What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-08-06 · 85 added, 81 removed, 131 unchanged (56% of the section changed)

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In addition, Illumina paid us the final Continuation Advances of $34 million during the first quarter of 2020.

However, pursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we enter into a definitive agreement providing for, or consummate, a Change of Control Transaction (as defined in the Termination Agreement), then we may be required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction.

If such Change of Control Transaction is not consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction, then we will not be required to repay the Reverse Termination Fee.

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

However, 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 (as defined in the Termination Agreement), 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.

No such definitive agreement was entered into nor was a Change of Control Transaction consummated as of September 30, 2020.

The $98.0 million in cash we received from Illumina for the reverse termination fee was recorded as a short-term liability as of September 30, 2020 and, on October 1, 2020, after the contingency clauses lapsed, it was subsequently recognized as a gain and will be reflected in the fourth quarter of 2020 as Other Income.

In addition, up to the $52.0 million of Continuation Advances paid to us are repayable without interest to Illumina if, within two years of March 31, 2020, we enter into a Change of Control Transaction or raise 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.

Senior Management

On April 1, 2020, Michael Phillips retired as Sr.

Vice President of Research and Development.

Phillips transitioned to a consultant role on the same date.

The consulting services are scheduled to end in March 2021.

On May 26, 2020, we announced that Eric E.

Schaefer was appointed to the role of Vice President and Chief Accounting Officer and designated as the Company’s principal accounting officer.

On June 10, 2020, we announced that Dr.

Michael Hunkapiller will retire as Chief Executive Officer and President by the end of the year.

Hunkapiller will continue to serve on the board until the end of his term in 2021.

On the same date, we announced that Susan Barnes will retire as Executive Vice President and Chief Financial Officer in August 2020.

On July 31, 2020, our Board of Directors appointed Ben Gong to the role of interim Chief Financial Officer and designated him as the Company’s principal financial officer, effective August 8, 2020.

Gong will replace Susan K.

Barnes who will retire as the Company’s Executive Vice President, Chief Financial Officer and principal financial officer on August 7, 2020.

Our President and Chief Executive Officer Christian O.

Henry was appointed effective September 14, 2020, succeeding Dr.

Michael Hunkapiller who announced his retirement, which will be effective at the end of the year.

Our Chief Financial Officer Susan G.

Kim was appointed effective September 28, 2020, succeeding Susan K.

Barnes who retired on August 7, 2020.

Also, our Vice President and Chief Accounting Officer Eric E.

Schaefer was appointed effective May 26, 2020, and our Chairman of the Board Dr.

Milligan was appointed effective September 14, 2020.

Business Overview

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Our current products include the Sequel II instrument and SMRT Cell 8M, which together are capable of sequencing up to approximately eight million DNA molecules simultaneously, and the previous generation Sequel instrument and Sequel SMRT Cell 1M, which together are capable of sequencing up to approximately one million DNA molecules simultaneously.

In October 2020, we launched the Sequel IIe System, which has increased computational capacity, and is designed to enable customers to generate PacBio HiFi reads more efficiently.

Our customers and our scientific collaborators have published numerous peer-reviewed articles in journals including Nature, Science, Cell, PNAS and The New England Journal of Medicine highlighting the power and applications of SMRT sequencing in projects such as finishing genomes, structural variation discovery, isoform transcriptome characterization, rare mutation discovery and the identification of chemical modifications of DNA related to virulence and pathogenicity.

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The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods, and services worldwide, including in the regions in which we sell our products and services and conduct our business operations.

The financial results for the three and six months ended June 30, 2020 were impacted negatively as many of our customers in multiple regions around the world shut down operations for various periods of time in efforts to curb the spread of the COVID-19 pandemic.

This resulted in lower product revenues for the three and six months ended June 30, 2020 as compared to the same period of 2019.

The financial results for the three and nine months ended September 30, 2020 were impacted negatively as many of our customers in multiple regions around the world shut down operations for various periods of time in efforts to curb the spread of the COVID-19 pandemic.

This resulted in lower product revenues for the three and nine months ended September 30, 2020 as compared to the same periods of 2019.

A significant number of our customer sites that had shut down due to COVID-19 have re-opened.

However, those that have re-opened have not necessarily resumed operating at their prior run rates, which has negatively impacted the sale of our consumables.

As of June 30, 2020, approximately 20% of the sites remained inactive.

In addition, a significant number of customers have delayed purchases or difficulties obtaining funding for capital expenditures due to the negative impact of the pandemic on their businesses.

This dynamic continues to negatively impact the recognition of revenue related to the sale of our Sequel and Sequel II instruments.

The negative impacts of COVID-19 on our customers will likely continue to adversely impact our revenues during the second half of 2020, including the third quarter of 2020.

The negative impacts of COVID-19 on our customers will likely continue to adversely impact our revenues during the fourth quarter of 2020.

Due to the uncertain scope and duration of the pandemic, we cannot reasonably estimate the future impact to our operations and financial results.

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Results of Operations

Comparison of the three months ended June 30, 2020 and 2019

Three Months Ended June 30,

Comparison of the three months ended September 30, 2020 and 2019

Three Months Ended September 30,

(in thousands, except percentages)

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Other income, net

Total revenue for the three months ended June 30, 2020 was $17.1 million compared to $24.6 million for the same period during 2019.

Product revenue of $13.8 million for the three months ended June 30, 2020 consisted primarily of $8.9 million from sales of Sequel and Sequel II instruments and $4.8 million from sales of consumables, compared to total product revenue of $21.3 million for the same period during 2019, consisting of $12.7 million from sales of Sequel instruments and $8.6 million from sales of consumables.

Total revenue for the three months ended September 30, 2020 was $19.1 million compared to $21.9 million for the same period during 2019.

Product revenue of $15.7 million for the three months ended September 30, 2020 consisted primarily of $7.7 million from instrument revenue and $8.0 million from consumables revenue, compared to total product revenue of $18.5 million for the same period during 2019, consisting of $11.6 million from instrument revenue and $6.9 million of consumables revenue.

The decrease in instrument sales was primarily attributable to a lower number of instrument shipments and installations due to COVID-19 as discussed above.

The decrease in consumable sales was primarily attributable to lower utilization of the installed base of instruments due to COVID-19 as discussed above.

The negative impact of COVID-19 on our customers will likely continue to adversely impact our revenues during the second half of 2020.

Service and other revenue of $3.3 million and $3.4 million for the three months ended June 30, 2020 and 2019, respectively, was primarily derived from product maintenance agreements sold on our installed instruments.

Cost of product revenue was $8.2 million for the three months ended June 30, 2020, compared to cost of product revenue of $12.0 million for the same period during 2019.

Cost of service and other revenue for the three months ended June 30, 2020 was $2.2 million, compared to $3.0 million for the same period during 2019.

Gross profit for the three months ended June 30, 2020 was $6.6 million, resulting in a gross margin of 38.7%, compared to gross profit of $9.6 million, resulting in a gross margin of 39.0% for the same period during 2019.

Gross profit decreased $3.0 million for the three months ended June 30, 2020 compared to the same period in 2019 primarily due to lower product revenue realized for the three months ended June 30, 2020.

The increase in consumable sales was primarily attributable to higher Sequel II consumables sales.

The negative impact of COVID-19 on our customers will likely continue to adversely impact our revenues during the fourth quarter of 2020.

Service and other revenue of $3.3 million and $3.4 million for the three months ended September 30, 2020 and 2019, respectively, was primarily derived from product maintenance agreements sold on our installed instruments.

Gross profit for the three months ended September 30, 2020 was $7.1 million, resulting in a gross margin of 37.0%, compared to gross profit of $6.9 million, resulting in a gross margin of 31.5% for the same period during 2019.

Cost of product revenue was $9.2 million for the three months ended September 30, 2020, compared to cost of product revenue of $12.2 million for the same period during 2019.

The decrease of $3.0 million in cost of product revenue was primarily attributable to our incurring $2.8 million of product transition costs including inventory reserves taken in connection with the transition from Sequel to Sequel II during the three months ended September 30, 2019, partially offset by lower factory production in the three months ended September 30, 2020 resulting in under-absorbed overhead.

Cost of service and other revenue for the three months ended September 30, 2020 was $2.8 million, compared to $2.8 million for the same period during 2019.

Research and Development Expense

During the three months ended June 30, 2020, research and development expense remained relatively flat compared to the same period during 2019.

Research and development expense included stock-based compensation expense of $1.4 million and $1.9 million during the three months ended June 30, 2020 and 2019, respectively.

During the three months ended September 30, 2020, research and development expense increased by $1.5 million, or 10%, compared to the same period during 2019.

The increase in research and development expense was primarily driven by higher chip development costs.

Research and development expense included stock-based compensation expense of $2.1 million and $1.9 million during the three months ended September 30, 2020 and 2019, respectively.

Sales, General and Administrative Expense

During the three months ended June 30, 2020, sales, general and administrative expense decreased by $4.0 million, or 21%, compared to the same period during 2019.

The decrease in sales, general and administrative expense was primarily attributable to $3.3 million in merger related expenses during the three months ended June 30, 2019, which did not recur during the three months ended June 30, 2020, and a decrease of $1.1 million in patent litigation expenses incurred during the three months ended June 30, 2020 as compared to the same period in 2019.

Sa les, general and administrative expense included stock-based compensation expense of $1.3 million and $1.7 million during the three months ended June 30, 2020 and 2019, respectively.

During the three months ended September 30, 2020, sales, general and administrative expense decreased by $5.3 million, or 26%, compared to the same period during 2019.

The decrease in sales, general and administrative expense was primarily attributable to $3.6 million in merger related expenses during the three months ended September 30, 2019, which did not recur during the three months ended September 30, 2020, and a decrease of $1.4 million in patent litigation expenses incurred during the three months ended September 30, 2020 as compared to the same period in 2019.

Sa les, general and administrative expense included stock-based compensation expense of $2.2 million and $1.7 million during the three months ended September 30, 2020 and 2019, respectively.

Interest Expense

Interest expense for the three months ended June 30, 2020 decreased $0.6 million compared to the same period in 2019, as the debt agreement with Deerfield entered into in February 2013 (the “Facility Agreement”) matured in February 2020.

Comparison of the six months ended June 30, 2020 and 2019

Six Months Ended June 30,

Interest expense for the three months ended September 30, 2020 decreased $0.7 million compared to the same period in 2019, as the debt agreement with Deerfield entered into in February 2013 (the “Facility Agreement”) matured in February 2020.

The $98.0 million in cash we received from Illumina for the Reverse Termination Fee was recorded as a short-term liability as of September 30, 2020.

On October 1, 2020, the contingency clauses lapsed and, as a result, we expect to recognize a gain of $98 million in our fourth quarter of 2020 financial results.

Comparison of the nine months ended September 30, 2020 and 2019

Nine Months Ended September 30,

(in thousands, except percentages)

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Other income, net

Total revenue for the six months ended June 30, 2020 was $32.7 million, compared to $41.0 million for the same period during 2019.

Product revenue of $26.0 million for the six months ended June 30, 2020 consisted of $13.0 million from sales of Sequel and Sequel II instruments and $13.0 million from sales of consumables, compared to total product revenue of $34.7 million for the same period during 2019, consisting of $18.3 million from sales of Sequel and Sequel II instruments and $16.4 million from sales of consumables.

Total revenue for the nine months ended September 30, 2020 was $51.8 million, compared to $63.0 million for the same period during 2019.

Product revenue of $41.8 million for the nine months ended September 30, 2020 consisted of $20.7 million from sales of Sequel and Sequel II instruments and $21.1 million from sales of consumables, compared to total product revenue of $53.2 million for the same period during 2019, consisting of $29.9 million from sales of Sequel and Sequel II instruments and $23.3 million from sales of consumables.

The decrease in instrument sales was primarily attributable to a lower number of instrument shipments and installations due to COVID-19 as discussed above.

The decrease in consumable sales was primarily attributable to lower utilization of the installed base of instruments due to COVID-19 as discussed above.

The negative impact of COVID-19 on our customers will likely continue to adversely impact our revenues during the second half of 2020.

Service and other revenue of $6.6 million and $6.3 million for the six months ended June 30, 2020 and 2019, respectively, was primarily derived from product maintenance agreements sold on our installed instruments.

Gross profit for the six-month period ended June 30, 2020 was $14.1 million, resulting in a gross margin of 43.2%, compared to gross profit of $14.7 million, resulting in a gross margin of 35.9% for the same period during 2019.

Cost of product revenue was $13.6 million for the six months ended June 30, 2020, compared to cost of product revenue of $20.6 million for the same period during 2019.

Cost of product revenue decreased $7.0 million for the six months ended June 30, 2020 compared to the same period in 2019 primarily resulting from lower product shipments.

In addition, during the six months ended June 30, 2019, we incurred product transition costs including an inventory reserve taken in connection with the transition from Sequel to Sequel II.

Cost of service and other revenue for the six-month period ended June 30, 2020 was $4.9 million, compared to $5.7 million for the same period during 2019.

The negative impact of COVID-19 on our customers will likely continue to adversely impact our revenues during the fourth quarter of 2020.

Service and other revenue of $10.0 million and $9.8 million for the nine months ended September 30, 2020 and 2019, respectively, was primarily derived from product maintenance agreements sold on our installed instruments.

Gross profit for the nine months ended September 30, 2020 was $21.2 million, resulting in a gross margin of 41.9%, compared to gross profit of $21.6 million, resulting in a gross margin of 34.4% for the same period during 2019.

Gross margin for the nine months ended September 30, 2019 was negatively impacted by product transition costs, including inventory reserves taken in connection with the transition from Sequel to Sequel II.

Cost of product revenue was $22.9 million for the nine months ended September 30, 2020, compared to cost of product revenue of $32.8 million for the same period during 2019.

Cost of product revenue decreased by $10.0 million for the nine months ended September 30, 2020 compared to the same period in 2019 primarily resulting from lower product shipments.

In addition, during the nine months ended September 30, 2019, we incurred product transition costs including an inventory reserve taken in connection with the transition from Sequel to Sequel II.

Cost of service and other revenue for the nine months ended September 30, 2020 was $7.7 million, compared to $8.5 million for the same period during 2019.

Research and Development Expense

During the six months ended June 30, 2020, research and development expense remained flat compared to the same period during 2019.

Research and development expense included stock-based compensation expense of $3.2 million and $3.9 million during the six months ended June 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, research and development expense increased by $1.4 million, or 3%, compared to the same period during 2019.

The increase in research and development expense was primarily driven by higher chip development costs.

Research and development expense included stock-based compensation expense of $5.3 million and $5.8 million during the nine months ended September 30, 2020 and 2019, respectively.

Sales, General and Administrative Expense

During the six months ended June 30, 2020, sales, general and administrative expense increased by $1.2 million, or 3%, compared to the same period during 2019.

The increase in sales, general and administrative expense was primarily attributable to an increase of $0.9 million in compensation expense.

Sales, general and administrative expense included stock-based compensation expense of $3.1 million and $3.6 million during the six-month periods ended June 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, sales, general and administrative expense decreased by $4.1 million, or 7%, compared to the same period during 2019.

The decrease in sales, general and administrative expense was primarily attributable to the acquisition-related legal fees of $12.8 million incurred for the nine months ended September 30, 2019, partially offset by $6.0 million merger advisory fee incurred in the first quarter of 2020;

an increase of $1.2 million in salary and bonus expenses for the nine months ended September 30, 2020, an increase of $1.2 million in litigation expenses for the nine months ended September 30, 2020.

Sales, general and administrative expense included stock-based compensation expense of $5.2 million and $5.3 million during the nine months ended September 30, 2020 and 2019, respectively.

Interest Expense

Interest expense for the six m onths ended June 30, 2020 decreased $1.0 million compared to the same period in 2019, as the Facility Agreement matured in February 2020.

Interest expense for the nine m onths ended September 30, 2020 decreased $1.7 million compared to the same period in 2019, as the Facility Agreement matured in February 2020.

Liquidity and Capital Resources

Cash, cash equivalents and investments at June 30, 2020 totaled $120.0 million, compared to $49.1 million at December 31, 2019.

The increase was attributable to the Reverse Termination Fee and Continuation Advances we received from Illumina partially offset by cash used in operations and the $16.0 million repayment of debt associated with the Facility Agreement.

We believe that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements for at least the next 12 months from the filing date of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

Cash, cash equivalents and investments at September 30, 2020 totaled $208.6 million, compared to $49.1 million at December 31, 2019.

The increase was attributable to the proceeds from our public offering of common stock completed in August 2020, as well as the Reverse Termination Fee and Continuation Advances we received from Illumina, partially offset by cash used in operations and a $16.0 million repayment of debt in the first quarter of 2020.

We believe that our existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements for at least the next 12 months from the date of filing of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020.

However, the potential economic or other disruptions caused by the COVID-19 pandemic could have a material adverse effect on our business, results of operations and liquidity.

