PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

NOTE 5. CONVERTIBLE SENIOR NOTES

2029 Convertible Senior Notes

On November 7, 2024, we entered into an exchange agreement with SB Northstar LP (“SBN”), a subsidiary of SoftBank Group Corp., pursuant to which we have agreed to exchange the remaining approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding for (i) $200.0 million aggregate principal amount of 1.50% Convertible Senior Notes due 2029 (the “2029 Notes”), (ii)20,451,570 shares of common stock (the “Exchange Shares”) and (iii) $50.0 million of cash (the “2024 Exchange Transaction”). The Exchange Shares were issued on November 21, 2024 (the “Closing Date”). The 2029 Notes, the Exchange Shares, and shares of common stock issuable upon conversion of the 2029 Notes are subject to certain lock-up restrictions for asix-month period (the “Lock-Up Period”) beginning on the Closing Date of the 2024 Exchange Transaction; the lock-up restrictions will terminate immediately prior to the consummation of any change in control of the Company.

Upon any conversion of the 2029 Notes, SBN will not be entitled to be issued a number of shares of the Company’s common stock which would cause SBN's beneficial ownership of common stock to exceed either 9.9% of the total number of issued and outstanding shares of common stock or 9.9% of the combined voting power of all of the securities of the Company, in each case, following such conversion.

The 2029 Notes are governed by an indenture (the “2029 Indenture”) between the Company and U.S. Bank Trust Company, National Association, as trustee. The 2029 Notes bear interest at a rate of 1.50% per annum. Interest on the 2029 Notes is payable semi-annually in arrears on February 15 and August 15 and commencing on February 15, 2025. The 2029 Notes will mature on August 15, 2029, subject to earlier conversion, redemption or repurchase.

The 2029 Notes are convertible at the option of the holder at any time from the expiration of the Lock-Up Period until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company. The 2029 Notes are convertible into shares of our common stock based on an initial conversion rate of 204.5157 shares of common stock per $1,000 principal amount of the 2029 Notes (which is equal to an initial conversion price of approximately $4.89 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2029 Notes, we may elect to settle such conversion obligation in cash, shares of our common stock, or a combination of cash and shares of our common stock.

On or after August 20, 2027, and prior to the 31st scheduled trading day immediately preceding the maturity date, the 2029 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 2029 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.

Upon the occurrence of a Fundamental Change (as defined in the 2029 Indenture), the holders of the 2029 Notes may require that we repurchase all or part of the principal amount of the 2029 Notes at a purchase price of par plus unpaid interest up to, but excluding, the maturity date.

The 2029 Notes are subject to certain debt and lien covenants as well as springing guarantees, in each case, the terms of which are set forth in a second letter agreement between the Company and SBN entered into in connection with the Indenture.

The 2029 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2029 Notes under the 2029 Indenture. The 2029 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 2029 Notes at a rate equal to (i)0.25% per annum of the principal amount of the 2029 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 2029 Notes outstanding for each day from, and including, the 181 st calendar day to, and including, the 360 th 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 2029 Indenture). On the 361 st 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 361 st day), the 2029 Notes shall be subject to acceleration as provided for in the 2029 Indenture.

The 2029 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 2029 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2029 Notes were not issued at a substantial premium; therefore, the 2029 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 2029 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 such 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.

The exchange qualified as a troubled debt restructuring under ASC 470-60 –Troubled Debt Restructurings by Debtors. Since the undiscounted cash flows of the 2029 Notes were less than the carrying amount of the exchanged 2028 Notes, the carrying value of the 2029 Notes was determined based on the total undiscounted cash flows. As a result, no interest expense will be recognized for the 2029 Notes. The Company recorded a gain on debt restructuring of $154.4 million, which resulted in a decrease of basic net loss per share of $0.56, during the year ended December 31, 2024 on our consolidated statements of operations and comprehensive loss. The gain was calculated as the difference between the carrying amount of the old debt and the carrying amount of the new debt, adjusted for debt issuance costs.

