What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-03 · 137 added, 135 removed, 81 unchanged (77% of the section changed)

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We do not assume any obligation to update any forward-looking statements.

Termination of Merger with Illumina, Inc.

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

As part of the Termination Agreement, Illumina paid us a $98.0 million Reverse Termination Fee, from which we paid our financial advisor associated fees of $6 million in April 2020.

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 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

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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PacBio® 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 current products include the Sequel II and Sequel IIe instruments 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.

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

Senior Management

Our President and Chief Executive Officer Christian O.

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

Michael Hunkapiller who announced his retirement, which was effective at the end of 2020.

Our Chief Financial Officer Susan G.

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

Barnes who retired on August 7, 2020.

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.

On December 31, 2020, the Board of Directors appointed Mark Van Oene to the role of Chief Operating Officer and designated him as the Company’s principal operating officer, and appointed Peter Fromen to the role of Chief Commercial Officer, effective in each case upon his commencement of employment with the Company on January 8, 2021.

2021 Strategic Objectives

For 2021, we have outlined three strategic objectives:

 Expand our commercial reach;

 Accelerate our product development pipeline;

 Drive market leadership in whole-genome clinical sequencing.

Expanding our commercial reach includes hiring senior level team members with extensive commercial experience.

By the end of 2021, we expect to more than double our number of quota-carrying field sales personnel from the 22 that we employed at the end of 2020.

In addition, we plan to expand our commercial support activities and invest in more sales tools.

We also intend to invest more heavily in marketing programs to increase the awareness of our products to a broader number of potential customers.

As a result of these commercial expansion activities, we expect our sales, general, and administrative expense to increase significantly in 2021 as compared to 2020.

Accelerating our product development pipeline includes significantly expanding our research and development team in an effort to accelerate the development of multiple new products.

In association with the collaboration we entered into with Invitae Corporation (“Invitae”) in January 2021, as described below, we plan to develop a new platform with production-scale high-throughput capability, which will be in addition to other new products we already have in development.

In order to develop these multiple products in parallel, we significantly increasing our Research and Development headcount.

In addition, we expect to increase our spending on outside development costs.

As a result, we expect our research and development expense to increase significantly in 2021 as compared to 2020.

We believe that with the capabilities of our SMRT technology, we can be a market leader in whole-genome clinical sequencing.

Leading institutions such as Children’s Mercy Kansas City, Invitae, the HudsonAlpha Institute for Biotechnology and Stanford University have adopted our products to study rare and inherited disease.

We believe the market opportunity for clinical sequencing is very large, and could drive significant revenue growth for the company.

To accelerate this growth, we entered into the collaboration with Invitae, who is a market leader in medical genetic testing, and has the desire to sequence hundreds of thousands of genomes annually with our technology.

We will continue to pursue additional partnerships to further drive the adoption of whole-genome clinical sequencing.

Invitae Collaboration

On January 12, 2021 we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae Corporation (“Invitae”).

Pursuant to the Development Agreement, Invitae is providing certain funding to PacBio to enable PacBio to develop products relating to production-scale high-throughput sequencing (“Program Products”).

If and when Program Products become commercially available for sale, Invitae may purchase the Program Products, which are expected to provide it with the ability to leverage the power of PacBio’s highly accurate HiFi sequencing to expand its whole genome testing capabilities.

In addition to selling the Program Products to Invitae, we will have the right to broadly commercialize Program Products for sale to other customers.

The funding Invitae will provide to PacBio will equal certain development costs incurred by PacBio in connection with the Program Products (“Program Development Costs”).

Under the Development Agreement, we will be responsible for conducting a program to develop the Program Products, and subsequently for manufacturing the Program Products.

We will make general decisions regarding the development program jointly with Invitae but PacBio is responsible for all research and development activities.

The entire development program is expected to last approximately sixty months, but may be shorter or longer.

As the primary benefit of its contribution, Invitae will be entitled to preferred pricing on the Program Products if and when they are available for commercial sale.

Each Program Product will have a preferential pricing period, which will not exceed four years from the date of the first delivery of that Program Product (“Preferential Pricing Period”).

During the Preferential Pricing Period for each Program Product, Invitae may purchase the Program Product at a substantially reduced margin until it has recouped a multiple of its contribution as defined in the Development Agreement.

