Exhibit 10.1

Execution Version

FACILITY AGREEMENT

FACILITY AGREEMENT (as amended, restated, modified or otherwise supplemented
from time to time, this “Agreement”), dated as of February 5, 2013, between
Pacific Biosciences of California, Inc., a Delaware corporation (the
“Borrower”), and the lenders set forth on the signature page of this Agreement
(the “Lenders” and, together with the Borrower, the “Parties”).

W I T N E S S E T H:

WHEREAS, the Borrower wishes to borrow from the Lenders twenty million five
hundred thousand Dollars ($20,500,000) for the purpose described in Section 2.1;
and

WHEREAS, the Lenders desire to make loans to the Borrower for such purpose,

NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the
Parties agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.1 General Definitions. Wherever used in this Agreement, the Exhibits
or the Schedules attached hereto, unless the context otherwise requires, the
following terms have the following meanings:

“Affiliate” means, with respect to any Person, any other Person:

(a) that owns, directly or indirectly, in the aggregate more than 10% of the
beneficial ownership interest of such Person;

(b) that directly or indirectly through one or more intermediaries controls, or
is controlled by, or is under common control with, such Person; or

(c) that directly or indirectly is a general partner, controlling shareholder,
or managing member of such Person.

“Agreement Date” means the date of this Agreement.

“Applicable Laws” means all statutes, rules and regulations of the U.S. Food and
Drug Administration (“FDA”) and of other Governmental Authorities in the United
States or elsewhere exercising regulatory authority similar to that of the FDA
applicable to the ownership, testing, development, manufacture, packaging,
processing, use, distribution, marketing, labeling, promotion, sale, offer for
sale, storage, import, export or disposal of any product manufactured or
distributed by or on behalf of the Borrower or its Subsidiaries.

“Authorizations” has the meaning set forth in Section 3.1(p).

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“Business Day” means a day on which banks are open for business in The City of
New York and San Francisco, California.

“Cash and Cash Equivalents” means the amount of cash and cash equivalents and
marketable securities shown on the Borrower’s consolidated balance sheet
included in the SEC Reports or otherwise made available to the Borrower’s
stockholders.

“Code” means the Internal Revenue Code of 1986, as amended, and any Treasury
Regulations promulgated thereunder.

“Common Stock” means the common stock, par value $0.001 per share, of the
Borrower.

“Default” means any event which, at the giving of notice, lapse of time or
fulfillment of any other applicable condition (or any combination of the
foregoing), would constitute an Event of Default.

“Disbursement” has the meaning given to it in Section 2.2.

“Disclosure Schedule” means the disclosure schedule attached to this Agreement.

“Dollars” and the “$” sign mean the lawful currency of the United States of
America.

“Domestic Subsidiary” means a Subsidiary organized under the laws of a
jurisdiction located in the United States of America, other than any such
Subsidiary substantially all of the assets of which consist of stock in Foreign
Subsidiaries that are “controlled foreign corporations” within the meaning of
Section 957(a) of the Code.

“Event of Default” has the meaning given to it in Section 5.4.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, including
the rules and regulations promulgated thereunder.

“Excluded Taxes” means with respect to any Lender, (a) income or franchise Taxes
imposed on (or measured by) such Lender’s net income by the United States of
America, or by the jurisdiction (or any political subdivision thereof) under the
laws of which such Lender is organized or incorporated or in which the principal
office or applicable lending office of such Lender is located or with which it
has a present or former connection (other than any connection arising solely
from having executed, delivered, performed its obligations or received payment
under, or enforced this Agreement), (b) any branch profits Taxes imposed by the
United States of America, or (c) any withholding Tax that is imposed on amounts
payable to the Lender under laws in effect at the time the Lender becomes a
party to this Agreement (or designates a new lending office) or is directly
attributable to such Lender’s failure or inability to comply with
Section 2.5(d), except to the extent that the Lender (or its assignor, if any)
was entitled, at the time of designation of a new lending office (or
assignment), to receive additional amounts from the Borrower with respect to
such withholding Tax pursuant to Section 2.5(a) or is legally unable to comply
with Section 2.5(d) as a result of any change in law occurring subsequent to the
date such Lender becomes a party to this Agreement (or designates a new lending
office).

 

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“Final Payment” means such amount as may be necessary to repay the outstanding
principal amount of the Notes and any other amounts owing by the Borrower to the
Lenders pursuant to the Transaction Documents.

“Final Payment Date” means, subject to Section 2.3(a), the earlier of (i) the
date on which the Borrower repays the Notes (together with any other amounts
accrued and unpaid under the Transaction Documents) and (ii) the seventh
anniversary of the Agreement Date.

“GAAP” means generally accepted accounting principles consistently applied as
set forth in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession).

“Government Authority” means any government, governmental department, ministry,
cabinet, commission, board, bureau, agency, tribunal, regulatory authority,
instrumentality, judicial, legislative, fiscal, or administrative body or
entity, whether domestic or foreign, federal, state or local, having
jurisdiction over the matter or matters and Person or Persons in question.

“Hedging Obligations” means all liabilities under take-or-pay or similar
arrangements or under any interest rate swaps, caps, floors, collars and other
interest hedge or protection agreements, treasury locks, equity forward
contracts, currency agreements or commodity purchase or option agreements or
other interest or exchange rate or commodity price hedging agreements and any
other derivative instruments, in each case, whether the Borrower and its
Subsidiaries is liable contingently or otherwise, as obligor, guarantor or
otherwise, or in respect of which liabilities the Borrower or its Subsidiaries
otherwise assures a creditor against loss.

“Indebtedness” means the following:

(i) all indebtedness for borrowed money;

(ii) the deferred purchase price of assets or services (other than payables)
which in accordance with GAAP would be shown to be a liability on the balance
sheet (or on the liability side of a balance sheet);

(iii) all guarantees of Indebtedness;

(iv) the maximum amount of all letters of credit issued or acceptance facilities
established for the account of the Borrower and any of its Subsidiaries,
including without duplication, all drafts drawn thereunder;

(v) all capitalized lease obligations (determined in accordance with GAAP on the
Agreement Date);

(vi) all Indebtedness of another Person secured by any Lien on any property of
the Borrower or its Subsidiaries, whether or not such Indebtedness has been
assumed or is recourse (with the amount thereof, in the case of any such
indebtedness that has not been assumed by the Borrower or its Subsidiaries,
being measured as the lower of (x) fair market value of such property and
(y) the amount of the indebtedness secured);

 

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(vii) the net liability in respect of all Hedging Obligations; and

(viii) indebtedness created or arising under any conditional sale or title
retention agreement.

In no event shall the term “Indebtedness” include (a) any indebtedness under any
overdraft or cash management facilities or under credit cards or purchase card
arrangements so long as any such indebtedness is repaid in full no later than
five Business Days following the date on which it was incurred or in the case of
such indebtedness in respect of credit or purchase cards, within 60 days of its
incurrence, (b) any obligations in respect of a lease properly classified as an
operating lease in accordance with GAAP (as in effect on the Agreement Date),
(c) any liability for federal, state, local or other taxes not yet delinquent or
being contested in good faith and for which adequate reserves have been
established to the extent required by GAAP, (d) accrued liabilities in the
ordinary course of business or (e) any customer deposits or advance payments
received in the ordinary course of business.

“Indemnified Person” has the meaning given to it in Section 6.11.

“Indemnified Taxes” means all Taxes including Other Taxes, other than Excluded
Taxes.

“Indemnity” has the meaning given to it in Section 6.11.

“Interest Rate” means 8.75% simple interest per annum.

“IP” and “Intellectual Property” have the respective meanings given to them in
Section 3.1(l).

“Lien” means any lien, pledge, preferential arrangement, mortgage, security
interest, deed of trust, charge, assignment, hypothecation, title retention, or
other encumbrance on or with respect to property or interest in property.

“Loan” means the loan made available by the Lenders to the Borrower pursuant to
Section 2.2 in the aggregate amount of twenty million, five hundred thousand
Dollars ($20,500,000) or, as the context may require, the principal amount
thereof from time to time outstanding.

“Loss” has the meaning given to it in Section 6.11.

“Major Transaction” has the meaning set forth in the Warrants.

“Majority in Interest” means the Lenders holding Notes representing a majority
of the aggregate principal amount of the outstanding Notes.

“Material Adverse Effect” means a material adverse effect on (a) the business,
operations, condition (financial or otherwise) or assets of the Borrower and its
Subsidiaries,

 

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taken as a whole, (b) the validity or enforceability of any material provision
of any Transaction Document, (c) the ability of the Borrower to timely perform
the Obligations or (d) the rights and remedies of the Lenders, taken as a whole,
under any Transaction Document.

“Milestone” means that Net Sales for the 12 month period from the beginning of
the second calendar quarter of 2014 through the first calendar quarter of 2015
are at least $41 million.

“Net Proceeds” means in connection with any Qualified Financing, the cash
proceeds received from such Qualified Financing, net of attorneys’ fees,
investment banking fees, accountants’ fees, underwriting discounts and
commissions and other out-of-pocket fees and expenses actually incurred in
connection therewith.

“Net Sales” means, without duplication, the aggregate gross amount invoiced by
or on behalf of the Borrower or any of its Subsidiaries or any direct or
indirect assignee or licensee of the Borrower for products sold globally in bona
fide, arm’s length transactions, less customary deductions determined, without
duplication, in accordance with the selling Person’s customary accounting
methods as generally and consistently applied for: (i) cash or terms discounts,
(ii) sales, use and value added taxes (if and only to the extent included in the
gross invoice amount), (iii) reasonable and customary accruals for third party
rebates and chargebacks, (iv) returns and (v) recalls.

“Notes” means the Notes issued to the Lenders evidencing the Loan in the form
attached hereto as Exhibit A.

“Obligations” means all obligations (monetary or otherwise) of the Borrower
arising under or in connection with the Transaction Documents other than the
Registration Rights Agreement and the Warrants.

“Organizational Documents” means the Certificate of Incorporation and Bylaws,
each as amended to date, of the Borrower or its Subsidiaries, as the context may
require.

“Other Taxes” means any and all present or future stamp or documentary taxes or
any other excise or property taxes, duties, other charges or similar levies, and
all liabilities with respect thereto, together with any interest, fees,
additions to tax or penalties applicable thereto (including by reason of any
delay in payment) arising from any payment made hereunder or from the execution,
delivery, registration or enforcement of, or otherwise with respect to, any
Transaction Document.

