues of $ 0 and a net loss of $ 15.6 million from the acquired Omniome business have been included in our Consolidated Statement of Operations and Comprehensive (Loss) Income for the twelve months ended December 31, 2021.

Circulomics, Inc.

On July 20, 2021, we acquired Circulomics Inc.

(“Circulomics”), a Maryland-based biotechnology company focused on delivering highly differentiated sample preparation products that enable genomic workflows.

(“Circulomics”), a Maryland-based biotechnology company focused on delivering highly differentiated sample preparation products that enable genomic workflows (the “Circulomics acquisition”).

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.

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 Circulomics 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):

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We recognized goodwill of $ 19.3 million, which is primarily attributable to the synergies expected from capabilities in extraction and sample preparation and is not deductible for income tax purposes.

We recorded $ 11.4 million for the fair value of acquired intangible assets, of which $ 11.0 million consists of developed technology.

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

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

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

INVITAE COLLABORATION ARRANGEMENT

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

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

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

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

Under the Development Agreement, Invitae is funding certain development costs we incur in connection with the Program Products (“Program Development Costs”).

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

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

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

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

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

During the Preferential Pricing Period for each Program Product, we are obligated to sell the Program Product at a substantial discount to Invitae until a multiple of the contribution received from Invitae is repaid.

For a specified period after the end of the Preferential Pricing Period, we have arranged to sell the Program Product to Invitae at a higher price, as determined by a formula, than the price during the Preferential Pricing Period (“Extended Pricing Period”).

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

We and Invitae may terminate the Development Agreement if the other party remains in material breach of the Development Agreement following a cure period to remedy the material breach and certain other circumstances by each party, including circumstances where Invitae may terminate for delays, intellectual property concerns, our change in control, or without cause.

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

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

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

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

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

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

Discounts that are not expected to be used will be recognized consistent with the guidance in Topic 606 relating to breakage, in proportion to the expected purchases by Invitae.

Any remaining unused discounts will be recognized when they expire.

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

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

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

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

We recorded $ 11.4 million for the fair value of acquired intangible assets, which consists of developed technology and customer relationships.

INVITAE COLLABORATION

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.

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 year ended December 31, 2022, Invitae purchased certain currently available instruments, for which $ 3.7 million of revenue was recognized as product revenue on the Consolidated Statements of Operations and Comprehensive (Loss) Income under the terms of the Amended and Restated Agreement.

As of December 31, 2022, $ 21.4 million of deferred revenue, current, is recorded on the Consolidated Balance Sheet relating to all future performance obligations under the Amended and Restated Agreement.

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

As part of the Termination Agreement, Illumina paid us cash payments (“Continuation Advances”) totaling $ 52 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 a non-operating expense in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

Please refer to Note 1.

Organization and Significant Accounting Policies for the accounting treatment of the Continuation Advances.

Reverse Termination Fee from Illumina

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

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 non-operating income in the fourth quarter of 2020.

FINANCIAL INSTRUMENTS

FINAN CIAL INSTRUMENTS

Fair Value of Financial Instruments

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We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis.

Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over

time or among market makers.

Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.

Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.

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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.

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.

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 June 30, 2023 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.

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(in thousands)

Beginning balance as of January 1, 2021

Acquisition of Omniome

Beginning balance as of December 31, 2021

Change in estimated fair value

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

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

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

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

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

As discussed further below in Note 7.

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

As a result, $ 52.0 million of Continuation Advances were repaid without interest to Illumina in February 2021 and recorded as a non-operating expense in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2021.

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

For the year ended December 31, 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.

As discussed above, we recorded a contingent consideration liability in connection with our acquisition of Omniome during the year ended December 31, 2021.

Cash, Cash Equivalents and Investments

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

As of December 31, 2021

Cash, Cash Equivalents, Restricted Cash, and Investments

The following table summarizes our cash, cash equivalents, restricted cash, and investments:

December 31, 2022

(in thousands)

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Long-term restricted cash

As of December 31, 2020

December 31, 2021

(in thousands)

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government & agency securities

Treasury security

Total cash and cash equivalents

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BALANCE SHEET COMPONENTS

Short-term restricted cash

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

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

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

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

Inventory, Net

Inventory, net, consisted of the following components:

(in thousands)

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Finished goods

Inventory, net

Property and Equipment, Net

As of December 31, 2021 and 2020, our property and equipment, net, consisted of the following components:

Property and equipment, net, consisted of the following components:

(in thousands)

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Property and equipment, net

Construction in progress consists of capitalizable costs that have been incurred for the construction of long-lived assets, and is primarily comprised of amounts that will be classified as lab equipment.

