PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Index to Consolidated Financial Statements Page(s) Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 60 Consolidated Financial Statements Consolidated Balance Sheets 62 Consolidated Statements of Operations and Comprehensive (Loss) Income 63 Consolidated Statements of Stockholders’ Equity 64 Consolidated Statements of Cash Flows 65 Notes to Consolidated Financial Statements 66 — 89 59 Report of Independent Registered Public Accounting F irm To the Stockholders and the Board of Directors of Pacific Biosciences of California, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Pacific Biosciences of California, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive (loss) income , stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023, expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of 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. ‎ 60 Revenue recognition - Identification of performance obligations and allocation of contract consideration Description of the Matter 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 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. San Mateo, California February 28, 2023 ‎ 61 PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Consolidated Balance Sheets December 31, (in thousands, except per share amounts) 2022 2021 Assets Current assets Cash and cash equivalents $ 325,089 $ 460,725 Investments 447,229 583,675 Accounts receivable, net 18,786 24,241 Inventory, net 50,381 24,599 Prepaid expenses and other current assets 10,289 7,394 Short-term restricted cash 300 500 Total current assets 852,074 1,101,134 Property and equipment, net 41,580 32,504 Operating lease right-of-use assets, net 39,763 46,617 Long-term restricted cash 2,922 4,592 Intangible assets, net 410,245 410,979 Goodwill 409,974 409,974 Other long-term assets 10,528 1,170 Total assets $ 1,767,086 $ 2,006,970 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 12,028 $ 11,002 Accrued expenses 32,596 36,261 Deferred revenue, current 30,498 10,977 Operating lease liabilities, current 8,886 7,710 Other liabilities, current 7,233 5,759 Contingent consideration liability, current 172,094 — Total current liabilities 263,335 71,709 Deferred revenue, non-current 1,794 25,049 Contingent consideration liability, non-current — 169,717 Operating lease liabilities, non-current 41,070 49,970 Convertible senior notes, net, non-current 896,683 896,067 Other liabilities, non-current 1,300 3,471 Total liabilities 1,204,182 1,215,983 Commitments and contingencies Stockholders’ equity Preferred stock, $ 0.001 par value: Authorized 50,000 shares; No shares issued or outstanding — — Common stock, $ 0.001 par value: Authorized 1,000,000 shares; issued and outstanding 226,505 and 220,978 shares at December 31, 2022 and December 31, 2021, respectively 227 221 Additional paid-in capital 2,099,782 2,009,945 Accumulated other comprehensive loss ( 4,765 ) ( 1,087 ) Accumulated deficit ( 1,532,340 ) ( 1,218,092 ) Total stockholders’ equity 562,904 790,987 Total liabilities and stockholders’ equity $ 1,767,086 $ 2,006,970 See accompanying notes to the consolidated financial statements. ‎ 62 PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Consolidated Statements of Operations and Comprehensive (Loss) Income Years Ended December 31, (in thousands, except per share amounts) 2022 2021 2020 Revenue: Product revenue $ 108,699 $ 113,505 $ 65,424 Service and other revenue 19,605 17,008 13,469 Total revenue 128,304 130,513 78,893 Cost of Revenue: Cost of product revenue 60,932 56,358 35,424 Cost of service and other revenue 13,899 14,989 10,903 Amortization of intangible assets 733 306 — Loss on purchase commitment 3,705 — — Total cost of revenue 79,269 71,653 46,327 Gross profit 49,035 58,860 32,566 Operating Expense: Research and development 193,000 112,899 64,152 Sales, general and administrative 160,854 124,124 72,799 Merger-related expenses — 31,129 — Change in fair value of contingent consideration 2,377 1,143 — Total operating expense 356,231 269,295 136,951 Operating loss ( 307,196 ) ( 210,435 ) ( 104,385 ) Gain from Reverse Termination Fee from Illumina — — 98,000 (Loss)/Gain from Continuation Advances from Illumina — ( 52,000 ) 34,000 Interest expense ( 14,690 ) ( 12,530 ) ( 267 ) Other income, net 7,638 93 2,055 (Loss) income before benefit from income taxes ( 314,248 ) ( 274,872 ) 29,403 Benefit from income taxes — ( 93,649 ) — Net (loss) income ( 314,248 ) ( 181,223 ) 29,403 Other comprehensive (loss) income: Unrealized (loss) gain on investments ( 3,678 ) ( 1,172 ) 80 Comprehensive (loss) income $ ( 317,926 ) $ ( 182,395 ) $ 29,483 Net (loss) income per share: Basic $ ( 1.40 ) $ ( 0.89 ) $ 0.18 Diluted $ ( 1.40 ) $ ( 0.89 ) $ 0.17 Weighted average shares outstanding used in calculating ‎ net (loss) income per share Basic 224,550 204,136 165,187 Diluted 224,550 204,136 174,970 See accompanying notes to the consolidated financial statements. ‎ 63 PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Consolidated Statements of Stockholders ’ Equity Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholders' (in thousands) Shares Amount Capital Income (Loss) Deficit Equity Balance at December 31, 2019 153,119 $ 153 $ 1,120,999 $ 5 $ ( 1,066,240 ) $ 54,917 Net income — — — — 29,403 29,403 Other comprehensive gain — — — 80 — 80 ASC 326 adoption effect — — — — ( 32 ) ( 32 ) Issuance of common stock in conjunction with equity plans 9,819 10 46,350 — — 46,360 Issuance of common stock from Underwritten Public Equity Offerings, net of issuance costs 29,356 29 187,201 — — 187,230 Share-based compensation expense — — 17,533 — — 17,533 Balance at December 31, 2020 192,294 $ 192 $ 1,372,083 $ 85 $ ( 1,036,869 ) $ 335,491 Net loss — — — — ( 181,223 ) ( 181,223 ) Other comprehensive loss — — — ( 1,172 ) — ( 1,172 ) Issuance of common stock in conjunction with equity plans 8,557 9 31,797 — — 31,806 Issuance of common stock in Private Placement, net of issuance costs 11,215 11 294,834 — — 294,845 Issuance of common stock in acquisition of Omniome 8,912 9 237,876 — — 237,885 Share-based compensation expense — — 73,355 — — 73,355 Balance at December 31, 2021 220,978 $ 221 $ 2,009,945 $ ( 1,087 ) $ ( 1,218,092 ) $ 790,987 Net loss — — — — ( 314,248 ) ( 314,248 ) Other comprehensive loss — — — ( 3,678 ) — ( 3,678 ) Issuance of common stock in conjunction with equity plans 5,527 6 11,224 — — 11,230 Share-based compensation expense — — 78,613 — — 78,613 Balance at December 31, 2022 226,505 $ 227 $ 2,099,782 $ ( 4,765 ) $ ( 1,532,340 ) $ 562,904 See accompanying notes to the consolidated financial statements. ‎ 64 PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Consolidated Statements of Cash Flows Years Ended December 31, (in thousands) 2022 2021 2020 Cash flows from operating activities Net (loss) income $ ( 314,248 ) $ ( 181,223 ) $ 29,403 Adjustments to reconcile net loss to net cash used in operating activities Loss (gain) from Continuation Advances — 52,000 ( 34,000 ) Depreciation 9,480 7,199 6,428 Amortization of intangibles 913 381 — Amortization of right-of-use assets 6,925 4,005 2,876 Amortization of debt discount and financing costs 640 539 129 Share-based compensation 78,613 73,355 17,533 Amortization of premium and accretion