“Permitted Affiliate Transaction” means (a) transactions between and among the
Borrower and any of its Subsidiaries or between and among any Subsidiaries of
Borrower, (b) Permitted Distributions (c) indemnification arrangements, employee
agreements or arrangements, compensation arrangements (including equity-based
compensation) and reimbursement of expenses of current or former officers,
employees or directors and (d) compensation, retention, bonus or similar
arrangements entered into in the ordinary course of business or approved by the
Borrower’s board of directors (or a committee thereof), (e) transactions
contemplated by the Transaction Documents, (f) transactions on terms not less
favorable to the Borrower or any of its Subsidiaries than could be obtained on
an arm’s length

 

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basis from unrelated third parties, (g) transactions, collaborative
arrangements, licensing agreements, joint ventures, partnerships and similar
business arrangements permitted by Section 5.2(iii) and (h) licenses, customer
agreements, vendor agreements and other agreements and arrangements entered into
in the ordinary course of business.

“Permitted Distributions” means:

(i) purchases of capital stock from former employees, consultants and directors
pursuant to repurchase agreements or other similar agreements;

(ii) distributions or dividends consisting solely of the Borrower’s capital
stock;

(iii) distributions of rights under, and purchases for value of any rights
distributed, in connection with any stockholder rights plan;

(iv) purchases of capital stock or options to acquire such capital stock with
the proceeds received from a substantially concurrent issuance of capital stock
or convertible securities;

(v) purchases of capital stock pledged as collateral for loans to employees;

(iv) purchases of capital stock in connection with the exercise of stock options
or stock appreciation rights by way of cashless exercise or in connection with
the satisfaction of withholding tax obligations;

(v) purchases of fractional shares of capital stock arising out of stock
dividends, splits or combinations or business combinations;

(vi) the settlement or performance of such Person’s obligations under any
warrant, equity derivative transaction, option contract or similar transaction
or combination of transactions;

(vii) in connection with any acquisition, (A) receive or accept the return to
the Borrower or any of its Subsidiaries of Capital Stock of the Borrower or any
of its Subsidiaries constituting a portion of the purchase price consideration
in settlement of indemnification claims or (B) make payments or distributions to
dissenting stockholders pursuant to applicable law;

(viii) other payments (other than dividends), distributions, redemptions,
retirements or purchases in an aggregate amount not to exceed $250,000 in any
fiscal year; and

(ix) dividends and distributions from any Subsidiary of the Borrower to the
Borrower or any other Subsidiary.

“Permitted Indebtedness” means Indebtedness existing as of the Agreement Date
and set forth in the Disclosure Schedule and:

(i) the Obligations;

 

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(ii) Indebtedness described under Item (ii) (including any adjustment of
purchase price, earnout, indemnification and other similar obligations incurred
in an acquisition) under the definition of Indebtedness;

(iii) Indebtedness described Item (v) under the definition of Indebtedness;

(iv) Indebtedness secured by purchase money Liens; provided that such
Indebtedness when incurred by the Borrower or any of its Subsidiaries shall not
exceed the purchase price of the asset(s) financed;

(v) Indebtedness of any Person acquired or assumed pursuant to an acquisition,
provided that such Indebtedness is either (i) not incurred in contemplation of
or in connection with such acquisition or (ii) constitutes Indebtedness owing to
the seller of the assets acquired in such acquisition;

(vi) Hedging Obligations incurred in the ordinary course of business not for
speculative purposes;

(vii) Indebtedness in respect of (i) unsecured letters of credit or bank
guaranties in an aggregate outstanding amount not to exceed $100,000 at any time
or (ii) secured letters of credit or bank guaranties;

(viii) Performance bonds, surety bonds, bank guaranties and similar instruments
incurred in the ordinary course of business;

(ix) Guarantees with respect to any Permitted Indebtedness;

(x) Indebtedness (i) of the Borrower to any Subsidiary or (ii) of any Subsidiary
to Borrower or any other Subsidiary;

(xi) Unsecured Subordinated Indebtedness in an aggregate principal amount at any
time outstanding not to exceed $250,000; provided, however, that such
Indebtedness shall not provide for repayments of principal until the Obligations
have been paid in full and shall provide for interest at market rates.

(xii) Indebtedness consisting of (A) the financing of insurance premiums or
(B) take-or-pay obligations contained in supply agreements;

(xiii) Indebtedness incurred to purchase equipment; and

(xiv) Any refinancings, renewals, extensions, increases or replacements of
Indebtedness listed in clauses (ii), (iii), (iv) and (v) so long as no such
Indebtedness shall be refinanced for a principal amount in excess of the
principal balance outstanding thereon at the time of such refinancing.

 

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“Permitted Liens” means:

(i) Liens existing on the Agreement Date and set forth in the Disclosure
Schedule, and any renewals or extensions thereof, provided that the property
covered thereby is not increased and any renewal or extension of the obligations
secured or benefited thereby is permitted by clause (iii) or (iv) of the
definition of Permitted Indebtedness;

(ii) Liens in favor of the Lenders;

(iii) Carriers’, warehousemen’s mechanics’ materialmen’s, repairmen’s,
landlords’ and other statutory or common law Liens created by operation of
applicable law;

(iv) Liens arising in the ordinary course of business and securing obligations
that are not more than 30 days past due or are being contested in good faith by
appropriate proceedings;

(v) Liens for taxes, assessments or governmental charges or levies that are
(A) not yet due, (B) not yet delinquent for a period of more than 30 days,
(C) not subject to penalties for nonpayment or (D) that are being contested in
good faith by appropriate proceedings;

(vi) Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default;

(vii) Liens in favor of financial institutions arising in connection with the
Borrower’s or its Subsidiaries’ accounts maintained in the ordinary course of
the Borrower’s and its Subsidiaries’ business held at such institutions to
secure standard fees for services charged by, but not financing made available
by, such institutions;

(viii) Liens securing Indebtedness permitted pursuant to clauses (iii), (iv),
(v) and (viii) of the definition of Permitted Indebtedness;

(ix) Lessor Liens;

(x) Pledges or deposits in the ordinary course of business in connection with
workers’ compensation, unemployment insurance and other social security
legislation;

(xi) Deposits to secure (i) the performance of tenders, bids, trade contracts,
licenses and leases, statutory obligations, surety bonds, performance bonds,
bank guaranties and other obligations of a like nature incurred in the ordinary
course of business (including earnest money deposits in respect of any
acquisition), or (ii) indemnification obligations relating to any disposition;

 

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(xii) Easements, rights of way, restrictions and other similar encumbrances
affecting real property which, in the aggregate, are not substantial in amount,
and which do not in any case materially interfere with the ordinary conduct of
the business of the applicable Person;

(xiii) Leases, licenses or subleases granted to others not interfering in any
material respect with the business of the Borrower and its Subsidiaries;

(xiv) Liens of a collection bank arising under Section 4-210 of the Uniform
Commercial Code (or equivalent in foreign jurisdictions) on items in the course
of collection;

(xv) Good faith deposits required in connection with any acquisition or letter
of intent;

(xvi) To the extent constituting a Lien, escrow arrangements securing
indemnification obligations associated with any acquisition;

(xvii) Liens (i) on advances of cash or cash equivalents in favor of the seller
of any property to be acquired by the Borrower or any of its Subsidiaries to be
applied against the purchase price for such acquisition; provided, that (x) the
aggregate amount of such advances of cash or cash equivalents shall not exceed
the purchase price of such acquisition and (y) the property is acquired within
90 days following the date of the first such advance so made; and
(ii) consisting of an agreement to dispose of any property in a disposition of
assets, in each case, solely to the extent such acquisition or disposition, as
the case may be, would have been permitted on the date of the creation of such
Lien;

(xviii) Deposits as security for contested taxes or contested import or customs
duties;

(xix) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the importation of
goods;

(xx) Statutory, common law or contractual Liens of creditor depository
institutions or institutions holding securities accounts (including rights of
set-off or similar rights and remedies);

(xxi) Any encumbrance or restriction (including put and call arrangements) with
respect to the transfer of the equity interests of any joint venture or similar
arrangement pursuant to the terms thereof;

(xxii) Liens on the assets of a Person existing at the time such assets are
acquired or Person becomes a Subsidiary of the Borrower; provided, however, that
any such Lien may not extend to any other assets of the Borrower or any other
Subsidiary that is not a direct Subsidiary of such Person; provided further,
that any such Lien was not created in anticipation of or in connection with such
acquisition;

 

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(xxiii) “march-in” and other rights of the U.S. government pursuant to the
Bayh-Dole Act (35 U.S.C. Section 200-212 and 37 C.F.R. 401);

(xxiv) Additional Liens; provided that the Indebtedness or other obligations
secured thereby do not exceed $250,000 in the aggregate outstanding at any time;

(xxv) Liens on cash collateral securing obligations in respect of credit card
and/or purchase card arrangements; and

(xxvi) Liens on cash collateral securing reimbursement obligations of the
Borrower and its Subsidiaries under letters of credit.

“Person” means and includes any natural person, individual, partnership, joint
venture, corporation, trust, limited liability company, limited company, joint
stock company, unincorporated organization, government entity or any political
subdivision or agency thereof, or any other entity.

“Register” has the meaning set forth in Section 1.4 (b).

“Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the Agreement Date, by and among the Borrower and the Lenders, as amended,
restated, modified or supplemented from time to time.

“SEC” means the United States Securities and Exchange Commission.

“SEC Reports” means the annual, quarterly and periodic reports filed by the
Borrower with the SEC.

“Securities Act” means the Securities Act of 1933, as amended, including the
rules and regulations promulgated thereunder.

“Security Agreement” mean the agreement executed on the Agreement Date pursuant
to which the Borrower grants to the Lenders a lien the collateral described
therein to secure its obligations under the Transaction Documents (excluding the
Warrants and the Registration Rights Agreement).

“Subordinated Indebtedness” is indebtedness incurred by the Borrower
subordinated to all of the Obligations (pursuant to a subordination,
intercreditor, or other similar agreement in form and substance satisfactory to
the Lenders holding a Majority in Interest entered into between the Lenders and
the other creditor), on terms acceptable to the Lenders holding a Majority in
Interest.

“Subsidiary” or “Subsidiaries” means, as to the Borrower, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by the Borrower.

 

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“Tax Affiliate” means (a) the Borrower and its Subsidiaries and (b) any
Affiliate of the Borrower with which the Borrower files or is required to file
consolidated combined or unitary tax returns.

“Taxes” means all present or future taxes, levies, imposts, stamp or other
duties, fees, assessments, deductions, withholdings, all other governmental
charges, and all liabilities with respect thereto, together with any interest,
fees, additions to tax or penalties applicable thereto (including by reason of
any delay in payment).

“Transaction Documents” means this Agreement, the Notes, the Security Agreement
and any other document or instrument delivered in connection with any of the
foregoing and dated the Agreement Date or subsequent thereto, whether or not
specifically mentioned herein or therein.

“Warrants” has the meaning given to it in Section 2.10.

“Warrant Shares” has the meaning set forth in Section 3.1(w).

