Pacific Biosciences of California
PACIFIC BIOSCIENCES OF CALIFORNIA, INC. (Form: 10-Q, Received: 08/02/2017 16:20:37)

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30 , 2017

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 001-34899

 

Pacific Biosciences of California, Inc.

(Exact name of registrant as specified in its charter)

 

 



 

Delaware

16-1590339

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)



 

13 05 O’Brien Drive

Menlo Park, CA 94025

94025

(Address of principal executive offices)

(Zip Code)

(650) 521-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 



 

 

 



 

 

 

Large accelerated filer

Accelerated filer   



 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company



 

 

 



 

Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 




 

Table of Contents

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  



Number of shares outstanding of the issuer’s common stock as of July 31 , 2017 :   115,591,469    

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TABLE O F CONTENTS







 



PAGE N o .



 

PART I  - FINANCIAL INFORMATION

 



 

 Item 1. Financial Statements (unaudited):

 



 

 Condensed Consolidated Balance Sheets as of June 30 , 2017 and December 31, 201 6  



 

 Condensed Consolidated Statements of Operations and Comprehensive L oss for the Three-   and Six- Month Periods Ended June 30 , 2017 and 201 6  



 

 Condensed Consolidated Statements of Cash Flows for the Six - Month Periods Ended June 30 , 2017 and 201 6  



 

 Notes to Condensed Consolidated Financial Statements  



 

 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

19 



 

 Item 3. Quantitative and Qualitative Disclosures About Market Risk  

28 



 

 Item 4. Controls and Procedures  

28 



 

PART II. OTHER INFORMATION

 



 

 Item 1. Legal Proceedings  

29 



 

 Item 1A. Risk Factors  

30 



 

 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

48 



 

 Item 3. Default Upon Senior Securities  

48 



 

 Item 4. Mine Safety Disclosures  

48 



 

 Item 5. Other Information  

48 



 

 Item 6. Exhibits  

48 



 



 

 EXHIBIT INDEX  

50 







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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Balance Sheets

(Unaudited)







 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,

(in thousands, except per share amounts)

2017

 

2016

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

36,478 

 

$

16,765 

Investments

 

66,118 

 

 

55,213 

Accounts receivable

 

9,525 

 

 

11,421 

Inventory

 

17,266 

 

 

15,634 

Prepaid expenses and other current assets

 

3,545 

 

 

9,978 

Total current assets

 

132,932 

 

 

109,011 

Property and equipment, net

 

40,289 

 

 

14,560 

Long-term restricted cash

 

4,500 

 

 

4,500 

Other long-term assets

 

184 

 

 

9,813 

Total assets

$

177,905 

 

$

137,884 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

6,514 

 

$

8,359 

Accrued expenses

 

17,840 

 

 

16,604 

Deferred service revenue, current

 

6,782 

 

 

7,130 

Other liabilities, current

 

1,915 

 

 

1,681 

Notes payable, current

 

2,643 

 

 

 —

Total current liabilities

 

35,694 

 

 

33,774 

Deferred service revenue, non-current

 

1,296 

 

 

1,297 

Deferred rent, non-current

 

14,599 

 

 

19 

Other liabilities, non-current

 

 —

 

 

1,664 

Notes payable, non-current

 

10,441 

 

 

16,106 

Financing derivative

 

15 

 

 

356 

Total liabilities

 

62,045 

 

 

53,216 



 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 



 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred Stock, $0.001 par value:

 

 

 

 

 

Authorized 50,000 shares; No shares issued or outstanding

 

 —

 

 

 —

Common Stock, $0.001 par value:

 

 

 

 

 

Authorized 1,000,000 shares; Issued and outstanding 115,562 and 92,677 shares at June 30, 2017 and December 31, 2016, respectively

 

116 

 

 

93 

Additional paid-in-capital

 

952,710 

 

 

872,114 

Accumulated other comprehensive income (loss)

 

(16)

 

 

Accumulated deficit

 

(836,950)

 

 

(787,544)

Total stockholders’ equity

 

115,860 

 

 

84,668 

Total liabilities and stockholders’ equity

$

177,905 

 

$

137,884 

See accompanying notes to the condensed consolidated financial statements.

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Operations and Comprehensive L oss

(Unaudited)











 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Month Periods Ended June 30,

 

Six-Month Periods Ended June 30,

(in thousands, except per share amounts)

2017

 

2016

 

2017

 

2016

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product revenue

$

16,548 

 

$

13,587 

 

$

37,842 

 

$

25,966 

Service and other revenue

 

3,525 

 

 

3,564 

 

 

7,146 

 

 

6,716 

Contractual revenue

 

 —

 

 

3,596 

 

 

 —

 

 

7,192 

Total revenue

 

20,073 

 

 

20,747 

 

 

44,988 

 

 

39,874 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

8,155 

 

 

7,115 

 

 

19,517 

 

 

13,995 

Cost of service and other revenue

 

3,917 

 

 

2,988 

 

 

8,533 

 

 

5,731 

Total cost of revenue

 

12,072 

 

 

10,103 

 

 

28,050 

 

 

19,726 

Gross profit

 

8,001 

 

 

10,644 

 

 

16,938 

 

 

20,148 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

16,883 

 

 

17,522 

 

 

33,854 

 

 

33,883 

Sales, general and administrative

 

15,505 

 

 

11,192 

 

 

30,770 

 

 

22,900 

Total operating expense

 

32,388 

 

 

28,714 

 

 

64,624 

 

 

56,783 

Operating loss

 

(24,387)

 

 

(18,070)

 

 

(47,686)

 

 

(36,635)

Interest expense

 

(826)

 

 

(795)

 

 

(1,664)

 

 

(1,574)

Other income (expense), net

 

(326)

 

 

366 

 

 

(56)

 

 

358 

Net loss

 

(25,539)

 

 

(18,499)

 

 

(49,406)

 

 

(37,851)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

(13)

 

 

11 

 

 

(21)

 

 

59 

Comprehensive loss

$

(25,552)

 

$

(18,488)

 

$

(49,427)

 

$

(37,792)



 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

$

(0.26)

 

$

(0.21)

 

$

(0.52)

 

$

(0.44)

Shares used in computing basic and diluted net loss per share

 

97,360 

 

 

88,148 

 

 

95,177 

 

 

85,876 



 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to the condensed consolidated financial statements.



