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Item 5. Market for Registrant’s Common Equity

2021-02-26 compared with 2020-02-28 · 16 added, 365 removed, 26 unchanged (94% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The Nasdaq Global Select Market under the symbol “PACB.”

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The Nasdaq Global Select Market under the symbol “PACB.”

Holders of Record

As of January 31, 20 20 , there were approximately 28 s tockholders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.

As of January 31, 2021, there were approximately 20 stockholders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.

Dividend Policy

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Performance Graph

The performance graph included in this Annual Report on Form 10-K shall not be deemed “filed”

for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Pacific Biosciences under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

The performance graph included in this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Pacific Biosciences under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

The following graph shows a comparison from December 31, 2015 through December 31, 2020 of the cumulative total return for our common stock, the Nasdaq Composite Index and the Nasdaq Biotechnology Index.

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Our historical results are not necessarily indicative of the results to be expected for any future period.

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Year Ended December 31,

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Total cost of revenue

Gain from lease amendments (2)

Total operating expense

Operating loss

Gain from Reverse Termination Fee from Illumina (1)

Gain from Continuation Advances from Illumina (1)

Net Income (loss)

Net loss per share:

Basic and diluted net loss per share

Shares used in computing basic and diluted net loss per share (4)

Net income (loss) per share

Weighted average shares outstanding used in calculating net income (loss) per share

As of December 31,

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Total liabilities

Total stockholders' equity

During 2013, we entered into the Roche Agreement and received a non-refundable up-front payment of $35.0 million.

Revenue for the year ended December 31, 2015 consists of four quarterly periods of amortization of $3.6 million, reflecting the increased certainty of the development time period.

Revenue for the year ended December 31, 2016 included amortization of $3.6 million of the upfront Roche payment for each of the first three quarters of 2016, plus amortization of $1.3 million for the fourth quarter of 2016 upon our receipt of notice on December 2016 that Roche had elected to terminate the Roche Agreement, which became effective on February 10, 2017.

In addition, we achieved the second and third (final) development milestones under the Roche Agreement and recognized the related $10.0 million and $20.0 million, respectively, as contractual revenue during the year ended December 31, 2015.

Comprised of one-time gain of $23.0 million associated with the lease amendment agreements with our prior landlord, which amended the terms and conditions of certain of our existing Menlo Park facility real property leases.

In accordance with the terms of the Merger Agreement , during the fourth quarter of 2019 we received cash payments totaling $18.0 million from Illumina , which we re flected as a part of other income for the year ended December 31, 2019.

Please see “Note 2 .

Termination of Merger with Illumina ”

in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

F rom 2012 to 2017, we established various “at-the-market”

offerings pursuant to which we could offer and sell shares of our common stock.

Our first sales through our “at-the-market”

offering occurred in 2013 and as of December 31, 2017, we have sold a total of 27.8 million shares of our common stock at an average price of $5.83, for total net proceeds of $157.1 million.

We terminated the “at-the-market”

offering in June 2017.

Subsequently, in June 2017, we issued and sold a total of 17.7 million shares of our common stock at a price to the public of $3.10 per share in an underwritten public offering.

We paid a commission equal to 4% of the gross proceeds from the sale of shares of our common stock under the underwriting agreement.

The total net proceeds to us from the offering, after deducting the underwriting commission and offering expenses, were approximately $52.5 million.

Additionally, for the year ended December 31, 2018, we issued 30.6 million shares of our common stock through our two underwritten public offerings with a weighted average offering price of $3.38 per share.

The total net proceeds to us from the two offerings, after deducting the underwriting commission and offering expenses, were approximately $97.5 million.

Please see “Note 9.

Stockholders’

Equity”

in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included in this Annual Report on Form 10-K.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.

You should read the “Risk Factors”

section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Termination of Merger with Illumina

On November 1, 2018, we entered into a Merger Agreement with Illumina and FC Ops Corp .

We, Illumina and Merger Subsidiary entered into the Amendment on September 25, 2019.

The Amendment, among other things, extended the End Time (as defined in the Merger Agreement) to December 31, 2019.