W e will continue to monitor our operating expenses and cash flows in response to the evolving market conditions.

We will continue to monitor our operating expenses and cash flows in response to the evolving market conditions.

On January 2, 2020, we and Illumina mutually agreed to terminate the Merger Agreement.

As part of the Termination Agreement, Illumina paid us the Reverse Termination Fee of $98.0 million from which we paid our financial advisor associated fees of $6.0 million.

In addition, Illumina paid us the additional Continuation Advances of $6.0 million in January 2020 and $22.0 million in February 2020 and made the last Continuation Advance payment to us of $6.0 million in March 2020.

P ursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we enter into a definitive agreement providing for, or consummate, a Change of Control Transaction, then we may be required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction.

If such Change of Control Transaction is not entered into on or prior to September 30, 2020 or if such change of control transaction is entered into on or prior to September 30, 2020 but is not consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction, then we will not be required to repay the Reverse Termination Fee.

In addition, up to $52.0 million of the Continuation Advances that we received are repayable without interest to Illumina if, within two years of March 31, 2020, we enter into, or consummate a Change of Control Transaction or raise at least $100 million in equity in a single transaction or debt financing (may have multiple closings), with the amount repayable dependent on the amount raised by us.

If we are required to repay the Termination Fee or the Continuation Advances, we may not be able to fund our projected operating requirements for at least twelve months from the date of filing this Quarterly Report.

Factors that may affect our capital needs include, but are not limited to, whether we will have to repay the Reverse Termination Fee or Continuation Advances;

As part of the Termination Agreement , up to $52.0 million of the Continuation Advances that we received from Illumina are repayable without interest to Illumina if, within two years of March 31, 2020, we enter into, or consummate a Change of Control Transaction or raise at least $100 million in a single equity or debt financing (may have multiple closings), with the amount repayable dependent on the amount raised by us.

Factors that may affect our capital needs include, but are not limited to, whether we will have to repay the Continuation Advances;

the pace of adoption of our products which affects the sales of our products and services;

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and other factors.

We may raise additional capital in the future.

We expect to raise additional capital in the future.

To the extent that we raise additional funds through the sale of equity or convertible debt, the issuance of such securities will result in dilution to our stockholders.

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Our primary uses of cash in operating activities are for the development of ongoing product enhancements and future products, manufacturing, and support functions related to our sales, general and administrative activities.

We had $51.6 million of cash provided from operating activities for the six months ended June 30, 2020, compared to cash usage of $42.9 million from operating activities for the same period in 2019.

Cash provided by operating activities for the six months ended June 30, 2020 was due to the $98.0 million Reverse Termination Fee received from Illumina, non-cash items such as stock-based compensation of $7.3 million and depreciation of $3.2 million, partially offset by a net loss of $21.8 million and a gain from Continuation Advances from Illumina of $34.0 million, which is considered to be a financing activity.

The change in net operating assets and liabilities was primarily attributed to a decrease of $3.9 million in accounts receivable, an increase of other liabilities of 2.0 million primarily relating to employee contributions for the Employee Stock Purchase Plan, partially offset by an increase of $3.8 million in inventory.

Cash used in operating activities for the six months ended June 30, 2019 was due primarily to a net loss of $54.9 million, offset by non-cash items such as stock-based compensation of $8.5 million and depreciation of $3.6 million.

The change in net operating assets and liabilities was primarily attributed to an increase of $3.5 million in accounts receivable, partially offset by an increase of $3.2 million in accrued expense.

We had $33.8 million of cash provided from operating activities for the nine months ended September 30, 2020, compared to cash usage of $60.1 million from operating activities for the same period in 2019.

Cash provided by operating activities for the nine months ended September 30, 2020 was due to the $98.0 million Reverse Termination Fee received from Illumina, non-cash items such as stock-based compensation of $12.3 million and depreciation of $4.8 million, partially offset by a net loss of $45.5 million and a gain from Continuation Advances from Illumina of $34.0 million, which is considered to be a financing activity.

The change in net operating assets and liabilities was primarily attributed to a decrease of $3.4 million in accounts receivable, partially offset by an increase of $3.0 million in inventory.

Cash used in operating activities for the nine months ended September 30, 2019 was due primarily to a net loss of $84.0 million, offset by non-cash items such as stock-based compensation of $12.5 million and depreciation of $5.5 million.

The change in net operating assets and liabilities was primarily attributed to an increase of $1.4 million in accounts receivable, partially offset by an increase of $4.9 million in accrued expenses and a decrease of $2.3 million in inventory.

Investing Activities

Our investing activities consist primarily of capital expenditures and investment purchases, sales and maturities.

We used $57.2 million of cash for investing activities for the six months ended June 30, 2020, compared to receiving cash of $45.8 million from investing activities for the same period in 2019.

Cash used in investing activities for the six months ended June 30, 2020 was due primarily to net purchases of investments of $56.8 million and purchases of property and equipment of $0.4 million.

Cash provided in investing activities for the six months ended June 30, 2019 was due primarily to net maturities of investments of $47.7 million.

We used $120.8 million of cash for investing activities for the nine months ended September 30, 2020, compared to receiving cash of $65.5 million from investing activities for the same period in 2019.

Cash used in investing activities for the nine months ended September 30, 2020 was due primarily to net purchases of investments of $119.9 million and purchases of property and equipment of $1.0 million.

Cash provided in investing activities for the nine months ended September 30, 2019 was due primarily to net maturities of investments of $68.2 million.

Financing Activities

Cash provided from financing activities was $18.8 million and $8.1 million for the six months ended June 30, 2020 and 2019, respectively.

Cash provided by financing activities during the six months ended June 30, 2020 was due to $34.0 million of Continuation Advances from Illumina and proceeds of $0.8 million from the issuance of common stock through our equity compensation plans, partially offset by $16.0 million we repaid for the remaining outstanding principal to Deerfield upon the maturity of the Facility Agreement.

Cash provided by financing activities during the six months ended June 30, 2019 was due to $8.1 million from the issuance of common stock through our equity compensation plans.

Cash provided from financing activities was $126.0 million and $8.4 million for the nine months ended September 30, 2020 and 2019, respectively.

Cash provided by financing activities during the nine months ended September 30, 2020 stemmed from the net proceeds of $93.8 million from our August 2020 underwritten public equity offering after deducting underwriter commissions and paid offering expenses, $34.0 million of Continuation Advances from Illumina and proceeds of $14.2 million from the issuance of common stock through our equity compensation plans, partially offset by $16.0 million we repaid for the remaining outstanding principal to Deerfield upon the maturity of the Facility Agreement.

Cash provided by financing activities during the nine months ended September 30, 2019 was due to $8.4 million from the issuance of common stock through our equity compensation plans.

Capital Resources

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On July 14, 2020, the registration statement was declared effective by the SEC, which allows us to access the capital markets for the three-year period following this effective date.

However, the Termination Agreement currently limits our ability to issue additional securities or incur indebtedness as up to the $52.0 million of Continuation Advances paid to us are repayable without interest to Illumina if, within two years of March 31, 2020, we enter into a Change of Control Transaction or raise at least $100 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by us).

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

Under the terms of the underwriting agreement, we also granted the underwriters a 30-day option to purchase up to an additional 2,914,500 shares of our common stock, which was subsequently exercised in full, and the offering including the sale of shares of common stock subject to the underwriters’ option, closed in August 2020.

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

We paid a commission equal to 6% of the gross proceeds from the sale of shares of our common stock.

The total net proceeds to us from the offering after deducting the underwriting discount were approximately $93.9 million, excluding approximately $0.3 million of offering expenses, $0.2 million of which was unpaid as of September 30, 2020.

As a result, $150.1 million remains available under the current shelf registration.

However, the Termination Agreement currently limits our ability to issue additional securities or incur indebtedness as up to the $52.0 million of Continuation Advances paid to us are repayable without interest to Illumina if, within two years of March 31, 2020, we enter into a Change of Control Transaction or raise 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.

Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any off-balance sheet arrangements.

As of September 30, 2020, we did not have any off-balance sheet arrangements.

In the ordinary course of business, we enter into standard indemnification arrangements.

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Commitments and Contingencies” in Part I, Item 1 of this Form 10-Q, any associated expenses incurred are included within the related accrued litigation expense amounts.

No additional liability associated with such indemnification agreements has been recorded as of June 30, 2020.

No additional liability associated with such indemnification agreements has been recorded as of September 30, 2020.

Quantitative and Qualitative Disclosures About Market Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis