false--09-30Q3202100012991300.0480.0430001299130pacb:OmniomeStockAwardsRelatedToAcquisitionMemberpacb:AchievementOfMilestoneMember2021-09-202021-09-200001299130us-gaap:CommonStockMember2020-07-012020-09-300001299130us-gaap:CommonStockMember2020-01-012020-09-300001299130us-gaap:RetainedEarningsMember2021-09-300001299130us-gaap:AdditionalPaidInCapitalMember2021-09-300001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-09-300001299130us-gaap:RetainedEarningsMember2021-06-300001299130us-gaap:AdditionalPaidInCapitalMember2021-06-300001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-06-3000012991302021-06-300001299130us-gaap:RetainedEarningsMember2020-12-310001299130us-gaap:AdditionalPaidInCapitalMember2020-12-310001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001299130us-gaap:RetainedEarningsMember2020-09-300001299130us-gaap:AdditionalPaidInCapitalMember2020-09-300001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300001299130us-gaap:RetainedEarningsMember2020-06-300001299130us-gaap:AdditionalPaidInCapitalMember2020-06-300001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-3000012991302020-06-300001299130srt:RevisionOfPriorPeriodAccountingStandardsUpdateAdjustmentMemberus-gaap:AccountingStandardsUpdate201904Memberus-gaap:RetainedEarningsMember2019-12-310001299130srt:RevisionOfPriorPeriodAccountingStandardsUpdateAdjustmentMemberus-gaap:AccountingStandardsUpdate201904Member2019-12-310001299130us-gaap:RetainedEarningsMember2019-12-310001299130us-gaap:AdditionalPaidInCapitalMember2019-12-310001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001299130pacb:OmniomePlanMemberpacb:ExercisePriceRangeAcqusitionTwoMember2021-01-012021-09-300001299130pacb:ExercisePriceRangeOneMember2021-01-012021-09-300001299130pacb:ExercisePriceRangeFiveMember2021-01-012021-09-300001299130pacb:ExercisePriceRangeThreeMember2021-01-012021-09-300001299130us-gaap:PerformanceSharesMember2021-09-300001299130pacb:ExercisePriceRangeOneMember2021-09-300001299130pacb:ExercisePriceRangeFiveMember2021-09-300001299130us-gaap:PerformanceSharesMemberpacb:OmniomePlanMemberpacb:ExercisePriceRangeAcqusitionTwoMember2021-01-012021-09-300001299130us-gaap:EmployeeStockOptionMemberpacb:OmniomePlanMemberpacb:ExercisePriceRangeAcqusitionMember2021-01-012021-09-300001299130pacb:ExercisePriceRangeTwoMember2021-01-012021-09-300001299130pacb:ExercisePriceRangeFourMember2021-01-012021-09-300001299130pacb:EquityIncentivePlan2020Member2021-09-300001299130pacb:EmployeeStockPurchasePlanMember2021-09-300001299130pacb:OmniomePlanMember2021-09-200001299130pacb:InducementEquityIncentivePlan2020Member2020-12-020001299130pacb:EquityIncentivePlan2020Member2020-08-040001299130pacb:InducementEquityIncentivePlan2020Member2021-04-182021-04-180001299130pacb:EmployeeStockPurchasePlanMember2021-01-012021-01-310001299130srt:MinimumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-09-300001299130srt:MaximumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-09-300001299130srt:MinimumMemberus-gaap:EmployeeStockOptionMember2021-07-012021-09-300001299130srt:MinimumMemberpacb:EmployeeStockPurchasePlanMember2021-07-012021-09-300001299130srt:MaximumMemberus-gaap:EmployeeStockOptionMember2021-07-012021-09-300001299130srt:MaximumMemberpacb:EmployeeStockPurchasePlanMember2021-07-012021-09-300001299130srt:MinimumMemberus-gaap:EmployeeStockOptionMember2021-01-012021-09-300001299130srt:MinimumMemberpacb:EmployeeStockPurchasePlanMember2021-01-012021-09-300001299130srt:MaximumMemberus-gaap:EmployeeStockOptionMember2021-01-012021-09-300001299130srt:MaximumMemberpacb:EmployeeStockPurchasePlanMember2021-01-012021-09-300001299130srt:MinimumMemberpacb:EmployeeStockPurchasePlanMember2020-07-012020-09-300001299130srt:MaximumMemberpacb:EmployeeStockPurchasePlanMember2020-07-012020-09-300001299130us-gaap:EmployeeStockOptionMember2020-07-012020-09-300001299130srt:MinimumMemberpacb:EmployeeStockPurchasePlanMember2020-01-012020-09-300001299130srt:MaximumMemberpacb:EmployeeStockPurchasePlanMember2020-01-012020-09-300001299130us-gaap:EmployeeStockOptionMember2020-01-012020-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2021-09-300001299130pacb:PerformanceBasedRestrictedStockUnitsRsusMember2021-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2020-12-310001299130pacb:PerformanceBasedRestrictedStockUnitsRsusMember2020-12-310001299130pacb:EmployeeStockPurchasePlanMember2020-07-012020-09-300001299130pacb:EmployeeStockPurchasePlanMember2020-01-012020-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2021-07-012021-09-300001299130pacb:PerformanceBasedRestrictedStockUnitsRsusMember2021-07-012021-09-300001299130pacb:EmployeeStockPurchasePlanMember2021-07-012021-09-300001299130us-gaap:EmployeeStockOptionMember2021-04-012021-06-300001299130us-gaap:EmployeeStockOptionMember2021-01-012021-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2021-01-012021-09-300001299130pacb:PerformanceBasedRestrictedStockUnitsRsusMember2021-01-012021-09-300001299130pacb:EmployeeStockPurchasePlanMember2021-01-012021-09-300001299130us-gaap:PerformanceSharesMember2021-01-012021-09-300001299130pacb:TimeBasedStockOptionsMember2021-01-012021-09-300001299130srt:NorthAmericaMember2021-07-012021-09-300001299130srt:EuropeMember2021-07-012021-09-300001299130srt:AsiaPacificMember2021-07-012021-09-300001299130us-gaap:ProductMember2021-04-012021-06-300001299130pacb:ServiceAndOtherMember2021-04-012021-06-300001299130pacb:InstrumentMember2021-04-012021-06-300001299130pacb:ConsumableMember2021-04-012021-06-300001299130srt:NorthAmericaMember2021-01-012021-09-300001299130srt:EuropeMember2021-01-012021-09-300001299130srt:AsiaPacificMember2021-01-012021-09-300001299130pacb:InstrumentMember2021-01-012021-09-300001299130pacb:ConsumableMember2021-01-012021-09-300001299130srt:NorthAmericaMember2020-07-012020-09-300001299130srt:EuropeMember2020-07-012020-09-300001299130srt:AsiaPacificMember2020-07-012020-09-300001299130us-gaap:ProductMember2020-04-012020-06-300001299130pacb:ServiceAndOtherMember2020-04-012020-06-300001299130pacb:InstrumentMember2020-04-012020-06-300001299130pacb:ConsumableMember2020-04-012020-06-3000012991302020-04-012020-06-300001299130srt:NorthAmericaMember2020-01-012020-09-300001299130srt:EuropeMember2020-01-012020-09-300001299130srt:AsiaPacificMember2020-01-012020-09-300001299130pacb:InstrumentMember2020-01-012020-09-300001299130pacb:ConsumableMember2020-01-012020-09-300001299130pacb:SecurityDepositMember2020-12-310001299130pacb:CustomerDepositMember2020-12-310001299130pacb:ObrienLeaseAgreementMember2021-09-300001299130pacb:ObrienLeaseAgreementMember2015-10-3100012991302020-01-022020-01-020001299130pacb:CirculomicsIncMember2021-07-202021-07-2000012991302020-10-012020-12-310001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-07-012021-09-300001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-09-300001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-012020-09-300001299130us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-09-300001299130us-gaap:RetainedEarningsMember2021-07-012021-09-300001299130us-gaap:RetainedEarningsMember2021-01-012021-09-300001299130us-gaap:RetainedEarningsMember2020-07-012020-09-300001299130us-gaap:RetainedEarningsMember2020-01-012020-09-300001299130pacb:OmniomeIncMember2021-09-300001299130us-gaap:USGovernmentCorporationsAndAgenciesSecuritiesMemberus-gaap:FairValueInputsLevel2Member2021-09-300001299130us-gaap:CorporateDebtSecuritiesMemberus-gaap:FairValueInputsLevel2Member2021-09-300001299130us-gaap:CommercialPaperNotIncludedWithCashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel2Member2021-09-300001299130us-gaap:USGovernmentCorporationsAndAgenciesSecuritiesMember2021-09-300001299130us-gaap:CorporateDebtSecuritiesMember2021-09-300001299130us-gaap:CommercialPaperNotIncludedWithCashAndCashEquivalentsMember2021-09-300001299130us-gaap:CorporateDebtSecuritiesMemberus-gaap:FairValueInputsLevel2Member2020-12-310001299130us-gaap:CommercialPaperNotIncludedWithCashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel2Member2020-12-310001299130us-gaap:CorporateDebtSecuritiesMember2020-12-310001299130us-gaap:CommercialPaperNotIncludedWithCashAndCashEquivalentsMember2020-12-310001299130pacb:CirculomicsIncMember2021-01-012021-09-300001299130pacb:CirculomicsIncMemberus-gaap:DevelopedTechnologyRightsMember2021-01-012021-09-300001299130pacb:CirculomicsIncMemberus-gaap:CustomerRelationshipsMember2021-01-012021-09-300001299130pacb:CirculomicsIncMemberus-gaap:DevelopedTechnologyRightsMember2021-09-300001299130pacb:CirculomicsIncMemberus-gaap:CustomerRelationshipsMember2021-09-300001299130pacb:CirculomicsIncMember2021-09-300001299130srt:MinimumMemberus-gaap:MeasurementInputDiscountRateMember2021-09-300001299130srt:MaximumMemberus-gaap:MeasurementInputDiscountRateMember2021-09-300001299130pacb:ConvertibleSeniorNotesMember2021-01-012021-09-300001299130pacb:ConvertibleSeniorNotesMember2021-09-300001299130pacb:ConvertibleSeniorNotesMember2021-02-280001299130pacb:ConvertibleSeniorNotesMember2021-02-090001299130pacb:ConvertibleSeniorNotesMember2021-02-160001299130us-gaap:ProductMember2021-07-012021-09-300001299130pacb:ServiceAndOtherMember2021-07-012021-09-300001299130us-gaap:ProductMember2021-01-012021-09-300001299130pacb:ServiceAndOtherMember2021-01-012021-09-300001299130us-gaap:ProductMember2020-07-012020-09-300001299130pacb:ServiceAndOtherMember2020-07-012020-09-300001299130us-gaap:ProductMember2020-01-012020-09-300001299130pacb:ServiceAndOtherMember2020-01-012020-09-300001299130pacb:InvitaeCorporationMemberpacb:DevelopmentAgreementMember2021-09-300001299130pacb:InvitaeCorporationMember2021-09-300001299130us-gaap:ServiceMember2021-09-300001299130pacb:CustomerBMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2021-07-012021-09-300001299130pacb:CustomerBMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2021-01-012021-09-300001299130pacb:CustomerBMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2020-07-012020-09-300001299130pacb:CustomerBMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2020-01-012020-09-300001299130us-gaap:CommonStockMember2021-09-300001299130us-gaap:CommonStockMember2021-06-300001299130us-gaap:CommonStockMember2020-12-310001299130us-gaap:CommonStockMember2020-09-300001299130us-gaap:CommonStockMember2020-06-300001299130us-gaap:CommonStockMember2019-12-3100012991302019-12-310001299130us-gaap:CommercialPaperMemberus-gaap:FairValueInputsLevel2Member2021-09-300001299130pacb:CashAndMoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2021-09-300001299130us-gaap:CommercialPaperMember2021-09-300001299130pacb:CashAndMoneyMarketFundsMember2021-09-300001299130us-gaap:USTreasurySecuritiesMemberus-gaap:FairValueInputsLevel2Member2020-12-310001299130us-gaap:USGovernmentCorporationsAndAgenciesSecuritiesMemberus-gaap:FairValueInputsLevel2Member2020-12-310001299130us-gaap:CommercialPaperMemberus-gaap:FairValueInputsLevel2Member2020-12-310001299130pacb:CashAndMoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2020-12-310001299130us-gaap:USTreasurySecuritiesMember2020-12-310001299130us-gaap:USGovernmentCorporationsAndAgenciesSecuritiesMember2020-12-310001299130us-gaap:CommercialPaperMember2020-12-310001299130pacb:CashAndMoneyMarketFundsMember2020-12-3100012991302020-09-300001299130pacb:OmniomeIncMemberpacb:InProcessResearchAndDevelopmentIntangibleMember2021-09-200001299130pacb:CirculomicsIncMember2021-07-200001299130pacb:OmniomeIncMemberpacb:AchievementOfMilestoneMember2021-09-200001299130pacb:OmniomeStockAwardsRelatedToAcquisitionMember2021-09-200001299130pacb:OmniomeIncMember2021-09-200001299130pacb:OmniomeIncMemberpacb:AchievementOfMilestoneMember2021-09-202021-09-200001299130pacb:OmniomeStockAwardsRelatedToAcquisitionMember2021-09-202021-09-200001299130us-gaap:EmployeeStockOptionMember2021-07-012021-09-300001299130us-gaap:ConvertibleDebtSecuritiesMember2021-07-012021-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2021-07-012021-09-300001299130pacb:EmployeeStockPurchasePlanMember2021-07-012021-09-300001299130us-gaap:EmployeeStockOptionMember2021-01-012021-09-300001299130us-gaap:ConvertibleDebtSecuritiesMember2021-01-012021-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2021-01-012021-09-300001299130pacb:EmployeeStockPurchasePlanMember2021-01-012021-09-300001299130us-gaap:EmployeeStockOptionMember2020-07-012020-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2020-07-012020-09-300001299130pacb:PerformanceBasedRestrictedStockUnitsRsusMember2020-07-012020-09-300001299130pacb:EmployeeStockPurchasePlanMember2020-07-012020-09-300001299130us-gaap:EmployeeStockOptionMember2020-01-012020-09-300001299130pacb:TimeBasedRestrictedStockUnitsRsusMember2020-01-012020-09-300001299130pacb:PerformanceBasedRestrictedStockUnitsRsusMember2020-01-012020-09-300001299130pacb:EmployeeStockPurchasePlanMember2020-01-012020-09-300001299130us-gaap:SellingGeneralAndAdministrativeExpensesMember2021-07-012021-09-300001299130us-gaap:ResearchAndDevelopmentExpenseMember2021-07-012021-09-300001299130us-gaap:CostOfSalesMember2021-07-012021-09-300001299130pacb:StockBasedCompensationMember2021-07-012021-09-300