of discount on marketable securities, net ( 244 ) 4,011 ( 107 ) Change in the estimated fair value of contingent consideration 2,377 1,143 — Inventory provision 6,027 678 527 Loss on disposition of equipment 278 54 — Deferred income taxes — ( 93,649 ) — Changes in assets and liabilities Accounts receivable, net 5,455 ( 7,166 ) ( 1,603 ) Inventory, net ( 33,906 ) ( 13,109 ) ( 1,623 ) Prepaid expenses and other assets ( 12,324 ) ( 1,024 ) ( 1,063 ) Accounts payable 1,025 6,363 ( 5,072 ) Accrued expenses ( 3,651 ) 15,320 4,102 Deferred revenue ( 3,734 ) 25,736 729 Operating lease liabilities ( 7,724 ) ( 4,990 ) ( 3,802 ) Other liabilities 887 ( 803 ) 5,046 Net cash (used in) provided by operating activities ( 263,211 ) ( 111,180 ) 19,503 Cash flows from investing activities Purchase of property and equipment ( 16,750 ) ( 5,931 ) ( 1,039 ) Purchase of intangible assets ( 179 ) — — Cash paid for purchase of Circulomics, net of cash acquired — ( 28,560 ) — Cash paid for purchase of Omniome, net of cash acquired — ( 291,233 ) — Purchase of investments ( 442,788 ) ( 988,046 ) ( 373,283 ) Sales of investments — 212,734 1,400 Maturities of investments 575,800 422,505 153,600 Net cash provided by (used in) in investing activities 116,083 ( 678,531 ) ( 219,322 ) Cash flows from financing activities Continuation Advances — ( 52,000 ) 34,000 Proceeds from issuance of Convertible Senior Notes, net of issuance costs — 895,536 — Proceeds from issuance of common stock under equity offerings, net of issuance costs — 294,845 187,479 Proceeds from issuance of common stock from equity plans 11,230 31,806 46,360 Notes payable principal payoff ( 1,608 ) ( 361 ) ( 16,000 ) Other — ( 245 ) — Net cash provided by financing activities 9,622 1,169,581 251,839 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 137,506 ) 379,870 52,020 Cash, cash equivalents, and restricted cash at beginning of period 465,817 85,947 33,927 Cash, cash equivalents, and restricted cash at end of period $ 328,311 $ 465,817 $ 85,947 Cash and cash equivalents at end of period 325,089 460,725 81,611 Restricted cash at end of period 3,222 5,092 4,336 Cash, cash equivalents, and restricted cash at end of period $ 328,311 $ 465,817 $ 85,947 Supplemental disclosure of cash flow information Interest paid $ 14,049 $ 6,928 $ 491 Supplemental disclosure of non-cash investing and financing activities Inventory transferred to property and equipment $ 2,812 $ 2,586 $ 1,097 Property and equipment transferred to inventory $ ( 715 ) $ ( 383 ) $ ( 919 ) Right-of-use asset and liability additions and modifications $ — $ 2,576 $ — Issuance of common stock in acquisition of Omniome $ — $ 237,885 $ — See accompanying notes to the consolidated financial statements. 65 PACIFIC BIOSCIENCES OF CALIFORNIA, INC. Notes to Consolidated Financial Statements NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Business Overview 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 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. Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations (CROs), pharmaceutical companies, and agricultural companies. References in this report to “PacBio,” “we,” “us,” the “Company,” and “our” refer to Pacific Biosciences of California, Inc. and its consolidated subsidiaries. Basis of Presentation and Consolidation Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, as set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. The consolidated financial statements include the accounts of Pacific Biosciences and our wholly owned subsidiaries. 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 The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. On an ongoing basis, we evaluate our significant estimates including, but not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the fair value of contingent consideration, the valuation of acquired intangible assets, the fair value of certain equity awards, the useful lives assigned to long-lived assets, the computation of provisions for income taxes, the borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities, the probability associated with variable payments under partnership development agreements, and the valuations related to our convertible senior notes. While the extent of the potential impact of the 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. Functional Currency The U.S. dollar is the functional currency of our international operations. We remeasure foreign subsidiaries monetary assets and liabilities to the U.S. dollar and record net gains or losses from remeasurement in other income, net, in the consolidated statement of operations and comprehensive ( loss) income. Cash, Cash Equivalents, 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-related. Unrealized gains and losses that are not credit-related are recognized in accumulated other comprehensive (loss) income in stockholders’ equity. Realized gains and losses, expected credit losses, as well as interest income, on available-for-sale securities are also reported in other income, net. The cost used in the determination of gains and losses of securities sold is based on the specific identification method. The cost of marketable securities is adjusted for the amortization of premiums and discounts to expected maturity. Premium and discount amortization is recorded in other income, net. 66 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. 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. We maintain cash, cash equivalents, and investments with various major financial institutions. The counterparties to the agreements relating to our investment securities consist of various major corporations, financial institutions, municipalities, and government agencies of high credit standing. At December 31, 2022, most of our cash was deposited with U.S. financial institutions. Our investment policy generally restricts the amount of credit exposure to any one issuer. There is no limit to the percentage of the portfolio that may be maintained in securities issued by the U.S. Treasury and U.S. Government Agencies, or other securities fully backed by U.S. Treasury or Government agencies. We have not experienced significant credit losses from financial institutions. 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 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. We have not experienced any significant credit losses to date. 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, 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, 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 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. 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. Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs while determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories. We make inventory purchases and commitments to meet future shipment schedules based on forecasted demand for our products. The business environment in which we operate is subject to rapid changes in technology and customer demand. We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration, and quality issues. Based on our analysis, we record adjustments to inventory for potentially excess, obsolete, or impaired goods, when appropriate, to report inventory at net realizable value. Inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates. Any such adjustments would result in a charge to our results of operations. 67 Property and Equipment, Net 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: Estimated Useful Lives Leasehold improvements 3 to 10 years Lab equipment 3 to 5 years Computer equipment 3 to 5 years Computer software 3 years Furniture and fixtures 3 to 5 years Operating Leases We record operating lease right-of-use assets and liabilities on our Consolidated Balance Sheets for all leases with a term of more than 12 months. The operating lease right-of-use assets and liabilities are calculated as the present value of remaining minimum lease payments over the remaining lease term using our estimated secured incremental borrowing rates at the commencement date. Lease payments included in the measurement of the lease liability comprise the fixed rent per the term of the Lease. Operating lease expense is recognized on a straight-line basis over the lease term, with variable lease payments, such as common area maintenance fees, recognized in the period incurred. 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. 68 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. 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 Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of our instruments and related consumables; 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, 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. 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, 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 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 69 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. Manufacturing overhead is predominantly comprised of labor and facility 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. Research and Development Research and development expense consists primarily of expenses for personnel engaged in the development of our core technology, the design and development of our future products and current product enhancements. These expenses also include prototype-related expenditures, development equipment and supplies, partner development costs, facilities costs, and other related overhead. We expense research and development costs during the period in which the costs are incurred. 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 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. 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 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. Although we have historically not experienced significant credit losses, our exposure to credit losses may increase if our customers are adversely affected by changes in economic pressures or uncertainty associated with local or global economic recessions, disruptions associated with the evolution of the COVID-19 pandemic, or other customer-specific factors. 70 Income Taxes We account for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax bases of our assets and liabilities and the amounts reported in the financial statements. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date. A full valuation allowance is provided against our net deferred tax assets as it is more likely than not that the deferred tax assets will not be fully realized. We regularly review our positions taken relative to income taxes. To the extent our tax positions are more likely than not going to result in additional taxes, we accrue the estimated amount of tax related to such uncertain positions. 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. See Note 10. Stockholders’ Equity for further information regarding share-based compensation. Other Comprehensive (Loss) Income 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 There are no accounting standards updates (“ASUs”) that have been recently adopted and are applicable to our consolidated financial statements . Accounting Pronouncements Pending Adoption In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU provides specific guidance on how to recognize contract assets and contract liabilities related to revenue contracts with customers acquired in a business combination. This amendment improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. This authoritative guidance will be effective for us in the first quarter of 2023. The adoption of this guidance is not expected to have a material effect on our consolidated financial statements. NOTE 2. BUSINESS ACQUISITIONS Omniome, Inc. On September 20, 2021, we completed our acquisition of Omniome, Inc. (“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 share-based compensation expense. This share-based compensation expense was due to accelerated vesting of Omniome stock awards in connection with the acquisition. 71 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): Total cash paid $ 315,703 Fair value of share consideration 249,435 Fair value of contingent consideration 168,574 Less: Share-based compensation expense excluded from consideration transferred ( 18,923 ) Total consideration transferred $ 714,789 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. 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 $ 15,338 Property and equipment, net 6,123 Operating lease right-of-use assets, net 18,095 In-process research and development ("IPR&D") 400,000 Goodwill 390,665 Other assets 3,203 Deferred income tax liability ( 91,814 ) Liabilities assumed ( 26,821 ) Total consideration transferred $ 714,789 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 , 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 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. 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. 72 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: Years Ended December 31, (in thousands, except per share amounts) 2021 2020 Pro forma total revenue $ 130,513 $ 78,893 Pro forma net (loss) income $ ( 278,451 ) $ 17,510 Pro forma net (loss) income per share - basic and diluted $ ( 1.27 ) $ 0.09 Our consolidated financial statements include the results of operations for Omniome beginning September 20, 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 (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 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): Cash and cash equivalents $ 987 Property and equipment, net 214 Intangible assets 11,360 Goodwill 19,309 Other assets 467 Deferred income tax liability ( 2,672 ) Liabilities assumed ( 118 ) Total consideration transferred $ 29,547 The excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill. We recognized goodwill of $ 19.3 million, which is primarily attributable to the synergies expected from capabilities in extraction and sample preparation and is not deductible for income tax purposes. We recorded $ 11.4 million for the fair value of acquired intangible assets, which consists of developed technology and customer relationships. NOTE 3. 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. 