We incurred issuance costs related to the 2029 Notes of approximately $3.1 million, including $0.2 million of lender fees, which were recorded as a reduction to the gain on debt restructuring on our consolidated statements of operations and comprehensive loss. We also paid accrued but unpaid interest of $1.8 million on the 2028 Notes in connection with the 2024 Exchange Transaction.

We did not receive any cash proceeds from the 2024 Exchange Transaction. In exchange for issuing the 2029 Notes, Exchange Shares and paying $50.0 million of cash pursuant to the 2024 Exchange Transaction, we received and cancelled the exchanged 2028 Notes. Following the closing of the 2024 Exchange Transaction, no amounts were outstanding on the 2028 Notes.

The carrying amount of the liability for the 2029 Notes as of December 31, 2024 is $214.2 million, of which $212.0 million is included as convertible senior notes, net, non-current, and $2.2 million is included as accrued expenses on our consolidated balance sheets.

As of December 31, 2024, the estimated fair value (Level 2) of the 2029 Notes was $175.0 million. The fair value of the 2029 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.

2030 Convertible Senior Notes

In June 2023, we entered into a privately negotiated exchange agreement with a holder of our outstanding 1.50% Convertible Senior Notes due 2028 (the “2028 Notes”), pursuant to which we issued $441.0 million in aggregate principal amount of our 1.375% Convertible Senior Notes due 2030 (the “2030 Notes” and together with the 2029 Notes, the “Notes”) in exchange for $441.0 million principal amount of the 2028 Notes (the “2023 Exchange Transaction”), pursuant to exemptions from registration under the Securities Act of 1933, as amended, and the rules and regulations thereunder. The 2030 Notes were issued on June 30, 2023.

The 2030 Notes are governed by an indenture (the “2030 Indenture”) between the Company and U.S. Bank Trust Company, National Association, as trustee. The 2030 Notes bear interest at a rate of 1.375% per annum. Interest on the 2030 Notes is payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 2023. The 2030 Notes will mature on December 15, 2030, subject to earlier conversion, redemption or repurchase.

The 2030 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 2030 Notes are convertible into shares of our common stock based on an initial conversion rate of 46.5116 shares of common stock per $1,000 principal amount of the 2030 Notes (which is equal to an initial conversion price of approximately $21.50 per share of common stock), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. Upon conversion of the 2030 Notes, we may elect to settle such conversion obligation in cash, shares of our common stock, or a combination of cash and shares of our common stock.

On or after June 20, 2028, and prior to the 31st scheduled trading day immediately preceding the maturity date, the 2030 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 2030 Notes, plus accrued and unpaid interest up to, but excluding, the redemption date.

Upon the occurrence of a Fundamental Change (as defined in the 2030 Indenture), the holders of the 2030 Notes may require that we repurchase all or part of the principal amount of the 2030 Notes at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date, and all unpaid interest from the fundamental change repurchase date thereon, but excluding, the maturity date.

The 2030 Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the 2030 Notes under the 2030 Indenture. The 2030 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 2030 Notes at a rate equal to (i)0.25% per annum of the principal amount of the 2030 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 2030 Notes outstanding for each day from, and including, the 181 st calendar day to, and including, the 360 th 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 2030 Indenture). On the 361 st 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 361 st day), the 2030 Notes shall be subject to acceleration as provided for in the 2030 Indenture.

The 2030 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 2030 Notes is not accounted for as an embedded derivative because it is considered to be indexed to our common stock, and the 2030 Notes were not issued at a substantial premium; therefore, the 2030 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 2030 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 such 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.

The 2023 Exchange Transaction was accounted for as an extinguishment driven by the change in fair value of the embedded conversion option. We recorded a loss on extinguishment of debt of approximately $2.0 million in connection with the 2023 Exchange Transaction during the year ended December 31, 2023, which represents the difference between the fair value and the principal amount of the 2030 Notes of the debt at the modification date, plus unamortized debt issuance costs of $1.5 million related to the respective portion of the 2028 Notes.

We incurred issuance costs related to the 2030 Notes of approximately $7.3 million, which were recorded as debt issuance costs and are presented as a reduction to the 2030 Notes on our consolidated balance sheets. The debt issuance costs are amortized to interest expense using the effective interest method over the term of the 2030 Notes, resulting in an effective interest rate of 1.6%. We also paid accrued but unpaid interest of $2.5 million on the 2028 Notes in connection with the 2023 Exchange Transaction on June 30, 2023.

We did not receive any cash proceeds from the 2023 Exchange Transaction. In exchange for issuing the 2030 Notes pursuant to the 2023 Exchange Transaction, we received and cancelled the exchanged 2028 Notes. Following the closing of the 2023 Exchange Transaction, $459.0 million in aggregate principal amount of 2028 Notes remained outstanding with terms unchanged.

The net carrying amount of the liability for the 2030 Notes is included as convertible senior notes, net, non-current on our consolidated balance sheets as follows:

Interest expense for the 2030 Notes for the years ended December 31, 2024, 2023, and 2022 was as follows:

As of December 31, 2024, the estimated fair value (Level 2) of the 2030 Notes was $293.9 million. The fair value of the 2030 Notes is estimated using a binomial lattice model that is primarily affected by the trading price of our common stock, market interest rates and volatility.

2028 Convertible Senior Notes

On February 9, 2021, we entered into an investment agreement with SBN relating to the issuance and sale to SBN of $900.0 million in aggregate principal amount of the 2028 Notes. The 2028 Notes were issued on February 16, 2021 and bore interest at a rate of 1.50% per annum. As discussed above, in June 2023 we completed an exchange of $441.0 million in aggregate principal amount of our 2028 Notes for $441.0 million aggregate principal amount of the 2030 Notes, leaving approximately $459.0 million in aggregate principal amount of 2028 Notes outstanding. Also as discussed above, in November 2024 we completed an exchange of the remaining $459.0 million in aggregate principal amount of the 2028 Notes outstanding for (i) $200.0 million aggregate principal amount of the 2029 Notes, (ii) the Exchange Shares and (iii) $50.0 million of cash. As of December 31, 2024 no amounts were outstanding on the 2028 Notes.

We incurred issuance costs related to the 2028 Notes of approximately $4.5 million, which were recorded as debt issuance costs and are presented as a reduction to the 2028 Notes on our consolidated balance sheets. The debt issuance costs were amortized to interest expense using the effective interest method over the term of the 2028 Notes, resulting in an effective interest rate of 1.6%. In connection with the 2024 Exchange Transaction, the remaining unamortized debt issuance costs related to the 2028 Notes of $1.1 million were extinguished by offsetting the carrying amount of the convertible senior notes.

The net carrying amount of the liability for the 2028 Notes is included as convertible senior notes, net, non-current on our consolidated balance sheets as follows:

Interest expense for the 2028 Notes was as follows for the years ended December 31, 2024, 2023, and 2022:

NOTE 6. RESTRUCTURING

During the year ended December 31, 2024, we implemented an expense reduction initiative that included workforce reductions, the closing of our San Diego office, and other actions to reduce annualized run-rate operating expenses.

A summary of the pre-tax restructuring charges are as follows:

(1) For the year ended December 31, 2024, cumulative charges incurred to date include $14.9 million in sales, general and administrative expense; $5.9 million in research and development expense; and $4.4 million in cost of revenue.

Cumulative charges incurred to date include employee separation costs comprised of approximately $5.5 million related to salaries, wages and other employee benefits paid to terminated employees pursuant to the Worker Adjustment and Retraining Notification (WARN) Act and approximately $4.5 million of severance costs.