001299130pacb:MergerRelatedExpensesStockSettledMember2021-07-012021-09-300001299130pacb:MergerRelatedExpensesMilestoneMember2021-07-012021-09-300001299130pacb:MergerRelatedExpensesCashSettledMember2021-07-012021-09-300001299130us-gaap:SellingGeneralAndAdministrativeExpensesMember2021-01-012021-09-300001299130us-gaap:ResearchAndDevelopmentExpenseMember2021-01-012021-09-300001299130us-gaap:CostOfSalesMember2021-01-012021-09-300001299130pacb:StockBasedCompensationMember2021-01-012021-09-300001299130pacb:MergerRelatedExpensesStockSettledMember2021-01-012021-09-300001299130pacb:MergerRelatedExpensesMilestoneMember2021-01-012021-09-300001299130pacb:MergerRelatedExpensesCashSettledMember2021-01-012021-09-300001299130us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-07-012020-09-300001299130us-gaap:ResearchAndDevelopmentExpenseMember2020-07-012020-09-300001299130us-gaap:CostOfSalesMember2020-07-012020-09-300001299130pacb:StockBasedCompensationMember2020-07-012020-09-300001299130us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-01-012020-09-300001299130us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-09-300001299130us-gaap:CostOfSalesMember2020-01-012020-09-300001299130pacb:StockBasedCompensationMember2020-01-012020-09-300001299130us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001299130us-gaap:AdditionalPaidInCapitalMember2020-01-012020-09-300001299130us-gaap:AdditionalPaidInCapitalMember2021-07-012021-09-300001299130us-gaap:AdditionalPaidInCapitalMember2021-01-012021-09-300001299130pacb:OmniomeIncMember2021-01-012021-09-3000012991302021-02-012021-02-2800012991302020-01-012020-03-3100012991302019-10-012019-12-3100012991302020-04-012020-04-300001299130pacb:PacbioIprPetitionsMember2020-06-222020-06-220001299130us-gaap:CommonStockMember2021-07-012021-09-300001299130us-gaap:CommonStockMember2021-01-012021-09-300001299130pacb:OmniomePlanMember2021-09-202021-09-200001299130pacb:InvitaeCorporationMemberpacb:DevelopmentAgreementMember2021-01-122021-01-120001299130pacb:ConvertibleSeniorNotesMember2021-02-162021-02-160001299130pacb:OneHundredAndEightyFirstDayTo360thDayMemberpacb:ConvertibleSeniorNotesMember2021-02-162021-02-160001299130pacb:EachDayDuringFirst180DaysMemberpacb:ConvertibleSeniorNotesMember2021-02-162021-02-160001299130us-gaap:ServiceMembersrt:MinimumMember2021-01-012021-09-3000012991302021-04-012021-06-300001299130us-gaap:FairValueInputsLevel3Member2021-09-300001299130us-gaap:FairValueInputsLevel2Member2021-09-300001299130us-gaap:FairValueInputsLevel1Member2021-09-300001299130us-gaap:FairValueInputsLevel3Member2020-12-310001299130us-gaap:FairValueInputsLevel2Member2020-12-310001299130us-gaap:FairValueInputsLevel1Member2020-12-3100012991302020-03-310001299130pacb:OmniomeIncMember2021-09-202021-09-2000012991302021-07-012021-09-3000012991302020-07-012020-09-3000012991302020-01-012020-09-300001299130us-gaap:USGovernmentCorporationsAndAgenciesSecuritiesMember2021-09-300001299130us-gaap:InvestmentsMember2021-09-300001299130us-gaap:CorporateDebtSecuritiesMember2021-09-300001299130us-gaap:CommercialPaperNotIncludedWithCashAndCashEquivalentsMember2021-09-300001299130us-gaap:CommercialPaperMember2021-09-300001299130us-gaap:CashAndCashEquivalentsMember2021-09-300001299130pacb:UsGovernmentCorporationsAndAgenciesSecuritiesNotIncludedWithCashAndCashEquivalentsMember2021-09-300001299130pacb:ShortTermRestrictedCashMember2021-09-300001299130pacb:LongTermRestrictedCashMember2021-09-300001299130pacb:CashAndMoneyMarketFundsMember2021-09-300001299130us-gaap:USTreasurySecuritiesMember2020-12-310001299130us-gaap:USGovernmentCorporationsAndAgenciesSecuritiesMember2020-12-310001299130us-gaap:InvestmentsMember2020-12-310001299130us-gaap:CorporateDebtSecuritiesMember2020-12-310001299130us-gaap:CommercialPaperNotIncludedWithCashAndCashEquivalentsMember2020-12-310001299130us-gaap:CommercialPaperMember2020-12-310001299130us-gaap:CashAndCashEquivalentsMember2020-12-310001299130pacb:UsGovernmentCorporationsAndAgenciesSecuritiesNotIncludedWithCashAndCashEquivalentsMember2020-12-310001299130pacb:ShortTermRestrictedCashMember2020-12-310001299130pacb:LongTermRestrictedCashMember2020-12-310001299130pacb:CashAndMoneyMarketFundsMember2020-12-3100012991302020-12-3100012991302021-09-3000012991302021-10-3100012991302021-01-012021-09-30pacb:itemxbrli:pureiso4217:USDxbrli:sharesiso4217:USDxbrli:shares

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

Or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 001-34899

Pacific Biosciences of California, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware	16-1590339
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1305 O’Brien Drive Menlo Park, CA	94025
(Address of principal executive offices)	(Zip Code)

(650) 521-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	PACB	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes T   No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  T No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

---

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No   T

Number of shares outstanding of the issuer’s common stock as of October 31, 2021: 220,598,363.  

‎

---

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	PAGE No
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	4
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2021 and 2020	5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	6
Condensed Consolidated Statements of Cash Flows for the NineMonths Ended September 30, 2021 and 2020	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
Item 4. Controls and Procedures	38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3. Default Upon Senior Securities	67
Item 4. Mine Safety Disclosures	67
Item 5. Other Information	67
Item 6. Exhibits	68

---

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
(in thousands, except per share amounts)	2021			2020
Assets
Current assets
Cash and cash equivalents	$	425,388		$	81,611
Investments		654,502			237,203
Accounts receivable		23,946			16,837
Inventory		18,276			14,230
Prepaid expenses and other current assets		7,193			4,870
Short-term restricted cash		500			836
Total current assets		1,129,805			355,587
Property and equipment, net		31,119			24,899
Operating lease right-of-use assets, net		45,862			29,951
Long-term restricted cash		4,560			3,500
Intangible assets, net		411,206			—
Goodwill		411,533			—
Other long-term assets		70			43
Total assets	$	2,034,155		$	413,980
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	4,960		$	3,579
Accrued expenses		30,820			17,350
Deferred revenue, current		9,773			8,722
Operating lease liabilities, current		7,128			4,332
Other liabilities, current		2,927			4,519
Total current liabilities		55,608			38,502
Deferred revenue, non-current		18,447			1,568
Contingent consideration liability, non-current		168,574			—
Operating lease liabilities, non-current		49,954			37,667
Convertible senior notes, net, non-current		895,915			—
Other liabilities, non-current		4,850			752
Total liabilities		1,193,348			78,489
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 220,547 shares and 192,294 shares at September 30, 2021 and December 31, 2020, respectively		221			192
Additional paid-in capital		1,989,322			1,372,083
Accumulated other comprehensive income		27			85
Accumulated deficit		(1,148,763)			(1,036,869)
Total stockholders’ equity		840,807			335,491
Total liabilities and stockholders’ equity	$	2,034,155		$	413,980

See accompanying notes to the condensed consolidated financial statements.

---

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2021			2020			2021			2020
Revenue:
Product revenue	$	30,502		$	15,749		$	82,338		$	41,798
Service and other revenue		4,385			3,333			12,156			9,959
Total revenue		34,887			19,082			94,494			51,757
Cost of revenue:
Cost of product revenue		15,530			9,228			41,449			22,874
Cost of service and other revenue		3,870			2,790			10,828			7,718
Amortization of intangible assets		123			—			123			—
Total cost of revenue		19,523			12,018			52,400			30,592
Gross profit		15,364			7,064			42,094			21,165
Operating expense:
Research and development		27,508			16,467			70,323			46,727
Sales, general and administrative		31,606			14,772			86,804			54,846
Merger-related expenses		30,726			—			30,726			—
Total operating expense		89,840			31,239			187,853			101,573
Operating loss		(74,476)			(24,175)			(145,759)			(80,408)
Gain (loss) from Continuation Advances		—			—			(52,000)			34,000
Interest expense		(3,673)			—			(9,051)			(267)
Other income (expense), net		(133)			467			92			1,143
Loss before benefit from income taxes		(78,282)			(23,708)			(206,718)			(45,532)
Benefit from income taxes		(94,824)			—			(94,824)			—
Net income (loss)		16,542			(23,708)			(111,894)			(45,532)
Other comprehensive income (loss):
Unrealized income (loss) on investments		33			(125)			(58)			113
Comprehensive income (loss)	$	16,575		$	(23,833)		$	(111,952)		$	(45,419)
Net income (loss) per share:
Basic	$	0.08		$	(0.14)		$	(0.56)		$	(0.29)
Diluted	$	0.08		$	(0.14)		$	(0.56)		$	(0.29)
Weighted average shares outstanding used in computing net income (loss) per share
Basic		202,194			166,862			198,545			158,195
Diluted		215,127			166,862			198,545			158,195

See accompanying notes to the condensed consolidated financial statements.

‎

---

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

										Accumulated
							Additional			Other						Total
		Common Stock					Paid-in			Comprehensive			Accumulated			Stockholders'
(in thousands)		Shares		Amount			Capital			Income (Loss)			Deficit			Equity
For the three months ended September 30, 2021
Balance at June 30, 2021		198,917		$	199		$	1,423,357		$	(6)		$	(1,165,305)		$	258,245
Net income		—			—			—			—			16,542			16,542
Other comprehensive income		—			—			—			33			—			33
Issuance of common stock in conjunction with equity plans		1,503			2			4,809			—			—			4,811
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			237,875			—			—			237,884
Stock-based compensation expense		—			—			28,447			—			—			28,447
Balance at September 30, 2021		220,547		$	221		$	1,989,322		$	27		$	(1,148,763)		$	840,807
For the three months ended September 30, 2020
Balance at June 30, 2020		154,318		$	154		$	1,129,091		$	243		$	(1,088,096)		$	41,392
Net loss		—			—			—			—			(23,708)			(23,708)
Other comprehensive loss		—			—			—			(125)			—			(125)
Issuance of common stock in conjunction with equity plans		3,274			3			13,344			—			—			13,347
Issuance of common stock from underwritten public equity offering, net of issuance costs		22,345			23			93,575			—			—			93,598
Stock-based compensation expense		—			—			4,992			—			—			4,992
Balance at September 30, 2020		179,937		$	180		$	1,241,002		$	118		$	(1,111,804)		$	129,496
For the nine months ended September 30, 2021
Balance at December 31, 2020		192,294		$	192		$	1,372,083		$	85		$	(1,036,869)		$	335,491
Net loss		—			—			—			—			(111,894)			(111,894)
Other comprehensive loss		—			—			—			(58)			—			(58)
Issuance of common stock in conjunction with equity plans		8,126			9			30,113			—			—			30,122
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			237,875			—			—			237,884
Stock-based compensation expense		—			—			54,417			—			—			54,417
Balance at September 30, 2021		220,547		$	221		$	1,989,322		$	27		$	(1,148,763)		$	840,807
For the nine months ended September 30, 2020
Balance at December 31, 2019		153,119		$	153		$	1,120,999		$	5		$	(1,066,240)		$	54,917
Net loss		—			—			—			—			(45,532)			(45,532)
Other comprehensive income		—			—			—			113			—			113
Adoption effect of Topic 326		—			—			—			—			(32)			(32)
Issuance of common stock in conjunction with equity plans		4,473			4			14,170			—			—			14,174
Issuance of common stock from underwritten public equity offering, net of issuance costs		22,345			23			93,575			—			—			93,598
Stock-based compensation expense		—			—			12,258			—			—			12,258
Balance at September 30, 2020		179,937		$	180		$	1,241,002		$	118		$	(1,111,804)		$	129,496