73 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. NOTE 4. TERMINATION OF MERGER WITH ILLUMINA On November 1, 2018, we entered into an Agreement and Plan of Merger (as amended, the “Illumina Merger Agreement”) with Illumina, Inc. (“Illumina”) and FC Ops Corp., a wholly owned subsidiary of Illumina (“Illumina Merger Sub”). On January 2, 2020, we, Illumina and Illumina Merger Sub, entered into an agreement to terminate the Merger Agreement (the “Termination Agreement”). Continuation Advances from Illumina As part of the Termination Agreement, Illumina paid us cash payments (“Continuation Advances”) totaling $ 52 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. NOTE 5. FINAN CIAL INSTRUMENTS Fair Value of Financial Instruments Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy established under GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:  Level 1: quoted prices in active markets for identical assets or liabilities;  Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and  Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively. 74 We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of December 31, 2022 and December 31, 2021, respectively: December 31, 2022 December 31, 2021 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents: Cash and money market funds $ 137,636 $ — $ — $ 137,636 $ 327,315 $ — $ — $ 327,315 Commercial paper — 166,453 — 166,453 — 133,185 — 133,185 U.S. government & agency securities — 21,000 — 21,000 — 225 — 225 U.S. Treasury security — — — — — — — — Total cash and cash equivalents 137,636 187,453 — 325,089 327,315 133,410 — 460,725 Investments: Commercial paper — 127,302 — 127,302 — 187,632 — 187,632 Corporate debt securities — 49,491 — 49,491 — 8,968 — 8,968 U.S. government & agency securities — 270,436 — 270,436 — 387,075 — 387,075 Total investments — 447,229 — 447,229 — 583,675 — 583,675 Short-term restricted cash 300 — — 300 500 — — 500 Long-term restricted cash 2,922 — — 2,922 4,592 — — 4,592 Total assets measured at fair value $ 140,858 $ 634,682 $ — $ 775,540 $ 332,407 $ 717,085 $ — $ 1,049,492 Liabilities Contingent consideration $ — $ — $ 172,094 $ 172,094 $ — $ — $ 169,717 $ 169,717 Total liabilities measured at fair value $ — $ — $ 172,094 $ 172,094 $ — $ — $ 169,717 $ 169,717 We classify contingent consideration, which was incurred in connection with the acquisition of Omniome, within Level 3 as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value. We estimate the fair value of the contingent consideration liability by discounting the probability-weighted outcomes to present value using an estimate of our borrowing rate and the risk-free rate. The potential outcomes of milestone achievement dates are within the period from 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. The discount rates used are the sum of the U.S. risk-free rate and the estimated subordinated credit spread for B- and B credit rating, which ranges from 10.1 % to 10.5 %. Changes in our estimated subordinated credit spread can result in changes in the fair value of the contingent consideration liability, where a lower credit spread may result in an increased liability valuation. Changes in the estimated fair value of the contingent consideration liability for the year ended December 31, 2022 were as follows: (in thousands) Level 3 Beginning balance as of December 31, 2021 $ 169,717 Change in estimated fair value 2,377 Ending balance as of December 31, 2022 $ 172,094 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. 75 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. Cash, Cash Equivalents, Restricted Cash, and Investments The following table summarizes our cash, cash equivalents, restricted cash, and investments: December 31, 2022 Gross Gross Amortized unrealized unrealized Fair (in thousands) Cost gains losses Value Cash and cash equivalents: Cash and money market funds $ 137,636 $ — $ — $ 137,636 Commercial paper 166,514 — ( 61 ) 166,453 U.S. government & agency securities 20,994 6 — 21,000 Total cash and cash equivalents 325,144 6 ( 61 ) 325,089 Investments: Commercial paper 127,626 9 ( 333 ) 127,302 Corporate debt securities 49,998 — ( 507 ) 49,491 U.S. government & agency securities 274,315 1 ( 3,880 ) 270,436 Total investments 451,939 10 ( 4,720 ) 447,229 Total cash, cash equivalents, and investments $ 777,083 $ 16 $ ( 4,781 ) $ 772,318 Short-term restricted cash $ 300 $ — $ — $ 300 Long-term restricted cash $ 2,922 $ — $ — $ 2,922 December 31, 2021 Gross Gross Amortized unrealized unrealized Fair (in thousands) Cost gains losses Value Cash and cash equivalents: Cash and money market funds $ 327,316 $ — $ — $ 327,316 Commercial paper 133,190 — ( 5 ) 133,185 U.S. government & agency securities 225 — — 224 Total cash and cash equivalents 460,731 — ( 5 ) 460,725 Investments: Commercial paper 187,705 — ( 73 ) 187,632 Corporate debt securities 8,964 9 ( 5 ) 8,968 U.S. government & agency securities 388,088 1 ( 1,014 ) 387,075 Total investments 584,757 10 ( 1,092 ) 583,675 Total cash, cash equivalents, and investments $ 1,045,488 $ 10 $ ( 1,097 ) $ 1,044,400 Short-term restricted cash $ 500 $ — $ — $ 500 Long-term restricted cash $ 4,592 $ — $ — $ 4,592 The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of December 31, 2022: (in thousands) Fair Value Due in one year or less $ 564,752 Due after one year through 5 years 69,930 Total investments $ 634,682 Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties. 76 NOTE 6. BALANCE SHEET COMPONENTS Inventory, Net Inventory, net, consisted of the following components: December 31, (in thousands) 2022 2021 Purchased materials $ 24,139 $ 7,993 Work in process 14,062 8,611 Finished goods 12,180 7,995 Inventory, net $ 50,381 $ 24,599 Property and Equipment, Net Property and equipment, net, consisted of the following components: December 31, (in thousands) 2022 2021 Laboratory equipment and machinery $ 38,998 $ 31,534 Leasehold improvements 34,129 31,114 Computer equipment 18,438 15,059 Software 6,879 5,578 Furniture and fixtures 3,426 3,202 Construction in progress 4,698 2,303 Total 106,568 88,790 Less: Accumulated depreciation ( 64,988 ) ( 56,286 ) Property and equipment, net $ 41,580 $ 32,504 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. Goodwill and intangible Assets Goodwill 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 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): Estimated Gross Net Useful Life Carrying Accumulated Carrying (in years) Amount Amortization Amount Developed technology 15 $ 11,179 $ ( 1,039 ) $ 10,140 Customer relationships 2 360 ( 255 ) 105 Total $ 11,539 $ ( 1,294 ) $ 10,245 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. 