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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)









 

 

 

 

 



 

 

 

 

 



Six-Month Periods Ended June 30,

(in thousands)

2017

 

2016

Cash flows from operating activities

 

 

 

 

 

Net loss

$

(49,406)

 

$

(37,851)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

Depreciation

 

4,839 

 

 

1,823 

Amortization of debt discount and financing costs

 

652 

 

 

548 

(Gain) Loss from derivative

 

485 

 

 

(336)

Stock-based compensation

 

9,994 

 

 

9,619 

Other items

 

87 

 

 

154 

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

1,896 

 

 

(5,182)

Inventory

 

(2,240)

 

 

(4,491)

Prepaid expenses and other assets

 

6,368 

 

 

1,004 

Accounts payable

 

(1,944)

 

 

683 

Accrued expenses

 

(2,266)

 

 

778 

Deferred service revenue

 

(349)

 

 

(36)

Deferred contractual revenue

 

 —

 

 

(7,192)

Other liabilities

 

2,404 

 

 

1,327 

Net cash used in operating activities

 

(29,480)

 

 

(39,152)

Cash flows from investing activities

 

 

 

 

 

Purchase of property and equipment

 

(6,116)

 

 

(3,255)

Disposal of property and equipment

 

12 

 

 

10 

Purchase of investments

 

(61,181)

 

 

(64,572)

Sales of investments

 

3,662 

 

 

13,334 

Maturities of investments

 

46,511 

 

 

22,082 

Net cash used in investing activities

 

(17,112)

 

 

(32,401)

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock from equity plans

 

6,231 

 

 

4,502 

Notes payable principal paying off

 

(4,500)

 

 

 —

Proceeds from issuance of common stock from at-the-market equity offering, net of issuance costs

 

11,865 

 

 

58,200 

Proceeds from issuance of common stock from underwritten public equity offering, net of issue costs

 

52,709 

 

 

 —

Net cash provided by financing activities

 

66,305 

 

 

62,702 

Net increase (decrease) in cash and cash equivalents

 

19,713 

 

 

(8,851)

Cash and cash equivalents at beginning of period

 

16,765 

 

 

33,629 

Cash and cash equivalents at end of period

$

36,478 

 

$

24,778 



 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

Changes in deposits for property and equipment paid in prior period

$

9,694 

 

$

 —

Property and equipment paid by landlord

$

12,600 

 

$

 —

Changes in unpaid Property and equipment

$

3,323 

 

$

37 

Property and equipment returned to landlord

$

1,854 

 

$

 —

Inventory transferred to property and equipment

$

608 

 

$

1,245 



See accompanying notes to the condensed consolidated financial statements.

 

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. 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 and find novel genes; targeted sequencing to more comprehensively characterize genetic variations; and DNA base modification identification to help characterize epigenetic regulation and DNA damage. Our technology combines very high consensus accuracy and long read lengths with the ability to detect real-time kinetic information.

In September 2015, we announced that we had launched a new nucleic acid sequencing platform, the PacBio Sequel ® ™ System (the “Sequel System”), which will provide higher throughput, more scalability, a reduced footprint and lower sequencing project costs compared to the PacBio ® RS II System, while maintaining the existing benefits of our SMRT Technology.

The names “Pacific Biosciences,” “PacBio,” “SMRT,” “SMRTbell,” “Sequel” and our logo are our trademarks.



NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, as set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. The consolidated financial statements include the accounts of Pacific Biosciences and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. Translation adjustments resulting from translating foreign subsidiaries’ results of operations and assets and liabilities into U.S. dollars are immaterial for all periods presented.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. Our estimates include, but are not limited to, the valuation of inventory, revenue valuation, the valuation of a financing derivative and long-term notes, the valuation and recognition of share-based compensation, the delivery period for collaboration agreements, the useful lives assigned to long-lived assets, and the computation provisions for income taxes. Actual results could differ materially from these estimates.

During the first and second quarter of 2017, we recorded   a charge to cost of revenue of $1.3 million and $0.3 million, respectively, relating to leased RS II instruments primarily due to a change in the estimated useful life of these instruments.

Fair Value of Financial Instruments

The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities. The carrying value of our other liabilities, non-current, approximates fair value due to the time to maturity and prevailing market rates.

The fair value hierarchy established under U.S. GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are as follows:

 

 

 

Level 1: quoted prices in active markets for identical assets or liabilities;

 

 

 

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

 

 

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions

7

 


 

for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.

We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of  June 30 , 2017 and December 31, 2016 respectively (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



June 30, 2017

 

December 31, 2016

(in thousands)

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

$

17,160 

 

$

 —

 

$

 —

 

$

17,160 

 

$

14,516 

 

$

 —

 

$

 —

 

$

14,516 

Commercial paper

 

 —

 

 

19,318 

 

 

 —

 

 

19,318 

 

 

 —

 

 

2,249 

 

 

 —

 

 

2,249 

US government & agency securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total cash and cash equivalents

 

17,160 

 

 

19,318 

 

 

 —

 

 

36,478 

 

 

14,516 

 

 

2,249 

 

 

 —

 

 

16,765 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 —

 

 

29,640 

 

 

 —

 

 

29,640 

 

 

 —

 

 

23,583 

 

 

 —

 

 

23,583 

Corporate debt securities

 

 —

 

 

9,715 

 

 

