PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-Q

Item 2. 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 condensed consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q and those in our Annual Report on Form 10-K for the year ended December 31, 2020. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including statements related to our expectations regarding the potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, expectations regarding sales of products in future periods that reflect increased commercial presence and customer demand, expectations regarding the impact of the Circulomics acquisition and Omniome transaction, and information with respect to our products, plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties, including statements regarding our expected financial results in future periods. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. You should read the “Risk Factors” section of this Quarterly Report on Form 10-Q 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. We do not assume any obligation to update any forward-looking statements. Business Overview 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. 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 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. 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. 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 Chairman of the Board Dr. John F. 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. Our Vice President and Chief Accounting Officer, Michele Farmer, was appointed effective May 17, 2021. 24 Table of Contents 2021 Strategic Objectives For 2021, we have outlined three strategic objectives:  Expand our commercial reach;  Accelerate our product development pipeline; and  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 are 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. Acquisition of Omniome, Inc. On July 19, 2021, we entered into an Agreement and Plan of Merger and Plan of Reorganization (the “Omniome Merger Agreement”) with Omniome, Inc. (“Omniome”), Apollo Acquisition Corp, a wholly owned subsidiary of ours (“Omniome Merger Sub I”), Apollo Acquisition Sub, LLC, a wholly owned subsidiary of ours (“Omniome Merger Sub II” and together with Omniome Merger Sub I, the “Omniome Merger Subs”), and Shareholder Representative Services, LLC, as securityholder representative. Omniome is a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy. Pursuant to the Omniome Merger Agreement, we agreed to acquire all of the outstanding equity interests of Omniome, with Omniome becoming a wholly owned subsidiary of ours (the “Omniome Merger”). Omniome’s stockholders approved the Omniome Merger. No approval of our stockholders is required to consummate the Omniome Merger. Subject to the terms and conditions of the Omniome Merger Agreement, at the effective time of the Omniome Merger, holders of Omniome’s outstanding equity interests will be entitled to receive approximately $600 million (composed of approximately 9.4 million shares of our common stock and $300 million in cash). Subject to the terms of the Omniome Merger Agreement and the achievement of a specified milestone, holders of Omniome’s outstanding equity interests will also be entitled to receive $200 million (composed of $100 million in cash and the rest in shares of our common stock). All amounts are subject to adjustment as specified in the Omniome Merger Agreement. As part of the Merger, we will assume certain of Omniome’s unvested stock options. Pursuant to the Omniome Merger Agreement, we will be required to register the equity portion of the merger consideration for resale with the SEC following the closing of the Merger. The closing of the Omniome Merger is subject to the satisfaction of customary conditions, including, among others: (1) the accuracy of representations and warranties of, and performance of covenants by, the other party (in each case, subject to certain qualifications, if applicable), (2) the absence of a continuing material adverse effect, (3) the absence of any law or order restraining, enjoining or otherwise prohibiting the Omniome Merger; and (4) the expiration or termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company, Omniome, and the Omniome Merger Subs have made customary representations, warranties, and covenants in the Omniome Merger Agreement, including, among other things, covenants with respect to the conduct of 25 Table of Contents Omniome’s business during the period between the execution of the Omniome Merger Agreement and consummation of the Omniome Merger. The Omniome Merger Agreement contains customary termination rights for both the Company and Omniome including, but not limited to, (1) in the event that the Omniome Merger has not been consummated on or prior to December 16, 2021, (2) the parties’ mutual written agreement to terminate the Omniome Merger Agreement, or (3) a material breach by one party, which breach cannot be cured within 20 calendar days, entitling the non-breaching party to not consummate its closing conditions under the Omniome Merger Agreement. 