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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2021

Or

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

For the transition period from             to             

Commission File Number 001-34899

 

Pacific Biosciences of California, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

16-1590339

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1305 O’Brien Drive

Menlo Park, CA

94025

(Address of principal executive offices)

(Zip Code)

(650521-8000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

PACB

The NASDAQ Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  T No  o

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

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

T

Smaller reporting company

T

Emerging growth company

o


Table of Contents

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

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

Number of shares outstanding of the issuer’s common stock as of April 30, 2021: 198,372,941.  


2


Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

PAGE No

Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

4

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the ThreeMonths Ended March 31, 2021 and 2020

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020

6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

7

Notes to Condensed Consolidated Financial Statements

8

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

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. Controls and Procedures

31

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

32

Item 1A. Risk Factors

32

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

59

Item 3. Default Upon Senior Securities

59

Item 4. Mine Safety Disclosures

59

Item 5. Other Information

59

Item 6. Exhibits

60

3


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

March 31,

December 31,

(in thousands, except per share amounts)

2021

2020

Assets

Current assets

Cash and cash equivalents

$

932,398

$

81,611

Investments

227,921

237,203

Accounts receivable

12,906

16,837

Inventory

16,268

14,230

Prepaid expenses and other current assets

5,623

4,870

Short-term restricted cash

836

836

Total current assets

1,195,952

355,587

Property and equipment, net

24,207

24,899

Operating lease right-of-use assets, net

29,162

29,951

Long-term restricted cash

3,500

3,500

Other long-term assets

67

43

Total assets

$

1,252,888

$

413,980

Liabilities and Stockholders’ Equity

Current liabilities

Accounts payable

$

3,471

$

3,579

Accrued expenses

14,672

17,350

Deferred revenue, current

9,607

8,722

Operating lease liabilities, current

4,448

4,332

Other liabilities, current

1,539

4,519

Total current liabilities

33,737

38,502

Deferred revenue, non-current

5,687

1,568

Operating lease liabilities, non-current

36,485

37,667

Convertible senior notes, net

895,674

Other liabilities, non-current

752

752

Total liabilities

972,335

78,489

Commitments and contingencies

 

 

Stockholders’ equity

Preferred stock, $0.001 par value:

Authorized 50,000 shares; No shares issued or outstanding

Common stock, $0.001 par value:

Authorized 1,000,000 shares; issued and outstanding 198,340 shares and 192,294 shares at March 31, 2021 and December 31, 2020, respectively

198

192

Additional paid-in capital

1,404,585

1,372,083

Accumulated other comprehensive income

74

85

Accumulated deficit

(1,124,304)

(1,036,869)

Total stockholders’ equity

280,553

335,491

Total liabilities and stockholders’ equity

$

1,252,888

$

413,980

See accompanying notes to the condensed consolidated financial statements.

4


Table of Contents

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

Three Months Ended March 31,

(in thousands, except per share amounts)

2021

2020

Revenue:

Product revenue

$

25,303

$

12,293

Service and other revenue

3,694

3,305

Total revenue

28,997

15,598

Cost of revenue:

Cost of product revenue

12,697

5,421

Cost of service and other revenue

3,323

2,689

Total cost of revenue

16,020

8,110

Gross profit

12,977

7,488

Operating expense:

Research and development

20,548

15,250

Sales, general and administrative

26,139

24,947

Total operating expense

46,687

40,197

Operating loss

(33,710)

(32,709)

Gain (loss) from Continuation Advances

(52,000)

34,000

Interest expense

(1,789)

(267)

Other income, net

64

238

Net income (loss)

(87,435)

1,262

Other comprehensive income:

Unrealized income (loss) on investments

(11)

25

Comprehensive income (loss)

$

(87,446)

$

1,287

Net income (loss) per share:

Basic

$

(0.45)

$

0.01

Diluted

$

(0.45)

$

0.01

Weighted average shares outstanding used in computing net income (loss) per share

Basic

194,790

153,453

Diluted

194,790

155,855

See accompanying notes to the condensed consolidated financial statements.


5


Table of Contents

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

Accumulated

Additional

Other

Total

Paid-in

Comprehensive

Accumulated

Stockholders'

(in thousands)

Common Stock

Capital

Income (Loss)

Deficit

Equity

For the three months ended March 31, 2021

Balance at December 31, 2020

192,294 

$

192 

$

1,372,083 

$

85 

$

(1,036,869)

$

335,491 

Net loss

(87,435)

(87,435)

Other comprehensive loss

(11)

(11)

Issuance of common stock in conjunction with equity plans

6,046 

6 

22,337 

22,343 

Stock-based compensation expense

10,165 

10,165 

Balance at March 31, 2021

198,340 

$

198 

$

1,404,585 

$

74 

$

(1,124,304)

$

280,553 

For the three months ended March 31, 2020

Balance at December 31, 2019

153,119 

$

153 

$

1,120,999 

$

5 

$

(1,066,240)

$

54,917 

Net income

1,262 

1,262 

Other comprehensive income

25 

25 

Adoption effect of Topic 326

(32)

(32)