 —

 

 

9,715 

 

 

 —

 

 

10,739 

 

 

 —

 

 

10,739 

US government & agency securities

 

 —

 

 

26,763 

 

 

 —

 

 

26,763 

 

 

 —

 

 

20,579 

 

 

 —

 

 

20,579 

Asset backed securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

312 

 

 

 —

 

 

312 

Total investments

 

 —

 

 

66,118 

 

 

 —

 

 

66,118 

 

 

 —

 

 

55,213 

 

 

 —

 

 

55,213 

Long-term restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

4,500 

 

 

 —

 

 

 —

 

 

4,500 

 

 

4,500 

 

 

 —

 

 

 —

 

 

4,500 

Total assets measured at fair value

$

21,660 

 

$

85,436 

 

$

 —

 

$

107,096 

 

$

19,016 

 

$

57,462 

 

$

 —

 

$

76,478 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing derivative

$

 —

 

$

 —

 

$

15 

 

$

15 

 

$

 —

 

$

 —

 

$

356 

 

$

356 

Total liabilities measured at fair value

$

 —

 

$

 —

 

$

15 

 

$

15 

 

$

 —

 

$

 —

 

$

356 

 

$

356 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



The estimated fair value of the Financing Derivative liability (as defined in “Note 6. Notes Payable’) was determined using Level 3 inputs, or significant unobservable inputs. Refer to “Note 6. Notes Payable” for a detailed description and valuation approach. Changes to the estimated fair value of the Financing Derivative are recorded in “Other income (expense), net” in the condensed consolidated statements of operations and comprehensive loss.

The following table provides the changes in the fair value of the Financial Derivative during the six -month period ended June 30 , 2017 (in thousands):









 

 



 

 

Financing Derivative

Amount

Balance as of December 31, 2016

$

356 

Gain on change in estimated fair value

 

(341)

Balance as of June 30, 2017

$

15 



During the six -month period ended June 30 , 2017, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis and our valuation techniques did not change compared to the prior year.

8

 


 

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other current liabilities approximate fair value due to their short maturities.

We determined the fair value of the Notes (as defined in “Note 6. Notes Payable”) from the debt facility we entered into during the first quarter of 2013 using Level 3 inputs, or si gnificant unobservable inputs. The value of the Notes was determined by comparing the difference between the fair value of the Notes with and without the Financing Derivative by calculating the respective present values from future cash flows using a 9.2 % and 10.6% weighted average market yield at June 30 , 2017 and December 31, 2016, respectively. Refer to “Note 6. Notes Payable” for additional details regarding the Notes. The estimated fair value and carrying value of the Notes are as follows (in thousands):

The estimated fair value and carrying value of the Notes are as follows (in thousands):









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



June 30, 2017

 

December 31, 2016



Fair Value

 

Carrying Value

 

Fair Value

 

Carrying Value

Notes payable

$

15,958 

 

$

13,084 

 

$

19,788 

 

$

16,106 



Net Loss per Share

The following outstanding common stock options to purchase common stock were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Six Months Ended June 30,

 

 

(in thousands)

 

2017

 

2016

 

 

 

 

Options outstanding

 

25,592 

 

22,588 

 

 

 

 





Recent Accounting Pronouncements



Recently Adopted Accounting Standards

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ,   which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. Furthermore, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur .

We adopted this guidance as of January 1, 2017. Prior to adoption, the excluded windfall deductions for federal and state purposes were $6.0 million and $0.6 million, respectively. Upon adoption of ASU 2016-09, we recognized the excluded windfall deductions as a deferred tax asset with a corresponding offset to valuation allowance . The total deferred tax asset s   were $321.5 million as of January 1, 2017 , which was fully offset by a valuation allowance . Further, we did not elect an accounting policy change to record forfeitures as they occur and thus we continue to estimate forfeitures at each period.

During 2016, we adopted ASU 2014-15 , Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15 ). ASU 2014-15 requires companies to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosure. Management performed such an assessment and concluded there was not substantial doubt about our ability to continue as a going concern. 



Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases. The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases . ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 is effective for periods beginning after December 15, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effective for us in the first quarter of 2018. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. 

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We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.  We expect to adopt the standard using the modified retrospective approach with the cumulative effect of adopting this standard to be recorded to retaine d earnings on January 1, 2018. The new revenue standard is principle - based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. We are still in the process of evaluating the effect of the new standard on our historical financial statements and disclosures. While we have not completed our evaluation, we currently believe that the impact to revenue and expense recognized will not be material to any of the years presented. As we complete our evaluation of this new standard, new information may arise that could change our current understanding of the impact to revenue and expense recognized. Additionally, we will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust our assessment and implementation plans accordingly.



NOTE 3. CONTRACTUAL REVENUE

In September 2013, we entered into the “Roche Agreement” with Roche, pursuant to which we accounted for, and recognized as revenue, the up-front payment received thereunder using the proportional performance method over the periods in which the delivery of elements pursuant to the Roche Agreement occurs. We recognized revenue under the Roche Agreement using a straight-line convention over the service periods of the deliverables as this method approximated our performance of services pursuant to the Roche Agreement. Out of the $35.0 million upfront cash payment received, quarterly amortization of $1.7 million was recognized as contractual revenue from the fourth quarter of 2013 to the fourth quarter of 2014. Beginning in the three-month period ended March 31, 2015, we revised the estimated development period related to our contractual revenue amortization based on increasing certainty of the development time on a prospective approach and quarterly amortization of $3.6 million was recognized as contractual revenue for each of the four quarters of 2015 and for each of the first three quarters of 2016. As of September 30, 2016, the total deferred contractual revenue balance was $1.3 million, relating to the amount allocated to the deliverable of our participation on the joint steering committee. In December 2016, we received notice from Roche that Roche had elected to terminate the Roche Agreement for convenience and the termination became effective February 10, 2017, which was 60 days after the date of the notice in accordance with the terms of the Roche Agreement. Upon such notice in December 2016, no further participation on the joint steering committee was deemed necessary; as such, we recognized the entire remaining unamortized deferred revenue of $1.3 million as contractual revenue in the fourth quarter of 2016.