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 us to develop products relating to production-scale high-throughput sequencing (“Program Products”). Subject to completion of the Omniome Merger, we intend to expand the Development Agreement to include the sequencing technology developed by Omniome. If and when Program Products become commercially available for sale, Invitae may purchase the Program Products. 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 us will equal certain development costs we incur 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 we are 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, our 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 we are 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. 26 Table of Contents All amounts received from Invitae will be initially deferred and accumulated in non-current deferred revenue. As of June 30, 2021, we have $8.7 million of non-current deferred revenue on the Condensed Consolidated Balance Sheet related to payments received from Invitae. 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. 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. A significant number of our customer sites that shut down due to COVID-19 have now re-opened. A significant number of customers delayed 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. In response to local stay-at-home orders and in alignment with CDC recommendations, we have limited our manufacturing and commercial operations based in Menlo Park, California. We will, however, continue to provide consumables, instruments and support to scientists at government, academic, and commercial labs that remain open. To aid in containing the spread of COVID-19, we have implemented remote-work options and are limiting employee travel as much as possible. We are monitoring this rapidly evolving situation, including regarding the Delta variant of COVID-19. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future. Specifically, difficult macroeconomic conditions, decreases in discretionary capital spending, increased and prolonged unemployment or a decline in consumer confidence as a result of the COVID-19 pandemic could have a continuing adverse effect on the demand for some of our products. Such economic disruption could have a material adverse effect on our business, results of operations and liquidity. The degree of impact of COVID-19 on our business will depend on several factors, such as the duration and the extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business. Critical Accounting Policies and Estimates 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. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 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 . 27 Table of Contents Results of Operations Comparison of the three months ended June 30, 2021 and 2020 Three Months Ended June 30, $ Change % Change (in thousands, except percentages) 2021 2020 (unaudited) Revenue: Product revenue $ 26,533 $ 13,756 $ 12,777 93% Service and other revenue 4,077 3,321 756 23% Total revenue 30,610 17,077 13,533 79% Cost of Revenue: Cost of product revenue 13,222 8,225 4,997 61% Cost of service and other revenue 3,635 2,239 1,396 62% Total cost of revenue 16,857 10,464 6,393 61% Gross profit 13,753 6,613 7,140 108% Operating Expense: Research and development 22,266 15,010 7,256 48% Sales, general and administrative 29,060 15,127 13,933 92% Total operating expense 51,326 30,137 21,189 70% Operating loss (37,573) (23,524) (14,049) (60%) Interest expense (3,589) — (3,589) N/A Other income, net 161 438 (277) (63%) Net loss $ (41,001) $ (23,086) $ (17,915) (78%) Revenue Total revenue for the three months ended June 30, 2021 was $30.6 million compared to $17.1 million for the same period during 2020. Product revenue of $26.5 million for the three months ended June 30, 2021 consisted of approximately $14.3 million from instrument revenue and $12.2 million from consumables revenue, compared to total product revenue of $13.8 million for the same period during 2020, consisting of approximately $8.9 million from instrument revenue and $4.9 million of consumables revenue. The increase in instrument sales was primarily attributable to a higher number of instrument shipments and installations, as we placed 38 Sequel II/IIe systems during the three months ended June 30, 2021 compared to 23 for the same period of 2020. We expect the number of Sequel II/IIe placements to continue to grow during the second half of 2021 relative to the first half, reflecting our increased commercial presence and customer demand. The increase in consumable sales was primarily attributable to higher Sequel II/IIe consumables sales as the installed base of Sequel II/IIe systems has grown, as well as lower utilization of the installed base of instruments due to the impact of the COVID-19 pandemic during the three months ended June 30, 2020. Service and other revenue of $4.1 million and $3.3 million for the three months ended June 30, 2021 and 2020, respectively, was primarily derived from product maintenance agreements sold on our installed instruments. Service revenue has