Issuance of common stock in conjunction with equity plans

834 

1 

198 

199 

Stock-based compensation expense

4,032 

4,032 

Balance at March 31, 2020

153,953 

$

154 

$

1,125,229 

$

30 

$

(1,065,010)

$

60,403 

See accompanying notes to the condensed consolidated financial statements

6


Table of Contents

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended March 31,

(in thousands)

2021

2020

Cash flows from operating activities

Net income (loss)

$

(87,435)

$

1,262

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Loss (gain) from Continuation Advances

52,000

(34,000)

Depreciation

1,606

1,657

Amortization of operating lease right-of-use assets

790

709

Amortization of debt discount and financing costs

74

129

Stock-based compensation

10,165

4,032

Amortization (accretion) from investment premium (discount)

565

(83)

Changes in assets and liabilities

Accounts receivable

3,931

7,909

Inventory

(2,556)

(3,374)

Prepaid expenses and other assets

(675)

(58)

Accounts payable

153

(4,129)

Accrued expenses

(2,680)

4,721

Deferred revenue

5,004

(970)

Operating lease liabilities

(1,066)

(931)

Other liabilities

(2,980)

489

Deferred gain from Reverse Termination Fee

98,000

Net cash provided by (used in) operating activities

(23,104)

75,363

Cash flows from investing activities

Purchase of property and equipment

(401)

(117)

Purchase of investments

(64,426)

(72,960)

Sales of investments

4,597

Maturities of investments

68,400

18,750

Net cash provided by (used in) investing activities

8,170

(54,327)

Cash flows from financing activities

Continuation Advances

(52,000)

34,000

Notes payable principal payoff

(16,000)

Proceeds from issuance of Convertible Senior Notes, net of issuance costs

895,624

Issuance costs paid for underwritten public equity offering

(246)

Proceeds from issuance of common stock from equity plans

22,343

199

Net cash provided by financing activities

865,721

18,199

Net increase in cash and cash equivalents and restricted cash

850,787

39,235

Cash and cash equivalents and restricted cash at beginning of period

85,947

33,627

Cash and cash equivalents and restricted cash at end of period

$

936,734

$

72,862

Cash and cash equivalents at end of period

$

932,398

$

68,862

Restricted cash at end of period

4,336

4,000

Cash and cash equivalents and restricted cash at end of period

$

936,734

$

72,862

See accompanying notes to the condensed consolidated financial statements.

 

7


Table of Contents

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. OVERVIEW

We design, develop and manufacture sequencing systems to help scientists resolve genetically complex problems. Based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, our products enable: de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures; full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes; targeted sequencing to more comprehensively characterize genetic variations; and real-time kinetic information for epigenome characterization. Our technology provides high accuracy, ultra-long reads, uniform coverage and the ability to simultaneously detect epigenetic changes. PacBio® sequencing systems, including consumables and software, provide a simple and fast end-to-end workflow for SMRT sequencing.

Our current products include the Sequel II and Sequel IIe instruments and SMRT Cell 8M, which together are capable of sequencing up to approximately eight million DNA molecules simultaneously, and the previous generation Sequel instrument and Sequel SMRT Cell 1M, which together are capable of sequencing up to approximately one million DNA molecules simultaneously. In October 2020, we launched the Sequel IIe System, which has increased computational capacity, and is designed to enable customers to generate PacBio HiFi reads more efficiently.

Our research and development efforts are focused on developing new products and further improving our existing products including continuing chemistry and sample preparation improvements to increase throughput and expand our supported applications. By providing access to genetic information that was previously inaccessible, we enable scientists to confidently increase their understanding of biological systems.

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

NOTE 2. INVITAE COLLABORATION

On January 12, 2021 we entered into a multi-year Development and Commercialization Agreement (the “Development Agreement”) with Invitae Corporation (“Invitae”). Pursuant to the Development Agreement, Invitae is providing certain funding to PacBio to enable PacBio to develop products relating to production-scale high-throughput sequencing (“Program Products”). If and when Program Products become commercially available for sale, Invitae may purchase the Program Products. In addition to selling the Program Products to Invitae, we will have the right to broadly commercialize Program Products for sale to other customers.

The funding Invitae will provide to PacBio will equal certain development costs incurred by PacBio in connection with the Program Products (“Program Development Costs”). Under the Development Agreement, we will be responsible for conducting a program to develop the Program Products, and subsequently for manufacturing the Program Products. We will make general decisions regarding the development program jointly with Invitae but PacBio is responsible for all research and development activities. The entire development program is expected to last approximately sixty months, but may be shorter or longer.

As the primary benefit of its contribution, Invitae will be entitled to preferred pricing on the Program Products if and when they are available for commercial sale. Each Program Product will have a preferential pricing period, which will not exceed four years from the date of the first delivery of that Program Product (“Preferential Pricing Period”). During the Preferential Pricing Period for each Program Product, Invitae may purchase the Program Product at a substantially reduced margin until it has recouped a multiple of its contribution as defined in the Development Agreement. For a specified period after the end of the Preferential Pricing Period, Invitae has the right to purchase the Program Product at a higher price, determined by a formula, than the price during the Preferential Pricing Period (“Extended Pricing Period”). The Extended Pricing Periods will terminate early if Invitae does not meet certain volume minimums.