Further, the Roche Agreement provided for additional payments totaling $40.0 million upon the achievement of certain development milestones, all of which have previously been received and recognized as revenue. Consideration from development milestones is recognized in the period in which a milestone is achieved only if the milestone is considered substantive in its entirety. We achieved the first development milestone under the Roche Agreement and recognized the related $10.0 million as contractual revenue during the year ended December 31, 2014. We achieved the second and the third (final) development milestones under the Roche Agreement and recognized the related $10.0 million and $20.0 million as contractual revenue during the three-month periods ended June 30, 2015 and December 31, 2015, respectively. There are no other milestones remaining to be achieved.



NOTE 4. CASH, CASH EQUIVALENTS AND INVESTMENTS

The following table s summarize our cash, cash equivalents and investments as of June 30 , 2017 and December 31, 201 6 (in thousands):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



As of June 30, 2017  



 

 

Gross

 

Gross

 

 



Amortized

 

unrealized

 

unrealized

 

Fair



Cost

 

gains

 

losses

 

Value

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

$

17,160 

 

$

 —

 

$

 —

 

$

17,160 

Commercial paper

 

19,319 

 

 

 —

 

 

(1)

 

 

19,318 

Total cash and cash equivalents

 

36,479 

 

 

 —

 

 

(1)

 

 

36,478 

Investments:

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

29,640 

 

 

 

 

(2)

 

 

29,640 

Corporate debt securities

 

9,718 

 

 

 —

 

 

(3)

 

 

9,715 

Asset backed securities

 

 —

 

 

 —

 

 

 —

 

 

 —

US government & agency securities

 

26,775 

 

 

 —

 

 

(12)

 

 

26,763 

Total investments

 

66,133 

 

 

 

 

(17)

 

 

66,118 

Total cash, cash equivalents and investments

$

102,612 

 

$

 

$

(18)

 

$

102,596 

10

 


 



 

 

 

 

 

 

 

 

 

 

 

Long-term restricted cash:

 

 

 

 

 

 

 

 

 

 

 

Cash

$

4,500 

 

$

 —

 

$

 —

 

$

4,500 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2016  



 

 

Gross

 

Gross

 

 



Amortized

 

unrealized

 

unrealized

 

Fair



Cost

 

gains

 

losses

 

Value

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

$

14,516 

 

$

 —

 

$

 —

 

$

14,516 

Commercial paper

 

2,249 

 

 

 —

 

 

 —

 

 

2,249 

Total cash and cash equivalents

 

16,765 

 

 

 —

 

 

 —

 

 

16,765 

Investments:

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

23,581 

 

 

 

 

(3)

 

 

23,583 

Corporate debt securities

 

10,741 

 

 

 

 

(3)

 

 

10,739 

Asset backed securities

 

312 

 

 

 —

 

 

 —

 

 

312 

US government & agency securities

 

20,574 

 

 

 

 

(2)

 

 

20,579 

Total investments

 

55,208 

 

 

13 

 

 

(8)

 

 

55,213 

Total cash, cash equivalents and investments

$

71,973 

 

$

13 

 

$

(8)

 

$

71,978 



 

 

 

 

 

 

 

 

 

 

 

Long-term restricted cash:

 

 

 

 

 

 

 

 

 

 

 

Cash

$

4,500 

 

$

 —

 

$

 —

 

$

4,500 



 

 

 

 

 

 

 

 

 

 

 



The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of June 30 , 2017 :













 

 



 

 

(in thousands)

Fair Value

Due in one year or less

$

84,143 

Due after one year through 5 years

 

1,293 

Total investments in debt securities

$

85,436 



Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.  



NOTE   5 .   BA LANCE SHEET COMPONENTS



Inventory



As of June 30 , 2017 and December 31, 201 6 ,   our inventory   consisted of the following components:







 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,

(in thousands)

2017

 

2016

Purchased materials

$

6,803 

 

$

4,817 

Work in process

 

6,695 

 

 

7,287 

Finished goods

 

3,768 

 

 

3,530 

Inventory

$

17,266 

 

$

15,634 



Prepaid Expenses and Other Current Assets

As of June 30 , 2017 and December 31, 2016, our prepaid expenses and other current assets consisted of the following components:





 

 

 

 

 

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June 30,

 

December 31,

(in thousands)

2017

 

2016

Receivable from Prior Landlord

$

755 

 

$

5,000 

Rent deposits for O'Brien building

 

1,080 

 

 

2,160 

Prepaid expenses

 

1,140 

 

 

2,342 

Other current assets

 

570 

 

 

476 

Prepaid expenses and other current assets

$

3,545 

 

$

9,978 



On July 23, 2015, we entered into a Lease Amendment Agreement (the “Lease Amendment Agreement”) with Peninsula Innovation Partners, LLC (the “Prior Landlord”), which amends the terms and conditions of certain of our then existing Menlo Park facility real property leases.  As consideration for our agreement to amend the existing leases pursuant to the Lease Amendment Agreement, and subject to the terms and conditions contained therein, we became eligible to receive up to $20.0 million from the Prior Landlord over time (the “Landlord Payments”), and rent abatement for the remainder of the lease. As of December 31, 2016, $5.0 million of the Landlord Payments were outstanding.

In January 2017, we entered into a Third Lease Amendment Agreement with the Prior Landlord that increased the amount of the Landlord Payments by $65,000. During the first quarter of 2017, we received Landlord Payments totaling $2,628,000.

In May 2017, we entered into a Fourth Lease Amendment Agreement with the Prior Landlord, based on which we turned over the 940 Hamilton and 1010 Hamilton buildings to the Prior Landlord. Accordingly, in June 2017 we received $1,682,000 in Landlord Payments, resulting in a remaining balance of $755,000 in “Prepaid Expenses and Other Current Assets” in the condensed consolidated balance sheets at June 30, 2017.  Refer to “Note 7. Commitments and Contingencies” for additional details.



Other Long-term Assets

As of June 30 , 2017 and December 31, 2016, our other long-term assets consisted of the following components:









 

 

 

 

 



June 30,

 

December 31,

(in thousands)

2017

 

2016

Rent deposits and tenant improvements for O'Brien building

$

 —

 

$

9,641 

Other

 

184 

 

 

172 

Other long-term assets

$

184 

 

$

9,813 



In January 2017 we moved into the O’Brien building, and accordingly, the $9.6 million tenant improvement s balance recorded in “Other Long-term Assets” at December 31, 2016 was transferred into leasehold improvement s under “Property and Equipment” in the three-month period ended March 31, 2017.  



Property and Equipment, Net

As of June 30 , 2017 and December 31, 2016, our property and equipment, net, consisted of the following components:







 

 

 

 

 



June 30,

 

December 31,

(in thousands)

2017

 

2016

Building

$

 —

 

$

1,160 

Laboratory equipment and machinery

 

23,853 

 

 

23,337 

Leasehold improvements

 

31,170 

 

 

8,138 

Computer equipment

 

9,096 

 

 

7,170 

Software

 

4,600 

 

 

5,189 

Furniture and fixtures

 

2,411 

 

 

823 

Construction in progress

 

1,272 

 

 

5,772 



 

72,402 

 

 

51,589 

Less: Accumulated depreciation

 

(32,113)

 

 

(37,029)

Property and equipment, net

$

40,289 

 

$

14,560 

12

 


 



In May 2017, we entered into a Fourth Lease Amendment Agreement with the Prior Landlord, based on which we turned over the 940 Hamilton and 1010 Hamilton buildings to the Prior Landlord. The 940 Hamilton building was a capital lease with a long-term facility financing obligation associated with this lease included in “Other liabilities, non-current” and the corresponding building and related leasehold improvements were included in “Property and equipment, net” of the condensed consolidated balance sheets. Upon turning over the building to the Prior Landlord, the capital lease was terminated, resulting in the extinguishment of the facility financing obligation.

By the end of the first quarter of 2017, improvements associated with our O’Brien premises were substantially completed. As a result, during the first quarter of 2017 we capitalized $28.9 million of tenant improvements. A s the premises were completed in phases during the first half of 2017, tenant improvements were placed into service in phases once construction was substantially complete and the related asset was ready for its intended use. Refer to “Note 7. Commitments and Contingencies” for additional details.



NOTE 6. NOTES PAYABLE

Facility Agreement

Pursuant to a Facility Agreement (the “Facility Agreement”) we entered into with entities affiliated with Deerfield Management Company, L.P. (collectively, “Deerfield”) during February 2013, we issued promissory notes in the aggregate principal amount of $20.5 million (the “Notes”). The Notes bear simple interest at a rate of 8.75% per annum, payable quarterly in arrears commencing on April 1, 2013.

In connection with the execution of the Facility Agreement, we issued warrants to purchase an aggregate of 5.5 million shares of common stock immediately exercisable at an exercise price per share initially equal to $2.63 (the “Warrants”). During the year ended December 31, 2016, warrants to purchase 5.5 million shares of common stock were net exercised, resulting in the issuance of approximately 4.2 million shares of common stock . The cashless net exercises of the warrants did not result in any additional funds being collected by us. As of December 31, 2016, no warrants remained outstanding.

In addition, the Facility Agreement requires us to maintain consolidated cash and cash equivalents on the last day of each calendar quarter of not less than $2.0 million. As security for our repayment of our obligations under the Facility Agreement, we granted to Deerfield a security interest in substantially all of our property.

The Facility Agreement has a maximum term of seven years from inception. Subsequent to the date of the Facility Agreement, at the election of the holders of Notes representing a majority of the aggregate principal amount of the outstanding Notes, the Notes holders may elect to receive 25% of the net proceeds from any financing that includes an equity component, including without limitation, the sale or issuance of our common stock, options, warrants or other securities convertible or exchangeable for shares of our common stock, as payment of the Notes. This right is subject to certain exceptions set forth in the Facility Agreement. The Notes holders have the option to require us to repay the Notes if we complete a Major Transaction (as defined in the Facility Agreement), including a change of control or a sale of all or substantially all of our assets. Additionally, the principal balance of the Facility Agreement may become immediately due and payable upon an Event of Default (as defined in the Facility Agreement), in which case the Notes holders would have the right to require us to repay 100% of the principal amount of the loan, plus any accrued and unpaid interest thereon. The Facility Agreement does not provide for a prepayment of the Notes at our option.

On June 23, 2017, pursuant to a partial exercise by the Notes holders of their right to elect to receive up to 25% of the net proceeds from any qualified financing that includes an equity component, we paid $4.5 million of outstanding principal, together with accrued and unpaid interest, to one of the Notes holders with proceeds from our underwritten public equity offering (Refer to “Note 8. Stockholders’ Equity” for additional details).



Financing Derivative

A number of features embedded in the Notes required accounting for as a derivative, including the indemnification of certain withholding taxes and the acceleration of debt upon (i) a qualified financing, (ii) an event of default, (iii) a Major Transaction, and (iv) the exercise of the warrant via offset to debt principal. These features represent a single derivative (the “Financing Derivative”) that was bifurcated from the debt instrument and accounted for as a liability at fair value, with changes in fair value between reporting periods recorded in other income (expense), net.

