Stockholders' Equity

9 Months Ended

Sep. 30, 2022

NOTE 9. STOCKHOLDERS’ EQUITY

Equity Plans

The 2020 Equity Incentive Plan (the “2020 Plan”), the 2020 Inducement Equity Incentive Plan (the “Inducement Plan”) and the 2021 adopted Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”) allow for the issuance of stock options, restricted units and awards and performance-based awards.

On August 4, 2020, stockholders approved the 2020 Plan and reserved 11,000,000 shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan.

On December 2, 2020, the Board of Directors (the “Board”) adopted the Inducement Plan and reserved 2,500,000 shares of our common stock for issuance pursuant to equity awards granted under the Inducement Plan. On April 18, 2021 and November 22, 2021, the Board amended the Inducement Plan to reserve an additional 750,000 and 360,000 shares, respectively.

On September 20, 2021, in connection with the acquisition of Omniome, we adopted the Omniome Equity Incentive Plan of Pacific Biosciences of California, Inc. (the “Omniome Plan”). Under the Omniome Merger Agreement, each unvested option to purchase Omniome common stock, granted under the Omniome Plan held by employees continuing with us, were assumed by PacBio and converted into an option to purchase shares of our common stock. The terms and conditions of the converted options are substantially the same (including vesting and exercisability), except that (A) the assumed options cover shares of PacBio’s common stock; (B) the number of shares of our common stock subject to the assumed option is equal to the product of (i) the number of shares of Omniome common stock subject to the corresponding unvested option, multiplied by (ii) the exchange ratio (as defined below), with any resulting fractional share rounded down to the nearest whole share; and (C) the exercise price per share of the assumed options is equal to the quotient of (i) the exercise price per share of the corresponding unvested option to purchase shares of Omniome common stock, divided by (ii) the exchange ratio (as defined below), with any resulting fractional cent rounded up to the nearest whole cent. The exchange ratio was equal to 0.259204639. We reserved 2,494,128 shares of our common stock for issuance pursuant to equity awards under the Omniome Plan.

On May 25, 2022, stockholders approved an amendment to the 2020 Plan and we reserved an additional 18,000,000 shares of our common stock for issuance pursuant to equity awards granted under the 2020 Plan.

As of September 30, 2022, we had 18.7 million shares remaining and available for future issuance under the 2020 Plan, Inducement Plan, and the Omniome Plan.

Stock Options

Time-based Stock Options

The following table summarizes stock option activity for time-based awards for the nine months ended September 30, 2022 (shares in thousands):



				Weighted
	Number			average
	of shares	Exercise price		exercise price
Outstanding at December 31, 2021	12,159	$	1.16 – 46.37	$	11.38
Granted	5,211		4.61 – 16.58		10.34
Exercised	(650)		1.16 – 8.90		3.33
Canceled	(1,485)		2.47 – 46.37		20.96
Outstanding at September 30, 2022	15,235	$	1.16 – 46.37	$	10.43

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Performance-based Stock Options

The following table summarizes stock option activity for performance-based awards for the nine months ended September 30, 2022 (shares in thousands):



				Weighted
	Number			average
	of shares	Exercise price		exercise price
Outstanding at December 31, 2021	304	$	4.71 – 4.90	$	4.71
Granted	—		—		—
Exercised	—		—		—
Canceled	(2)		4.71 – 4.90		4.75
Outstanding at September 30, 2022	302	$	4.71 – 4.90	$	4.71

For the three and nine months ended September 30, 2022, we recognized stock-based compensation expense of $6.4 million and $20.9 million, respectively, related to time-based and performance-based options.

Restricted Stock Units (“RSUs”)

The following table summarizes the time-based RSU activity for the nine months ended September 30, 2022 (shares in thousands):



		Weighted average
	Number	grant date
	of shares	fair value
Outstanding at December 31, 2021	7,392	$	19.78
Granted	5,054		10.24
Vested	(2,395)		14.58
Forfeited	(1,381)		19.86
Outstanding at September 30, 2022	8,670	$	15.64

For the three and nine months ended September 30, 2022, we recognized stock-based compensation expense of $10.3 million and $31.9 million, respectively, related to restricted stock units.

Employee Stock Purchase Plan (“ESPP”)

Shares issued under our ESPP were 1,878,168 and 1,913,968 during the nine months ended September 30, 2022 and 2021, respectively. In February 2022, an additional 4.0 million shares were reserved under the ESPP. As of September 30, 2022, 9,932,505 shares of our common stock remain available for issuance under our ESPP.

For the three and nine months ended September 30, 2022, we recognized stock-based compensation expense of $2.3 million and $7.9 million, respectively, related to our ESPP.

Stock-Based Compensation

The following table summarizes stock-based compensation expense (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	934	$	1,837	$	3,680	$	4,734
Research and development		7,519		5,162		24,232		12,519
Sales, general and administrative		10,483		9,897		32,746		25,613
Merger-related expenses - stock-settled		—		6,349		—		6,349
Merger-related expenses - milestone		—		5,202		—		5,202
Stock-based compensation		18,936		28,447		60,658		54,417
Merger-related expenses - cash-settled		—		7,373		—		7,373
Total stock-based compensation expense	$	18,936	$	35,820	$	60,658	$	61,790

Determining Fair Value

We estimate the fair value of stock options granted using the Black-Scholes valuation method and a single option award approach. When determining the current share prices underlying the stock options for calculating the grant-date fair value, we reference the observable market prices of our stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair market value of RSUs granted is the closing price of our shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting period. For shares purchased under our ESPP, we estimate the grant-date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. We estimate forfeitures of stock options, RSUs and shares purchased under our ESPP which is utilized to determine the compensation expense to be recorded over the requisite service period.

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

Expected Volatility - The expected volatility used in the Black-Scholes valuation method is derived from the implied volatility related to our share price over the expected term.

Expected Dividend - We have never paid dividends on our shares and, accordingly, the dividend yield percentage is zero for all periods.

Risk-Free Interest Rate - The risk-free interest rate used in the Black-Scholes valuation method is the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected terms.

For the three and nine months ended September 30, 2022 and 2021, the fair value of employee stock options was estimated using the following assumptions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Expected term in years		4.6		2.1 — 4.6		4.6		2.1 — 4.6
Expected volatility		75%		67% — 80%		70% - 76%		67% — 80%
Risk-free interest rate		3.66%		0.05% — 0.71%		0.41% - 3.66%		0.05% — 0.74%
Dividend yield		—		—		—		—
Weighted average grant date fair value per share	$	4.94	$	5.97	$	5.93	$	15.63

For the three and nine months ended September 30, 2022 and 2021, the fair value of shares to be issued under the ESPP was estimated using the following assumptions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Expected term in years		0.5 — 2.0		0.5 — 2.0		0.5 — 2.0		0.5 — 2.0
Expected volatility		97%		67%		70% — 97%		67% — 68%
Risk-free interest rate		3.34% — 3.51%		0.06% — 0.20%		0.60% — 3.51%		0.06% — 0.20%
Dividend yield		—		—		—		—
Weighted average grant date fair value per share	$	3.40	$	16.73	$	4.28	$	25.07