We and Invitae may terminate the Development Agreement if the other party remains in material breach of the Development Agreement following a cure period to remedy the material breach. In addition, the Development Agreement includes certain other circumstances for termination by each party, including circumstances where Invitae may terminate for delays, IP concerns, PacBio’s change in control, or without cause.

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

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We expect to incur significant development costs over the duration of the Development Agreement. There can be no assurances that the development program will be successful or that the Program Products will become ready for commercial sale.

We determined that the primary benefit from the arrangement to Invitae is the ability to procure the Program Products during the Preferential Pricing Period at substantial discounts. As we expect the Program Products to be available for Invitae to purchase in the future, we concluded the arrangement is within the scope of ASC Topic 606, Revenue from Contracts with Customers. In addition, Invitae is not expected to substantially benefit from the intellectual property developed under the arrangement, or benefit from other goods or services during the development period. It is also not a collaboration in the scope of ASC Topic 808 Collaborative Arrangements, as PacBio is responsible for performing the research and development activities.

Accordingly, the amounts received by the Company from Invitae during the development period represent significant discounts toward future supplies of the Program Products during the Preferential Pricing Period, and will be accounted as material rights in accordance with ASC Topic 606. Proportionate amounts of these material rights will be recognized in revenue when Invitae places purchase orders for Program Products and the associated goods or services are delivered to Invitae. To the extent the discounts are not expected to be used, they will be recognized consistent with the guidance in Topic 606 relating to breakage, in proportion to the expected purchases by Invitae. Any remaining unused discounts will be recognized when they expire.

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

We determined that a significant financing component exists in relation to the amounts received by Invitae during the development period and until the development is complete. The resulting financing costs will be recognized by the Company over that period, with corresponding increases in deferred revenues. As a result, future revenue attributable to the material rights will be increased by the same amount.

Costs incurred to develop the Program Products are considered research and development and are expensed as incurred. There are no origination or fulfilment costs related to the arrangement with Invitae that are eligible to be capitalized.

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

NOTE 3. TERMINATION OF MERGER WITH ILLUMINA

On November 1, 2018, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Illumina, Inc. (“Illumina”) and FC Ops Corp., a wholly owned subsidiary of Illumina (“Merger Subsidiary”). On January 2, 2020, we, Illumina and Merger Subsidiary, entered into an agreement to terminate the Merger Agreement (the “Termination Agreement”).

Continuation Advances from Illumina

As part of the Termination Agreement, Illumina paid us cash payments (“Continuation Advances”) of $18.0 million during the fourth quarter of 2019 and $34.0 million during the first quarter of 2020. We recorded the $34.0 million as part of other income in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2020.

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

Resulting from the issuance and sale of $900 million of 1.50% Convertible Senior Notes due February 15, 2028, $52.0 million of Continuation Advances were paid without interest to Illumina in February 2021 and recorded as other expense in the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2021. Please refer to Note 4. Summary of Significant Accounting Policies for the accounting treatment of the Continuation Advances.

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Reverse Termination Fee from Illumina

As part of the Termination Agreement, Illumina paid us a $98.0 million termination fee (the “Reverse Termination Fee”), from which we paid our financial advisor associated fees of $6.0 million in April 2020.

Pursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we entered into a definitive agreement providing for, or consummated, a Change of Control Transaction, then we may have been required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction. As indicated in ASC 450, Contingencies, a gain contingency usually is not recognized in the financial statements until the period in which all contingencies are resolved and the gain is realizable. As such, we deferred the gain from the Reverse Termination Fee from Illumina until the date when the associated contingency lapsed. On October 1, 2020, the contingency clauses lapsed and we recorded the $98.0 million as a part of other income in the fourth quarter of 2020.

NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

In the opinion of management, our accompanying unaudited condensed consolidated financial statements (“Financial Statements”) have been prepared on a consistent basis with our December 31, 2020 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. The Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, as permitted by such rules and regulations, omit certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). These Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the entire year or any future periods.

The condensed consolidated financial statements include the accounts of Pacific Biosciences and our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

COVID-19

We are subject to risks and uncertainties as a result of the novel coronavirus pandemic (“COVID-19”). The extent of the impact of the COVID-19 pandemic on our business is highly uncertain as responses to the pandemic can change quickly and information is rapidly evolving. We considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of March 31, 2021.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. Our estimates include, but are not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the probability of repaying the Continuation Advances and Reverse Termination Fee to Illumina, the valuation and recognition of share-based compensation, the expected renewal period for service contracts to derive the amortization period for capitalized commissions, the useful lives assigned to long-lived assets, the computation of provisions for income taxes, the borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities, the borrowing rate used in calculating the financing component of the Invitae collaboration and valuations related to our convertible senior notes. Actual results could differ materially from these estimates.

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Fair Value of Financial Instruments

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

The fair value hierarchy established under U.S. GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

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

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

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

 We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of March 31, 2021 and December 31, 2020 respectively: