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 our recently completed Circulomics and Omniome acquisitions, 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 and clinical researchers resolve genetically complex problems. Our products address several applications based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, including human germline sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Across these applications, customers use our technology in a wide range of sequencing methods, including whole genome sequencing and de novo genome assembly, long-range phasing, targeted sequencing, full-length RNA and single-cell sequencing, methylation and epigenetic characterization, and others. Our technology provides high accuracy, long reads, uniform coverage, and the ability to detect epigenetic changes simultaneously. PacBio® sequencing systems, including consumables and software, offer a simple and fast end-to-end workflow for SMRT sequencing. In addition to our SMRT sequencing technology, we are developing a highly accurate short-read sequencing platform based on the novel Sequencing by Binding (SBB®) technology. Upon launch, we expect SBB to address adjacent applications and complement our existing long-read sequencing technology. Strategic Objectives We outlined the following strategic objectives for 2021:  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. We employed 44 quota-carrying field sales personnel as of September 30, 2021 and we expect to more than double our number of quota-carrying field sales personnel by the end of 2021 as compared to the 22 representatives 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. 28 Table of Contents 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 in January 2021 with Invitae Corporation (“Invitae”), a leader in medical genetic testing, we plan to develop a new platform with production-scale high-throughput capability to complement the other new products we already have in development. In addition, with our acquisition of Omniome, Inc. (“Omniome”), we expect to continue to invest in the development of a short-read sequencing platform. 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 significant, and could drive substantial revenue growth for the company. In addition to our collaboration with Invitae, who has the desire to sequence hundreds of thousands of genomes annually with our technology, we continue to pursue additional partnerships to further drive the adoption of whole-genome clinical sequencing. Recent Business Developments On January 12, 2021, we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae to develop a production-scale high-throughput sequencing platform that leverages the power of our highly accurate HiFi sequencing to expand Invitae’s whole genome testing capabilities. On February 16, 2021, we issued convertible senior notes to SB Northstar LP, a subsidiary of SoftBank Group Corp., pursuant to an investment agreement with SB Northstar LP, for $900 million at 1.50% interest rate, due February 15, 2028. On July 22, 2021, we acquired Circulomics Inc (“Circulomics”), a leader in high molecular weight DNA extraction to enable a path toward an end-to-end automated workflow. On September 20, 2021, we completed our acquisition of Omniome, a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy results, for total consideration transferred of $714.8 million. This amount consisted of approximately $315.7 million in cash, 8,911,580 shares of our common stock with a fair value of $249.4 million and contingent consideration with a fair value of $168.6 million. Out of the total payment, approximately $18.9 million, comprised of $7.4 million of cash, 226,811 shares of PacBio common stock with a fair value of $6.3 million and $5.2 million of contingent consideration, was accounted for as a one-time post acquisition stock-based compensation expense. On September 20, 2021, in connection with the acquisition of Omniome, we issued and sold 11,214,953 shares of common stock in a private placement transaction at a price of $26.75 per share, for aggregate proceeds of approximately $294.8 million, net of issuance costs of approximately $5.2 million. 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. However, 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 all developments surrounding 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 the global economic impact of the pandemic, 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. 29 Table of Contents 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. We evaluate our critical accounting policies and estimates on an ongoing basis. 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. All changes to critical accounting policies and estimates are discussed in Note 5, “Significant Accounting Policies” of the unaudited condensed consolidated financial statements. Results of Operations Comparison of the three months ended September 30, 2021 and 2020 Three Months Ended September 30, $ Change % Change (in thousands, except percentages) 2021 2020 (unaudited) Revenue: Product revenue $ 30,502 $ 15,749 $ 14,753 94% Service and other revenue 4,385 3,333 1,052 32% Total revenue 34,887 19,082 15,805 83% Cost of revenue: Cost of product revenue 15,530 9,228 6,302 68% Cost of service and other revenue 3,870 2,790 1,080 39% Amortization of intangible assets 123 — 123 100% Total cost of revenue 19,523 12,018 7,505 62% Gross profit 15,364 7,064 8,300 117% Operating expense: Research and development 27,508 16,467 11,041 67% Sales, general and administrative 31,606 14,772 16,834 114% Merger-related expenses 30,726 — 30,726 100% Total operating expense 89,840 31,239 58,601 188% Operating loss (74,476) (24,175) (50,301) (208%) Interest expense (3,673) — (3,673) (100%) Other income (expense), net (133) 467 (600) (128%) Loss before benefit from income taxes (78,282) (23,708) (54,574) (230%) Benefit