Other costs in the year ended December 31, 2024 are primarily related to accelerated amortization and depreciation of $8.1 million for the right-of-use asset, leasehold improvements, and furniture and fixtures relating to the abandonment of the San Diego office. We also incurred cumulative charges to date for excess inventory of $3.6 million primarily relating to a decrease in internal demand resulting from the expense reduction initiatives which were recognized in cost of product revenues. The accelerated amortization and depreciation, which was recognized in sales, general and administrative expense, was determined as a result of the Company's change in estimate pertaining to its remaining useful life of the San Diego office utilizing the estimated date on which it planned to abandon the San Diego office. The lease liability pertaining to the San Diego office was also remeasured during the year ended December 31, 2024 resulting in a reduction in the operating lease liability balance of $4.4 million, which was offset against the right-of-use asset on our consolidated balance sheets. We exited our San Diego office in September 2024.

A summary of the liabilities related to the restructuring is as follows:

The table above excludes noncash activities and amounts incurred relating to the San Diego office lease liability. The ending balance of the San Diego office lease liability as of December 31, 2024 is $2.6 million, and is included in operating lease liabilities, current on our consolidated balance sheets.

The other restructuring costs are expected to be incurred and paid by the end of 2025.

NOTE 7. 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. 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.

As of December 31, 2024, the maturities of our operating lease liabilities were as follows:

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 7.7%. The weighted-average remaining lease term for our operating leases as of December 31, 2024 was 2.7 years.

Cash Flows

Cash paid for amounts included in the present value of operating lease liabilities was $14.2 million and $12.1 million for the years ended December 31, 2024 and 2023, respectively, and were included in operating cash flows.

Operating Lease Costs

Operating lease costs were $14.5 million and $10.4 million for the years ended December 31, 2024 and 2023, 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, 2024.

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 cancellable without penalty. For those agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities or pricing as of the reporting date. Licensing agreements under which we commit to ongoing minimum royalty payments, some of which are subject to adjustment, may be terminated under certain circumstances.

Our purchase orders and contractual obligations are approximately $57.6 million as of December 31, 2024, 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 $1.0 million for the year ended December 31, 2024, which was recorded as part of accrued expenses on our 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 supply agreements with third-party vendors, for which we do not expect to have related sales.

We have a long-term supply agreement, which was most recently amended in September 2024 (the “Supply Agreement”), for the purchase of certain products with a semiconductor manufacturer (“Supplier”). The Supply Agreement provides for minimum purchase commitments through 2027 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 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. $3.0 million was refunded to us during the year ended December 31, 2024. As of December 31, 2024, $4.0 million related to the Deposit was included in prepaid expenses and other current assets on our consolidated balance sheets and $8.0 million related to the Deposit was included in other long-term assets on our consolidated balance sheets, as we believe it is probable the minimum volume purchase commitment level will be achieved.

NOTE 8. INCOME TAXES

We are subject to income taxes both in the United States and certain foreign jurisdictions 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, 2024, 2023, and 2022 income/(loss) before taxes from U.S. operations were ($311.0) million, ($318.9) million, and ($315.7) million, respectively, and income/(loss) before taxes from foreign operations was $1.5 million, $0.7 million, and $1.8 million, respectively.

Income Tax Provision (Benefit)

Income tax provision (benefit) consists of the following:

Income tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax rate of 21% to pretax loss as follows:

Deferred income taxes reflect the net tax effects of loss and credit carryforwards 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:

At December 31, 2024, we maintained a valuation allowance against our net deferred tax assets which totaled $558.8 million, including net operating loss carryforwards and research and development credits of $434.1 million and $91.4 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.

For the year ended December 31, 2024, the Company's valuation allowance increased to $558.8 million, primarily because of an increase in our credits and capitalized research & experimental expenses that were fully offset by a valuation allowance. For the year ended December 31, 2023, the Company's valuation allowance increased to $525.7 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.

As of December 31, 2024, we had a net operating loss carryforward for federal income tax purposes of approximately $1,704.2 million, of which $783.2 million is subject to expiration beginning in 2025. We had a total state net operating loss carryforward of approximately $1,170.6 million, which is 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 in 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 $64.4 million, a portion of which will begin to expire in 2025 if not utilized and state research credits of approximately $54.6 million, which have no expiration date. These tax credits are subject to the same limitations discussed above.