Additionally, Illumina had until December 18, 2019 to exercise its unilateral right to extend the End Time to March 31, 2020.

In addition, the Amendment provided that Illumina w ould make payments to us of $6.0 million on or before each of October 1, 2019, November 1, 2019 and December 2, 2019.

If Illumina elected to further extend the End Time to March 31, 2020, then, except under limited situations, Illumina would be required to make payments to us of $6.0 million on or before each of January 2, 2020, and March 2, 2020, and a payment of $22.0 million on or before February 3, 2020.

We refer to all of these payments, whether received or for which we are entitled, as “Continuation Advances ”.

In accordance with the terms of the Merger Agreement, we received Continuation Advances totaling $18.0 million from Illumina during the fourth quarter of 2019.

On December 17, 2019, the U.S.

Federal Trade Commission publicly announced that it had authorized legal action to block the Merger.

On December 18, 2019, we received written notice from Illumina pursuant to which Illumina exercised its right to extend the End Time to March 31, 2020.

On January 2, 2020, we, Illumina and Merger Subsidiary entered into the Termination Agreement.

As part of our agreement to terminate the Merger Agreement, Illumina subsequently paid us the Reverse Termination Fee, from which we expect to pay our financial advisor associated fees of approximately $10 million.

In addition, Illumina paid us the additional Continuation Advance s of $6 million in January 2020 and $22 million in February 2020 and is scheduled to make a final Continuation Advance to us of $6 million in March 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 will 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 full amount of the 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.

We design, develop and manufacture sequencing systems to help scientists resolve genetically complex problems.

Based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, our products enable:

de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures;

full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes;

targeted sequencing to more comprehensively characterize genetic variations;

and real-time kinetic information for epigenome characterization.

Our technology provides high accuracy, ultra-long reads, uniform coverage and the ability to simultaneously detect epigenetic changes.

sequencing systems, including consumables and software, provide a simple and fast end-to-end workflow for SMRT sequencing.

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.

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.

Our research and development efforts are focused on developing new products and further improving our existing products including continuing chemistry and sample preparation improvements to increase throughput and expand our supported applications.

By providing access to genetic information that was previously inaccessible, we enable scientists to confidently increase their understanding of biological systems.

Cash Position

Cash, cash equivalents and investments, excluding restricted cash, at December 31, 201 9 totaled $ 49.1 million , compared to $ 102.4 million at December 31, 201 8 .

For year ended December 31, 2018, we issued 30.6 million shares of our common stock through our two underwritten public offerings with an average offering price of $3.38 per share.

The total net proceeds to us from the two offerings, after deducting the underwriting commission and offering expenses, were approximately $97.5 million.

On November 1, 2018, we entered into the Merger Agreement with Illumina.

In accordance with the terms of the Merger Agreement, we received cash payments totaling $18.0 million from Illumina during the fourth quarter of 2019.

Please refer to the section titled “Termination of Merger with Illumina”

above for additional cash considerations relating to the terminated merger with Illumina.

We may 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.

There can be no assurance that such funds will be available on favorable terms, or at all, particularly in light of restrictions under the Termination Agreement .

If adequate funds are not available, we may be required to obtain funds by entering into collaboration, licensing or debt agreements on unfavorable terms.

If we are unable to raise funds on favorable terms, or at all, we may have to reduce our cash burn rate and may not be able to support our commercialization efforts, or to increase or maintain the level of our research and development activities.

If we are unable to generate sufficient cash flows or to raise adequate funds to finance our forecasted expenditures, we may have to make significant changes to our operations, including delaying or reducing the scope of or eliminating some or all of our development programs.

We also may have to reduce sales, marketing, engineering, customer support or other resources devoted to our existing or new products or cease operations.

If our cash, cash equivalents and investments are insufficient to fund our projected operating requirements, and we are unable to raise capital, it would have a material adverse effect on our business, financial condition and results of operations.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which we have prepared in accordance with U.S.

generally accepted accounting principles (“U.S.

GAAP”).

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, cost of revenue, and operating expenses, and related disclosure of contingent assets and liabilities.

Management based its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ materially from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

Revenue Recognition

Our revenue is generated primarily from the sale of products and services.