Depreciation expense during the years ended December 31, 2022, 2021, and 2020 was $ 9.5 million, $ 7.2 million, and $ 6.4 million, respectively.

Long-term restricted cash

For our facility located at 1305 O’Brien Drive, Menlo Park, California (the “O’Brien Lease”), we were required to establish a letter of credit for the benefit of the landlord and to submit $ 4.5 million as a deposit for the letter of credit in October 2015.

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

In connection with the acquisition of Omniome in September 2021, we acquired $ 1.6 million of long-term restricted cash related to a letter of credit established for a facility lease.

Goodwill and intangible Assets

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

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

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

Balance as of December 31, 2020

Acquisition of Omniome

Acquisition of Circulomics

Balance as of December 31, 2021

As of December 31, 2022 and 2021, the goodwill balance was $ 410.0 million.

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.

Acquired Intangible Assets

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

Intangible assets include acquired IPR&D of $ 400 million as a result of the Omniome acquisition in September 2021.

As of December 31, 2022, the research and development project had not been completed or abandoned and, therefore, the IPR&D intangible asset is not currently subject to amortization.

IPR&D is reviewed for impairment at least annually, or more frequently if an event occurs indicating the potential for impairment.

We performed our annual assessment for IPR&D impairment in the fourth quarter of 2022, noting no impairment.

In addition to IPR&D, we had the following acquired definite-lived intangible assets as of December 31, 2022 (in thousands, except years):

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Customer relationships

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

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

Amortization expense of intangibles was $ 0.9 million and $ 0.4 million for the years ended December 31, 2022 and 2021, respectively.

We had no amortization expense of intangibles for the year ended December 31, 2020.

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

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Accrued Expenses

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

Accrued expenses consisted of the following components:

(in thousands)

Salaries and benefits

Accrued product development costs

Accrued interest payable

Inventory accrual

Accrued purchase commitments

Accrued product development costs

Accrued professional services and legal fees

Inventory accrual

Warranty accrual

Accrued expenses

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:

Years Ended December 31,

(in thousands)

Balance at beginning of period

Additions charged to cost of product revenue

Repairs and replacements

Balance at end of period

Deferred Revenue

As of December 31, 2021, we had a total of $ 36.0 million of deferred revenue, $ 11.0 million of which was recorded as deferred revenue, current and primarily relates to deferred service contract revenues to be recognized over the next year and the remaining $ 25.0 million was recorded as deferred revenue, non-current.

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

As of December 31, 2022, we had a total of $ 32.3 million of deferred revenue, $ 30.5 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 .

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 6 years.

Revenue recorded in the year ended December 31, 2022 includes $ 13.0 million of previously deferred revenue that was included in deferred revenue, current as of December 31, 2021.

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

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

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

In connection with the acquisition of Omniome, we acquired $ 1.3 million in short-term debt and $ 3.0 million in long-term debt relating to a term loan facility that Omniome obtained in April 2020.

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Other Liabilities, Current

As of December 31, 2021 and 2020, our Other liabilities, current consisted of the following components:

Other liabilities, current, consisted of the following components:

(in thousands)

Accrued Employee Stock Purchase Plan

Short-term loan

Other liabilities, current

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Net carrying amount

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

Interest expense for the Notes was as follows for the years ended December 31, 2022, 2021, and 2020:

Years Ended December 31,

(in thousands)

Contractual interest expense

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We often have options to renew lease terms for buildings.

For the O’Brien Lease, the renewal option is 5 years and the rent will be based on fair market value at the time of renewal and was not included in the lease term.

In addition, certain lease arrangements may be terminated prior to their original expiration date at our discretion.

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

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

Maturity of Lease Liabilities

Years ending December 31,

As of December 31, 2022, the maturities of our operating lease liabilities were as follows:

(in thousands)

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Operating lease costs were $ 10.5 million and $ 7.2 million for the years ended December 31, 2022 and 2021, respectively.

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

Contingencies

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

Legal Proceedings

District Court Proceedings

On 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.

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

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

7,767,441 (the “‘441 Patent”).

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.