As of December 31, 2024, our total unrecognized tax benefit was $17.7 million. A reconciliation of the beginning and ending unrecognized tax benefit balance is as follows:

Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2024 and 2023, we hadno 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, 2021 to present and December 31, 2020 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 9. STOCKHOLDERS' EQUITY

Common and 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, 2024 and 2023, there wereno shares of preferred stock issued or outstanding.

Common stockholders are entitled to dividends when and if declared by our board of directors. There have beenno dividends declared to date. The holder of each share of common stock is entitled toone vote.

Underwritten Public Equity Offerings

In January 2023, we entered into an underwriting agreement, relating to the public offering of 17.5 million shares of our common stock, $0.001 par value per share, at a price to the public of $10.00 per share. Under the terms of the underwriting agreement, we also granted the underwriters a 30-day option to purchase up to an additional 2.6 million 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 January 2023. In total, we sold 20.1 million shares of our common stock. We paid a commission equal to 5.75% 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 $189.7 million, excluding approximately $0.5 million of offering expenses.

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. The 2010 Employee Stock Purchase Plan (the “ESPP”) allows eligible employees to acquire common stock at a discounted price through payroll deductions during designated offering periods.

On May 25, 2022, stockholders approved an amendment to the 2020 Plan, and we reserved an additional 18.0 million shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan.

On June 18, 2024, stockholders approved an amendment to the 2020 Plan, and we reserved an additional 20.0 million shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan.

As of December 31, 2024, we had 28.4 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan. Shares remaining and available for future issuance reflect shares that may become eligible to vest upon the achievement of maximum targets for certain equity awards.

Stock Options

The following table summarizes stock option activity for time-based awards:

The aggregate intrinsic value of the outstanding options presented in the table above as of December 31, 2024, totaled $0.1 million, and had a weighted-average remaining contractual life of 5.4 years.

The aggregate intrinsic value of outstanding options represents the total pre-tax intrinsic value (i.e. the difference between $1.83, our closing stock price on the last trading day of our fourth quarter of 2024, 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, 2024. The aggregate intrinsic value changes at each reporting date based on the fair market value of our common stock.

The vested and exercisable options as of December 31, 2024, totaled 9,429,082 shares, had an aggregate intrinsic value that was not significant, a weighted-average exercise price per share of $11.26, and a weighted-average remaining contractual life of 5.1 years.

The vested and expected to vest options as of December 31, 2024, totaled 10,957,644 shares, had an aggregate intrinsic value of $0.1 million, a weighted-average exercise price per share of $11.13, and a weighted-average remaining contractual life of 5.4 years.

The total intrinsic value of stock options exercised during the years ended December 31, 2024, 2023, and 2022 was $0.8 million, $8.8 million, and $5.0 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 $1.40 in 2024, $7.32 in 2023, and $5.93 in 2022, each determined by the Black-Scholes option valuation method.

Restricted Stock Units ("RSU") and Performance Stock Units ("PSU")

We have awarded both Restricted Stock Units (RSUs) and Performance Stock Units (PSUs). Each RSU represents the right to receiveone share of our common stock upon meeting the required service-based vesting conditions. RSUs typically vest over four years, with equal annual installments.

In 2023, PSUs were granted and are based on performance against predefined revenue targets and require continued employment throughout the vesting period. These shares become issuable after the third year of the performance period. Achieving the maximum revenue goal allows up to 200% of the target PSU shares to become eligible for vesting, while failing to meet the minimum revenue goal results in no shares vesting.

The following table summarizes the time-based RSU and PSU activity:

The total fair value of shares vested related to RSUs during the years ended December 31, 2024, 2023, and 2022 was $47.2 million, $39.3 million, and $39.2 million, respectively.

The weighted-average grant-date fair value of all RSUs granted was $5.02 in 2024, $9.65 in 2023, and $10.15 in 2022.