Product revenue primarily consists of sales of our instruments and related consumables;

Service and other revenue consist primarily of revenue earned from product maintenance agreements with some additional revenue from instrument lease agreements and grant revenue.

We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable.

Revenues are recognized when control of the promised goods or services is transferred to our customers or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Taxes we collect concurrent with revenue-producing activities are excluded from revenue.

Our instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, installation, training, and consumables.

Additionally, our instrument sale arrangements generally include a one-year period of service.

For such bundled arrangements, we account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

Our customers cannot benefit from our instrument systems without installation, and installation can only be performed by us or qualified distributors.

As a result, the system and installation are considered to be a single performance obligation recognized after installation is completed except for sales to qualified distributors, in which case the system is distinct and recognized when control has transferred to the distributor which typically occurs upon shipment.

The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price (“SSP”).

The SSP is determined based on observable prices at which we separately sell the products and services.

If a SSP is not directly observable, then we will estimate the SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices and other observable inputs.

We recognize revenues as performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer.

Our revenue arrangements generally do not provide a right of return.

Contract liabilities and contract assets - Contract liabilities consist of deferred revenue.

We record deferred revenues when cash payments are received or due in advance of our performance for product maintenance agreements.

Deferred revenue is recognized over the related performance period, generally one to three years, on a straight-line basis as we are standing ready to provide services and a time-based measure of progress best reflects the satisfaction of the performance obligation.

As of December 31, 2019, we had a total of $0.6 million of deferred commissions included in “Prepaid expenses and other current assets”

which is recognized as the related revenue is recognized.

Additionally, as a practical expedient, we expense costs to obtain a contract as such costs are incurred if the amortization period would have been a year or less.

Contract assets as of December 31, 2019 and December 31, 2018 were not material.

Instrument lease agreements - Instrument leases are generally classified as operating-type leases and revenue from these leases is recognized on a straight-line basis over the respective lease term, once the lessee takes (or has the right to take) control/possession of the property under the lease.

Effectively, this occurs once the installation is complete and control of the instrument is transferred to our customers.

Other practical expedients and exemptions - Customers generally are invoiced upon acceptance of the system, which is also the start of the one-year service period.

As such, there is typically not more than a one-year difference between the receipt of cash and the provision of services.

Therefore, we apply the practical expedient and do not account for any potential significant financing benefit.

However, it is noted that some customers will pre-order extended service periods at the time of the initial system sale.

These customers may choose to make quarterly or annual payments or prepay multiple years of service upfront but there is no pricing difference between these different payment options.

As such, no significant financing component is believed to exist with any of our existing arrangements.

Inventories are stated at the lower of average cost or net realizable value.

Cost is determined using the first-in, first-out (“FIFO”) method.

Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete balances.

Cost includes depreciation, labor, material, and overhead costs, including product and process technology costs while determining net realizable value of inventories involves numerous judgements, including projecting future average selling prices, sales volumes, and costs to complete products in work in process inventories.

We enter into inventory purchases and commitments so that we can meet future shipment schedules based on forecasted demand for our products.

The business environment in which we operate is subject to rapid changes in technology and customer demand.

We perform a detailed assessment of inventory each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration, and quality issues.

Based on our analysis, we record adjustments to inventory for potentially excess, obsolete, or impaired goods, when appropriate, in order to report inventory at net realizable value.

Inventory adjustments may be required if actual demand, component costs, supplier arrangements, or product life cycles differ from our estimates.

Any such adjustments would result in a charge to our results of operations .

Operating Leases

We lease administrative, manufacturing and laboratory facilities under operating leases.

Lease agreements may include rent holidays, rent escalation clauses and tenant improvement allowances.

We recognize scheduled rent increases on a straight-line basis over the lease term beginning with the date we take possession of the leased space.

Leasehold improvements are capitalized at cost and depreciated over the shorter of their expected useful life or the life of the lease.

On January 1, 2019, we adopted ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the consolidated balance sheet.

Prior to that, we recorded tenant improvement allowances as deferred rent liabilities and amortize d the deferred rent over the term of the lease to rent expense on the statements of operations and comprehensive loss.

Leases with terms of 12 months or less are expensed on a straight-line basis over the term and are not recorded in the consolidated balance s heets.

Recent Accounting Pronouncements

Please see “Note 3 .

Summary of Significant Accounting Policies”, subsection titled “

Recent Accounting Pronouncements ”

, in Part II, Item 8 of this Annual Report on Form 10-K for information regarding applicable recent accounting pronouncements.

Results of Operations

Comparison of the Years Ended December 31, 2019 and 2018

Year Ended December 31,

(in thousands, except percentages)

Product revenue

Service and other revenue

Total revenue

Cost of Revenue:

Cost of product revenue

Cost of service and other revenue

Total cost of revenue

Operating Expense:

Research and development

Sales, general and administrative

Total operating expense

Operating loss

Gain from C ontinuation A dvances from Illumina

Interest expense

Other income, net

Total revenue for the year ended December 31, 201 9 was $9 0.9 million compared to $ 78.6 million for 201 8 .

An increase in revenue associated with shipments of Sequel II instruments for the year ended December 31, 2019 was partially offset by a decrease in revenue associated with fewer shipments of Sequel instruments.

Product revenue for the year ended December 31, 201 9 consisted of $ 45.1 million from sales of Sequel and Sequel II instruments and $ 32.6 million from sales of consumables, for total product revenues of $ 77.7 million, compared to $ 28.5 million from sales of sales of Sequel instruments and $ 37.9 million from sales of consumables, for total product revenue of $6 6.4 million for the year ended December 31, 201 8 .

The increase in instrument sales was primarily attributable to a higher number of instrument shipments and installations for the year ended December 31, 2019.

The decrease in consumable sales was driven by lower utilization of Sequel instruments as a number of customers are transitioning from Sequel to Sequel II.

Service and other revenue of $ 13.1 million and $ 12.3 million for the year ended December 31 , 2019 and 2018, respectively, was primarily derived from product maintenance agreements sold on our installed instruments.

The increase in service and other revenue was primarily attributable to a larger number of installed instruments under service contracts .

Gross profit for the year ended December 31, 2019 was $34.6 million, resulting in a gross margin of 38.0%, compared to gross profit of $25.1 million, resulting in a gross margin of 31.9% for 2018.

The increase in gross profit of $9.5 million was driven by higher revenue with higher margin.

Cost of product revenue was $44.8 million for the year ended December 31, 2019, compared to cost of product revenue of $42.1 million for 2018.

Cost of service and other revenue remained flat at $11.5 million from 2018 to 2019.

Research and Development Expense

For the year ended December 31, 2019, research and development expense decreased by $3.0 million, or 5%, compared to 2018.

The decrease in research and development expense was primarily attributable to a decrease in stock-based compensation expense.

R esearch and development expense included stock-based compensation expense of $7.7 million and $10.1 million for the year ended December 31, 2019 and 2018, respectively.

Sales, General and Administrative Expense

For the year ended December 31, 2019, sales, general and administrative expense increased by $12.0 million, or 19%, compared to 2018.

The increase in sales, general and administrative expense was primarily attributable to higher legal and professional fees related to the terminated merger, partially offset by a decrease in stock-based compensation expense.

Legal and professional fees related to the terminated merger were approximately $14.1 million in 2019, compared with approximately $4.7 million in 2018.

Sales, general and

administrative expense included stock-based compensation expense of $6.8 million and $10.0 million for the year ended December 31, 2019 and 2018, respectively.

Gain f rom C ontinuation A dvance s from Illumina

In accordance with the terms of the Merger Agreement , during the fourth quarter of 2019 we received C ontinuation A dvance s totaling $18.0 million from Illumina, which are recorded as part of other in come .

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

As part of our agreement to terminate the Merger Agreement and as previously agreed to pursuant to the terms of the Merger Agreement, Illumina paid us Continuation Advances of $6 million in January 2020 and $22 million in February 2020 and is scheduled to make the last Continuation Advance to us of $6 million in March 2020.

Interest Expense

Interest expense for the year ended December 31, 2019 remained flat compared to 2018.

Interest expense related primarily to the debt agreement with Deerfield entered into in February 2013 (the “Facility Agreement”) which matured and was terminated in February 2020.

Comparison of the Years Ended December 31, 2018 and 2017

Year Ended December 31,

(in thousands, except percentages)

Product revenue

Service and other revenue

Total revenue

Cost of Revenue:

Cost of product revenue

Cost of service and other revenue

Total cost of revenue

Operating Expense:

Research and development

Sales, general and administrative

Total operating expense

Operating loss

Interest expense

Other income, net

Total revenue for the year ended December 31, 2018 was $78.6 million compared to $93.5 million for 2017.

Product revenue for the year ended December 31, 2018 was $66.4 million, compared to $80.0 million for the year ended December 31, 2017.

The decrease in product revenue from 2017 to 2018 was primarily a result of lower instrument installations in 2018, as some customers postponed purchases in anticipation of the Sequel®

II system and SMRT®

Cell 8M product launches in 2019.

In addition, consumables revenue decreased in 2018 as an increase in Sequel consumables was more than offset by a significant decrease in RS II consumables.

Service and other revenue was $12.3 million and $13.4 million for the years ended December 31, 2018 and 2017, respectively, and was primarily derived from product maintenance agreements sold for our installed instrument base.

Lower year-over-year service revenue was due to a decrease of higher priced RS II service contract renewals, which is a result of the ongoing transition of our customer base from RS II to Sequel systems.

Gross profit for the year ended December 31, 2018 was $25.1 million, resulting in a gross margin of 32% while gross profit for the year ended December 31, 2017 was $34.7 million, resulting in a gross margin of 37%.

Gross profit decreased in 2018 as a result of lower product revenue, increased inventory reserves primarily driven by product transitions, and higher period costs recognized as a result of lower production volume.

Cost of product revenue was $42.1 million for the year ended December 31, 2018, compared to $42.9 million for 2017.

Despite lower product revenue in 2018 compared with 2017, cost of product revenue was relatively flat due to higher product transition costs, including an inventory reserve of $3.1 million taken on older consumables as new products were introduced in 2018 and higher period costs recognized in 2018.

Cost of service and other revenue for the year ended December 31, 2018 decreased to $11.5 million compared to $15.9 million for the year ended December 31, 2017.

During the year ended December 31, 2017, we recorded charges to cost of revenue totaling $1.6 million relating to leased RS II instruments primarily due to a change in the estimated useful life of these instruments.

In addition, for the year ended December 31, 2018 we have continued to improve Sequel instrument reliability which has led to reduced cost of service during the period.

Research and Development Expense

Research and development expense for the year ended December 31, 2018 decreased by $2.7 million to $62.6 million compared to $65.3 million for the year ended December 31, 2017.

The decrease in research and development expenses for the year ended December 31, 2018 can be primarily attributed to lower chip development expenses in 2018 as compared to 2017.

This was partially offset by an increase of $1.2 million in stock-based compensation expense in the fourth quarter of 2018 related to the cancellation of the future offering periods of the employee stock purchase plan in connection with the Merger Agreement which we entered into with Illumina.

Research and development expenses included stock-based compensation expenses of $10.1 million and $8.5 million for the years ended December 31, 2018 and December 31, 2017, respectively.

Sales, General and Administrative Expense

Sales, general and administrative expense for the year ended December 31, 2018 increased by $4.4 million to $63.5 million compared to $59.1 million for the year ended December 31, 2017.

The increase in sales, general and administrative expenses for the year ended December 31, 2018 over 2017 can be primarily attributed to $4.7 million of additional legal and professional fees incurred in connection with the Merger Agreement, $1.6 million of executive bonus costs and the increase in stock-based compensation expense related to the Merger Agreement, partially offset by a decrease in patent litigation expenses.

Sales, general and administrative expenses included stock-based compensation expenses of $10.0 million and $9.5 million for the years ended December 31, 2018 and December 31, 2017, respectively.

Interest Expense

Interest expense for the year ended December 31, 2018 decreased by $0.5 million compared to the year ended December 31, 2017.

Interest expense related primarily to the Facility Agreement.

In June 2017, we repaid $4.5 million out of the original $20.5 million debt facility.

Liquidity and Capital Resources

Cash, cash equivalents and investments at December 31, 201 9 totaled $ 49.1 million, compared to $ 102.4 million at December 31, 201 8 .

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 Annual Report on Form 10-K for the year ended December 31, 201 9 ;

however, we may raise additional capital in the future.

Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 20 20 , which includes various assumptions regarding demand for our products.

Generally, we expect demand for our products to increase.

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 from which we expect to pay our financial advisor associated fees of approximately $10 million.

In addition, Illumina paid us the additional Continuation Advance s of $6.0 million in January 2020 and $22.0 million in February 2020 and is scheduled to make 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 (as defined in the Termination Agreement), then we will repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction.

In addition, up to $52.0 million of the Continuation Advances that we receive 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 (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 Annual 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;

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

our ability to obtain new collaboration and customer arrangements;

the progress of our research and development programs;

initiation or expansion of research programs and collaborations;

the purchase of patent licenses;

future acquisitions;

manufacturing costs, service costs, the impact

of product quality, litigation costs, including the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights;

costs of developing new and enhanced products;

and other factors.

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.

There can be no assurance that such funds will be available on favorable terms, or at all, particularly in light of restrictions under the Termination Agreement.

If adequate funds are not available, we may be required to obtain funds by entering into collaboration, licensing or debt agreements on unfavorable terms.

If we are unable to generate sufficient cash flows or to raise adequate funds to finance our forecasted expenditures, we may have to make significant changes to our operations, including delaying or reducing the scope of, or eliminating some or all of, our development programs.

We also may have to reduce sales, marketing, engineering, customer support or other resources devoted to our existing or new products or cease operations.

Operating Activities

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.

The net cash used for the years ended December 31, 2019, 2018 and 2017 primarily reflected the net loss for those periods, partially offset by non-cash operating expenses including depreciation and stock-based compensation, as well as changes in working capital.

In 2019, cash used in operating activities was $ 78.3 million, reflect ing a net loss of $ 84.1 million, adjusted for non-cash items such as stock-based compensation of $ 16.4 million and depreciation of $7.

The change in net operating assets and liabilities was primarily attributed to a decrease of $3.

9 million in inventory, partially offset by a n increase of $ 6.7 million in accounts receivable .

In 2018, c ash used in operating activities was $66.4 million, reflect ing a net loss of $102.6 million, adjusted for non-cash items such as stock-based compensation of $23.2 million and depreciation of $7.2 million.

The change in net operating assets and liabilities was primarily attributed to a decrease of $4.8 million in accounts receivable, a decrease of $3.6 million in inventory, partially offset by a decrease of $2.2 million in accounts payable.

In 2017, c ash used in operating activities was $67.5 million in 2017, reflect ing a net loss of $92.2 million , adjusted for non-cash items such as stock-based compensation of $ 20.4 million and depreciation of $8.4 million.

The change in net operating assets and liabilities was primarily attributed to an increase of $8.4 million in inventory and a decrease of $4.0 million in accrued expenses, partially offset by a decrease in prepaid expenses and other assets of $7.8 million, of which $5.0 million related to the payments we received from our prior landlord as a result of exiting a portion of our prior facilities.

Investing Activities

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

In 2019, net cash provided by investing activities was $ 62.0 million, comprised of net purchase of investments of $ 64.8 million and net purchase of property and equipment of $ 2.8 million.

In 2018, net cash used in investing activities was $38.4 million, comprised of net purchase of investments of $36.6 million and purchase of property and equipment of $1.9 million.

In 2017, net cash used in investing activities was $1.5 million, comprised of net sales and maturities of investments of $8.8 million and net purchase of property and equipment of $10.4 million.

Financing Activities

In 2019, cash provided by financing activities was $ 26.5 million, comprised of $18.0 million of C ontinuation A dvance s f rom Illumina and n et proceeds of $ 8.5 million from the issuance of common stock through our equity compensation plans.

In 2018, cash provided by financing activities was $107.2 million, comprised of net proceeds of $97.5 million from our underwritten public equity offerings, after deducting underwriter commissions and offering expenses and $9.7 million from the issuance of common stock through our equity compensation plans.

In 2017, cash provided by financing activities was $68.8 million, comprised of net proceeds of $52.5 million from our underwritten public equity offering, after deducting underwriter commissions and offering expenses, net proceeds of $11.9 million from our common stock “at-the-market”

offering program and $8.9 million from the issuance of common stock through our equity compensation plans, partially offset by our payment of $4.5 million in outstanding principal under the Facility Agreement in the second quarter of 2017.

Capital Resources

In August 2017, we filed a shelf registration statement on Form S-3 with the SEC pursuant to which we may, from time to time, sell up to an aggregate of $150.0 million of our common stock, preferred stock, depository shares, warrants, units or debt securities.

August 18, 2017, 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.

“At-the-Market”

Equity Offering

In February 2017, we filed a prospectus supplement pursuant to which we could offer and sell, from time to time, additional shares of our common stock having an aggregate offering price of up to $60.0 million.

During the six-month period ended June 30, 2017 we issued 3.2 million shares of our common stock at an average price of $3.86 per share through our “at-the-market”

offering, resulting in net proceeds of $11.9 million.

We terminated our current “at-the-market”

offering program in June 2017.

We paid a commission equal to 3% of the gross proceeds from the sale of shares of our common stock through the “at-the-market’

offering program under the sales agreement.

Underwritten Public Equity Offering

In June 2017, we issued and sold a total of 17,732,257 shares of our common stock at a price of $3.10 per share in an underwritten public offering.

We paid a commission equal to 4% of the gross proceeds from the sale of shares of our common stock under the underwriting agreement.

The total net proceeds to us from the offering, after deducting the underwriting commission and offering expenses, were approximately $52.5 million.

Total stockholders'

(1) In accordance with the terms of the Merger Agreement, Illumina paid us cash payments (“Continuation Advances”), of $34.0 million and $18.0 million for the year ended December 31, 2020 and 2019, respectively, which we reflected as a part of Other income for the year ended December 31, 2020 and 2019, respectively.

In addition, a s part of the Termination Agreement, Illumina paid us a Reverse Termination Fee of $98.0 million, which we reflected as a part of other income for the year ended December 31, 2020.

Please see “Note 2.

Termination of Merger with Illumina” in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

(2) For the year ended December 31, 2020, we issued 29.4 million shares of our common stock through our two underwritten public offerings with an average offering price of $6.40.

The total net proceeds to us from the two offerings, after deducting the underwriting commission and offering expenses, were approximately $187.2 million.

Debt Facility Agreement

Under the terms of the Facility Agreement , we received $20.5 million and issued promissory notes in the aggregate principal amount of $20.5 million (the “Notes”).

The Notes bear simple interest at a rate of 8.75% per annum, payable quarterly in arrears commencing on April 1, 2013 and on the first business day of each January, April, July and October thereafter.

The Facility Agreement ha d a maximum term of seven years.

We received net proceeds of $20.0 million, representing $20.5 million of gross proceeds, less a $500,000 facility fee, before deducting other expenses of the transaction.

On June 23, 2017, pursuant to a partial exercise by the Notes holders of their right to elect to receive up to 25% of the net proceeds from any financing that includes an equity component, we paid $4.5 million of outstanding principal , together with accrued and unpaid interest, to one of the Notes holders with proceeds from our underwritten public equity offering.

As of December 31, 2019, a balance of $16.0 million aggregate principal amount of debt remained outstanding under this facility and presented as “Notes payable, current”

on the consolidated balance sheet as of December 31, 2019 .

The Facility Agreement also contain ed various representations and warranties, and affirmative and negative covenants, customary for financings of this type, including restrictions on our ability to incur additional indebtedness or liens on our assets, except as permitted under the Facility Agreement.

In addition, the Facility Agreement require d us to maintain consolidated cash and cash equivalents on the last day of each calendar quarter of not less than $2.0 million.

As security for our repayment of our obligations under the Facility Agreement, we granted the lenders a security interest in substantially all of our property and interests in property.