77 The estimated future amortization expense of acquisition-related intangible assets with definite lives is estimated as follows (in thousands): 2023 $ 853 2024 745 2025 745 2026 745 2027 746 2028 and thereafter 6,411 Total $ 10,245 Accrued Expenses Accrued expenses consisted of the following components: December 31, (in thousands) 2022 2021 Salaries and benefits $ 17,432 $ 25,282 Accrued interest payable 5,100 5,100 Accrued purchase commitments 3,705 — Accrued product development costs 2,326 1,936 Accrued professional services and legal fees 1,005 1,640 Inventory accrual 332 108 Warranty accrual 1,651 594 Other 1,045 1,601 Accrued expenses $ 32,596 $ 36,261 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) 2022 2021 Balance at beginning of period $ 594 $ 161 Additions charged to cost of product revenue 3,199 2,120 Repairs and replacements ( 2,142 ) ( 1,687 ) Balance at end of period $ 1,651 $ 594 Deferred Revenue 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. Term Loans In connection with the acquisition of Omniome, we acquired $ 1.3 million in short-term debt and $ 3.0 million in long-term debt relating to a term loan facility that Omniome obtained in April 2020. Borrowings on the term loan facility were used to fund Omniome’s purchases of equipment, which serves as collateral. Each term loan has a term of 43 months and bears a fixed interest rate of approximately 17 % annually. The fee for the elective option to prepay all, but not less than all, of the borrowed amounts at any time after the 24 th month and before the 43 rd month after the commencement date, is 4 % of the outstanding loan balance. Payments are made in equal monthly installments including principal and interest. As of December 31, 2022, the carrying value of term loans outstanding was $ 2.3 million. The related long-term portion of $ 0.5 million was recorded as part of other liabilities, non-current and the short-term portion of $ 1.8 million was recorded as part of other liabilities, current on the Consolidated Balance Sheet. The interest expense was $ 0.6 million for the year ended December 31, 2022, which was included as part of interest expense in the Consolidated Statement of Operations and Comprehensive (Loss) Income. ‎ 78 As of December 31, 2022, the future principal payments remaining on term loans was the following: (in thousands) 2023 $ 1,842 2024 490 Total $ 2,332 Other Liabilities, Current Other liabilities, current, consisted of the following components: December 31, (in thousands) 2022 2021 Accrued Employee Stock Purchase Plan $ 3,638 $ 3,598 Short-term loan 1,842 1,608 Other 1,753 553 Other liabilities, current $ 7,233 $ 5,759 NOTE 7. CONVERTIBLE SENIOR NOTES On February 9, 2021, we entered into an investment agreement (the “Investment Agreement”) with SB Northstar LP (the “Purchaser”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to the Purchaser of $ 900 million in aggregate principal amount of our 1.50 % Convertible Senior Notes (the “Notes”). The Notes were issued on February 16, 2021 . The Notes are governed by an indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at a rate of 1.50 % per annum. Interest on the Notes is payable semi-annually in arrears on February 15 and August 15 and commenced on August 15, 2021. The Notes will mature on February 15, 2028 , subject to earlier conversion, redemption, or repurchase. The Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The Notes are convertible into shares of our common stock based on an initial conversion rate of 22.9885 shares of common stock per $ 1,000 principal amount of the Notes (which is equal to an initial conversion price of $ 43.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash. On or after February 20, 2026, the Notes will be redeemable by the Company in the event that the closing sale price of our common stock has been at least 150 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide the redemption notice at a redemption price of 100 % of the principal amount of such Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. With certain exceptions, upon a change of control of the Company or the failure of our common stock to be listed on certain stock exchanges (a “Fundamental Change”), the holders of the Notes may require that we repurchase all or part of the principal amount of the Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date. The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture. The Indenture also includes customary covenants for convertible notes of this type. To the extent we elect, the sole remedy for an event of default relating to our failure to comply with certain of our reporting obligations shall, for the first 360 calendar days after the occurrence of such an event of default, consist exclusively of the right to receive additional interest on the Notes at a rate equal to (i) 0.25 % per annum of the principal amount of the Notes outstanding for each day during the first 180 calendar days of the 360-day period after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived) and (ii) 0.50 % per annum of the principal amount of the Notes outstanding for each day from, and including, the 181st calendar day to, and including, the 360th calendar day after the occurrence of such an event of default during which such event of default is continuing (or, if earlier, the date on which such event of default is cured or waived as provided for in the Indenture). On the 361st day after such event of default (if the event of default relating to our failure to comply with its obligations is not cured or waived prior to such 361st day), the Notes shall be subject to acceleration as provided for in the Indenture. 79 The Notes are accounted for in accordance with the authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. Under ASU 2020-06, the guidance requires that debt with an embedded conversion feature is accounted for in its entirety as a liability and no portion of the proceeds from the issuance of the convertible debt instrument is accounted for as attributable to the conversion feature unless the conversion feature is required to be accounted for separately as an embedded derivative or the conversion feature results in a substantial premium. The conversion feature of the Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the Notes were not issued at a premium; therefore, the Notes are accounted for in their entirety as a liability. Because we may elect to settle any conversions entirely in shares, and because settlement in shares is the default settlement method, the liability is classified as non-current. The requirement to repurchase the Notes including unpaid interest to the maturity date in the event of a Fundamental Change is considered a put option for certain periods requiring bifurcation under ASC 815 – Derivatives and Hedging. However, given the low probability of a Fundamental Change occurring during the applicable periods, the value of the embedded derivative is immaterial. The additional interest feature in the event of our failure to comply with certain reporting obligations is also considered an embedded derivative requiring bifurcation under ASC 815. However, due to the nature and terms of the reporting obligations, the value of the embedded derivative is immaterial. We incurred issuance costs related to the Notes of approximately $ 4.5 million, which were recorded as debt issuance cost and are presented as a reduction to the Notes on our Consolidated Balance Sheets and are amortized to interest expense using the effective interest method over the term of the Notes, resulting in an effective interest rate of 1.6 %. As of December 31, 2022, the net carrying amount of the liability for the Notes is recorded as convertible senior notes, net in the Consolidated Balance Sheets as follows (in thousands): Principal amount $ 900,000 Unamortized debt issuance costs ( 3,317 ) Net carrying amount $ 896,683 Interest expense for the Notes was as follows for the years ended December 31, 2022, 2021, and 2020: Years Ended December 31, (in thousands) 2022 2021 2020 Contractual interest expense $ 13,500 $ 11,812 $ - Amortization of debt issuance costs 617 532 - Total interest expense $ 14,117 $ 12,344 $ - As of December 31, 2022, the estimated fair value (Level 2) of the Notes was $ 604.8 million. The fair value of the Notes is estimated using a pricing model that is primarily affected by the trading price of our common stock and market interest rates. NOTE 8. COMMITMENTS AND CONTINGENCIES Leases We record operating lease right-of-use assets and liabilities on our Consolidated Balance Sheets for all leases with a term of more than 12 months. In connection with the acquisition of Omniome, we acquired $ 18.1 million in right-of-use assets and liabilities on our Consolidated Balance Sheets. The operating lease right-of-use assets and liabilities are calculated as the present value of remaining minimum lease payments over the remaining lease term using our estimated secured incremental borrowing rates at the commencement date. Lease payments included in the measurement of the lease liability comprise the fixed rent per the term of the Lease. All of our leases are operating leases. Lease payments comprise the base rent per the term of the Lease. Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments, such as common area maintenance fees, recognized in the period those payments are incurred. We often have options to renew lease terms for buildings. 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. ‎ 80 As of December 31, 2022, the maturities of our operating lease liabilities were as follows: (in thousands) 2023 $ 11,955 2024 12,018 2025 12,279 2026 12,392 2027 9,930 Thereafter — Total undiscounted operating lease payments 58,574 Less: imputed interest ( 8,618 ) Present value of operating lease liabilities $ 49,956 Balance Sheet Classification Operating lease liabilities, current $ 8,886 Operating lease liabilities, non-current 41,070 Total operating lease liabilities $ 49,956 We use our incremental borrowing rate to determine the present value of lease payments, as the implicit rates in our leases are not readily determinable. The weighted-average discount rate used to measure our operating lease liabilities was 6.7 %. The weighted-average remaining lease term for our operating leases as of December 31, 2022 was 4.7 years. Cash Flows Cash paid for amounts included in the present value of operating lease liabilities was $ 11.2 million and $ 8.2 million for the years ended December 31, 2022 and 2021, respectively, and were included in operating cash flow. Operating Lease Costs Operating lease costs were $ 10.5 million and $ 7.2 million for the years ended December 31, 2022 and 2021, respectively. Contingencies We may become involved in legal proceedings, claims and assessments from time to time in the ordinary course of business. We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. 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. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fundraising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between such third parties and us in connection with such fundraising efforts. To the extent that any such indemnification obligations apply to the lawsuits described above, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification obligations has been recorded as of 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. 81 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. NOTE 9. INCOME TAXES 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. Significant management judgement is required in determining our provision for income taxes, deferred tax assets and liabilities, and valuation allowances recorded against net deferred tax assets in accordance with U.S. GAAP. These estimates and judgements occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in the current or subsequent period. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50 % likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether the factors underlying the sustainability assertion have changed and the amount of the recognized tax benefit is still appropriate. We account for Global Intangible Low-taxed Income as a period cost. 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. Income tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax rate of 21 % to pretax income or loss as follows: Years ended December 31, 2022 2021 2020 Statutory tax rate 21.0 % 21.0 % 21.0 % State tax rate, net of federal benefit 4.4 5.5 ( 8.3 ) Change in valuation allowance ( 25.1 ) ( 4.9 ) 6.3 Tax credits 2.2 2.5 ( 3.6 ) Share-based compensation ( 2.2 ) 10.9 ( 15.2 ) Merger Expenses - ( 0.9 ) - Other ( 0.4 ) ( 0.1 ) ( 0.2 ) Total ( 0.1 ) % 34.0 % 0.0 % 82 Deferred income taxes reflect the net tax effects of loss and credit carry forwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands): December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 400,629 $ 378,035 Research and development credits 71,526 60,672 Capitalized research and experimental expenses 34,863 — Accruals and reserves 18,417 10,822 Share-based compensation 17,117 12,838 Operating lease liability 11,537 13,105 Total deferred tax assets 554,089 475,472 Less: Valuation allowance ( 445,574 ) ( 366,940 ) Total deferred tax assets: 108,515 108,532 Intangibles ( 98,931 ) ( 97,345 ) Fixed assets ( 1,262 ) ( 1,523 ) Operating lease right-of-use assets ( 9,157 ) ( 10,502 ) Total deferred tax liabilities ( 109,350 ) ( 109,370 ) Net deferred tax assets $ ( 835 ) $ ( 838 ) 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. We regularly assess the need for a valuation allowance against our deferred income tax assets by considering both positive and negative evidence related to whether it is more likely than not that our deferred income tax assets will be realized. 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. We maintain a valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Consolidated Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 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. 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. We had a total state net operating loss carryforward of approximately $ 1,071.8 million, which are subject to annual expirations. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change of ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. We have federal credits of approximately $ 47.2 million, which will begin to expire in 2024 if not utilized and state research credits of approximately $ 42.6 million, which have no expiration date. These tax credits are subject to the same limitations discussed above. 83 As of December 31, 2022, our total unrecognized tax benefit was $ 10.4 million. A reconciliation of the beginning and ending unrecognized tax benefit balance is as follows (in thousands): Balance as of December 31, 2019 $ 21,979 Decrease in balance related to tax positions taken in prior year ( 17,255 ) Increase in balance related to tax positions taken during current year 1,230 Balance as of December 31, 2020 5,954 Increase in balance related to tax positions taken in prior year 189 Increase in balance related to tax positions taken during current year 2,192 Balance as of December 31, 2021 8,335 Decrease in balance related to tax positions taken in prior year ( 10 ) Increase in balance related to tax positions taken during current year 2,085 Balance as of December 31, 2022 $ 10,410 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. If total unrecognized tax benefits were realized in the future, it would not result in any tax benefit as we currently have a full valuation allowance. We file U.S. federal and various state income tax returns. For U.S. federal and state income tax purposes, the statute of limitations currently remains open for the years ending December 31, 2019 to present and December 31, 2018 to present, respectively. In addition, all of the net operating losses and research and development credit carryforwards that may be utilized in future years may be subject to examination. We are not currently under examination by income tax authorities in any jurisdiction. NOTE 10. STOCKHOLDERS’ EQUITY Preferred Stock Our Certificate of Incorporation, as amended and restated in October 2010 in connection with the closing of our initial public offering, authorizes us to issue 1,000,000,000 shares of $ 0.001 par value common stock and 50,000,000 shares of $ 0.001 par value preferred stock. As of December 31, 2022 and 2021, there were no shares of preferred stock issued or outstanding. Common Stock Common stockholders are entitled to dividends when and if declared by our board of directors. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote. Underwritten Public Equity Offerings 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. We paid a commission equal to 6 % of the gross proceeds from the sale of shares of our common stock. The total net proceeds to us from the offering after deducting the underwriting discount were approximately $ 93.9 million, excluding approximately $ 0.3 million of offering expenses. In November 2020, we entered into an underwriting agreement, relating to the public offering of 6,096,112 shares of our common stock, $ 0.001 par value per share, at a price to the public of $ 14.25 per share. Under the terms of the underwriting agreement, we also granted the underwriters a 30 -day option to purchase up to an additional 914,416 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 November 2020. In total, we sold 7.0 million shares of our common stock. We paid a commission equal to 6 % of the gross proceeds from the sale of shares of our common stock. The total net proceeds to us from the offering after deducting the underwriting discount were approximately $ 93.9 million, excluding approximately $ 0.3 million of offering expenses. In total, for the year ended December 31, 2020, we issued 29.4 million shares of our common stock through our two underwritten public offerings with an average offering price of $ 6.40 . The total net proceeds to us from the two offerings, after deducting the underwriting commission and offering expenses, were approximately $ 187.2 million. Private Placement of Common Stock On July 19, 2021, in connection with the Omniome acquisition, we entered into a purchase agreement with certain qualified institutional buyers and institutional accredited investors, pursuant to which we agreed to sell an aggregate of 11,214,953 shares of common stock, at a price of $ 26.75 per share, for aggregate gross proceeds of approximately $ 300 million. The transaction closed on September 20, 2021. We registered the private placement shares for resale following the closing of the merger. 84 Equity Plans The 2020 Equity Incentive Plan (the “2020 Plan”), the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”), and the 2021 adopted Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”) allow for the issuance of stock options, restricted units and awards, and performance-based awards. On August 4, 2020, stockholders approved the 2020 Plan and reserved 11,000,000 shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan. On December 2, 2020, the Board of Directors (the “Board”) adopted the Inducement Plan and reserved 2,500,000 shares of our common stock for issuance pursuant to equity awards granted under the Inducement Plan. On April 18, 2021 and November 22, 2021, the Board amended the Inducement Plan to reserve an additional 750,000 and 360,000 shares, respectively. On September 20, 2021, in connection with the acquisition of Omniome, we adopted the Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”). Under the Omniome Merger Agreement, each unvested option to purchase Omniome common stock, granted under the Omniome Plan held by employees continuing with us, 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; (B) the number of shares of our common stock subject to the assumed option is equal to the product of (i) the number of shares of Omniome common stock subject to the corresponding unvested option, multiplied by (ii) the exchange ratio (as defined below), with any resulting fractional share rounded down to the nearest whole share; and (C) the exercise price per share of the assumed options is equal to the quotient of (i) the exercise price per share of the corresponding unvested option to purchase shares of Omniome common stock, divided by (ii) the exchange ratio (as defined below), with any resulting fractional cent rounded up to the nearest whole cent. The exchange ratio was equal to 0.259204639 . We reserved 2,494,128 shares of our common stock for issuance pursuant to equity awards under the Omniome Plan. 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. Stock Options Time-based stock options The following table summarizes time-based stock option activity for all of our equity compensation plans for the year ended December 31, 2022 (in thousands, except per share amounts): Number Weighted-average of shares exercise price Outstanding at December 31, 2021 12,159 $ 11.38 Granted 5,211 $ 10.34 Exercised ( 1,052 ) $ 3.25 Canceled ( 1,603 ) $ 19.66 Expired ( 97 ) $ 24.26 Outstanding at December 31, 2022 14,618 $ 10.60 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): Number Weighted-average of shares exercise price Outstanding at December 31, 2021 304 $ 4.71 Granted — $ — Exercised — $ — Canceled ( 46 ) $ 4.71 Outstanding at December 31, 2022 258 $ 4.71 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. 85 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 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. We measure compensation expense for these RSUs at fair value on the date of grant and recognize the expense over the expected vesting period on a straight-line basis. The RSUs do not entitle participants to the rights of holders of common stock, such as voting rights, until the shares are issued. RSUs that are expected to vest are net of estimated future forfeitures. The following table summarizes the RSU activity for the year ended December 31, 2022 (in thousands, except per share amounts): Weighted-average Number grant date of shares fair value RSUs outstanding at December 31, 2021 7,392 $ 19.78 RSUs granted 5,389 $ 10.15 RSUs released ( 2,582 ) $ 15.19 RSUs forfeited ( 1,664 ) $ 19.42 Unvested RSUs outstanding at December 31, 2022 8,535 $ 15.16 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, 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. Each offering period will generally consist of four purchase periods, each purchase period being approximately six months . The price at which the stock is purchased is equal to the lower of 85 % of the fair market value of the common stock at the beginning of an offering period or at the end of a purchase period. 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 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. Pursuant to the terms of the then-in-process Merger Agreement with Illumina, offerings under our 2010 ESPP were suspended after the completion of the purchase period ended March 1, 2019. After the merger with Illumina was terminated in January 2020, we began offerings under the ESPP again starting with the offering period beginning March 1, 2020. For the years ended December 31, 2022, 2021, and 2020, 1,878,168 shares, 1,913,968 shares, and 834,677 shares of common stock were purchased under the ESPP, respectively. As of December 31, 2022, 9,932,505 shares of our common stock remain available for issuance under our ESPP. 86 Share-based Compensation Total share-based compensation expense consists of the following (in thousands): Years Ended December 31, 2022 2021 2020 Cost of revenue $ 4,802 $ 6,126 $ 2,236 Research and development 30,676 20,275 7,061 Sales, general and administrative 43,135 35,403 8,236 Merger-related expenses - stock-settled — 6,349 — Merger-related expenses - milestone — 5,202 — Share-based compensation 78,613 73,355 17,533 Merger-related expenses - cash-settled — 7,373 — Total share-based compensation expense $ 78,613 $ 80,728 $ 17,533 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 We estimate the fair value of share options granted using the Black-Scholes valuation method and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair market value of RSU awards granted is the closing price of our shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting period. For shares purchased under our Employee Stock Purchase Plan, or ESPP, we estimate the grant-date fair value, and the resulting 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. Expected Volatility – The expected volatility used in the Black-Scholes valuation method is derived from the implied volatility related to our share price over the expected term. Expected Dividend – We have never paid dividends on our shares and, accordingly, the dividend yield percentage is zero for all periods. Risk-Free Interest Rate – The risk-free interest rate used in the Black-Scholes valuation method is the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected terms. Stock Options We estimated the fair value of employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. When determining the current share prices underlying the stock options for calculating the grant-date fair value, we reference observable market prices of similar or identical instruments in active markets. The fair value of employee stock options was estimated using the following weighted-average assumptions: Years Ended December 31, 2022 2021 2020 Expected term in years 4.6 2.1 - 4.6 5.0 Expected volatility 70 % - 76 % 67 % - 80 % 70.7 % Risk-free interest rate 0.41 % – 3.66 % 0.05 % – 1.10 % 0.3 % Dividend yield — — — Weighted-average grant date fair value per share $ 5.93 $ 15.53 $ 7.20 Cash received from option exercises for the years ended December 31, 2022, 2021, and 2020 was $ 3.4 million, $ 25.4 million and $ 43.9 million, respectively. 87 ESPP We estimate the fair value of shares to be issued under the ESPP using the Black-Scholes option pricing model. The fair value of shares to be issued under the ESPP was estimated using the following assumptions: Years Ended December 31, 2022 2021 2020 Expected term in years 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0 Expected volatility 70 % - 97 % 67 % - 68 % 57 % - 71 % Risk-free interest rate 0.60 % - 3.51 % 0.1 % - 0.2 % 0.1 %- 1.0 % Dividend yield — — — Weighted-average grant date fair value per share $ 4.28 $ 25.07 $ 1.87 Cash received through the ESPP for the years ended December 31, 2022, 2021, and 2020 was $ 7.8 million, $ 6.4 million, and $ 2.4 million, respectively. As of December 31, 2022, $ 125.1 million of total unrecognized compensation expense related to stock options, restricted stock, and ESPP shares was expected to be recognized over a weighted-average period of 2.4 years. NOTE 11. NET (LOSS) INCOME PER SHARE Basic net (loss) income per share and diluted net (loss) income per share are presented for the three years presented. The following table presents the calculation of weighted-average shares of common stock used in the computations of basic and diluted net (loss) income per share amounts presented in the accompanying consolidated statements of operations and comprehensive (loss) income (in thousands, except per share amounts): Years Ended December 31, 2022 2021 2020 Numerator: Net (loss) income $ ( 314,248 ) $ ( 181,223 ) $ 29,403 Denominator: Basic Weighted-average shares used in computing basic net (loss) income per share 224,550 204,136 165,187 Basic net (loss) income per share $ ( 1.40 ) $ ( 0.89 ) $ 0.18 Diluted Weighted-average shares used in computing basic net (loss) income per share 224,550 204,136 165,187 Add: weighted-average stock options — — 6,092 Add: weighted-average restricted stock units — — 2,324 Add: weighted-average common stock issuable pursuant to our ESPP — — 1,367 Weighted-average shares used in computing diluted net (loss) income per share 224,550 204,136 174,970 Diluted net (loss) income per share $ ( 1.40 ) $ ( 0.89 ) $ 0.17 The following shares issuable upon conversion of convertible senior notes, options outstanding, time-based RSUs, performance-based RSUs, and ESPP shares to purchase common stock were excluded from the computation of diluted net loss per share for the periods presented because the effect of including such shares would have been antidilutive: Years Ended December 31, (in thousands) 2022 2021 2020 Shares issuable upon conversion of convertible senior notes 20,690 20,690 — Options to purchase common stock 14,876 12,463 4,908 RSUs with time-based vesting 8,535 7,392 100 RSUs with performance-based vesting — — 94 ESPP shares 3,880 1,564 2,890 As described in Note 2. Business Acquisition s , the contingently issuable shares would be due upon the achievement of a milestone. See Note 10. Stockholders’ Equity for detailed information on RSUs with time-based vesting and RSUs with performance-based vesting. 88 NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION We are organized as, and operate in, one reportable segment: the development, manufacturing, and marketing of an integrated platform for genetic analysis. Our chief operating decision-maker is our Chief Executive Officer. 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. A summary of our revenue by geographic location is as follows: Years Ended December 31, (in thousands) 2022 2021 2020 Americas $ 69,561 $ 64,521 $ 37,277 Europe, Middle East, and Africa 22,598 30,271 19,065 Asia-Pacific 36,145 35,721 22,551 Total $ 128,304 $ 130,513 $ 78,893 A summary of our revenue by category is as follows: Years Ended December 31, (in thousands) 2022 2021 2020 Instrument revenue $ 48,719 $ 61,324 $ 34,282 Consumable revenue 59,980 52,181 31,142 Product revenue 108,699 113,505 65,424 Service and other revenue 19,605 17,008 13,469 Total revenue $ 128,304 $ 130,513 $ 78,893 NOT E 13. 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. ‎ 89 I TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.