For a specified period after the end of the Preferential Pricing Period, Invitae has the right to purchase the Program Product at a higher price, determined by a formula, than the price during the Preferential Pricing Period (“Extended Pricing Period”).

The Extended Pricing Periods will terminate early if Invitae does not meet certain volume minimums.

We and Invitae may terminate the Development Agreement if the other party remains in material breach of the Development Agreement following a cure period to remedy the material breach.

In addition, the Development Agreement includes certain other circumstances for termination by each party, including circumstances where Invitae may terminate for delays, IP concerns, PacBio’s change in control, or without cause.

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

We expect to incur significant development costs over the duration of the Development Agreement.

There can be no assurances that the development program will be successful or that the Program Products will become ready for commercial sale.

We determined that the primary benefit from the arrangement to Invitae is the ability to procure the Program Products during the Preferential Pricing Period at substantial discounts.

As we expect the Program Products to be available for Invitae to purchase in the future, we concluded the arrangement is within the scope of ASC Topic 606, Revenue from Contracts with Customers.

In addition, Invitae is not expected to substantially benefit from the intellectual property developed under the arrangement, or benefit from other goods or services during the development period.

It is also not a collaboration in the scope of ASC Topic 808 Collaborative Arrangements, as PacBio is responsible for performing the research and development activities.

Accordingly, the amounts received by the Company from Invitae during the development period represent significant discounts toward future supplies of the Program Products during the Preferential Pricing Period, and will be accounted as material rights in accordance with ASC Topic 606 .

Proportionate amounts of t hese material rights will be recognized in revenue when Invitae places purchase orders for Program Products and the associated goods or services are delivered to Invitae.

To the extent the discounts are not expected to be used, they will be recognized consistent with the guidance in Topic 606 relating to breakage, in proportion to the expected purchases by Invitae.

Any remaining unused discounts will be recognized when they expire.

All amounts received from Invitae will be initially deferred and accumulated in non-current deferred revenue.

We determined that a significant financing component exists in relation to the amounts received by Invitae during the development period and until the development is complete.

The resulting financing costs will be recognized by the Company over that period, with corresponding increases in deferred revenues.

As a result, future revenue attributable to the material rights will be increased by the same amount.

Costs incurred to develop the Program Products are considered research and development and are expensed as incurred.

There are no origination or fulfilment costs related to the arrangement with Invitae that are eligible to be capitalized.

We expect to incur significant development costs over the duration of the Development Agreement including $20-25 million expected to be incurred during fiscal 2021.

There can be no assurances that the development program will be successful or that the Program Products will become ready for commercial sale.

As of March 31, 2021, cumulative payments received from Invitae amounted to $4.1 million, and are included in “Deferred revenue, non-current” on the Condensed Consolidated Balance Sheet.

COVID-19 Update

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 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.

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 fourth quarter of 2020.

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

A significant number of customers had to delay purchases or had difficulties obtaining funding for capital expenditures due to the negative impact of the pandemic on their businesses.

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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Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited Financial Statements, which have been prepared in accordance with the rules and regulations of the SEC.

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with the rules and regulations of the SEC.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

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

We adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments on January 1, 2020, using the modified retrospective method.

Please see “Recently Adopted Accounting Standards” in the Note 3.

Summary of Significant Accounting Policies of Item 1.

Financial Statements.

Except as noted above, there have been no other material changes to our significant accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 .

Except for the adoption of ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, as discussed in Note 4.

Summary of Significant Accounting Policies and Note 7 .

Convertible Senior Notes , there have been no material changes to our significant accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 .

Results of Operations

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

Three Months Ended September 30,

(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 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 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 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 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 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,

Comparison of the three months ended March 31, 2021 and 2020

Three Months Ended March 31,

(in thousands, except percentages)

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Operating loss

Gain from Continuation Advances from Illumina

Gain (loss) from Continuation Advances

Interest expense

Other income, net

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 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.

Net income (loss)

Total revenue for the three months ended March 31, 2021 was $29.0 million compared to $15.6 million for the same period during 2020.

Product revenue of $25.3 million for the three months ended March 31, 2021 consisted primarily of $14.9 million from instrument revenue and $10.4 million from consumables revenue, compared to total product revenue of $12.3 million for the same period during 2020, consisting of $4.0 million from instrument revenue and $8.3 million of consumables revenue.

The increase in instrument sales was primarily attributable to a higher number of instrument shipments and installations.

The increase in consumable sales was primarily attributable to higher Sequel II consumables sales as the installed base of Sequel II systems has grown.

Service and other revenue of $3.7 million and $3.3 million for the three months ended March 31, 2021 and 2020, respectively, was primarily derived from product maintenance agreements sold on our installed instruments.

Gross profit for the three months ended March 31, 2021 was $13.0 million, resulting in a gross margin of 44.8%, compared to gross profit of $7.5 million for the same period during 2020, resulting in a gross margin of 48.0%.

From time to time, we may experience lower manufacturing yields and potential supply constraints which could have a material impact on our gross margins.

Cost of product revenue was $12.7 million for the three months ended March 31, 2021, compared to cost of product revenue of $5.4 million for the same period during 2020.

The increase of $7.3 million in cost of product revenue was primarily due to increased product shipments as described above.

Cost of service and other revenue for the three months ended March 31, 2021 increased to $3.3 million, compared to $2.7 million for the same period during 2020, due primarily to higher service volumes and increased stock-based compensation expense.

Research and Development Expense

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.

During the three months ended March 31, 2021, research and development expense increased by $5.3 million, or 35%, compared to the same period during 2020.

The increase in research and development expense was primarily driven by an increase of $3.3 million in compensation expenses and an increase of $1.6 million in product development costs.

Research and development expense included stock-based compensation expense of $3.0 million and $1.8 million during the three months ended March 31, 2021 and 2020, respectively.

Sales, General and Administrative Expense

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.

During the three months ended March 31, 2021, sales, general and administrative expense increased by $1.2 million, or 5%, compared to the same period during 2020.

The increase in sales, general and administrative expense was primarily attributable to an $11.5 million increase in compensation expense for the three months ended March 31, 2021 compared to the same period of 2020, partially offset by a $6.0 million financial advisory fee during the three months ended March 31, 2020 related to the terminated merger with Illumina and $4.1 million in lower legal and other professional expenses during the three months ended March 31, 2021 compared to the same period of 2020.

The increase in compensation expense is primarily attributable to executive hiring related to our senior management transitions during the second half of 2020 and early 2021, as well as higher payroll tax expenses associated with stock option exercises and restricted stock units vesting during the three months ended March 31, 2021.

Sa les, general and administrative expense included stock-based compensation expense of $6.1 million and $1.7 million during the three months ended March 31, 2021 and 2020, respectively.

Gain (loss) from Continuation Advances from Illumina

As part of the Termination Agreement, Illumina paid us Continuation Advances of $18.0 million during the fourth quarter of 2019 and $34.0 million during the first quarter of 2020.

We recorded the $34.0 million as part of other income in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2020.

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

Resulting from the issuance and sale of $900 million of 1.50% Convertible Senior Notes due February 15, 2028, $52.0 million of Continuation Advances were paid without interest to Illumina in February 2021 and recorded as other expense in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2021.

Interest Expense

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.

Interest expense for the three months ended March 31, 2021 increased $1.5 million compared to the same period in 2020, primarily due to interest incurred on the $900 million of 1.50% Convertible Senior Notes that were issued February 16, 2021.

Liquidity and Capital Resources

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.

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 , 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;

Cash, cash equivalents and investments at March 31, 2021 totaled $1.16 billion, compared to $318.8 million at December 31, 2020.

The increase was attributable to the net proceeds from our issuance of $900 million of 1.50% Convertible Senior Notes on February 16, 2021, partially offset by the repayment of $52 million of Continuation Advances to Illumina in the first quarter of 2021.

We have historically incurred, and expect to continue to incur, operating losses and generate negative cash flows from operations on an annual basis due to the investments we intend to make as described above, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business.

Factors that may affect our capital needs include, but are not limited to, 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;

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and other factors.

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.

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.

There can be no assurance that funds will be available on favorable terms, or at all.

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.

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.

We had $23.1 million of cash used in operating activities for the three months ended March 31, 2021, compared to cash provided by operating activities of $75.4 million for the same period in 2020.

Cash used in operating activities for the three months ended March 31, 2021 was due primarily to $87.4 million net loss, partially offset by a loss of $52.0 million from Continuation Advances repaid to Illumina that is considered a financing activity and non-cash items such as stock-based compensation of $10.2 million and depreciation of $1.6 million.

The change in net operating assets and liabilities was primarily attributable to decreases of $3.0 million in other liabilities and $2.7 million in accrued expenses and an increase of $2.6 million in inventory, partially offset by a decrease of $3.9 million in accounts receivable and an increase of $5.0 million in deferred revenue.