The estimated fair value of the Financing Derivative was determined by comparing the difference between the fair value of the Notes with and without the Financing Derivative by calculating the respective present values from future cash flows using a 9.2 % and 1 0.6 % weighted average market yield at June 30, 2017 and December 31, 2016, respectively. The estimated fair value of the Financing Derivative as of June 30, 2017 and December 31, 2015 was $0 .0 million and $0. 4 million, respectively.



Notes

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We initially recorded the Notes and Warrants at $14.1 million and $6.4 million, respectively, based upon the relative fair value allocation of the $20.5 million of proceeds. The carrying value of the Notes at the inception of the debt was $12.8 million, resulting in an original issue discount of $7.7 million.

As of June 30, 2017 and December 31, 2016, we ha d   outstanding $16.0 million and $20.5 million aggregate principal amount of Notes, respectively .   As of June 30, 2017 and December 31, 2016, a   debt discount of $2.9 million and   $4.3 million, respectively, remained to be amortized through February 2020 , the maturity of the Notes.

As of June 30, 2017, $2.6 million out of the outstanding $16.0 million aggregate principal amount of Notes was reclassified from “Notes payable, non-current” to “Notes payable, current”, as that portion of the principal becomes due by June 30, 2 018. 





NOTE 7 .   COMMITMENTS AND CONTINGENCIES



Leases

In December 2009, we entered into a lease agreement for a manufacturing and office facility in Menlo Park. For the facility to meet our needs and operating requirements, substantial tenant improvements, including improvements to the structural elements and principal operating systems of the facility, were necessary. The lessor provided a tenant improvement allowance of $1.8 million to apply towards the necessary improvements and we remained obligated for additional amounts over the afforded allowance. Due to our involvement in and the nature of the renovations made to the facility and our obligations to fund the costs of renovations exceeding the incentives afforded to us, we account for the facility as if we are the owner. Accordingly, we recorded $3.0 million of building and leasehold improvement assets, reflecting the $1.2 million fair value of the facility prior to commencing renovations and the $1.8 million of landlord incentives within property and equipment, net and a corresponding liability recorded to facility financing obligation.

As a result of the lease amendment agreement described below, future rent expense associated with our prior Menlo Park facility leases was reduced to zero . The remaining long-term facility financing obligations associated with these leases, presented as “Other liabilities, non-current” on the condensed consolidated balance sheets at June 30 , 2017 and December 31, 2016, were $ 0 million and $1.7 million , respectively .  



Lease Amendment Agreement

On July 23, 2015, we entered into a Lease Amendment Agreement (the “Lease Amendment Agreement”) with Peninsula Innovation Partners, LLC (the “ Prior Landlord”), which amends the terms and conditions of certain of our prior Menlo Park facility real property leases. The Lease Amendment Agreement provides for, among other things, amendments of the term for certain of the leases with the Prior Landlord, the termination of all renewal, expansion and extension rights contained in any of the existing leases with the Prior Landlord (including our options to extend the terms for certain of the existing leases for two consecutive five-year periods), as well as rent abatement for a specified period of time. As consideration for our agreement to amend the existing leases pursuant to the Lease Amendment Agreement, and subject to the terms and conditions contained therein, we became eligible to receive up to four payments of $5.0 million each from the Prior Landlord over time (the “Landlord Payments”), and rent abatement for the remainder of the lease. In the event that we breach any of the leases and fail to cure such breach within the time permitted, the Prior Landlord would have no obligation to make the final $5.0 million payment. On September 1, 2015, the permit process related to an architectural approval and a change of use permit with respect to our new premises at 1305 O’Brien Drive (formerly 1315 O’Brien Drive), Menlo Park, California (the “O’Brien Premises”) was completed, which satisfied the contingencies under the Lease Amendment Agreement. As a result, we recorded $23.0 million in “Gain on lease amendments” in the consolidated statements of operations and comprehensive loss for the three-month period ended September 30, 2015, reflecting that our rent payments were reduced to zero for the remaining term of our existing Menlo Park facility real property leases, and the aggregate of $20.0 million in Landlord Payments became receivable and any associated financing obligation was revalued. Of the $20.0 million remaining Landlord Payments, the first $5.0 million Landlord Payment was received in September 2015, the second $5.0 million Landlord Payment was received in February 2016 and the third $5.0 million Landlord Payment was received in August 2016.

In June 2016, we entered into a Second Lease Amendment Agreement with the Prior Landlord that modified the payment schedule for the final $5.0 million. At December 31, 2016, the final $5.0 million of L andlord P ayment s  w ere recorded in “Prepaid Expenses and Other Current Assets” in the condensed consolidated balance sheets.

In January 2017, we entered into a Third Lease Amendment Agreement with the Prior Landlord that increased the amount of the final $5.0 million Landlord Payments by $65,000 . During the first quarter of 2017, we received Landlord Payments totaling $2,628,000 .

In May 2017, we entered into a Fourth Lease Amendment Agreement with the Prior Landlord, based on which we turned over the 940 Hamilton and 1010 Hamilton buildings to the Prior Landlord. Accordingly, in June 2017 we received $1,682,000 in Landlord

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Payments, resulting in a remaining balance of $755,000 in “Prepaid Expenses and Other Current Assets” in the condensed consolidated balance sheets at June 30, 2017. 

The 940 Hamilton building was a capital lease with a long-term facility financing obligation associated with this lease included in “Other liabilities, non-current” and the corresponding building and related leasehold improvements were included in “Property and equipment, net” of the condensed consolidated balance sheets. Upon turning over the building to the Prior Landlord, the capital lease was terminated, resulting in the extinguishment of the facility financing obligation.



O’Brien Lease Agreement

On July 22, 2015, we entered into a new lease agreement (the “O’Brien Lease”) with respect to the O’Brien Premises. The term of the O’Brien Lease is one hundred thirty-two (132) months, commencing on the date that is the later of April 15, 2016 or the date on which the O’Brien Premises landlord has substantially completed certain shell improvements and tenant improvements. In December 2016, we entered into an amendment to the O’Brien Lease which defined the commencement date of the lease to be October 25, 2016, notwithstanding that such substantial completion did not occur until the first quarter of 2017. Base monthly rent was abated for the first six (6) months of the lease term and thereafter is $540,000 per month during the first year of the lease term, with specified annual increases thereafter until reaching $711,000 per month during the last twelve (12) months of the lease term. We were required to pay $2 .2 million in prepaid rent which was applied to the monthly rent installments due for the first to fourth months after the rent abatement period; and, as such, $2.2 million was recorded in “Prepaid expense and other current assets” in the condensed consolidated balance sheet as of both Mach 31, 2017 and December 31, 2016. As of June 30, 2017, $1.1 million was recorded in “Prepaid expense and other current assets” in the condensed consolidated balance sheet. We were required to establish a deposit of $4.5 million in the form of a letter of credit in October 2015; and, as such, $4.5 million was recorded in “Long-term restricted cash” in the condensed consolidated balance sheet as of both June 30 , 2017 and December 31, 2016.

T he landlord was obligated to construct certain warm shell improvements at the landlord’s cost and expense and provide us with a tenant improvement allowance in the amount of $12.6 million. Construction was completed in phases and we began moving into the O’Brien Premises during January 2017. By the end of the first quarter of 2017, improvements associated with the entire O’Brien Premises were substantially completed. As a result, during the first quarter of 2017 we capitalized $28.9 million of tenant improvements, of which $12.6 million was paid by the landlord as a tenant improvement allowance. As the $12.6 million tenant improvement allowance is accounted for as a lease incentive, $12.6 million was recorded to “Deferred rent, non-current”, which will be amortized over the lease t erm of approximately 11 years. In addition, as the premises w ere completed in phases during the first half of 2017, tenant improvements were placed into service in phases once construction was substantially complete and the related asset was ready for its intended use.

As of June 30 , 2017 , the future annual minimum lease payments for the O’Brien lease w ere as follows:





 

 



Amount

Years ending December 31,

(in thousands)

Remaining of 2017

$

3,171

2018

 

6,822

2019

 

6,930

2020

 

7,056

2021

 

7,272

Thereafter

 

46,710

Total minimum lease payments

$

77,961



Rent expense was $ 1.6 million and $ 48,000   for the three-month periods ended June 30 , 2017 and 2016, respectively. Rent expense was $3.1 million and $100,200 for the six-month periods ended June 30, 2017 and 2016, respectively.



Legal

On November 2, 2016, we filed a complaint against Oxford Nanopore Technologies Ltd., Oxford Nanopore Technologies, Inc. (“ONT Inc.”) and Metrichor, Ltd. (“Metrichor” and, together with ONT Inc., “ONT”) with the U.S. International Trade Commission (“USITC”) for patent infringement.  On December 5, 2016, the USITC provided notice that an investigation had been inst ituted based on the complaint.  We are seeking exclusionary relief with respect to several ONT products, including ONT’s MinION and PromethION devices. The complaint is based on our U.S. Patent No. 9,404,146, entitled “Compositions and methods for nucleic acid sequencing” which covers novel methods for sequencing single nucleic acid molecules using linked double-stranded nucleic acid templates, providing improved sequencing accuracy. On March 1, 2017, we filed an amend ed complaint to add a second patent in the

15

 


 

same patent family, U.S. Patent No. 9,542,527, which was granted on January 10, 2017, to the investigation.  We are seeking, among other things, an exclusion order permanently barring entry of infringing ONT products into the United States, and a cease and desist order preventing ONT from advertising and selling infringing products in the United States. On May 23, 2017, the Administrative Law Judge (“ALJ”) assigned to the matter issued an order construing certain claim terms of the asserted patents.  On June 8, 2017, ONT filed a summary determination motion to terminate the proceedings based on the ALJ’s claim construction decision, which motion was not opposed by us.  The ALJ granted the motion on July 19, 2017, and, on July 31, 2017, we filed a petition to review with the USITC to correct what we believe was an incorrect construction of the claims.

On February 2, 2017, we filed a claim in the High Court of England and Wales against Oxford Nanopore Technologies Ltd. (“ONT Ltd.”) and Metrichor for infringement of Patent EP(UK) 3 025 542, which is in the same patent family as the patents asserted in the USITC action referred to above.  We are seeking remedies including injunctive relief, damages, and costs. On March 27, 2017, the defendants in the case filed their defense and counterclaim, denying infringement and seeking a declaration that the asserted patent is invalid. We filed our reply and defense to counterclaim on April 12, 2017.

On March 15, 2017, we filed a complaint in the U.S. District Court for the District of Delaware against ONT Inc. for patent infringement. The complaint is based on our U.S. Patent No. 9,546,400, entitled “Nanopore sequencing using n-mers” which covers novel methods for nanopore sequencing of nucleic acid molecules using the signals from multiple monomeric units. This patent was granted on January 17, 2017. We are seeking remedies including injunctive relie f , damages and costs. On May 8, 2017, the defendants filed a motion to dismiss the complaint, alleging that the asserted patent claims recite patent ineligible subject matter. We filed our response on June 5, 2017.

On April 21, 2017, ONT Ltd. and Harvard University filed a claim against us in the High Court of England and Wales for infringement of Patent EP(UK) 1 192 453, a patent owned by Harvard University and entitled “Molecular and atomic scale evaluation of biopolymers,” and for which ONT Ltd. alleges it holds an exclusive license.  ONT Ltd. and Harvard University are seeking remedies including injunctive relief, damages, and costs. On April 25, 2017, ONT Ltd. announced that it also had filed a claim against us in the District Court of Mannheim, Germany, for infringement of the German version of the patent. We received service in this matter on July 11, 2017.