Section 1.2 Interpretation. In this Agreement, unless the context otherwise
requires, all words and personal pronouns relating thereto shall be read and
construed as the number and gender of the party or parties requires and the verb
shall be read and construed as agreeing with the required word and pronoun; the
division of this Agreement into Articles and Sections and the use of headings
and captions is for convenience of reference only and shall not modify or affect
the interpretation or construction of this Agreement or any of its provisions;
the words “herein,” “hereof,” “hereunder,” “hereinafter” and “hereto” and words
of similar import refer to this Agreement as a whole and not to any particular
Article or Section hereof; the words “include,” “including,” and derivations
thereof shall be deemed to have the phrase “without limitation” attached thereto
unless otherwise expressly stated; references to a specified Article, Exhibit,
Section or Schedule shall be construed as a reference to that specified Article,
Exhibit, Section or Schedule of this Agreement; and any reference to any of the
Transaction Documents means such document as the same shall be amended,
restated, supplemented or modified and from time to time in effect.

Section 1.3 Business Day Adjustment. If the day by which a payment is due to be
made is not a Business Day, that payment shall be made by the next succeeding
Business Day.

Section 1.4

(a) The Borrower or its agent shall record on its books and records the amount
of the Loan, the interest rate applicable, all payments of principal and
interest thereon and the principal balance thereof from time to time
outstanding. Such record shall, absent manifest error, be conclusive evidence of
the amount of the Loan made by the Lenders to the Borrower and the interest and
payments thereon.

 

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(b) The Borrower or its agent shall establish and maintain at the Borrower’s
address referred to in Section 6.1, a record of ownership (the “Register”) in
which the Borrower agrees to register by book entry the interests (including any
rights to receive payment hereunder) of each Lender in the Loan, and any
assignment of any such interest, and (ii) accounts in the Register in accordance
with its usual practice in which it shall record (1) the names and addresses of
the Lenders (and any change thereto pursuant to this Agreement), (2) the amount
of the Loan and each funding of any participation therein, (3) the amount of any
principal or interest due and payable or paid, and (4) any other payment
received by the Lenders from the Borrower and its application to the Loan.

(c) Notwithstanding anything to the contrary contained in this Agreement, the
Loan (including any Notes evidencing the Loan) is a registered obligation, the
right, title and interest of the Lenders and their assignees in and to the Loan
shall be transferable only upon notation of such transfer in the Register and no
assignment thereof shall be effective until recorded therein. This Section 1.4
shall be construed so that the Loan is at all times maintained in “registered
form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the
Code.

(d) The Borrower and the Lenders shall treat each Person whose name is recorded
in the Register as a Lender for all purposes of this Agreement. Information
contained in the Register with respect to any Lender shall be available for
access by the Borrower or such Lender at any reasonable time and from time to
time upon reasonable prior notice.

ARTICLE 2

AGREEMENT FOR THE LOAN

Section 2.1 Use of Proceeds. The proceeds of the Loan will be used for working
capital and general corporate purposes.

Section 2.2 Disbursement. Subject to the conditions set forth in Article 4, the
Lenders shall advance the Loan to the Borrower in one disbursement (the
“Disbursement”) on the Agreement Date. The Lenders shall fulfill the
Disbursement in accordance with their respective allocations set forth on
Schedule 1.

Section 2.3 Payment. Payments on account of the principal amount of the Notes
shall be made only as follows: (a) If the Milestone has not been reached, the
Borrower shall, at Lender’s option and upon notice to the Borrower, pay to the
Lenders on each of the third, fourth and fifth anniversaries of the Agreement
Date one-third of the initial principal amount of the Notes.

(b) The Borrower shall pay to the Lenders the outstanding principal amount of
the Notes on (i) the Final Payment Date, (ii) the date the principal amount of
the Notes are declared to be or automatically becomes due and payable following
an Event of Default, and (ii) pursuant to the provisions of Section 5.3.

(c) The Notes shall be deemed prepaid and without premium, to the extent a
Lender satisfies the payment of the Exercise Price (as such term is defined in
the Warrants) through a reduction of the principal amount outstanding under such
Lender’s Note in accordance with Section 3(a)(i) of the Warrants.

 

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(d) Except as set forth in the next succeeding sentence, each payment shall be
applied first, to accrued and unpaid interest and second, to principal and shall
be allocated among the Lenders in accordance with their respective allocations
set forth on Schedule 1 hereto as such allocations may be revised by the Lenders
from time to time. Each payment pursuant to Section 2.3(e) shall be applied
first, to accrued and unpaid interest and second, to principal in such
allocation, in inverse order of maturity

(e) From and after the date hereof at the election of the Lenders holding a
Majority in Interest, Borrower shall apply 25% of the Net Proceeds from any
financing that includes, in whole or in part, an equity component, including
without limitation, the sale or issuance of Common Stock, Convertible Securities
or Options (“Qualified Financings”) to the payment of the Notes. The Borrower
shall give notice to the Lenders of a Qualified Financing within 5 days after
the consummation thereof. Within 5 days after the receipt of such notice, the
Lenders holding a Majority in Interest, in the exercise of their sole
discretion, may deliver a notice to the Borrower requiring prepayment of the
Notes in accordance with this Section 2.3(e) (a “Prepayment Notice”). Such
payment shall be made by the Borrower within five (5) Business Days following
the receipt by the Borrower of such Prepayment Notice and shall be applied in
accordance with Section 2.3(d).

As used herein, (i) “Options” shall mean warrants or other rights to subscribe
for or to purchase options for the purchase of shares of Common Stock, other
than any rights or options issued or granted pursuant to any of the Borrower’s
equity compensation plans or employee stock purchase plans, or the Warrants, and
(ii) “Convertible Securities” shall mean any stock or security (including any
debt security) convertible or exchangeable for shares of Common Stock, other
than any rights or options issued or granted pursuant to any of the Borrower’s
equity compensation plans or employee stock purchase plans, or the Warrants.

(f) Notwithstanding the foregoing, in no event shall either of the following
constitute a Qualified Financing: (i) any sale or issuance of Common Stock,
Convertible Securities or Options in connection with a Permitted Collaborative
Transaction (as defined below) or (ii) the sale or issuance by the Company, in
one or more transactions, of up to 15,000,000 shares of Common Stock (as
adjusted for any stock split, stock or combination), including the shares
issuable upon exercise or conversion of Options or Convertible Securities (as
adjusted for any stock split, stock or combination), but excluding for purposes
of determining such 15,000,000 shares (x) any shares of Common Stock issued or
sold pursuant to any of the Borrower’s equity compensation plans or employee
stock purchase plans, (y) any shares of Common Stock, Options and Convertible
Securities sold or issued in connection with a Permitted Collaborative
Transaction (as defined below) and (z) the Warrants. For purposes herein,
“Permitted Collaborative Transaction” means a collaborative arrangement,
licensing agreement, joint venture, partnership or similar business arrangement
relating primarily to research involving, or development and/or commercial
exploitation of, or the right to develop or commercially exploit, the
technology, intellectual property or products of the Borrower/Subsidiary and/or
the other party or parties thereto, which party or parties must be primarily
engaged in the sale of products and/or services into the life sciences, clinical

 

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diagnostics, applied research, public health, forensics, food safety, animal
health or manufacturing QC market or any other market applicable to
the technology, intellectual property or products of the Borrower/Subsidiary.

Section 2.4 Payments. Payments of any amounts due to the Lenders under this
Agreement shall be made in Dollars in immediately available funds prior to 4:00
p.m. New York City time on such date that any such payment is due, at such bank
or places as the Lenders shall from time to time designate in writing at least 5
Business Days prior to the date such payment is due. The Borrower shall pay all
and any costs (administrative or otherwise) imposed by banks, clearing houses,
or any other financial institution, in connection with making any payments under
any of the Transaction Documents, except for any costs imposed by the Lenders’
banking institutions.

Section 2.5 Taxes, Duties and Fees.

(a) Any and all payments hereunder or under any other Transaction Document shall
be made, in accordance with this Section 2.5, free and clear of and without
deduction for any and all present or future Taxes except as required by
applicable law. If Borrower shall be required by law to deduct any Indemnified
Taxes from or in respect of any sum payable hereunder or under any other
Transaction Document, (i) the sum payable shall be increased by as much as shall
be necessary so that after making all required deductions for Indemnified Taxes
(including deductions for Indemnified Taxes applicable to additional sums
payable under this Section 2.5) the Lenders shall receive an amount equal to the
sum they would have received had no such deductions been made (any and all such
additional amounts payable to Lenders shall hereafter be referred to as the
“Additional Amounts”), (ii) Borrower shall make such deductions, and
(iii) Borrower shall pay the full amount deducted to the relevant taxing or
other authority in accordance with applicable law. Within thirty (30) days after
the date of any payment of such Taxes, Borrower shall furnish to the applicable
Lender the original or a certified copy of a receipt evidencing payment thereof
or other evidence of such payment reasonably satisfactory to such Lender.

(b) In addition, Borrower agrees to pay, and authorizes Lenders to pay in its
name, all Other Taxes. Within 30 days after the date of any payment of Other
Taxes, Borrower shall furnish to Lenders the original or a certified copy of a
receipt evidencing payment thereof or other evidence of such payment reasonably
satisfactory to the Lenders holding a Majority in Interest.

(c) Borrower shall reimburse and indemnify, within 10 days after receipt of
demand therefor, each Lender for all Indemnified Taxes (including all
Indemnified Taxes imposed by any jurisdiction on amounts payable under this
Section 2.5(c)) paid by such Lender, whether or not such Indemnified Taxes were
correctly or legally asserted. A certificate of the applicable Lender(s) setting
forth the amounts to be paid thereunder and delivered to Borrower shall be
conclusive, binding and final for all purposes, absent manifest error.

(d) Each Lender (other than a Foreign Person (as hereinafter defined)) on or
before the Agreement Date shall provide to Borrower a properly completed and
executed IRS Form W-9 certifying that such Lender is organized under the laws of
the United States. Each

 

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Lender organized under the laws of a jurisdiction outside the United States (a
“Foreign Person”) that is entitled to an exemption from or reduction in U.S.
withholding tax shall provide Borrower with a properly completed and executed
IRS Form W-8ECI, W-8BEN, W-8IMY (including all required attachments) or other
applicable form, or any other applicable certificate or document reasonably
requested by the Borrower, and, if such Foreign Person is relying on the
portfolio interest exception of Section 871(h) or Section 881(c) of the Code (or
any successor provision thereto), shall also provide the Borrower with a
certificate (the “Portfolio Interest Certificate”) representing that such
Foreign Person is not a “bank” for purposes of Section 881(c) of the Code (or
any successor provision thereto), is not a 10% holder of the Borrower described
in Section 871(h)(3)(B) of the Code (or any successor provision thereto), and is
not a controlled foreign corporation receiving interest from a related person
(within the meaning of Sections 881(c)(3)(C) and 864(d)(4) of the Code, or any
successor provisions thereto). Each Lender shall provide new forms (or successor
forms) upon the expiration or obsolescence of any previously delivered forms and
shall promptly notify the Borrower of any change in circumstances which would
modify or render invalid any claimed exemption or reduction.