from income taxes (94,824) — (94,824) (100%) Net income (loss) $ 16,542 $ (23,708) $ 40,250 170% Revenue Revenue increased $15.8 million, or 83%, to $34.9 million for the three months ended September 30, 2021 as compared to $19.1 million for the three months ended September 30, 2020, driven primarily by an increase in instrument and consumable revenue. Instrument revenue increased $8.2 million, or 106%, to $15.9 million for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, primarily due to an increase in the instruments sold. During the three months ended September 30, 2021, we placed 44 Sequel II and Sequel IIe systems compared to the 20 systems placed in the three months ended September 30, 2020. Consumables revenue increased $6.6 million, or 82%, to $14.6 million for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. The increase in our consumables revenue is primarily attributable to the growth in the instrument installed base. Instrument and consumables revenues were adversely impacted by customer site closures and lower utilization of the installed base of instruments due to the impact of the COVID-19 pandemic during the three months ended September 30, 2020. 30 Table of Contents Service and other revenue increased $1.1 million, or 32%, to $4.4 million for the three months ended September 30, 2021, primarily due to higher product maintenance agreements sold on the growing installed base. Cost of revenue, gross profit and gross margin Cost of product revenue increased by $6.3 million, or 68%, to $15.5 million for the three months ended September 30, 2021, compared to $9.2 million for the three months ended September 30, 2020. The increase in cost of product revenue was primarily due to higher sales. Cost of service and other revenue increased by $1.1 million, or 39%, to $3.9 million compared to $2.8 million for the three months ended September 30, 2020, primarily due to higher service volumes from our growing installed base and increased stock-based compensation expense. Gross profit increased $8.3 million, or 117%, to $15.4 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Gross margin was 44.0% for the three months ended September 30, 2021 compared to gross margin of 37.0% for the same period during 2020. The improved gross margin percentage was primarily due to higher volumes and increased factory utilization during the three months ended September 30, 2021, compared to the same period of 2020, which was adversely impacted by the impact of the COVID-19 pandemic. Research and Development Expense Research and development expense increased by $11.0 million, or 67%, to $27.5 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The increase was primarily driven by an increase of $7.5 million in personnel expenses, including $3.1 million in stock-based compensation expense due to increase in headcount, and an increase of $2.2 million in product development costs compared to the same period of 2020. Research and development expense included stock-based compensation expense of $5.2 million and $2.1 million during the three months ended September 30, 2021, and 2020, respectively. We expect research and development expenses to increase significantly in 2021, due to the acquisition of Omniome and our intent to continue to hire a significant number of additional personnel in research and development. We estimate costs associated with the Invitae collaboration to total approximately $20 million for 2021. Sales, General and Administrative Expense Sales, general and administrative expense increased by $16.8 million, or 114%, to $31.6 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The increase in sales, general and administrative expense was primarily attributable to a $14.8 million increase in compensation expense, including $7.7 million in stock-based compensation expense, and a $0.7 million increase in legal and other professional expenses during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in compensation expense is primarily due to increase in headcount, as well as planned personnel additions as we execute on our plan to more than double our quota-carrying sales representatives during 2021. Sa les, general and administrative expense included stock-based compensation expense of $9.9 million and $2.2 million during the three months ended September 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 acquisition of Omniome. Stock-based compensation included in sales, general, and administrative expense is expected to increase significantly in 2021. Merger-related expenses Merger-related expenses of $30.7 million during the three months ended September 30, 2021 consist of $11.8 million of transaction costs arising from the acquisitions of Omniome and Circulomics and $18.9 million of stock-based compensation expense resulting from the acceleration of certain equity awards in connection with the Omniome merger. We recognized $18.9 million of stock-based compensation expense for the acceleration that was not attributable to pre-combination services, consisting of $6.3 million that was settled in shares of our common stock, $7.4 million that was settled in cash and $5.2 million related to contingent consideration. Interest Expense Interest expense for the three months ended September 30, 2021 was $3.7 million compared to none in the same period in 2020, primarily due to $3.5 million of interest incurred on the $900 million of 1.50% Convertible Senior Notes due February 15, 2028 that we issued on February 16, 2021. 31 Table of Contents Benefit from Income Taxes A deferred income tax benefit of $94.8 million for the three and nine months ended September 30, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2021. 32 Table of Contents Comparison of the nine months ended September 30, 2021 and 2020 Nine Months Ended September 30, $ Change % Change (in thousands, except percentages) 2021 2020 (unaudited) Revenue: Product revenue $ 82,338 $ 41,798 $ 40,540 97% Service and other revenue 12,156 9,959 2,197 22% Total revenue 94,494 51,757 42,737 83% Cost of revenue: Cost of product revenue 41,449 22,874 18,575 81% Cost of service and other revenue 10,828 7,718 3,110 40% Amortization of intangible assets 123 — 123 100% Total cost of revenue 52,400 30,592 21,808 71% Gross profit 42,094 21,165 20,929 99% Operating expense: Research and development 70,323 46,727 23,596 50% Sales, general and administrative 86,804 54,846 31,958 58% Merger-related expenses 30,726 — 30,726 100% Total operating expense 187,853 101,573 86,280 85% Operating loss (145,759) (80,408) (65,351) (81%) Gain (loss) from Continuation Advances from Illumina (52,000) 34,000 (86,000) (253%) Interest expense (9,051) (267) (8,784) (3290%) Other income, net 92 1,143 (1,051) (92%) Loss before benefit from income taxes (206,718) (45,532) $ (161,186) (354%) Benefit from income taxes (94,824) — (94,824) (100%) Net loss $ (111,894) $ (45,532) $ (66,362) (146%) Revenue Revenue increased $42.7 million, or 83%, to $94.5 million for the nine months ended September 30, 2021, as compared to $51.8 million for the nine months ended 2020, driven primarily by an increase in instrument and consumable revenue. Instrument revenue increased $24.5 million, or 118%, to $45.1 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, due primarily to an increase in the instruments sold. During the nine months ended September 30, 2021 we placed 123 Sequel II/IIe systems compared to 54 for the nine months ended September 30, 2020. We expect the number of Sequel II/IIe placements to continue to grow during the remainder of 2021, reflecting our increased commercial presence and customer demand. Consumables revenue increased $16.1 million, or 76%, to $37.2 million for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. 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 nine months ended September 30, 2020. Service and other revenue increased $2.2 million, or 22%, to $12.2 million for the nine months ended September 30, 2021, due primarily to a higher number of product maintenance agreements sold on our growing installed base. Cost of revenue, gross profit, and gross margin Cost of product revenue increased $18.6 million, or 81%, to $41.4 million for the nine months ended September 30, 2021, compared to $22.9 million for the nine months ended September 30, 2021. The increase in cost of product revenue was primarily due to higher sales. Cost of service and other revenue increased $3.1 million, or 40%, to $10.8 million for the nine-months ended September 30, 2021, compared to $7.7 million for the nine months ended September 30, 2020, due primarily to higher service volumes due to the growing installed base and increased stock-based compensation expense. 33 Table of Contents Gross profit increased $20.9 million, or 99%, to $42.1 million for the nine-month period ended September 30, 2021 compared to the nine months ended September 30, 2020. Gross margin was 44.5%, for the nine months ended September 30, 2021, compared to gross margin of 40.9% for the nine months ended September 30, 2020. The improved gross margin percentage was primarily due to higher sales volumes and increased factory utilization during the nine months ended September 30, 2021, compared to the same period of 2020, which was adversely impacted by the impact of the COVID-19 pandemic. Research and Development Expense Research and development expense increased by $23.6 million, or 50%, to $70.3 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase in research and development expense was primarily driven by an increase of $14.8 million in personnel expenses, including $7.2 million in stock-based compensation expense, and an increase of $6.1 million in product development costs compared to the same period of 2020. Research and development expense included stock-based compensation expense of $12.5 million and $5.3 million during the nine months ended September 30, 2021 and 2020, respectively. We expect research and development expenses to continue to grow in 2021, due to the acquisition of Omniome and our intent to hire a significant number of additional personnel in research and development. We estimate costs associated with the Invitae collaboration to total approximately $20 million for 2021. Sales, General and Administrative Expense Sales, general and administrative expense increased by $32.0 million, or 58%, to $86.8 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase in sales, general and administrative expense was primarily attributable to an increase of $38.4 million in compensation expense, including $20.3 million in stock-based compensation expense, partially offset by a $6.0 million financial advisory fee during the nine months ended September 30, 2020 related to the terminated merger with Illumina. The increase in compensation expense is primarily attributable to executive hiring related to senior management transitions during the second half of 2020 and first half of 2021, as well as planned personnel additions as we execute on our plan to more than double our quota-carrying sales representatives during 2021. During the nine months ended September 30, 2021, we added 22 quota-carrying sales representatives, bringing our total to 44. Sales, general and administrative expense included stock-based compensation expense of $25.6 million and $5.2 million during the nine-month periods ended September 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 acquisition of Omniome. Merger-related expenses Merger-related expenses of $30.7 million during the nine months ended September 30, 2021 consist of $11.8 million of transaction costs arising from the acquisitions of Omniome and Circulomics and $18.9 million of stock-based compensation expense resulting from the acquisition of Omniome. We recognized $18.9 million of stock-based compensation expense for the acceleration that was not attributable to pre-combination services, consisting of $6.3 million that was settled in shares of our common stock, $7.4 million that was settled in cash and $5.2 million related to contingent consideration. 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 nine months ended September 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 Income (Loss) for the nine months ended September 30, 2021. 34 Table of Contents Interest Expense Interest expense for the nine m onths ended September 30, 2021, increased by $8.8 million compared to the same period in 2020, primarily due to $8.8 million of interest incurred on the $900 million of 1.50% Convertible Senior Notes that were issued February 16, 2021. Benefit from Income Taxes A deferred income tax benefit of $94.8 million for the three and nine months ended September 30, 2021, is related to the release of the valuation allowance for deferred tax assets due to the recognition of deferred tax liabilities in connection with the Omniome and Circulomics acquisitions. We maintain a full valuation allowance on the net deferred tax assets of our U.S. entities as we have concluded that it is more likely than not that we will not realize our deferred tax assets. Accordingly, this benefit from income taxes is reflected on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2021. Liquidity and Capital Resources Liquidity As of September 30, 2021, we had $1.08 billion in cash, cash equivalents and investments, 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 and $300 million of common stock in a private placement. This increase was partially offset by the payment of $319.8 million, net of cash acquired, in the acquisitions of Omniome and Circulomics in the third quarter of 2021 and 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 in “—Results of Operations” above, and as a result, we may require additional capital resources to execute on our strategic initiatives to grow our business. 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, 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 used $79.5 million of cash in operating activities for the nine months ended September 30, 2021, compared to cash provided by operating activities of $33.8 million for the same period in 2020. Cash used in operating activities for the nine months ended September 30, 2021 was due primarily to a $111.9 million net loss, which includes a $94.8 million deferred income tax benefit, that was 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 $54.4 million and depreciation of $4.9 million and a net cash inflow from changes in operating assets and liabilities of $9.8 million. The change in net operating assets and liabilities was primarily attributable to increases of $17.9 million in deferred revenue and $10.3 million in accrued expenses, partially offset by an increase of $5.5 million in inventory, an increase of $6.9 million in accounts receivable, a decrease of $3.2 million in operating lease liabilities and a decrease of $3.0 million in other liabilities. 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. 35 Table of Contents Investing Activities Our investing activities consist primarily of business acquisitions, capital expenditures and investment purchases, sales and maturities. We used $744.3 million of cash for investing activities for the nine months ended September 30, 2021, compared to $120.8 million for the same period in 2020. Cash used in investing activities for the nine months ended September 30, 2021 was due primarily to net purchases of investments of $421.4 million, cash paid, net of cash acquired, of $319.8 million for the acquisitions of Omniome and Circulomics and purchases of property and equipment of $3.1 million. 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. Financing Activities Cash provided by financing activities was $1.17 billion and $126.0 million for the nine months ended September 30, 2021 and 2020, respectively. Cash provided by financing activities during the nine months ended September 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, net proceeds of $294.8 million from our September 2021 private placement of common stock after deducting issuance costs and proceeds of $30.1 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 nine months ended September 30, 2020 consisted of 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 received 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 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 transaction closed on September 20, 2021. We registered the private placement shares for resale with the SEC following the closing of the merger. Issuance and Sale of 1.50% Convertible Senior Notes due February 15, 2028 On February 16, 2021, we issued convertible senior notes to SB Northstar LP, a subsidiary of SoftBank Group Corp., pursuant to an investment agreement with SB Northstar LP, for $900 million at 1.50% interest rate, due February 15, 2028. 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 and commenced 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 our 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 our 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 we provide the redemption notice at a redemption price of 100% of the principal amount of such Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. 36 Table of Contents With certain exceptions, upon a change of control of the Company or the failure of our common stock to be listed on certain stock exchanges, the holders of the Notes may require that we repurchase all or part of the principal amount of the Notes at a purchase price of par plus unpaid interest up 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, 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 9 . 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, 2021.