Cash provided by operating activities for the three months ended March 31, 2020 was due to the $98.0 million Reverse Termination Fee received from Illumina and a net income of $1.3 million plus changes in net operating assets and liabilities, offset by a gain from Continuation Advances from Illumina of $34.0 million that is considered to be a financing activity, and non-cash items such as stock-based compensation of $4.0 million and depreciation of $1.7 million.

The change in net operating assets and liabilities was primarily attributable to a decrease of $7.9 million in accounts receivable and an increase of accrued liabilities of $4.7 million, partially offset by a decrease of $4.1 million in accounts payable and an increase of $3.3 million in inventory.

Investing Activities

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

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.

We received $8.2 million of cash from investing activities for the three months ended March 31, 2021, compared to using cash of $54.3 million for investing activities for the same period in 2020.

Cash provided by investing activities for the three months ended March 31, 2021 was due primarily to net sales and maturities of investments of $8.6 million, partially offset by purchases of property and equipment of $0.4 million.

Cash used in investing activities for the three months ended March 31, 2020 was due primarily to net purchases of investments of $54.2 million and purchases of property and equipment of $0.1 million.

Financing Activities

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

In June 2020, 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 $250.0 million of our common stock, preferred stock, depository shares, warrants, units or debt securities.

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.

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.

Cash provided from financing activities was $865.7 million and $18.2 million for the three months ended March 31, 2021 and 2020, respectively.

Cash provided by financing activities during the three months ended March 31, 2021 resulted from the net proceeds of $895.6 million from our February 2021 issuance of $900 million of 1.50% Convertible Senior Notes after deducting debt issuance costs and proceeds of $22.3 million from the issuance of common stock through our equity compensation plans, partially offset by $52.0 million of Continuation Advances repaid to Illumina.

Cash provided by financing activities during the three months ended March 31, 2020 was due to $34.0 million of Continuation Advances from Illumina and proceeds of $0.2 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 upon the maturity of a credit facility agreement.

Issuance and Sale of 1.50% Convertible Senior Notes due February 15, 2028

On February 9, 2021, we entered into an investment agreement with SB Northstar LP (the “Purchaser”), a subsidiary of SoftBank Group Corp., relating to the issuance and sale to the Purchaser of $900 million in aggregate principal amount of the Company’s 1.50% Convertible Senior Notes due February 15, 2028 (the “Notes”).

The Notes were issued on February 16, 2021.

The Notes are governed by an indenture (the “Indenture”) between the Company and U.S.

Bank National Association, as trustee.

The Notes bear interest at a rate of 1.50% per annum.

Interest on the Notes is payable semi-annually in arrears on February 15 and August 15 commencing on August 15, 2021.

The Notes will mature on February 15, 2028, subject to earlier conversion, redemption or repurchase.

The Notes are convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by the Company.

The Notes are convertible into shares of the Company’s common stock based on an initial conversion rate of 22.9885 shares of common stock per $1,000 principal amount of the Notes (which is equal to an initial conversion price of $43.50 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions.

Upon conversion of the Notes, we may elect to settle such conversion obligation in shares, cash or a combination of shares and cash.

On or after February 20, 2026 and prior to the 31 st scheduled trading day immediately preceding the maturity date of the Notes, the Notes will be redeemable by the Company in the event that the closing sale price of the Company’s common stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides the redemption notice at a redemption price of 100% of the principal amount of such Notes, plus accrued and unpaid interest to, but excluding, the redemption date.

With certain exceptions, upon a change of control of the Company or the failure of the Company’s common stock to be listed on certain stock exchanges, the holders of the Notes may require that the Company repurchase all or part of the principal amount of the Notes at a purchase price of par plus unpaid interest to, but excluding, the maturity date.

The Indenture includes customary “events of default,” which may result in the acceleration of the maturity of the Notes under the Indenture.

The Indenture also includes customary covenants for convertible notes of this type.

Off-Balance Sheet Arrangements

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

As of March 31, 2021, 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 September 30, 2020.

No additional liability associated with such indemnification agreements has been recorded as of March 31, 2021.

Quantitative and Qualitative Disclosures About Market Risk

Except for the broad effects of COVID-19 and its negative impact on the global economy and financial markets, there have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2019.

There have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2020.

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