(e) If a Lender determines in good faith that it has received a refund from a
Government Authority relating to Taxes in respect of which the Borrower paid
Additional Amounts or made a payment pursuant to Section 2.5(c), such Lender
shall promptly pay such refund to the Borrower, net of all out-of-pocket expense
(including any Taxes imposed thereon) of such Lender incurred in obtaining such
refund, provided that the Borrower, upon the request of such Lender, agrees to
repay the amount paid over to the Borrower (plus any penalties, interest or
other charges imposed by the relevant Governmental Authority) to such Lender if
such Lender is required to repay such refund to such Governmental Authority.
Nothing in this Section shall require any Lender to disclose any information it
deems confidential (including, without limitation, its tax returns) to any
Person, including Borrower.

(f) For the avoidance of doubt, the provisions of this Section 2.5 shall not
apply to payments on or under the Warrants or Warrant Shares.

Section 2.6 Costs, Expenses and Losses. If, as a result of any failure by the
Borrower to pay any sums due under this Agreement on the due date therefor
(after the expiration of any applicable grace periods), the Lenders shall incur
costs, expenses and/or losses, by reason of the liquidation or redeployment of
deposits from third parties, the Borrower shall pay to the Lenders upon request
by the Lenders, the amount of such costs, expenses and/or losses within fifteen
(15) days after receipt by it of a certificate from the Lenders setting forth in
reasonable detail such costs, expenses and/or losses, along with supporting
documentation. For the purposes of the preceding sentence, “costs, expenses
and/or losses” shall include, without limitation, any interest paid or payable
to carry any unpaid amount and any loss, premium, penalty or expense which may
be incurred in obtaining, liquidating or employing deposits of or borrowings
from third parties in order to make, maintain or fund the Loan or any portion
thereof.

Section 2.7 Interest. The outstanding principal amount of the Notes shall bear
interest at the Interest Rate (calculated on the basis of the actual number of
days elapsed in each quarter). Interest shall be paid quarterly in arrears
commencing on April 1, 2013 and on the first Business Day of each January,
April, July and October thereafter (each, an “Interest Payment Date”).

 

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Section 2.8 Interest on Late Payments. Without limiting the remedies available
to the Lenders under the Transaction Documents or otherwise, to the maximum
extent permitted by applicable law, if the Borrower fails to make a required
payment of principal or interest with respect to the Loan when due the Borrower
shall pay, in respect of such principal and interest at the rate per annum equal
to the Interest Rate plus ten percent (10%) for so long as such payment remains
outstanding. Such interest shall be payable on demand.

Section 2.9 Fee. On the Agreement Date, the Borrower shall pay to such entity
affiliated with the Lenders as the Lenders shall direct a fee of $500,000.

Section 2.10 Delivery of Warrants.

(a) On the date hereof, the Borrower shall issue to the Lenders warrants to
purchase an aggregate of 5,500,000 shares of Common Stock in substantially the
form set forth on Exhibit D-1 hereto (the “Warrants”) at an initial Exercise
Price of $2.63.

(b) All Warrants issued pursuant to this Section 2.10 shall be allocated among
the Lenders as set forth on Schedule 1.

Section 2.11 AHYDO Catch-Up Provision. Notwithstanding anything in this
Agreement to the contrary, commencing with the first “accrual period” (as
defined under Treas. Reg. Sec. 1.1272-1(b)(1)(ii)) ending after the fifth
anniversary of the Agreement Date, and each accrual period thereafter, Borrower
shall, in respect of any Note, pay in cash, on or before the end of such accrual
period, both the stated interest due and payable as set forth herein and any
accrued and unpaid “original issue discount” (determined in accordance with
Treas. Reg. Secs. 1.1273-1 and 1.1272-1) with respect to such Note if, but only
to the extent that, the aggregate amount of such original issue discount that
has accrued and has not been paid in cash from the Agreement Date through the
end of such accrual period (treating any payments made pursuant to
Section 2.3(a) and Section 2.3(e) of this Agreement as a payment of original
issue discount to the full extent required under Treas. Reg. Sec. 1.1275-2(a))
exceeds the product of the “issue price” (as defined in Treas. Reg. Sec.
1.1273-2(a)(1)) of such Note and the “yield to maturity” (determined in
accordance with Treas. Reg. Sec. 1.1272-1(b)) on such Note.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

Section 3.1 Representations and Warranties of the Borrower. The Borrower
represents and warrants as of the Agreement Date that except as set forth in the
Disclosure Schedule or the SEC Reports:

(a) The Borrower is conducting its business in compliance with its
Organizational Documents, which are in full force and effect with no defaults
outstanding thereunder.

(b) No Default or Event of Default (or any other default or event of default,
however described) has occurred under any of the Transaction Documents.

 

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(c) The Borrower (i) is capable of paying its debts as they fall due, is not
unable and has not admitted its inability to pay its debts as they fall due,
(ii) is not bankrupt or insolvent and (iii) has not taken action, and no such
action has been taken by a third party, for the Borrower’s winding up,
dissolution, or liquidation or similar executory or judicial proceeding or for
the appointment of a liquidator, custodian, receiver, trustee, administrator or
other similar officer for the Borrower or any or all of its assets or revenues.

(d) No Lien exists on the Borrower’s assets, except for Permitted Liens.

(e) The Borrower’s obligation to make any payment under this Agreement (together
with all charges in connection therewith) is absolute and unconditional, and
there exists no right of setoff or recoupment, counterclaim, cross-claim or
defense of any nature whatsoever to any such payment.

(f) No Indebtedness of the Borrower exists other than Permitted Indebtedness.

(g) The Borrower is validly existing as a corporation in good standing under the
laws of Delaware. The Borrower has full power and authority to own its
properties and conduct its business as currently conducted, and is duly
qualified to do business as a foreign entity and is in good standing in each
jurisdiction in which the conduct of its business makes such qualification
necessary and in which the failure to so qualify or be in good standing would
not have a Material Adverse Effect.

(h) There is not pending or, to the knowledge of the Borrower, threatened in
writing, any action, suit or other proceeding before any Governmental Authority
(a) to which the Borrower is a party or (b) which has as the subject thereof any
assets owned by the Borrower. To the knowledge of the Borrower, there are no
current or pending, legal, governmental or regulatory enforcement actions, suits
or other proceedings to which the Borrower or any of its assets is subject.

(i) Each of the Transaction Documents has been duly authorized, executed and
delivered by the Borrower, and constitutes a valid, legal and binding obligation
of the Borrower enforceable in accordance with its terms, except as such
enforceability may be limited by (i) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws affecting creditors’ rights
generally, (ii) by equitable principles (regardless of whether enforcement is
sought in equity or at law), (iii) rules of law governing specific performance,
injunctive relief or other equitable remedies and by general principles of
equity, and (iv) by applicable laws and principles of public policy in the case
of indemnification provisions. The execution, delivery and performance of the
Transaction Documents by the Borrower and the consummation of the transactions
therein contemplated will not (A) conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or, result in the creation or imposition of any Lien (other than the Lien in
favor of the Lenders) upon any assets of the Borrower pursuant to, any agreement
to which the Borrower is a party or by which the Borrower is bound or to which
any of the assets of the Borrower is subject, (B) result in any violation of or
conflict with the provisions of the Organizational Documents of the Borrower or
(C) result in the violation of any law or any judgment, order, rule, regulation
or decree of any Governmental Authority applicable to the Borrower, except, in
the case of clause (C) above, for

 

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any such conflict, breach or violation that would not have a Material Adverse
Effect. No consent, approval, authorization or order of, or registration or
filing with any Governmental Authority is required for the execution, delivery
and performance of any of the Transaction Documents or for the consummation by
the Borrower of the transactions contemplated hereby except for such
registrations and filings in connection with the issuance of the Warrants and
Warrant Shares pursuant the Transaction Documents that are necessary to comply
with federal and state securities laws, rules and regulations, such
registrations and filings contemplated by the Registration Rights Agreement and
filings contemplated by the Security Agreement. The Borrower has the corporate
power and authority to enter into the Transaction Documents and to consummate
the transactions contemplated under the Transaction Documents.

(j) The Borrower holds, and is operating in compliance in all material respects
with, all material franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any Governmental Authority
(collectively, “Necessary Documents”) required for the conduct of its business
and all Necessary Documents are valid and in full force and effect; and to its
knowledge, the Borrower has not received written notice of any revocation or
modification of any of the Necessary Documents, which revocation, modification
or non-renewal, individually or in the aggregate, would result in a Material
Adverse Effect, and the Borrower has no reason to believe that any of the
Necessary Documents will not be renewed in the ordinary course. The Borrower is
in compliance in all material respects with all applicable federal, state, local
and foreign laws, regulations, orders and decrees applicable to the conduct of
its business.

(k) The Borrower has good and marketable title to all of its assets free and
clear of all Liens except Permitted Liens. The property held under lease by the
Borrower is held under valid, subsisting and enforceable leases with only such
exceptions with respect to any particular lease as do not interfere in any
material respect with the conduct of the business of the Borrower.

(l) The Borrower owns, possesses, licenses or has the right to use pursuant to a
valid and enforceable written license, implied license or other legally
enforceable right, or could obtain on commercially reasonable terms, all of the
Intellectual Property (as defined below) that is necessary for the conduct of
its business as currently conducted (the “IP”) except as would not reasonably be
expected to have a Material Adverse Effect. To the knowledge of the Borrower the
material IP owned by the Borrower that is registered with or issued by a
Governmental Authority is valid and enforceable and there is no outstanding,
pending, or, to the knowledge of the Borrower, threatened in writing, action,
suit, other proceeding or claim by any third person challenging or contesting
the validity, scope, use, ownership, enforceability, or other rights of the
Borrower in or to any IP and the Borrower has not received any written notice
regarding any such action, suit, or other proceeding. To the knowledge of the
Borrower, the Borrower has not infringed or misappropriated any material
intellectual property rights of others. To the knowledge of the Borrower, there
is no pending or threatened in writing action, suit, other proceeding or claim
by others that the Borrower infringes upon, violates or uses the Intellectual
Property rights of others without authorization; and the Borrower has not
received any written notice regarding, any such action, suit, other proceeding
or claim. The Borrower is not a party to or bound by any options, licenses, or
agreements with respect to IP other than licenses entered into in the ordinary
course of business. The term “Intellectual Property” as used herein means (i)

 

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all patents, patent applications, patent disclosures and inventions (whether
patentable or unpatentable and whether or not reduced to practice), (ii) all
trademarks, service marks, trade dress, trade names, slogans, logos, and
corporate names and Internet domain names, together with all of the goodwill
associated with each of the foregoing, (iii) copyrights, copyrightable works,
and licenses, (iv) registrations and applications for registration for any of
the foregoing, (v) computer software (including but not limited to source code
and object code), data, databases, and documentation thereof, (vi) trade secrets
and other confidential information, (vii) other intellectual property, and
(viii) copies and tangible embodiments of the foregoing (in whatever form and
medium).