We were served on January 20, 2021 and plan to vigorously defend in this matter.

On November 23, 2020 we filed an Invalidation Petition at the China National Intellectual Property Administration (CNIPA) demonstrating the invalidity of the claims in the CN321 Patent on grounds of insufficient disclosure, and the lack of support, essential technical features, clarity, novelty, and inventiveness.

A hearing in the invalidation proceeding at the CNIPA was held on April 29, 2021.

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

We have filed a petition with the Wuhan Intermediate People’s court requesting dismissal of the infringement action.

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

Other Proceedings

From time to time, we may also be involved in a variety of other claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes, employment and other matters that arise in the normal course of our business.

In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications.

We record a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

We currently do not believe that the ultimate outcome of any of the matters described above is probable or reasonably estimable, or that these matters will have a material adverse effect on our business;

We do not believe that the ultimate outcome of any such pending matters 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.

Please see subsection titled Legal Proceedings , in Part I, Item 3 of this Annual Report on Form 10-K.

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.

We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law.

In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between such third parties and us in connection with such fundraising efforts.

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

Purchase Commitments

In the normal course of business, we enter into agreements to purchase goods or services or license intellectual property, certain of which are not cancelable without penalty.

For those agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities or pricing as of the reporting date.

Licensing agreements under which we commit to ongoing minimum royalty payments, some of which are subject to adjustment, may be terminated under certain circumstances.

Our purchase orders and contractual obligations are approximately $ 145.7 million as of December 31, 2022, which consist of open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers for which we have not received the goods or services.

A majority of these purchase obligations are due within a year.

Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

We recognized a loss on purchase commitment of $ 3.7 million for the year ended December 31, 2022, which was recorded as part of accrued expenses on the Consolidated Balance Sheet and is included in the aforementioned purchase orders and contractual obligations amount.

The purchase commitment loss is based on an estimate of future excess inventory related to a supply agreement with a third-party vendor, for which we do not expect to have related sales.

We have a long-term supply agreement, which was amended in October 2022 (the “Supply Agreement”), for the purchase of certain products with a semiconductor manufacturer (“Supplier”).

The Supply Agreement provides for minimum purchase commitments through 2026 on our part in exchange for guaranteed capacity at Supplier.

We are responsible for providing certain materials to allow our Supplier to perform its obligations under the contract.

We paid our Supplier a deposit of $ 9.0 million in November 2022 and will pay an additional deposit of $ 6.0 million in 2023, for a total of $ 15.0 million (the “Deposit”).

The Deposit is fully refundable to us, in accordance with the Supply Agreement, if we meet the minimum volume purchase commitment for the applicable year.

As of December 31, 2022, $ 9.0 million related to the Deposit was included in other long-term assets in the Consolidated Balance Sheets, as we believe it is probable the minimum volume purchase commitment level will be achieved.

We are subject to income taxes in the United States and certain states in which we operate, and we use estimates in determining our provisions for income taxes.

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We account for Global Intangible Low-taxed Income as a period cost.

During the years ended December 31, 2021, 2020 and 2019 income (loss) before taxes from U.S.

During the years ended December 31, 2022, 2021, and 2020 (loss) income before taxes from U.S.

operations were ($ 315.7 ) million, ($ 275.4 ) million, and $ 28.9 million, respectively, and income before taxes from foreign operations was $ 1.8 million, $ 0.8 million, and $ 0.6 million, respectively.

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Change in valuation allowance

Stock-based compensation

Share-based compensation

Merger Expenses

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Research and development credits

Capitalized research and experimental expenses

Accruals and reserves

Stock-based compensation

ASC 842 Operating lease liability

Share-based compensation

Operating lease liability

Total deferred tax assets

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Total deferred tax assets:

ASC 842 Operating lease right-of-use assets

Operating lease right-of-use assets

Total deferred tax liabilities

Net deferred tax assets

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

At December 31, 2022, we maintained a full valuation allowance against all of our deferred tax assets that totaled $ 445.6 million, including net operating loss carryforwards and research and development credits of $ 400.6 million and $ 71.5 million, respectively.

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

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

A deferred income tax benefit of $ 93.6 million for the year ended December 31, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions.

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

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Accordingly, this benefit from income taxes is reflected on our Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2022.

For the year ended December 31, 2022, our valuation allowance increased to $ 445.6 million, primarily because of an increase in our net operating losses, credits, and capitalized research and experimental expenses that were fully offset by a valuation allowance.

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

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

As of December 31, 2022, we had a net operating loss carryforward for federal income tax purposes of approximately $ 1,573.8 million, of which $ 774.9 million will begin to expire in 2024 if not utilized.

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Balance as of December 31, 2020

Decrease in balance related to tax positions taken in prior year

Increase in balance related to tax positions taken in prior year

Increase in balance related to tax positions taken during current year

Balance as of December 31, 2021

Increase in balance related to tax positions taken in prior year

Decrease in balance related to tax positions taken in prior year

Increase in balance related to tax positions taken during current year

Balance as of December 31, 2022

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

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

As of both December 31, 2022 and 2021, we had no accrued interest or penalties due to our net operating losses available to offset any tax adjustment.

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

On December 27, 2020, the U.S.

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

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

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

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

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

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

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

STOCKHOLDERS’ EQUITY

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

Under the terms of the underwriting agreement, we also granted the underwriters a 30 -day option to purchase up to an additional 2,914,500 shares of our common stock, which was subsequently exercised in full, and the offering including the sale of shares of common stock

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

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

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(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.

Under the Omniome Merger Agreement, each unvested option to purchase Omniome common stock, granted under the Omniome Plan held by employees continuing with us, was 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;

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

2020 Equity Incentive Plan

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

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

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

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

2020 Inducement Equity Incentive Plan

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

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

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

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 December 31, 2022, we had 18.9 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan.

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The following table summarizes time-based stock option activity for all of our equity compensation plans for the year ended December 31, 2022 (in thousands, except per share amounts):

Stock Options Outstanding

Exercise price

Weighted-average

exercise price

Outstanding at December 31, 2021

23.06 – 46.37

Assumed Omniome options

Outstanding at December 31, 2022

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

Performance-based stock options

The following table summarizes performance-based stock option activity for all of our equity compensation plans for the year ended December 31, 2022 (in thousands, except per share amounts):

Stock Options Outstanding

Exercise price

Weighted-average

exercise price

Outstanding at December 31, 2021

Assumed Omniome options

Outstanding at December 31, 2022

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

Options Outstanding

Options Exercisable

Weighted average

remaining contractual

Weighted average

Exercise price

exercise price

13.91 - 18.55

18.55 - 23.19

23.19 - 27.82

27.82 - 32.46

32.46 - 37.10

41.73 - 46.37

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

The aggregate intrinsic value represents the total pretax intrinsic value (i.e., the difference between $ 20.46 , our closing stock price on the last trading day of our fourth quarter of 2021 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2021.

The aggregate intrinsic value of outstanding options represents the total pre-tax intrinsic value (i.e.

the difference between $ 8.18 , our closing stock price on the last trading day of our fourth quarter of 2022 and the option exercise price multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2022.

The aggregate intrinsic value changes at each reporting date based on the fair market value of our common stock.

The weighted average remaining contractual life for exercisable options is 5.12 years.

The vested and expected to vest options as of December 31, 2021 totaled 11,535,217 , with aggregate intrinsic value of $ 141.9 million, weighted average exercise price per share of $ 10.46 and weighted average remaining contractual life of 6.28 years.

The aggregate intrinsic value of the outstanding options presented in the table above as of December 31, 2022, totaled $ 24.7 million, and had a weighted-average remaining contractual life of 6.7 years.

The vested and exercisable options as of December 31, 2022, totaled 9,408,063 shares, had an aggregate intrinsic value of $ 22.7 million, a weighted-average exercise price per share of $ 8.45 , and a weighted-average remaining contractual life of 5.4 years.

The vested and expected to vest options as of December 31, 2022, totaled 14,436,695 shares, had an aggregate intrinsic value of $ 24.6 million, a weighted-average exercise price per share of $ 10.61 , and a weighted-average remaining contractual life of 6.5 years.

The total intrinsic value of stock options exercised during the years ended December 31, 2022, 2021, and 2020 was $ 5.0 million, $ 146.1 million, and $ 63.1 million, respectively.

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

No stock options were granted in 2019.

Time-based RSUs

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

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

The total intrinsic value of options exercised represents the difference between our closing stock price on the exercise date and the option exercise price, multiplied by the number of in-the-money options exercised.

The weighted-average grant-date fair value of all options granted was $ 5.93 in 2022, $ 18.36 in 2021, and $ 4.14 in 2020, each determined by the Black-Scholes option valuation method.

Restricted Stock Units

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

These RSUs are time-based and vest over four years at a rate of 25 % annually.

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

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

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

The following table summarizes the RSU activity for the year ended December 31, 2022 (in thousands, except per share amounts):

Weighted-average

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Unvested RSUs outstanding at December 31, 2022

Performance-based RSUs

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

Performance-based RSUs are governed under the 2020 Plan.

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

Weighted average

PSUs outstanding at December 31, 2020

PSUs released

PSUs forfeited

Unvested PSUs outstanding at December 31, 2021

The total fair value of shares vested related to RSUs during the years ended December 31, 2022, 2021, and 2020 was $ 39.2 million, $ 9.2 million, and $ 6.3 million, respectively.

The weighted-average grant-date fair value of all RSUs granted was $ 10.15 in 2022, $ 35.33 in 2021, and $ 5.18 in 2020.

Employee Stock Purchase Plan

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

As of December 31, 2022, a total of 25.5 million shares of our common stock have been reserved for issuance under our 2010 Employee Stock Purchase Plan (the “ESPP”).

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

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Each offering period will generally end and the shares will be purchased twice yearly on March 1 and September 1.

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

If the stock price at the end of the purchase period is lower than the stock price at the beginning of the offering period, that offering period will be terminated and a new offering period will come into place.

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

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As of December 31, 2022, 9,932,505 shares of our common stock remain available for issuance under our ESPP.

Stock-based Compensation

Total stock-based compensation expense consists of the following (in thousands):

Share-based Compensation

Total share-based compensation expense consists of the following (in thousands):

Years Ended December 31,

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Merger-related expenses - milestone

Stock-based compensation

Share-based compensation

Merger-related expenses - cash-settled

Total stock-based compensation expense

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

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

Total share-based compensation expense

As of December 31, 2022 and 2021, $ 0.7 million and $ 0.9 million of share-based compensation cost was capitalized in inventory, net, on our consolidated balance sheets, respectively.

The tax benefit of share-based compensation expense was immaterial for the years ended December 31, 2022, 2021, and 2020.

Determining Fair Value

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The fair market value of RSU awards granted is the closing price of our shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting period.

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

For shares purchased under our Employee Stock Purchase Plan, or ESPP, we estimate the grant-date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model.

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

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

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

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

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

The fair value of employee stock options was estimated using the following weighted-average assumptions:

Years Ended December 31,

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0.41 % – 3.66 %

0.05 % – 1.10 %

Dividend yield

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

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

The fair value of shares to be issued under the ESPP was estimated using the following assumptions:

Years Ended December 31,

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0.60 % - 3.51 %

0.1 % - 0.2 %

Dividend yield

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

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

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

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

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Net (loss) income

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

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

Basic net (loss) income per share

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RSUs with performance-based vesting

As described in Note 2.

Business Acquisition s , the contingently issuable shares would be due upon the achievement of a milestone.

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

SEGMENT AND GEOGRAPHIC INFORMATION

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Our chief operating decision-maker is our Chief Executive Officer.

The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of evaluating financial performance and allocating resources, accompanied by information about revenue by geographic regions.

The Chief Executive Officer reviews financial information presented on a consolidated basis for the purposes of evaluating financial performance and allocating resources, accompanied by information about revenue by geographic regions.

Our assets are primarily located in the United States of America and not allocated to any specific region, and we do not measure the performance of geographic regions based upon asset-based metrics.

Therefore, geographic information is presented only for revenue.

Revenue by geographic region is based on the ship to address on the customer order.

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

A summary of our revenue by geographic location is as follows:

Years Ended December 31,

(in thousands)

North America

Europe (including the Middle East and Africa)

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

Europe, Middle East, and Africa

A summary of our revenue by category is as follows:

Years Ended December 31,

5 unchanged sentences

Total revenue

SUBSEQUENT EVENTS

On January 27, 2023, the Company issued and sold an aggregate of 20,125,000 shares of the Company’s common stock at a purchase price of $ 10.00 per share pursuant to an automatic shelf registration statement filed on Form S-3 (File No.

333-249999) with the Securities and Exchange Commission, resulting in aggregate gross proceeds of approximately $ 201.3 million.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data