Employee Stock Purchase Plan

As of December 31, 2024, a total of 33.5 million shares of our common stock have been reserved for issuance under the ESPP, which allows eligible employees to acquire common stock at a discounted price through payroll deductions during designated offering periods. Each offering period typically consists offour purchase periods, each lasting approximatelysix months. Shares are purchased at the lower of 85% of the fair market value of the common stock at either the beginning of the offering period or the end of the purchase period. If the stock price at the end of a purchase period is lower than at the start of the offering period, the existing offering period will be reset, and a new offering period will begin. The ESPP provides for an annual increase to the shares available for issuance at the beginning of each fiscal year equal to the lesser of 2% of the common shares then outstanding,4,000,000 shares, or an amount determined by the ESPP’s administrator.

For the years ended December 31, 2024, 2023, and 2022,1,906,529 shares,1,735,058 shares, and 1,878,168 shares of common stock were purchased under the ESPP, respectively. As of December 31, 2024,14.3 million shares of our common stock remain available for issuance under our ESPP.

Share-based Compensation

The following table summarizes share-based compensation expense:

As of December 31, 2024 and 2023, $0.6 million and $0.6 million of share-based compensation cost was capitalized in inventory, net, on our consolidated balance sheets, respectively.

We estimate forfeitures related to our share-based compensation plans. The estimated forfeiture rate is based on historical data, trends, and other relevant factors, such as employee turnover rates and expectations about future forfeitures. The estimated forfeiture rate is reviewed periodically and adjusted as necessary to reflect changes in these factors.

The tax benefit of share-based compensation expense was immaterial for the years ended December 31, 2024, 2023, and 2022 due to a valuation allowance on the net deferred tax assets of our U.S. entities, for which we have concluded that it is more likely than not that we will not realize our deferred tax assets.

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 the 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, considering 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 iszero 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

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:

Cash received from option exercises for the years ended December 31, 2024, 2023, and 2022 was $1.6 million, $6.5 million and $3.4 million, respectively.

ESPP

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

Cash received through the ESPP for the years ended December 31, 2024, 2023, and 2022 was $6.1 million, $8.8 million, and $7.8 million, respectively.

As of December 31, 2024, $80.1 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 2.2 years.

NOTE 10. NET LOSS PER SHARE

The following table presents the calculation of the basic and diluted net loss per share amounts presented on our consolidated statements of operations and comprehensive loss:

The following shares issuable upon conversion of the convertible senior notes and outstanding equity awards 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:

See Note 2. Business Acquisitions, for detailed information on contingently issuable shares that would be due upon achievement of a milestone. See Note 9. Stockholders’ Equity for detailed information on equity awards.

NOTE 11. SEGMENT AND GEOGRAPHIC INFORMATION

We are organized as, and operate in, one reportable segment: the development, manufacturing, and marketing of integrated platforms for genetic analysis. Our chief operating decision-maker (CODM) is our Chief Executive Officer. Our CODM reviews financial information presented on a consolidated basis for the purposes of evaluating financial performance and allocating resources.

On a regular basis, our CODM reviews:

•total revenues by category

•total expenses and expenses by function, including sales and marketing and general and administrative, which include depreciation and share-based compensation

•net loss per share

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 the segment profit or loss, including significant segment expenses is as follows:

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

(1) Includes United States revenue of $75.3 million, $100.5 million, and $66.8 million for the years ended December 31, 2024, 2023, and 2022, respectively.

A summary of our revenue by category is as follows:

NOTE 12. SUBSEQUENT EVENTS

On March 7, 2025, we entered into an amendment to our existing lease for our corporate headquarters, research and development facilities, and manufacturing and distribution centers in Menlo Park, California. The lease amendment extends the term from the prior expiration on October 31, 2027 to its new expiration on April 30, 2034. We will pay approximately $97.7 million in base rent over the life of the amended lease, and receive base rent abatement of approximately $11.6 million for the period beginning on March 1, 2025 and ending on July 31, 2026. We are also entitled to a tenant improvement allowance of $7.2 million.

On March 7, 2025, we entered into an agreement to acquire certain technology and related intellectual property from the Chinese University of Hong Kong for $9.7 million.