(m) The Borrower is not in violation in any material respect of the
Organizational Documents of the Borrower, or in breach of or otherwise in
default under, and no event has occurred which, with notice or lapse of time or
both, would constitute such breach or other default in the performance of any
agreement or condition contained in any agreement under which it may be bound,
or to which any of its assets is subject, except for such breaches or defaults
as would not have a Material Adverse Effect.

(n) All federal, state, local and foreign income and franchise and other
material Tax returns, reports and statements (collectively, the “Tax Returns”)
required to be filed by any Tax Affiliates have been filed with the appropriate
Governmental Authorities, all such Tax Returns are true and correct in all
material respects, and all Taxes, assessments and other governmental charges and
impositions reflected therein and all other material Taxes, assessments and
other governmental charges otherwise due and payable have been paid prior to the
date on which any liability may be added thereto for non-payment thereof except
for those contested in good faith by appropriate proceedings diligently
conducted and for which adequate reserves are maintained on the books of the
appropriate Tax Affiliate in accordance with GAAP. As of the Agreement Date, no
material Tax Return is under audit or examination by any Governmental Authority,
and no notice of any audit or examination or any assertion of any material claim
for Taxes has been given or made in writing by any Governmental Authority. Each
Tax Affiliate has properly withheld all material amounts required to be withheld
by such Tax Affiliate from its respective employees for all periods in full and
complete compliance with the Tax, social security and unemployment withholding
provisions of applicable law and such withholdings have been timely paid to the
respective Governmental Authorities. No Tax Affiliate has participated in a
“reportable transaction” within the meaning of Treasury Regulation
Section 1.6011-4(b) or has been a member of an affiliated, combined or unitary
group other than the group of which a Tax Affiliate is the common parent.

(o) The Borrower has not granted rights to develop, manufacture, produce,
assemble, distribute, license, market or sell its products to any other Person
except in the ordinary course of business and is not bound by any agreement that
affects the exclusive right of the Borrower to develop, manufacture, produce,
assemble, distribute, license, market or sell its products except in the
ordinary course of business.

(p) The Borrower: (A) is in compliance in all material respects with all
Applicable Laws; (B) does not have any pending warning letter or other
correspondence or notice from the FDA or any correspondence or notice from any
other Governmental Authority alleging or asserting noncompliance with any
Applicable Laws or any licenses, certificates,

 

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approvals, clearances, authorizations, permits and supplements or amendments
thereto required by any Applicable Laws (together, the “Authorizations”);
(C) possesses and complies in all material respects with the Authorizations,
which are valid and in full force and effect except where the failure to possess
or comply with any Authorization thereto would not result in a Material Adverse
Effect; (D) has not received written notice that any Governmental Authority has
taken, is taking or intends to take action to limit, suspend, modify or revoke
any Authorization and has not received any written notice that any Governmental
Authority is considering such action, in each case except as would not have a
Material Adverse Effect; (E) has filed, obtained, maintained or submitted all
reports, documents, forms, notices, applications, records, claims, submissions
and supplements or amendments as required by any Applicable Laws or
Authorizations, except as would not have a Material Adverse Effect; and (F) has
not, either voluntarily or involuntarily, initiated, conducted, or issued or
caused to be initiated, conducted or issued, any recall, market withdrawal or
replacement, safety alert, post-sale warning, “dear doctor” letter, or other
notice or action relating to the alleged lack of safety or efficacy of any
product or any alleged product defect or violation and, to the Borrower’s
knowledge, no third party has initiated, conducted or intends to initiate any
such notice or action, in each case that except as would not have a Material
Adverse Effect.

(q) The Borrower conducts no preclinical or clinical trials.

(r) The financial statements of the Borrower included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2011 and in its Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 31, June 30 and
September 30, 2012 together with the related notes fairly present in all
material respects the financial condition of the Borrower as of the dates
indicated and the results of operations and changes in cash flows for the
periods therein specified in conformity with GAAP consistently applied
throughout the periods involved, subject, in the case of unaudited financial
statements, to year-end adjustments; and, except as disclosed in such financial
statements, there are no material off-balance sheet arrangements or any other
relationships with unconsolidated entities or other persons, that may have a
material current or, to the Borrower’s knowledge, material future effect on the
Borrower’s financial condition, results of operations, liquidity, capital
expenditures, capital resources or significant components of revenue or
expenses.

(s) The Borrower maintains a system of internal accounting controls sufficient
to provide reasonable assurances that (i) transactions are executed in
accordance with management’s general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management’s general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.

(t) (i) To the knowledge of the Borrower, no “prohibited transaction” as defined
under Section 406 of ERISA or Section 4975 of the Code, or any individual or
class exemption issued and not exempt under ERISA Section 408 and the
regulations and published interpretations thereunder has occurred with respect
to any Employee Benefit Plan, except as for such transaction that would not have
a Material Adverse Effect, (ii) at no time within the last

 

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seven (7) years has the Borrower or any ERISA Affiliate maintained, sponsored,
participated in, contributed to or has or had any liability or obligation in
respect of any Employee Benefit Plan subject to Section 302 of ERISA, Title IV
of ERISA, or Section 412 of the Code or any “multiemployer plan” as defined in
Section 3(37) of ERISA or any multiple employer plan for which the Borrower or
any ERISA Affiliate has incurred or could reasonably be expected to incur
liability under Section 4063 or 4064 of ERISA, (iii) no Employee Benefit Plan
represents any current or future liability for retiree health, retiree life
insurance, or other retiree welfare benefits except as may be required by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or similar
state or local law, (iv) each Employee Benefit Plan is and has been operated in
compliance with its terms and all applicable laws, including but not limited to
ERISA and the Code, except for such failures to comply that would not have a
Material Adverse Effect, (v) no event has occurred (including a “reportable
event” as such term is defined in Section 4043 of ERISA) and no condition exists
that would subject the Borrower or any ERISA Affiliate to any tax, fine, lien,
penalty or liability imposed by ERISA, the Code or other applicable law, except
for any such tax, fine, lien, penalty or liability that would not, individually
or in the aggregate, have a Material Adverse Effect, (vi) the Borrower does not
maintain any Foreign Benefit Plan that could reasonably be expected to give rise
to a material liability or material obligation for the Borrower, and (vii) the
Borrower does not have any obligations under any collective bargaining
agreement. As used in this clause (t), “Employee Benefit Plan” means any
material “employee benefit plan” within the meaning of Section 3(3) of ERISA,
including, without limitation, all stock purchase, stock option, stock-based
severance, employment, change-in-control, medical, disability, fringe benefit,
bonus, incentive, deferred compensation, employee loan and all other employee
benefit plans, agreements, programs, policies or other arrangements, whether or
not subject to ERISA, under which (A) any current or former employee, director
or independent contractor of the Borrower or any of its Subsidiaries has any
present or future right to benefits and which are contributed to, sponsored by
or maintained by the Borrower or any of its respective Subsidiaries or (B) the
Borrower or any of its Subsidiaries has had or has any present or future
obligation or liability; “ERISA” means the Employee Retirement Income Security
Act of 1974, as amended; “ERISA Affiliate” means any member of the Borrower’s
controlled group as defined in Code Section 414 (b), (c), (m) or (o); and
“Foreign Benefit Plan” means any Employee Benefit Plan established, maintained
or contributed to outside of the United States of America or which covers any
employee working or residing outside of the United States.

(u) The Borrower has no Subsidiaries other than as set forth on the Disclosure
Schedule.

(v) Subsequent to December 31, 2012, the Borrower has not declared or paid any
dividends or made any distribution of any kind with respect to its capital
stock; and there has not been any change in the capital stock (other than a
change in the number of outstanding shares of Common Stock due to the issuance
of shares upon the exercise of outstanding options or warrants), or any issuance
of options, warrants, convertible securities or other rights to purchase the
capital stock, of the Borrower, except as such transactions may have occurred
under the Borrower’s equity compensation plans and/or employee stock purchase
plan.

(w) All of the issued and outstanding shares of capital stock of the Borrower
are duly authorized and validly issued, fully paid and nonassessable, have been
issued in

 

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compliance with all federal and state and foreign securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities that have not been waived in writing; the
Warrants and the shares of Common Stock issuable upon exercise of the Warrants
(the “Warrant Shares”), have been duly authorized and the Warrant Shares when
issued, delivered and paid for in accordance with the terms of the Warrants,
will have been validly issued and will be fully paid and nonassessable. There
are no preemptive rights or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of any shares of Common Stock, pursuant
to the Borrower’s Organizational Documents or any agreement to which the
Borrower or any of its Subsidiaries is a party or by which the Borrower or any
of its Subsidiaries is bound. All of the issued and outstanding shares of
capital stock of each of the Borrower’s Subsidiaries have been duly and validly
authorized and issued and are fully paid and nonassessable, and the Borrower or
its Subsidiaries owns of record and beneficially, free and clear of any claims,
Liens, proxies, or equities, all of the issued and outstanding shares of such
stock. There are no options, warrants, agreements, contracts or other rights in
existence to purchase or acquire from the Borrower or any Subsidiary of the
Borrower any shares of the capital stock of the Borrower or any Subsidiary of
the Borrower, except for such options or rights issued pursuant to the
Borrower’s equity compensation plans and/or employee stock purchase plan and the
Warrants.

(x) No Subsidiary of the Borrower conducts any material part of the business
conducted by the Borrower and each of its Subsidiaries taken as a whole.

Section 3.2 Borrower Acknowledgment. The Borrower acknowledges that it has made
the representations and warranties referred to in Section 3.1 in connection with
the Lenders entering into the Transaction Documents and that the Lenders have
entered into the Transaction Documents on the basis of, and in full reliance on,
each of such representations and warranties.

Section 3.3 Representations and Warranties of the Lenders. Each Lender
represents and warrants to the Borrower as of the Agreement Date that:

(a) It is acquiring the Warrants and the Warrant Shares solely for its account
for investment, not as an agent or nominee, and not with a view to or for resale
in connection with any distribution of the Warrants or Warrant Shares or any
part thereof.

(b) The Warrants and the Warrants Shares have not been registered under the
Securities Act on the basis that no distribution or public offering of the stock
of the Borrower is to be effected. It realizes that the basis for the exemptions
may not be present if, notwithstanding its representations, such Lender has a
present intention of acquiring the securities for a fixed or determinable period
in the future, selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the securities. None of
the Lenders has such present intention.

(c) The Warrants and the Warrant Shares must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption for such
registration is available.

 

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(d) Neither the Warrants nor the Warrant Shares may be sold pursuant to Rule 144
adopted under the Securities Act unless certain conditions are met.

(e) Lender will not make any disposition of all or any part of the Warrants or
Warrant Shares:

(i) Until there is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with said registration statement; or

(ii) Unless pursuant to an exemption from registration under the Securities Act,
including pursuant to Rules 144 or 144A (and the Borrower agrees that it will
not require an opinion of counsel with respect to transactions under Rule 144 or
Rule 144A of the Securities Act); or

(iii) Unless pursuant to a private sale effected under applicable formal or
informal SEC interpretation or guidance, such as a so-called “4(1) and a half”
sale pursuant to a legal opinion provided by Lender to the Borrower in the form
annexed as Exhibit C to the Warrants.

(f) It understands and agrees that all certificates evidencing the shares to be
issued to the Lenders upon exercise of the Warrants may bear a legend as set
forth in the Warrants.

(g) Such Lender is an “accredited investor” as defined in Regulation D
promulgated under the Securities Act.

(h) Such Lender is duly organized and validly existing under the laws of the
jurisdiction of its formation.

(i) Each Transaction Document to which it is a party has been duly authorized,
executed and delivered by such Lender and constitutes the valid and legally
binding obligation of such Lender, enforceable in accordance with its terms,
except as such enforceability may be limited by (i) applicable insolvency,
bankruptcy, reorganization, moratorium or other similar laws affecting
creditors’ rights generally, and (ii) applicable equitable principles (whether
considered in a proceeding at law or in equity).

(j) Such Lender has full power and authority to make the Disbursement and to
enter into and perform its other obligations under each of the Transaction
Documents and carry out the other transactions contemplated thereby.

(k) Such Lender (A) has had reasonable opportunity to ask questions of and
receive answers from Borrower concerning the Transaction Documents, (B) has been
permitted access, to such Lender’s satisfaction, to the SEC Reports, and
(C) understands that the entry into the Transaction Documents and the investment
in the securities issued thereunder is subject to risks as stated in the risk
factors disclosed in the SEC Reports or as otherwise may be applicable to
similar investments and acknowledges that it has had an opportunity to review,
and upon review, fully understands such risk factors.

 

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ARTICLE 4

CONDITIONS OF DISBURSEMENT

Section 4.1 Conditions to the Disbursement. The obligation of the Lenders to
make the Disbursement shall be subject to the fulfillment of the following
conditions:

(a) The Lenders shall have received executed counterparts of the Transaction
Documents from the Borrower, a certificate as to Organizational Documents,
resolutions, incumbency and an opinion of its counsel reasonably acceptable to
the Lenders;

(b) All actions required to be taken by the Borrower pursuant to Section 2.10
shall have been taken;

(c) The Borrower shall have executed and delivered to the Lenders the
Registration Right Agreement; and

(d) No Default or Event of Default has occurred or would result from the
Disbursement.

ARTICLE 5

PARTICULAR COVENANTS AND EVENTS OF DEFAULT

Section 5.1 Affirmative Covenants. Unless the Lenders holding a Majority in
Interest of the Notes shall otherwise agree:

(i) The Borrower shall and shall cause its Subsidiaries to maintain its
existence and qualify and remain qualified to do its business as currently
conducted, except in each case (a) where the failure to so maintain such
qualification would not reasonably be expected to have a Material Adverse Effect
or (b) any Subsidiary may merge, liquidate or dissolve into another Subsidiary;
provided that if any such event constitutes a Major Transaction and the Lenders
holding a Majority in Interest do not exercise the put right provided for in
Section 5.3, then the provisions of this Section 5.1(i) shall not have any force
or effect with respect to such event.

(ii) The Borrower shall and shall cause its Subsidiaries to comply in all
material respects with all Applicable Laws, except where the necessity of
compliance therewith is contested in good faith by appropriate proceedings or
where the failure to comply would not have a Material Adverse Effect.

(iii) The Borrower shall obtain and shall cause its Subsidiaries to make and
keep in full force and effect all licenses, certificates, approvals,
registrations, clearances, authorizations and permits required to conduct their
businesses, except where the failure to do so would not have a Material Adverse
Effect.

(iv) The Borrower shall promptly notify the Lenders of the occurrence of (i) any
Default or Event of Default and (ii) any claims, litigation, arbitration,
mediation or administrative or regulatory proceedings that are instituted
against the Borrower or any of its Subsidiaries that could reasonably be
expected to have a Material Adverse Effect provided that such notice shall be
given concurrently with public disclosure of any such event.

 

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(v) The Borrower shall maintain Cash and Cash Equivalents on the last day of
each calendar quarter of not less than $2 million.

(vi) If the Borrower is not required to file reports pursuant to Sections 13 or
15(d) of the Exchange Act, the Borrower will provide to the Lenders quarterly
financial statements for itself and its Subsidiaries within 45 days after the
end of each quarter, and audited annual financial statements within 120 days
after the end of each year prepared in accordance with GAAP with a report
thereon by the Borrower’s independent certified public accountants. If the
Borrower is required to file such reports, the Borrower will timely file with
the SEC (subject to appropriate extensions made under Rule 12b-25 of the
Exchange Act) any annual reports, quarterly reports and other periodic reports
required to be filed pursuant to Section 13 or 15(d) of the Exchange Act, and
the Borrower and its Subsidiaries will provide to the Lenders copies of all
documents, reports, financial data and other information not containing any
material non-public information that the Lenders may reasonably request.

(vii) The Borrower shall not conduct a material part of its business conducted
by the Borrower and its Subsidiaries taken as a whole, in whole or in part,
through any Subsidiary other than a Domestic Subsidiary unless such Subsidiary
executes and delivers to the Lenders a guaranty of the Obligations in a form
satisfactory to the Lenders and, if requested by the Lenders, a security
agreement in the form of the Security Agreement.

Section 5.2 Negative Covenants. Unless the Lenders holding a Majority in
Interest of the Notes shall otherwise agree:

(i) The Borrower shall not and shall not permit any Subsidiary to (a) liquidate,
provided that a Subsidiary may liquidate or merge into the Borrower or any other
Subsidiary, or dissolve (unless, in any such case, such Subsidiary ceases to own
any operating assets or conduct business), or (b) consummate any merger or
consolidation, unless (x) the Borrower or a Subsidiary is the surviving
corporation; provided that if any such event constitutes a Major Transaction and
the Lenders holding a Majority in Interest do not exercise the put right
provided for in Section 5.3, then the provisions of this Section 5.2(i) shall
not have any force or effect with respect to such event.

(ii) The Borrower shall not establish any Domestic Subsidiary that conducts any
material part of the business conducted by the Borrower and its Subsidiaries
taken as a whole unless such Domestic Subsidiary executes and delivers to the
Lenders a guaranty of the Obligations in a form reasonably satisfactory to the
Lenders holding a Majority in Interest and the Borrower and, if requested by the
Lenders, a security agreement in the form of the Security Agreement.

(iii) The Borrower shall not and shall not permit any Subsidiary to (i) enter
into any partnership, joint venture, syndicate, pool, profit-sharing or

 

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royalty agreement or other combination or engage in any such transaction with an
Affiliate of the Borrower in its capacity as such (other than Permitted
Affiliate Transactions), in each case whereby its income or profits are, or
might be, shared with another Person other than a Subsidiary except that the
Borrower and/or any Subsidiary may enter into any collaborative arrangements,
licensing agreements, joint ventures, partnerships and similar business
arrangements relating to research involving, or development and/or commercial
exploitation of, or the right to develop or commercially exploit, the
technology, intellectual property or products of the Borrower/Subsidiary and/or
the other party or parties thereto (including, without limitation, arrangements
that involve the assignment or licensing of any existing or newly developed
Intellectual Property under such arrangements or arrangements in respect of
funding research and development in exchange for future distribution rights in a
strategic arrangement), including any such arrangements whereby its income or
profits are or might be shared with any other Person, (ii) enter into any
management contract or similar arrangement whereby a substantial part of its
business is managed by another Person (other than the Borrower or any
Subsidiary), (iii) distribute, or permit the distribution of, any of its assets,
including its intangibles, to any Affiliate of the Borrower (in its capacity as
such) or any shareholder of the Borrower (in its capacity as such) or any
equityholder of an Affiliate (in its capacity as such) except for Permitted
Distributions and Permitted Affiliate Transactions or (iv) license or lease any
of its assets except (a) in connection with any arrangements described in part
(i) of this paragraph and (b) licenses or leases entered into in the ordinary
course of business.

(iv) The Borrower shall not and shall not permit any Subsidiary to (a) create,
incur or suffer any Lien upon any of its assets, except Permitted Liens or
(b) assign, sell, transfer or otherwise dispose of, any Transaction Document, or
its rights and obligations thereunder, except to the Borrower or a Subsidiary.

(v) The Borrower shall not and shall not permit any Subsidiary to create, incur,
assume, guarantee or remain liable with respect to any Indebtedness, other than
Permitted Indebtedness.

Section 5.3 Major Transaction. The Borrower shall give the Lenders notice of a
Major Transaction at least 30 days prior to the consummation of such transaction
but in any event not later than 5 Business Days following the first public
announcement thereof. Within 5 days after the receipt of such notice the Lenders
holding a Majority in Interest, in the exercise of their sole discretion, may
deliver a notice to the Borrower (the “Put Notice”), that the Final Payment
shall be due and payable simultaneously with the consummation of such Major
Transaction. If the Lenders deliver a Put Notice, then simultaneously with
consummation of such Major Transaction, the Borrower shall make the Final
Payment to the Lenders.

Section 5.4 General Acceleration Provision upon Events of Default. If one or
more of the events specified in this Section 5.4 shall have happened and be
continuing beyond the applicable cure period (each, an “Event of Default”), the
Lenders, by written notice to the Borrower, may declare the principal of, and
accrued and unpaid interest on, the Notes or any part

 

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of any of them (together with any other amounts accrued or payable under the
Transaction Documents) to be, and the same shall thereupon become, immediately
due and payable, without any further notice and without any presentment, demand,
or protest of any kind, all of which are hereby expressly waived by the
Borrower, and take any further action available at law or in equity, including,
without limitation, the sale of the Loan and all other rights acquired in
connection with the Loan:

(a) The Borrower shall have failed to make payment of (i) principal under the
Notes when due or (ii) any interest under the Notes when due and such failure
shall have continued for five (5) Business Days.

(b) The Borrower shall have failed to comply with the due observance or
performance of any covenant contained in this Agreement, the Security Agreement
or the Notes (other than the covenants described in (a) above), and such failure
shall not have been cured by the Borrower within 30 days after receiving written
notice of such failure from the Lenders.

(c) Any representation or warranty made by the Borrower in any Transaction
Document shall have been incorrect, false or misleading as of the date it was
made.

(d) (i) The Borrower shall generally be unable to pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts as they
come due or shall make a general assignment for the benefit of creditors;
(ii) the Borrower shall declare a moratorium on the payment of its debts;
(iii) the commencement by the Borrower of proceedings to be adjudicated bankrupt
or insolvent, or the consent by it to the commencement of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization, intervention or other similar relief under
any applicable law, or the consent by it to the filing of any such petition or
to the appointment of an intervenor, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of all or substantially all of its
assets; (iv) the commencement against the Borrower of a proceeding in any court
of competent jurisdiction under any bankruptcy or other applicable law (as now
or hereafter in effect) seeking its liquidation, winding up, dissolution,
reorganization, arrangement, adjustment, or the appointment of an intervenor,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official), and any such proceeding shall continue undismissed, or any order,
judgment or decree approving or ordering any of the foregoing shall continue
unstayed or otherwise in effect, for a period of ninety (90) days; or (v) any
other event shall have occurred which under any applicable law would have an
effect analogous to any of those events listed above in this subsection.

(e) One or more judgments against the Borrower or any Subsidiary or attachments
against any of their respective property not covered by insurance in an amount
individually or in the aggregate in excess of $250,000, remain(s) unpaid,
unstayed on appeal, undischarged, unbonded or undismissed for a period of
30 days from the date of entry of such judgment.

(f) Any authorization necessary for the execution, delivery or performance by
the Borrower of any Transaction Document or for the validity or enforceability
of any of the Obligations under any Transaction Document is not given or is
withdrawn or ceases to remain in full force or effect.

 

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(g) The validity of any Transaction Document shall be contested by the Borrower,
or any treaty, law, regulation, communiqué, decree, ordinance or policy of any
jurisdiction shall purport to render any material provision of any Transaction
Document invalid or unenforceable or shall purport to prevent or materially
delay the performance or observance by the Borrower of the Obligations.

(h) There is a failure to perform any agreement to which the Borrower of any
Subsidiary is a party resulting in a right by a third party to accelerate the
maturity of any Indebtedness for borrowed money in an amount in excess of
$250,000

(i) So long as the Lenders hold the Warrants, the occurrence of an Event of
Default (as such term is defined in the Warrants).

Section 5.5 Automatic Acceleration on Dissolution or Bankruptcy. Notwithstanding
any other provisions of this Agreement, if an Event of Default under
Section 5.4(d) shall occur, the principal of the Notes (together with any other
amounts accrued or payable under this Agreement) shall thereupon become
immediately due and payable without any presentment, demand, protest or notice
of any kind, all of which are hereby expressly waived by the Borrower.

Section 5.6 Recovery of Amounts Due. If any amount payable hereunder is not paid
as and when due, the Borrower hereby authorizes the Lenders to proceed, to the
fullest extent permitted by applicable law, without prior notice, by right of
set-off, banker’s lien or counterclaim, against any moneys or other assets of
the Borrower to the full extent of all amounts payable to the Lenders.

ARTICLE 6

MISCELLANEOUS

Section 6.1 Notices. Any notices required or permitted to be given under the
terms hereof shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile or by electronic mail and shall be
effective five (5) days after being placed in the mail, if mailed by regular
United States mail, or upon receipt, if delivered personally or by courier
(including a recognized overnight delivery service) or by facsimile, or when
read by electronic mail (sender shall have received a “read by recipient”
confirmation) in each case addressed to a party. The addresses for such
communications shall be:

If to the Borrower:

1380 Willow Road

Menlo Park, CA 94025

Attn: Stephen Moore

Email: smoore@pacificbiosciences.com

 

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With copy to:

Wilson Sonsini Goodrich & Rosati, PC

650 Page Mill Road

Palo Alto, CA 94304

Fax: 650-493-6811

Email: dpetkanics@wsgr.com

Attn: Donna Petkanics

If to the Lenders:

Deerfield Management Company, L.P.

780 Third Avenue, 37th Floor

New York, NY 10017

Fax: 212-599-3075

Email: dclark@deerfield.com

Attn: David J. Clark

With a copy to:

Katten Muchin Rosenman LLP

575 Madison Avenue

New York, New York 10022

Fax: (212) 940-8776

Email: mark.fisher@kattenlaw.com

Attn: Mark I. Fisher, Esq.

Section 6.2 Waiver of Notice. Whenever any notice is required to be given to the
Lenders or the Borrower under the any of the Transaction Documents, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.

Section 6.3 Reimbursement of Legal and Other Expenses. If any amount owing to
the Lenders under any Transaction Document shall be collected through
enforcement of this Agreement, any Transaction Document or restructuring of the
Loan in the nature of a work-out, settlement, negotiation, or any process of
law, or shall be placed in the hands of third Persons for collection, the
Borrower shall pay (in addition to all monies then due in respect of the Loan or
otherwise payable under any Transaction Document) reasonable attorneys’ and
other reasonable fees and out-of-pocket expenses incurred by the Lenders in
respect of such collection.

Section 6.4 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
applicable to contracts made and to be performed in such State. Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by this Agreement (whether brought
against a party hereto or its respective affiliates, directors, officers,
shareholders, employees or agents) may be commenced non-exclusively in the state
and federal courts sitting in the City of New York. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of

 

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Manhattan for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court. Each party hereby irrevocably waives personal service of process
and consents to process being served in any such suit, action or proceeding by
mailing a copy thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any other
manner permitted by law. The parties hereby waive all rights to a trial by jury.

Section 6.5 Successors and Assigns. This Agreement shall bind and inure to the
respective successors and assigns of the Parties, except that Borrower may not
assign or otherwise transfer all or any part of its rights under the Transaction
Documents without the prior written consent of the Lenders; provided that the
Borrower may assign or transfer all or any part of its rights under the
Transaction Documents without the prior written consent of the Lenders in
connection with a Major Transaction if the Lenders holding a Majority in
Interest do not exercise the put right provided for in Section 5.3.

Section 6.6 Entire Agreement. The Transaction Documents contain the entire
understanding of the Parties with respect to the matters covered thereby and
supersede any and all other written and oral communications, negotiations,
commitments and writings with respect thereto. The provisions of this Agreement
may be waived, modified, supplemented or amended only by an instrument in
writing signed by the authorized officer of each the Borrower and Lenders
holding a Majority in Interest.

Section 6.7 Severability. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any law, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby. The Parties shall endeavor in good faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provision.

Section 6.8 Counterparts. This Agreement may be executed in several
counterparts, and by each Party on separate counterparts, each of which and any
photocopies and facsimile copies thereof shall be deemed an original, but all of
which together shall constitute one and the same agreement.

Section 6.9 Survival.

(a) This Agreement and all agreements, representations and warranties made in
the Transaction Documents, and in any document, certificate or statement
delivered pursuant thereto or in connection therewith shall be considered to
have been relied upon by the other Parties and shall survive the execution and
delivery of this Agreement and the making of the Loan hereunder regardless of
any investigation made by any such other Party or on its behalf, and shall
continue in force until all amounts payable under the Transaction Documents
shall have been fully paid in accordance with the provisions thereof, and the
Lenders shall not be deemed to

 

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have waived, by reason of making the Loan, any Event of Default that may arise
by reason of such representation or warranty proving to have been false or
misleading, notwithstanding that the Lenders may have had notice or knowledge of
any such Event of Default or may have had notice or knowledge that such
representation or warranty was false or misleading at the time the Disbursement
was made.

(b) The obligations of the Borrower under Section 1.4 and the obligations of the
Borrower and the Lenders under this Article 6 shall survive and remain in full
force and effect regardless of the consummation of the transactions contemplated
hereby, the repayment of the Loan, or the termination of this Agreement or any
provision hereof.

Section 6.10 Waiver. Neither the failure of, nor any delay on the part of, any
Party in exercising any right, power or privilege hereunder, or under any other
Transaction Document, shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder, or under any other
Transaction Document, preclude other or further exercise thereof or the exercise
of any other right, power or privilege; nor shall any waiver of any right,
power, privilege or default hereunder, or under any other Transaction Document,
constitute a waiver of any other right, power, privilege or default or
constitute a waiver of any default of the same or of any other term or
provision. No course of dealing and no delay in exercising, or omission to
exercise, any right, power or remedy accruing to the Lenders upon any default
under this Agreement, or any other agreement shall impair any such right, power
or remedy or be construed to be a waiver thereof or an acquiescence therein; nor
shall the action of the Lenders in respect of any such default, or any
acquiescence by it therein, affect or impair any right, power or remedy of the
Lenders in respect of any other default. All rights and remedies herein provided
are cumulative and not exclusive of any rights or remedies otherwise provided by
law.

Section 6.11 Indemnity.

(a) The Parties shall, at all times, indemnify and hold each other (the
“Indemnity”) and each of their respective directors, partners, officers,
employees, agents, counsel and advisors (each, an “Indemnified Person”) harmless
in connection with any losses, damages, liabilities, penalties, or other
expenses resulting from claims from third parties arising out of, or relating
to, this Agreement or the Security Agreement or the use or intended use of the
Loan other than in accordance with this Agreement, which an Indemnified Person
may incur or to which an Indemnified Person may become subject (each, a “Loss”).
The Indemnity shall not apply to the extent that a court or arbitral tribunal
with jurisdiction over the subject matter of the Loss, and over the Lenders or
the Borrower, as applicable, and such other Indemnified Person that had an
adequate opportunity to defend its interests, determines that such Loss resulted
from the gross negligence or willful misconduct of the Indemnified Person, which
determination results in a final, non-appealable judgment or decision of a court
or tribunal of competent jurisdiction. The Indemnity is independent of and in
addition to any other agreement of any Party under any Transaction Document to
pay any amount to the Lenders or the Borrower, as applicable, and any exclusion
of any obligation to pay any amount under this subsection shall not affect the
requirement to pay such amount under any other section hereof or under any other
agreement. None of the Parties shall have any liability (whether direct or
indirect, in contract, tort or otherwise) under the Indemnity except to the
extent of direct (as opposed to special, indirect, consequential or punitive)
damages determined in a final, nonappealable judgment by a court of competent
jurisdiction.

 

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(b) Promptly after receipt by an Indemnified Person under this Section 6.11 of
notice of the commencement of any action (including any governmental action),
such Indemnified Person shall, if a Loss in respect thereof is to be made
against any Party (the “Indemnifying Person”) under this Section 6.11, deliver
to the Indemnifying Person a written notice of the commencement thereof, and the
Indemnifying Person shall have the right to participate in, and, to the extent
the Indemnifying Person so desires, to assume control of the defense thereof
with counsel mutually satisfactory to the Indemnifying Person and the
Indemnified Person, as the case may be.

(c) An Indemnified Person shall have the right to retain its own counsel with
the reasonable fees and expenses to be paid by the Indemnifying Person, if, in
the reasonable opinion of counsel for the Indemnifying Person, the
representation by such counsel of the Indemnified Person and the Indemnifying
Person would be inappropriate due to actual or potential differing interests
between such Indemnified Person and any other party represented by such counsel
in such proceeding. Notwithstanding the foregoing, the Indemnifying Person shall
pay for only one separate legal counsel for the Indemnified Persons, and such
legal counsel shall be selected by the Indemnifying Person. The failure to
deliver written notice to the Indemnifying Person within a reasonable time of
the commencement of any such action shall not relieve the Indemnifying Person of
any liability to the Indemnified Person under this Section 6.11, except to the
extent that the Indemnifying Person is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6.11 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.

(d) Without prejudice to the survival of any other agreement of any of the
Parties hereunder, the agreements and the obligations of the Parties contained
in this Section 6.11 shall survive the termination of each other provision
hereof and the payment of all amounts payable to the Lenders hereunder.

Section 6.12 No Usury. The Transaction Documents are hereby expressly limited so
that in no contingency or event whatsoever, whether by reason of acceleration or
otherwise, shall the amount paid or agreed to be paid to the Lenders for the
Loan exceed the maximum amount permissible under applicable law. If from any
circumstance whatsoever fulfillment of any provision hereof, at the time
performance of such provision shall be due, shall involve transcending the limit
of validity prescribed by law, then, ipso facto, the obligation to be fulfilled
shall be reduced to the limit of such validity, and if from any such
circumstance the Lenders shall ever receive anything which might be deemed
interest under applicable law, that would exceed the highest lawful rate, such
amount that would be deemed excessive interest shall be applied to the reduction
of the principal amount owing on account of the Loan, or if such deemed
excessive interest exceeds the unpaid balance of principal of the Loan, such
deemed excess shall be refunded to the Borrower. All sums paid or agreed to be
paid to the Lenders for the Loan shall, to the extent permitted by applicable
law, be deemed to be amortized, prorated, allocated and spread throughout the
full term of the Loan until payment in full so that the deemed rate of interest
on account of the Loan is uniform throughout the term thereof. The terms and
provisions of this Section shall control and supersede every other provision of
this Agreement and the Notes.

 

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Section 6.13 Further Assurances. From time to time, the Borrower shall perform
any and all acts and execute and deliver to the Lenders such additional
documents as may be necessary or as reasonably requested by the Lenders to carry
out the purposes of any Transaction Document or to preserve and protect the
Lenders’ rights as contemplated therein.

Section 6.14 Independent Transaction Documents. Each Transaction Document
constitutes an independent agreement between the parties thereto (the
“Transaction Parties”) and no Transaction Document shall be construed so as to
affect the rights of the Transaction Parties to their rights and remedies under
another Transaction Document.

[SIGNATURE PAGE FOLLOWS]

 

33

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IN WITNESS WHEREOF, the Lenders and the Borrower have caused this Agreement to
be duly executed as of the 5th day of February 2013.

 

BORROWER: PACIFIC BIOSCIENCES OF CALIFORNIA, INC. By:  

/s/ Susan K. Barnes

Name:   Susan K. Barnes Title:   Executive Vice President and
Chief Financial Officer LENDERS:

 

DEERFIELD PRIVATE DESIGN FUND II, L.P. By:   Deerfield Mgmt, L.P., its General
Partner By:   J.E. Flynn Capital LLC, its General Partner By:   /s/ David J.
Clark Name:   David J. Clark Title:   Authorized Signatory DEERFIELD PRIVATE
DESIGN INTERNATIONAL II, L.P. By:   Deerfield Mgmt, L.P., its General Partner
By:   J.E. Flynn Capital LLC, its General Partner By:   /s/ David J. Clark Name:
  David J. Clark Title:   Authorized Signatory DEERFIELD SPECIAL SITUATIONS
FUND, L.P. By:   Deerfield Mgmt, L.P., its General Partner By:   J.E. Flynn
Capital LLC, its General Partner By:   /s/ David J. Clark Name:   David J. Clark
Title:   Authorized Signatory DEERFIELD SPECIAL SITUATIONS INTERNATIONAL MASTER
FUND, L.P. By:   Deerfield Mgmt, L.P., its General Partner By:   J.E. Flynn
Capital LLC, its General Partner By:   /s/ David J. Clark Name:   David J. Clark
Title:   Authorized Signatory

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SCHEDULE 1

 

LENDER

  ALLOCATION OF DISBURSEMENT,
PREPAYMENTS AND WARRANTS  

Deerfield Special Situations International Master Fund, L.P.

  $ 1,867,500        501,037 Warrants   

Deerfield Special Situations Fund, L.P.

  $ 2,632,500        706,280 Warrants   

Deerfield Private Design Fund II, L.P.

  $ 7,456,000        2,000,390 Warrants   

Deerfield Private Design International II, L.P.

  $ 8,544,000        2,292,293 Warrants   

 

35

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DISCLOSURE SCHEDULE

Permitted Indebtedness

None

Permitted Liens

Pacific Biosciences of California, Inc.:

 

Secured Party

  

Original UCC-1 File No.

  

Jurisdiction

  

Collateral

Air Liquide industrial U.S. LP    12 7330541935 (filed 09/25/2012)    California
   Equipment Wells Fargo Foothill    20100153761 (filed 1/15/2010)    Delaware
   Equipment

Representations and Warranties (Section 3.1)

Foreign Benefit Plans (Section 3.1(s))

Benefit pension plan sponsored by Pacific Biosciences UK Ltd., currently
administered by Scottish Widows PLC

Subsidiaries (Section 3.1(t))

Pacific Biosciences International LLC [including Taiwan Registered Office]

Pacific Biosciences UK Ltd.

Pacific Biosciences Germany GmbH

Pacific Biosciences Canada Limited

PacBio Singapore PTE. Limited

Pacific Biosciences Japan GK

 

36

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Exhibit A

FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE CODE, THIS NOTE IS BEING
ISSUED WITH ORIGINAL ISSUE DISCOUNT. BORROWER WILL PROVIDE PROMPTLY TO ANY
LENDER, UPON WRITTEN REQUEST, THE ISSUE DATE, ISSUE PRICE, AMOUNT OF ORIGINAL
ISSUE DISCOUNT, AND YIELD TO MATURITY WITH RESPECT TO SUCH LENDER’S NOTE. ANY
SUCH WRITTEN REQUEST SHOULD BE MADE TO PACIFIC BIOSCIENCES OF CALIFORNIA, INC.,
1380 WILLOW ROAD, MENLO PARK, CA 94025, ATTENTION: [TITLE ONLY].

PROMISSORY NOTE

February 2013

FOR VALUE RECEIVED, Pacific Biosciences of California, Inc., a Delaware
corporation (the “Maker”), by means of this Promissory Note (this “Note”),
hereby unconditionally promises to [                    ] (the “Payee”), a
principal amount equal to [                    ], in lawful money of the United
States of America and in immediately available funds, on the dates provided in
the Facility Agreement.

This Note is a “Note” referred to in the Facility Agreement dated as of February
[    ], 2013 between the Maker, the Payee and the other parties thereto (as
amended, restated, modified and supplemented and in effect from time to time,
the “Facility Agreement”), with respect to the Loan made by the Payee
thereunder. Capitalized terms used herein and not expressly defined in this Note
shall have the respective meanings assigned to them in the Facility Agreement.

This Note shall bear interest on the principal amount hereof pursuant to the
provisions of the Facility Agreement.

The Maker shall make all payments to the Payee of interest and principal under
this Note in the manner provided in and otherwise in accordance with the
Facility Agreement. The outstanding principal amount of this Note shall be due
and payable in full on the Maturity Date.

If default (beyond any applicable grace period) is made in the punctual payment
of principal or any other amount under this Note in accordance with the Facility
Agreement, or if any other Event of Default has occurred and is continuing, this
Note shall, at the Payee’s option exercised at any time upon or after the
occurrence and during the continuance of any such payment default or other Event
of Default and in accordance with the applicable provisions of the Facility
Agreement, become immediately due and payable.

All payments of any kind due to the Payee from the Maker pursuant to this Note
shall be made in the full face amount thereof. Subject to the terms of the
Facility Agreement, all such payments will be free and clear of, and without
deduction or withholding for, any present or future taxes. The Maker shall pay
all and any costs (administrative or otherwise) imposed by the Maker’s banks,
clearing houses, or any other financial institution, in connection with making
any payments hereunder.

 

A-1

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The Maker shall pay all costs of collection, including, without limitation, all
reasonable, documented legal expenses and attorneys’ fees, paid or incurred by
the Payee in collecting and enforcing this Note.

Other than those notices required to be provided by Payee to Maker under the
terms of the Facility Agreement, the Maker and every endorser of this Note, or
the obligations represented hereby, expressly waives presentment, protest,
demand, notice of dishonor or default, and notice of any kind with respect to
this Note and the Facility Agreement or the performance of the obligations under
this Note and/or the Facility Agreement. No renewal or extension of this Note or
the Facility Agreement, no release of any Person primarily or secondarily liable
on this Note or the Facility Agreement, including the Maker and any endorser, no
delay in the enforcement of payment of this Note or the Facility Agreement, and
no delay or omission in exercising any right or power under this Note or the
Facility Agreement shall affect the liability of the Maker or any endorser of
this Note.

No delay or omission by the Payee in exercising any power or right hereunder
shall impair such right or power or be construed to be a waiver of any default,
nor shall any single or partial exercise of any power or right hereunder
preclude the full exercise thereof or the exercise of any other power or right.
The provisions of this Note may be waived or amended only in a writing signed by
the Maker and the Payee. This Note may be prepaid in whole or in part in
accordance with the provisions of the Facility Agreement.

This Note, and any rights of the Payee arising out of or relating to this Note,
may, at the option of the Payee, be enforced by the Payee in the courts of the
United States of America located in the Southern District of the State of New
York or in any other courts having jurisdiction. For the benefit of the Payee,
the Maker hereby irrevocably agrees that any legal action, suit or other
proceeding arising out of or relating to this Note may be brought in the courts
of the State of New York or of the United States of America for the Southern
District of New York, and hereby consents that personal service of summons or
other legal process may be made as set forth in Section 6.1 of the Facility
Agreement, which service the Maker agrees shall be sufficient and valid. The
Maker hereby waives any and all rights to demand a trial by jury in any action,
suit or other proceeding arising out of or relating to this Note or the
transactions contemplated by this Note.

This Note shall be governed by, and construed in accordance with, the laws of
the State of New York applicable to contracts made and to be performed in such
State.

[Signature page follows]

 

A-2

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IN WITNESS WHEREOF, an authorized representative of the Maker has executed this
Note as of the date first written above.

 

PACIFIC BIOSCIENCES OF CALIFORNIA, INC. By:  

 

  Name:   Title

 

A-3