Subject to certain exceptions set forth in our Facility Agreement, holders of our Notes could elect to receive up to 25% of the net proceeds from financing activities that include an equity component as prepayment of the Notes to be applied first, to accrued and unpaid interest and second, to principal.

However, in both February 2018 and September 2018, holders representing a majority of the aggregate principal amount of the outstanding Notes waived such right in connection with the issuance and sale of shares of common stock in our public offering.

In June 2017, pursuant to a partial exercise by the Notes holders of this right, we repaid $4.5 million of outstanding principal, together with accrued and unpaid interest, to one of the Notes holders with proceeds from our underwritten public equity offering.

In February 2020, upon the maturity of the debt, we repaid the remaining outstanding principal of $16.0 million and interest to Deerfield .

Contractual Obligations, Commitments and Contingencies

On July 22, 2015, we entered into a lease agreement (the “O’Brien Lease”) with respect to our facility located at 1305 O’Brien Drive, Menlo Park, California (the “O’Brien Premises”).

The term of the O’Brien Lease is one hundred thirty-two (132) months.

In December 2016, we entered into an amendment to the O’Brien Lease which defined the commencement date of the lease to be October 25, 2016, notwithstanding that such substantial completion did not occur until the first quarter of 2017.

Base monthly rent was abated for the first six (6) months of the lease term and thereafter was $540,000 per month during the first year of the lease term, with specified annual increases thereafter until reaching $711,000 per month during the last twelve (12) months of the lease term.

We were required to establish a letter of credit for the benefits of the landlord and to submit $4.5 million as a deposit for the letter of credit in October 2015 and, as such, $4.5 million was recorded at such time and continued to be recorded in “Long-term restricted cash”

in the consolidated balance sheet as of both December 31, 2018 and December 31, 2017.

Subsequently, pursuant to the terms of the 1305 O’Brien L ease, at May 1, 2019, the $4.5 million in restricted cash was reduced to $4.0 million.

Pursuant to the terms of the O’Brien Lease, the letter of

credit balance of $4.0 million at December 31, 2019 will be reduced again in May 2020 by $500,000 .

The following table provides summary information concerning our future contractual obligations as of December 31, 201 9 .

Payments due by period (in thousands)

Operating lease obligations (1)

Total contractual obligations

Maintenance, insurance, taxes and contingent rent obligations are excluded.

Amounts in the table above include interest and principal repayments on the debt.

Other Purchase Commitments

In addition, we had other purchase commitments of an estimated amount of approximately $1 5.5 million as of December 31, 201 9 , consisting 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, and acquisition and licensing of intellectual property.

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.

License Agreements

Payments related to licensing and other arrangements not included in the contractual obligations table include amounts related to cancelable license agreements with third parties for certain patent rights and technology.

Under the terms of these agreements, we may be obligated to pay royalties based on revenue from the sales of licensed products, or minimum royalties, whichever is greater, and license maintenance fees.

The future license maintenance fees and minimum royalty payments under the license agreements are not deemed to be material.

The table above reflects only payment obligations that are fixed and determinable.

Future royalties under our license agreements are not included in the table above because we cannot, at this time, determine when or if the events triggering any such payment obligations will occur or the amounts that will become potentially payable.

Legal Proceedings

Please see Item 3 “Legal Proceedings”

of this Annual Report on Form 10-K for additional information.

Off-Balance Sheet Arrangements

As of December 31, 201 9 , we did not have any off-balance sheet arrangements.

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

Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract, any defective products supplied by us, or any negligent acts or omissions, or willful misconduct, committed by us or any of our employees, agents or representatives.

The term of these indemnification agreements is generally perpetual after the execution of the agreement.

The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods, but have not yet been made.

To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

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 such indemnification obligations apply to the lawsuits described in “Note 7.

Commitments and Contingencies”

in Part II, Item 8 of this Annual Report on Form 10-K, any associated expenses incurred are included within the related accrued litigation expense amounts.

No additional liability associated with such indemnification agreements has been recorded at December 31, 201 9 .

Please see “Note 8.

Stockholders’ Equity” in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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-K

Item 5. Market for Registrant’s Common Equity