See accompanying notes to the condensed consolidated financial statements

---

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2021			2020
Cash flows from operating activities
Net loss	$	(111,894)		$	(45,532)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Loss (gain) from Continuation Advances		52,000			(34,000)
Depreciation		4,943			4,827
Amortization of intangible assets		154			—
Amortization of operating lease right-of-use assets		2,403			2,127
Amortization of debt discount and financing costs		381			129
Stock-based compensation		54,417			12,258
Amortization (accretion) from investment premium (discount)		3,107			(141)
Deferred income taxes		(94,824)			—
Changes in assets and liabilities
Accounts receivable		(6,871)			3,428
Inventory		(5,453)			(2,988)
Prepaid expenses and other assets		(1)			216
Accounts payable		196			(2,955)
Accrued expenses		10,267			1,646
Deferred revenue		17,930			(818)
Operating lease liabilities		(3,231)			(2,791)
Other liabilities		(2,996)			360
Deferred gain from Reverse Termination Fee		—			98,000
Net cash provided by (used in) operating activities		(79,472)			33,766
Cash flows from investing activities
Purchase of property and equipment		(3,089)			(972)
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		(857,421)			(234,555)
Sales of investments		212,734			—
Maturities of investments		223,285			114,700
Net cash used in investing activities		(744,284)			(120,827)
Cash flows from financing activities
Continuation Advances		(52,000)			34,000
Notes payable principal payoff		—			(16,000)
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		294,846			93,788
Proceeds from issuance of common stock from equity plans		30,121			14,174
Other		(246)			—
Net cash provided by financing activities		1,168,257			125,962
Net increase in cash and cash equivalents and restricted cash		344,501			38,901
Cash and cash equivalents and restricted cash at beginning of period		85,947			33,627
Cash and cash equivalents and restricted cash at end of period	$	430,448		$	72,528
Cash and cash equivalents at end of period	$	425,388		$	69,028
Restricted cash at end of period		5,060			3,500
Cash and cash equivalents and restricted cash at end of period	$	430,448		$	72,528
Supplemental disclosure of non-cash investing and financing activities
Issuance of common stock in acquisition of Omniome	$	237,884		$	—

See accompanying notes to the condensed consolidated financial statements.

 

---

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. OVERVIEW

We design, develop and manufacture sequencing systems to help scientists and clinical researchers resolve genetically complex problems. Our products address several applications based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, including human germline sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. 

Across these applications, customers use our technology in a wide range of sequencing methods, including whole genome sequencing and de novo genome assembly, long-range phasing, targeted sequencing, full-length RNA and single-cell sequencing, methylation and epigenetic characterization, and others.  Our technology provides high accuracy, long reads, uniform coverage, and the ability to detect epigenetic changes simultaneously. PacBio® sequencing systems, including consumables and software, offer a simple and fast end-to-end workflow for SMRT sequencing.

In addition to our SMRT sequencing technology, we are developing a highly accurate short-read sequencing platform based on the novel Sequencing by Binding (SBB®) technology.  Upon launch, we expect SBB to address adjacent applications and complement our existing long-read sequencing technology.

References in this report to “PacBio,” “we,” “us,” the “Company,” and “our” refer to Pacific Biosciences of California, Inc. and its consolidated subsidiaries.

NOTE 2. BUSINESS ACQUISITIONS

Omniome, Inc.

On September 20, 2021, we completed our acquisition of Omniome, Inc. (“Omniome”), a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy.

In connection with the acquisition, all outstanding equity securities of Omniome were cancelled in exchange for consideration of $714.8 million, which consisted of approximately $315.7 million in cash, 8,911,580 shares of our common stock with a fair value of $249.4 million and contingent consideration with a fair value of $168.6 million. The fair value of the 8,911,580 common shares issued was determined based on the closing market price of PacBio’s common shares on the acquisition date.

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

The contingent consideration of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of a nucleotide sequencing platform, comprising both an instrument and related consumables, that utilizes Omniome’s sequencing by binding technology. The number of shares of stock to be issued will be determined using the volume-weighted average of the trading prices of our common stock for the twenty trading days ending with and including the trading day that is two days immediately prior to the achievement of the milestone. Of the $100 million in shares of our common stock to be issued as part of the milestone, $4.1 million is attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction.

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

Total cash paid	$	315,703
Fair value of share consideration		249,435
Fair value of contingent consideration		168,574
Less: Stock-based compensation expense excluded from consideration transferred		(18,923)
Total consideration transferred	$	714,789

---

The contingent consideration is accounted for as a liability at fair value, with changes during each reporting period recognized in our consolidated statements of operations and comprehensive income (loss). The fair value of the contingent consideration liability is based on a scenario-based method which considers a range of possible outcomes and their assigned probabilities of occurrence. The potential outcomes are discounted to present value at a discount rate equal to the sum of the term-matched risk-free-interest rate plus PacBio’s credit spread.

The acquisition was accounted for as a business combination and, accordingly, the total fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands):

Cash and cash equivalents	$	15,338
Property and equipment, net		6,123
Operating lease right-of-use assets, net		18,095
In-process research and development ("IPR&D")		400,000
Goodwill		392,224
Other assets		3,203
Deferred income tax liability		(93,373)
Liabilities assumed		(26,821)
Total consideration transferred	$	714,789

The purchase price allocation is preliminary. We continue to collect information with regard to certain estimates and assumptions, including potential liabilities and contingencies. We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve months measurement period, if necessary. The goodwill recognized was primarily attributable to the assembled workforce and synergies that are expected to occur from the integration of Omniome and is not deductible for income tax purposes.

We have allocated $400 million of the purchase price to acquired in-process research and development. The fair value of the IPR&D was determined, with the assistance of a third-party valuation firm, using an income approach based on a forecast of expected future cash flows. The IPR&D will remain on our consolidated balance sheet as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development activities. During the development period following the acquisition, IPR&D will not be amortized, but instead will be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

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

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

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented as if Omniome had been acquired as of the beginning of the comparable fiscal year prior to the year of acquisition, giving effect on a pro forma basis to the purchase accounting adjustments such as $11.6 million of PacBio acquisition-related costs, $18.9 million of stock-based compensation expense related to acceleration of certain Omniome stock options not attributable to pre-combination service, and a $92.2 million one-time income tax benefit from the reduction of our deferred tax asset valuation allowance resulting from the Omniome acquisition, as well as a pro forma adjustment to reflect $16.7 million of Omniome’s acquisition-related costs. The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of the consolidated results of the combined business had the acquisition actually occurred at the beginning of the fiscal year 2020 or the results of future operations of the combined business.

---

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2021			2020			2021			2020
Pro forma total revenue	$	34,887		$	19,082		$	94,494		$	51,757
Pro forma net loss	$	(54,802)		$	(38,473)		$	(213,715)		$	(42,892)
Pro forma net loss per share - basic and diluted	$	(0.25)		$	(0.21)		$	(0.97)		$	(0.24)

Our condensed consolidated financial statements include the results of operations for Omniome beginning September 20, 2021. Since the date of acquisition, revenues of $0 and a net loss of $1.6 million from the acquired Omniome business have been included in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2021.

Circulomics, Inc.

On July 20, 2021, we acquired Circulomics Inc. (“Circulomics”), a Maryland-based biotechnology company focused on delivering highly differentiated sample preparation products that enable genomic workflows.

We paid $29.5 million in cash in exchange for all outstanding shares of common stock of Circulomics. We allocated the consideration transferred to the identifiable assets acquired and liabilities assumed based on their respective fair values at the date of the completion of the acquisition. The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands):

Cash and cash equivalents	$	987
Property and equipment, net		214
Intangible assets		11,360
Goodwill		19,309
Other assets		467
Deferred income tax liability		(2,672)
Liabilities assumed		(118)
Total consideration transferred	$	29,547

The excess of the value of consideration paid over the aggregate fair value of those net assets has been recorded as goodwill. We recognized goodwill of $19.3 million, which is primarily attributable to the synergies expected from capabilities in extraction and sample preparation and is not deductible for income tax purposes.

We recorded $11.4 million for the fair value of acquired intangible assets, which consist of developed technology and customer relationships. The purchase price allocation is preliminary as we continue to collect information with regard to certain estimates and assumptions. We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve month measurement period, if necessary.

Deferred income taxes

A benefit for income taxes of $94.8 million for the three and nine months ended September 30, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not utilize our deferred tax assets.

NOTE 3. INVITAE COLLABORATION

On January 12, 2021 we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae Corporation (“Invitae”). Pursuant to the Development Agreement, Invitae is providing certain funding to us to develop products relating to production-scale high-throughput sequencing (“Program Products”). If and when Program Products become commercially available for sale, Invitae may purchase the Program Products. In addition to selling the Program Products to Invitae, we will have the right to broadly commercialize Program Products for sale to other customers.

The funding Invitae will provide to us will equal certain development costs we incur in connection with the Program Products (“Program Development Costs”). Under the Development Agreement, we will be responsible for conducting a program to develop the Program Products, and subsequently for manufacturing the Program Products. We will make general

---

decisions regarding the development program jointly with Invitae but we are responsible for all research and development activities. The entire development program is expected to last approximately sixty months, but may be shorter or longer.

As the primary benefit of its contribution, Invitae will be entitled to preferred pricing on the Program Products if and when they are available for commercial sale. Each Program Product will have a preferential pricing period, which will not exceed four years from the date of the first delivery of that Program Product (“Preferential Pricing Period”). During the Preferential Pricing Period for each Program Product, Invitae may purchase the Program Product at a substantially reduced margin until it has recouped a multiple of its contribution as defined in the Development Agreement. For a specified period after the end of the Preferential Pricing Period, Invitae has the right to purchase the Program Product at a higher price, determined by a formula, than the price during the Preferential Pricing Period (“Extended Pricing Period”). The Extended Pricing Periods will terminate early if Invitae does not meet certain volume minimums.

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

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

We expect to incur significant development costs over the duration of the Development Agreement. There can be no assurances that the development program will be successful or that the Program Products will become ready for commercial sale.

We determined that the primary benefit from the arrangement to Invitae is the ability to procure the Program Products during the Preferential Pricing Period at substantial discounts. As we expect the Program Products to be available for Invitae to purchase in the future, we concluded the arrangement is within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. In addition, Invitae is not expected to substantially benefit from the intellectual property developed under the arrangement, or benefit from other goods or services during the development period. We are responsible for performing the research and development activities.

Accordingly, the amounts received by the Company from Invitae during the development period represent significant discounts toward future supplies of the Program Products during the Preferential Pricing Period, and will be accounted as material rights in accordance with ASC Topic 606. Proportionate amounts of these material rights will be recognized in revenue when Invitae places purchase orders for Program Products and the associated goods or services are delivered to Invitae. To the extent the discounts are not expected to be used, they will be recognized consistent with the guidance in Topic 606 relating to breakage, in proportion to the expected purchases by Invitae. Any remaining unused discounts will be recognized when they expire.

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

Costs incurred to develop the Program Products are research and development costs and are expensed as incurred. There were no capitalized origination or fulfilment costs related to the arrangement with Invitae that are eligible to be capitalized.

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”) of $18.0 million during the fourth quarter of 2019 and $34.0 million during the first quarter of 2020. We recorded the $34.0 million as part of other income in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2020.

---

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

Resulting from the issuance and sale of $900 million of 1.50% Convertible Senior Notes due February 15, 2028, $52.0 million of Continuation Advances were paid without interest to Illumina in February 2021 and recorded as other expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021. Please refer to Note 5. Summary of Significant Accounting Policies for the accounting treatment of the Continuation Advances.

Reverse Termination Fee from Illumina

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

Pursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we entered into a definitive agreement providing for, or consummated, a Change of Control Transaction, then we may have been required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction. As indicated in ASC 450, Contingencies, a gain contingency usually is not recognized in the financial statements until the period in which all contingencies are resolved and the gain is realizable. As such, we deferred the gain from the Reverse Termination Fee from Illumina until the date when the associated contingency lapsed. On October 1, 2020, the contingency clauses lapsed and we recorded the $98.0 million as a part of other income in the fourth quarter of 2020.

NOTE 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements, which include the accounts of Pacific Biosciences and the accounts of our wholly-owned subsidiaries, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures typically included in our audited financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on a consistent basis with the December 31, 2020 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state our financial position, results of operations, comprehensive income (loss), and cash flows for the period, but are not necessarily indicative of the results to be expected for the entire year or any future periods. All intercompany transactions and balances have been eliminated.

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

COVID-19

We are subject to risks and uncertainties as a result of the novel coronavirus pandemic (“COVID-19”). The extent of the impact of the COVID-19 pandemic on our business is highly uncertain as responses to the pandemic can change quickly and information is continuing to evolve, including the effects of the Delta variant. We considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of September 30, 2021.

Use of Estimates

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

---

Fair Value of Financial Instruments

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value hierarchy established under GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

Level 1: quoted prices in active markets for identical assets or liabilities;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.

We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.

The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities.

---

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of September 30, 2021 and December 31, 2020 respectively:

	September 30, 2021												December 31, 2020
(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	$	364,020		$	—		$	—		$	364,020		$	43,040		$	—		$	—		$	43,040
Commercial paper		—			61,368			—			61,368			—			32,537			—			32,537
U.S. government & agency securities		—			—			—			—			—			170			—			170
U.S. Treasury security		—			—			—			—			—			5,864			—			5,864
Total cash and cash equivalents		364,020			61,368			—			425,388			43,040			38,571			—			81,611
Investments:
Commercial paper		—			255,817			—			255,817			—			112,644			—			112,644
Corporate debt securities		—			13,595			—			13,595			—			17,456			—			17,456
U.S. government & agency securities		—			385,090			—			385,090			—			107,103			—			107,103
Total investments		—			654,502			—			654,502			—			237,203			—			237,203
Short-term restricted cash:
Cash		500			—			—			500			836			—			—			836
Long-term restricted cash:
Cash		4,560			—			—			4,560			3,500			—			—			3,500
Total assets measured at fair value	$	369,080		$	715,870		$	—		$	1,084,950		$	47,376		$	275,774		$	—		$	323,150
Liabilities
Continuation Advances	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Contingent consideration		—			—			168,574			168,574			—			—			—			—
Total liabilities measured at fair value	$	—		$	—		$	168,574		$	168,574		$	—		$	—		$	—		$	—

We classify contingent consideration, which was incurred in connection with the acquisition of Omniome, within Level 3 as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value. We estimate the fair value of the contingent consideration liability by discounting the probability-weighted outcomes to present value using an estimate of our borrowing rate and the risk-free rate. The potential outcomes of milestone achievement dates are within the period from December 31, 2022 to June 30, 2025, with the highest probability of achieving the milestone in the middle of this period. The discount rates used are the sum of the U.S. risk-free rate and the estimated subordinated credit spread for CCC+ and B- credit rating, which ranges from 4.3% to 4.8%.

As of December 31, 2020, we classified the Continuation Advances, which were incurred in connection with the Illumina Merger Agreement and were subject to repayment under certain circumstances, as a financial liability and were reported at fair value. The estimated fair value of the liability related to the Continuation Advances was determined using Level 3 inputs, or significant unobservable inputs. Management assessed the fair value of this financial instrument to be zero at December 31, 2020.

We were first approached by SB Northstar LP during the quarter ended March 31, 2021 regarding a potential convertible debt transaction. As discussed further below in Note 8. Convertible Senior Notes, in February 2021, we entered into an investment agreement with SB Northstar LP for the issuance and sale of $900 million of 1.50% Convertible Senior Notes due February 15, 2028. As a result, $52.0 million of Continuation Advances were repaid without interest to Illumina in February 2021 and recorded as other expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021. There was no further liability exposure for Continuation Advances as of September 30, 2021.

For the quarter ended September 30, 2021, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis and our valuation techniques did not change compared to the prior year. As discussed above, we recorded a contingent consideration liability in connection with our acquisition of Omniome during the quarter ended September 30, 2021.