grown as our installed base of Sequel II/IIe systems has grown. Gross Profit Gross profit for the three months ended June 30, 2021 was $13.8 million, resulting in a gross margin of 44.9%, compared to gross profit of $6.6 million for the same period during 2020, resulting in a gross margin of 38.7%. The improved gross margin percentage was primarily due to higher volumes and increased factory utilization during the three months ended June 30, 2021, compared to the same period of 2020. Cost of product revenue was $13.2 million for the three months ended June 30, 2021, compared to $8.2 million for the same period during 2020. The increase of $5.0 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 June 30, 2021 increased to $3.6 million, compared to $2.2 million for the same period during 2020, due primarily to higher service volumes and increased stock-based compensation expense. 28 Table of Contents Research and Development Expense During the three months ended June 30, 2021, research and development expense increased by $7.3 million, or 48%, compared to the same period during 2020. The increase in research and development expense was primarily driven by an increase of $4.0 million in compensation expenses due primarily to planned personnel additions during 2021, and an increase of $2.4 million in product development costs. Research and development expense included stock-based compensation expense of $4.3 million and $1.4 million during the three months ended June 30, 2021 and 2020, respectively. We expect research and development expenses to increase significantly in 2021, as we intend to hire a significant number of additional personnel in research and development. We estimate costs associated with the Invitae collaboration to total between $20 million and $25 million for 2021. Stock-based compensation included in research and development expense is expected to increase significantly in 2021. Research and development costs will also significantly increase following the closing of the Omniome Merger. Sales, General and Administrative Expense During the three months ended June 30, 2021, sales, general and administrative expense increased by $13.9 million, or 92%, compared to the same period during 2020. The increase in sales, general and administrative expense was primarily attributable to a $12.1 million increase in compensation expense and a $0.9 million increase in legal and other professional expenses during the three months ended June 30, 2021 compared to the same period of 2020. The increase in compensation expense is primarily attributable to executive hiring related to senior management transitions during the second half of 2020 and early 2021, as well as planned personnel additions as we execute on our plan to more than double quota-carrying sales representatives during 2021. During the three months ended June 30, 2021, we added 11 quota-carrying sales representatives, bringing the total to 39. Sa les, general and administrative expense included stock-based compensation expense of $9.6 million and $1.3 million during the three months ended June 30, 2021 and 2020, respectively. Sales, general and administrative expense is planned to increase significantly in 2021, as we expect to more than double our quota-carrying sales representatives, increase headcount as part of our business expansion and incur incremental costs in connection with the planned acquisition of Omniome. Stock-based compensation included in sales, general, and administrative expense is expected to increase significantly in 2021. Interest Expense Interest expense for the three months ended June 30, 2021 was $3.6 million compared to none in the same period in 2020, due to interest incurred on the $900 million of 1.50% Convertible Senior Notes that were issued on February 16, 2021. 29 Table of Contents Comparison of the six months ended June 30, 2021 and 2020 Six Months Ended June 30, $ Change % Change (in thousands, except percentages) 2021 2020 (unaudited) Revenue: Product revenue $ 51,836 $ 26,049 $ 25,787 99% Service and other revenue 7,771 6,626 1,145 17% Total revenue 59,607 32,675 26,932 82% Cost of Revenue: Cost of product revenue 25,919 13,646 12,273 90% Cost of service and other revenue 6,958 4,928 2,030 41% Total cost of revenue 32,877 18,574 14,303 77% Gross profit 26,730 14,101 12,629 90% Operating Expense: Research and development 42,815 30,260 12,555 41% Sales, general and administrative 55,198 40,074 15,124 38% Total operating expense 98,013 70,334 27,679 39% Operating loss (71,283) (56,233) (15,050) (27%) Gain (loss) from Continuation Advances from Illumina (52,000) 34,000 (86,000) (253%) Interest expense (5,378) (267) (5,111) (1914%) Other income, net 225 676 (451) (67%) Net loss $ (128,436) $ (21,824) $ (106,612) (489%) Revenue Total revenue for the six months ended June 30, 2021 was $59.6 million, compared to $32.7 million for the same period during 2020. Product revenue of $51.8 million for the six months ended June 30, 2021 consisted of approximately $29.2 million from instrument revenue and $22.6 million from consumables revenue, compared to total product revenue of $26.0 million for the same period during 2020, consisting of approximately $13.0 million from instrument revenue and $13.0 million of consumables revenue. The increase in instrument sales was primarily attributable to a higher number of instrument shipments and installations, as we placed 79 Sequel II/IIe systems during the six months ended June 30, 2021 compared to 34 for the same period of 2020. We expect the number of Sequel II/IIe placements to continue to grow during the second half of 2021 relative to the first half, reflecting our increased commercial presence and customer demand. The increase in consumable sales was primarily attributable to higher Sequel II/IIe consumables sales as the installed base of Sequel II/IIe systems has grown, as well as lower utilization of the installed base of instruments due to the impact of the COVID-19 pandemic during the six months ended June 30, 2020. Service and other revenue of $7.8 million and $6.6 million for the six months ended June 30, 2021 and 2020, respectively, was primarily derived from instrument maintenance agreements. Gross Profit Gross profit for the six-month period ended June 30, 2021 was $26.7 million, resulting in a gross margin of 44.8%, compared to gross profit of $14.1 million, resulting in a gross margin of 43.2% for the same period during 2020. The improved gross margin percentage was primarily due to higher volumes and increased factory utilization during the six months ended June 30, 2021, compared to the same period of 2020. Cost of product revenue was $25.9 million for the six months ended June 30, 2021, compared to cost of product revenue of $13.6 million for the same period during 2020. The increase of $12.2 million in cost of product revenue was primarily due to increased product shipments as described above. Cost of service and other revenue for the six-month period ended June 30, 2021 increased to $7.0 million, compared to $4.9 million for the same period during 2020, due primarily to higher service volumes and increased stock-based compensation expense. 30 Table of Contents Research and Development Expense During the six months ended June 30, 2021, research and development expense increased by $12.6 million, or 41%, compared to the same period during 2020. The increase in research and development expense was primarily driven by an increase of $7.3 million in compensation expenses due primarily to planned personnel additions during 2021, and an increase of $4.0 million in product development costs. Research and development expense included stock-based compensation expense of $7.4 million and $3.2 million during the six months ended June 30, 2021 and 2020, respectively. We expect research and development expenses to increase significantly in 2021, as we intend to hire a significant number of additional personnel in research and development. We estimate costs associated with the Invitae collaboration to total between $20 million and $25 million for 2021. Stock-based compensation included in research and development expense is expected to increase significantly in 2021. Research and development costs will also significantly increase following the closing of the Omniome Merger. Sales, General and Administrative Expense During the six months ended June 30, 2021, sales, general and administrative expense increased by $15.1 million, or 38%, compared to the same period during 2020. The increase in sales, general and administrative expense was primarily attributable to an increase of $23.6 million in compensation expense, partially offset by a $6.0 million financial advisory fee during the six months ended June 30, 2020 related to the terminated merger with Illumina and $3.1 million in lower legal and other professional expenses during the six months ended June 30, 2021 compared to the same period of 2020. The increase in compensation expense is primarily attributable to executive hiring related to senior management transitions during the second half of 2020 and early 2021, as well as planned personnel additions as we execute on our plan to more than double quota-carrying sales representatives during 2021. During the six months ended June 30, 2021, we added 17 quota-carrying sales representatives, bringing the total to 39. Sales, general and administrative expense included stock-based compensation expense of $15.7 million and $3.1 million during the six-month periods ended June 30, 2021 and 2020, respectively. Sales, general and administrative expense is planned to increase significantly in 2021, as we expect to more than double our quota-carrying sales representatives, increase headcount as part of our business expansion and incur incremental costs in connection with the planned acquisition of Omniome. Stock-based compensation included in sales, general, and administrative expense is expected to increase significantly in 2021. 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 loss for the six months ended June 30, 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 loss for the six months ended June 30, 2021. Interest Expense Interest expense for the six m onths ended June 30, 2021 increased by $5.1 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. 31 Table of Contents Liquidity and Capital Resources Liquidity Cash, cash equivalents and investments at June 30, 2021 totaled $1.14 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. For example, on July 19, 2021, we entered into a purchase agreement for approximately $300 million of shares of our common stock, conditioned upon, among other customary closing conditions, the closing of the Omniome Merger. 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 June 30, 2021. 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; 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; acquisitions of complementary businesses, technologies or assets; and other factors. 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 $38.8 million of cash used in operating activities for the six months ended June 30, 2021, compared to cash provided by operating activities of $51.6 million for the same period in 2020. Cash used in operating activities for the six months ended June 30, 2021 was due primarily to a $128.4 million net loss, partially offset by a loss of $52.0 million from Continuation Advances repaid to Illumina that is considered a financing activity, non-cash items such as stock-based compensation of $26.0 million and depreciation of $3.2 million and a net change in operating assets and liabilities of $4.9 million. The change in net operating assets and liabilities was primarily attributable to increases of $9.4 million in deferred revenue and $5.6 million in accrued expenses, partially offset by increases of $5.0 million in inventory and $3.1 million in accounts receivable and a decrease of $2.1 million in operating lease liabilities. Cash provided by operating activities for the six months ended June 30, 2020 was due to the $98.0 million Reverse Termination Fee received from Illumina, non-cash items such as stock-based compensation of $7.3 million and depreciation of $3.2 million, partially offset by a net loss of $21.8 million and a gain from Continuation Advances from Illumina of $34.0 million, which is considered to be a financing activity. The change in net operating assets and liabilities was primarily attributed to a decrease of $3.9 million in accounts receivable, an increase of other liabilities of 2.0 million primarily relating to employee contributions for the Employee Stock Purchase Plan, partially offset by an increase of $3.8 million in inventory. Investing Activities Our investing activities consist primarily of capital expenditures and investment purchases, sales and maturities. We used $452.6 million of cash for investing activities for the six months ended June 30, 2021, compared to $57.2 million for the same period in 2020. Cash used in investing activities for the six months ended June 30, 2021 was due primarily to net purchases of investments of $450.7 million and purchases of property and equipment of $2.0 million. Cash used in investing activities for the six months ended June 30, 2020 was due primarily to net purchases of investments of $56.8 million and purchases of property and equipment of $0.4 million. 32 Table of Contents Financing Activities Cash provided by financing activities was $868.6 million and $18.8 million for the six months ended June 30, 2021 and 2020, respectively. Cash provided by financing activities during the six months ended June 30, 2021 resulted from the net proceeds of $895.5 million from our February 2021 issuance of $900 million of 1.50% Convertible Senior Notes after deducting debt issuance costs and proceeds of $25.3 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 six months ended June 30, 2020 was due to $34.0 million of Continuation Advances received from Illumina and proceeds of $0.8 million from the issuance of common stock through our equity compensation plans, partially offset by $16.0 million we repaid for the remaining outstanding principal upon the maturity of a credit facility agreement. Private Placement of Common Stock On July 19, 2021, we entered into a purchase agreement with certain qualified institutional buyers and institutional accredited investors, pursuant to which we agreed to sell an aggregate of 11,214,953 shares of common stock, at a price of $26.75 per share, for aggregate gross proceeds of approximately $300 million. The closing is conditioned upon, among other customary closing conditions, the closing of the Omniome Merger. 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. 33 Table of Contents Off-Balance Sheet Arrangements As of June 30, 2021, 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 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 us and such third parties in connection with such fundraising efforts. To the extent that such indemnification obligations apply to the lawsuits described in Note 8 . Commitments and Contingencies in Part I, Item 1 of this Form 10-Q, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification agreements has been recorded as of June 30, 2021. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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.