Litigation is inherently unpredictable, and it is too early in the proceedings to predict the outcome of these lawsuits or any impact they may have on us. As such, the estimated financial effect associated with these complaints cannot be made as of this 10-Q filing time.

From time to time, we may also be involved in a variety of other claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes, employment and other matters that arise in the normal course of our business. In addition, third parties may, from time to time, assert claims against us in the form of letters and other communications. We record a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We currently do not believe that the ultimate outcome of any of the matters described above is probable or reasonably estimable, or that these matters will have a material adverse effect on our business; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of litigation and settlement costs, diversion of management resources and other factors.



NOTE 8. STOCKHOLDERS’ E QUITY

At-the-Market” Equity Offering

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

During the six - month period ended June 30 , 2017 we issued 3. 2 million shares of our common stock at an average price of $ 3.86 per share through our “at-the-market” offering, resulting in net proceeds of $ 11.9 million. We terminated our current “at-the-market” offering program in June 2017.

We pa id a commission equal to 3% of the gross proceeds from the sale of shares of our common stock under the sales agreement. We are not obligated to sell shares of our common stock under the sales agreement.

Subject to certain exceptions set forth in our Facility Agreement, holders of our Notes may elect to receive up to 25% of the net proceeds from financing activities that include an equity component as prepayment of the Notes to be applied first, to accrued and unpaid interest and second, to principal. However, in April 2017 holders representing a majority of the aggregate principal amount of the outstanding Notes waived such right in connection with the issuance and sale of shares of common stock under our “at-the-market” offering.

Underwritten Public Equity Offering

On June 15, 2017, we entered into an underwriting agreement ,   relating to the public offering of 15,419,354 shares of our common stock, $0.001 par value per share, at a price to the public of $3.10 per share. Under the terms of the Underwriting Agreement,  

16

 


 

we also granted the Underwriters a 30-day option to purchase up to an additional 2,312,903 shares of our common stock, which was subsequently exercised in full, and the o ffering, including the sale of shares of c ommon s tock subject to the Underwriters’ option, closed on June 20, 2017.  In total, we sold 17,732,257 shares of our common stock at a price of $3.10 per share. We pa id a commission equal to 4% of the gross proceeds from the sale of shares of our common stock under the underwriting agreement. The total net proceeds to us from the o ffering, after deducting the underwriting discount and paid offering expenses , w ere   approximately $52. 7 million ,   which exclud es approximately $0.2 million of offering expenses that were unpaid as of June 30, 2017.  

Warrants

In connection with the execution of the Facility Agreement, we issued immediately exercisable warrants to purchase 5 . 5 million shares of common stock at an exercise price per share initially equal to $2.63, all of which were ou tstanding at December 31, 2015.

During the three - month periods ended March 31, 2016, warrants to purchase 3,818,000 shares of common stock were net exercised, resulting in the issuance of approximately 3.0 million shares with all warrants being fully net exercised by December 31, 2016. As of June 30, 2017, no warrants remained outstanding.

Equity Plans

As of June 30 , 2017, we had three active equity compensation plans: the 2010 Equity Incentive Plan, the 2010 Outside Director Equity Incentive Plan, and the 2010 Employee Stock Purchase Plan (“ESPP”).

The following table summarizes stock option activity for all our stock option plans for the six -month period ended June 30 , 2017 (in thousands, except per share amounts):





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Stock Options Outstanding



 

 

 

 

 

 

 

Weighted



Shares available

 

Number

 

 

 

 

average



for grant

 

of shares

 

Exercise price

 

exercise price

Balances, December 31, 2016

6,835 

 

22,501 

 

$

1.16 – 16.00

 

$

6.30 

Additional shares reserved 

4,634 

 

 

 

 

 

 

 

 

Options granted

(5,258)

 

5,258 

 

 

3.30 – 5.27

 

 

5.10 

Options exercised

—  

 

(1,231)

 

 

1.16 – 4.55

 

 

2.54 

Options canceled

936 

 

(936)

 

 

1.16 – 16.0

 

 

7.24 

Balances, June 30, 2017

7,147 

 

25,592 

 

$

1.16 – 16.00

 

$

6.20 



Shares issued under our ESPP totaled 750,005 and 668,566 shares during the six -month periods ended June 30 , 2017 and 2016, respectively. As of June 30, 2017 ,   1,841,595 shares of our common stock remain available for issuance under our ESPP.

Stock-Based Compensation

Total stock-based compensation expense consists of the following (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Three-Month Periods Ended June 30,

 

Six-Month Periods Ended June 30,

 



2017

 

2016

 

2017

 

2016

 

Cost of revenue

$

572 

 

$

562 

 

$

1,095 

 

$

1,061 

 

Research and development

 

2,029 

 

 

2,131 

 

 

4,060 

 

 

4,041 

 

Sales, general and administrative

 

2,408 

 

 

2,345 

 

 

4,839 

 

 

4,517 

 

Total stock-based compensation expense

$

5,009 

 

$

5,038 

 

$

9,994 

 

$

9,619 

 



W e estimated the fair value of employee stock options on the grant date using the Black-Scholes option pricing model. The estimated fair value of employee stock options is amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following weighted average assumptions:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three-Month Periods Ended June 30,

 

Six-Month Periods Ended June 30,

 

 

Stock Option

2017

 

2016

 

2017

 

2016

 

 

Expected term in years

6.1

 

6.1

 

6.1

 

6.1

 

 

Expected volatility

70%

 

70%

 

70%

 

70%

 

 

Risk-free interest rate

1.9%

 

1.4%

 

2.1%

 

1.5%

 

 

Dividend yield

 

 

 

 

 

17

 


 



 

 

 

 

 

 

 

 

 

We estimate the value of employee stock purchase rights on the grant date using the Black-Scholes option pricing model. The fair value of shares to be purchased under our ESPP was estimated using the following assumptions: