PACB - 2019 Q3

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2019

Or

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

For the transition period from             to             

Commission File Number 001-34899

 

Pacific Biosciences of California, Inc.

(Exact name of registrant as specified in its charter)

 

 



 

Delaware

16-1590339

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)



 

1305 O’Brien Drive

Menlo Park, CA

94025

(Address of principal executive offices)

(Zip Code)

(650) 521-8000

(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    No  

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    No  

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

 

 

 

 



 

 

 

Large accelerated filer

Accelerated filer   



 

 

 

Non-accelerated filer

 

Smaller reporting company

Emerging growth company       

 

 



 

 


 

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. 

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

Number of shares outstanding of the issuer’s common stock as of October 31, 2019:  153,033,732   

2

 


 

Table of Contents

 

TABLE OF CONTENTS







 



PAGE No.



 

PART I - FINANCIAL INFORMATION

 



 

Item 1. Financial Statements (unaudited):

 



 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 



 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018 



 



 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018  



 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 



 

Notes to Condensed Consolidated Financial Statements 



 

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

25 



 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

33 



 

Item 4. Controls and Procedures 

33 



 

PART II. OTHER INFORMATION

 



 

Item 1. Legal Proceedings 

34 



 

Item 1A. Risk Factors 

34 



 

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

58 



 

Item 3. Default Upon Senior Securities 

58 



 

Item 4. Mine Safety Disclosures 

58 



 

Item 5. Other Information 

58 



 

Item 6. Exhibits 

58 







3

 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Balance Sheets

(Unaudited)







 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,

(in thousands, except per share amounts)

2019

 

2018

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

33,084 

 

$

18,844 

Investments

 

16,120 

 

 

83,510 

Accounts receivable

 

9,966 

 

 

8,595 

Inventory

 

15,067 

 

 

17,878 

Prepaid expenses and other current assets

 

2,704 

 

 

2,832 

Total current assets

 

76,941 

 

 

131,659 

Property and equipment, net

 

31,618 

 

 

34,073 

Operating lease right-of-use assets, net

 

33,510 

 

 

 —

Long-term restricted cash

 

4,000 

 

 

4,500 

Other long-term assets

 

41 

 

 

43 

Total assets

$

146,110 

 

$

170,275 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

8,111 

 

$

6,736 

Accrued expenses

 

15,823 

 

 

12,823 

Deferred service revenue, current

 

6,379 

 

 

6,537 

Operating lease liabilities, current

 

3,724 

 

 

 —

Notes payable, current

 

15,546 

 

 

 —

Other liabilities, current

 

1,110 

 

 

788 

Total current liabilities

 

50,693 

 

 

26,884 

Deferred service revenue, non-current

 

1,435 

 

 

890 

Operating lease liabilities, non-current

 

42,968 

 

 

 —

Deferred rent, non-current

 

 —

 

 

13,765 

Notes payable, non-current

 

 —

 

 

14,659 

Financing derivative

 

 —

 

 

16 

Total liabilities

 

95,096 

 

 

56,214 



 

 

 

 

 

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 153,031 and 150,244 shares at September 30, 2019 and December 31, 2018, respectively

 

153 

 

 

150 

Additional paid-in capital

 

1,116,999 

 

 

1,096,053 

Accumulated other comprehensive income (loss)

 

11 

 

 

(36)

Accumulated deficit

 

(1,066,149)

 

 

(982,106)

Total stockholders’ equity

 

51,014 

 

 

114,061 

Total liabilities and stockholders’ equity

$

146,110 

 

$

170,275 



 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)











 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(in thousands, except per share amounts)

2019

 

2018

 

2019

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

$

18,484 

 

$

15,150 

 

$

53,191 

 

$

49,917 

 

Service and other revenue

 

3,431 

 

 

3,010 

 

 

9,770 

 

 

9,183 

 

Total revenue

 

21,915 

 

 

18,160 

 

 

62,961 

 

 

59,100 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

12,188 

 

 

12,250 

 

 

32,786 

 

 

31,127 

 

Cost of service and other revenue

 

2,813 

 

 

2,718 

 

 

8,531 

 

 

8,623 

 

Total cost of revenue

 

15,001 

 

 

14,968 

 

 

41,317 

 

 

39,750 

 

Gross profit

 

6,914 

 

 

3,192 

 

 

21,644 

 

 

19,350 

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

14,962 

 

 

14,356 

 

 

45,357 

 

 

46,331 

 

Sales, general and administrative

 

20,066 

 

 

13,506 

 

 

58,915 

 

 

43,383 

 

Total operating expense

 

35,028 

 

 

27,862 

 

 

104,272 

 

 

89,714 

 

Operating loss

 

(28,114)

 

 

(24,670)

 

 

(82,628)

 

 

(70,364)

 

Interest expense

 

(664)

 

 

(616)

 

 

(1,933)

 

 

(1,795)

 

Other income (expense), net

 

(345)

 

 

242 

 

 

518 

 

 

396 

 

Net loss

 

(29,123)

 

 

(25,044)

 

 

(84,043)

 

 

(71,763)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized income (loss) on investments

 

(6)

 

 

(8)

 

 

47 

 

 

 

Comprehensive loss

$

(29,129)

 

$

(25,052)

 

$

(83,996)

 

$

(71,755)

 



 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

$

(0.19)

 

$

(0.19)

 

$

(0.55)

 

$

(0.55)

 

Shares used in computing basic and diluted net loss per share

 

152,983 

 

 

135,130 

 

 

152,351 

 

 

130,302 

 



 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to the condensed consolidated financial statements.

5

 


 

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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 September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

152,959 

 

$

153 

 

$

1,112,610 

 

$

17 

 

$

(1,037,026)

 

$

75,754 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(29,123)

 

 

(29,123)

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

(6)

 

 

 —

 

 

(6)

Issuance of common stock in conjunction with equity plans

 

72 

 

 

 —

 

 

327 

 

 

 —

 

 

 —

 

 

327 

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,062 

 

 

 —

 

 

 —

 

 

4,062 

Balance at September 30, 2019

 

153,031 

 

$

153 

 

$

1,116,999 

 

$

11 

 

$

(1,066,149)

 

$

51,014 

For the three months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

131,888 

 

$

132 

 

$

1,011,621 

 

$

(16)

 

$

(926,263)

 

$

85,474 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(25,044)

 

 

(25,044)

Other comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

(8)

 

 

 —

 

 

(8)

Issuance of common stock in conjunction with equity plans

 

771 

 

 

 

 

1,663 

 

 

 —

 

 

 —

 

 

1,664 

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

 

16,235 

 

 

16 

 

 

64,652 

 

 

 —

 

 

 —

 

 

64,668 

Stock-based compensation expense

 

 —

 

 

 —

 

 

5,126 

 

 

 —

 

 

 —

 

 

5,126 

Balance at September 30, 2018

 

148,894 

 

$

149 

 

$

1,083,062 

 

$

(24)

 

$

(951,307)

 

$

131,880 

For the nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

150,244 

 

$

150 

 

$

1,096,053 

 

$

(36)

 

$

(982,106)

 

$

114,061 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(84,043)

 

 

(84,043)

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

47 

 

 

 —

 

 

47 

Issuance of common stock in conjunction with equity plans

 

2,787 

 

 

 

 

8,414 

 

 

 —

 

 

 —

 

 

8,417 

Stock-based compensation expense

 

 —

 

 

 —

 

 

12,532 

 

 

 —

 

 

 —

 

 

12,532 

Balance at September 30, 2019

 

153,031 

 

$

153 

 

$

1,116,999 

 

$

11 

 

$

(1,066,149)

 

$

51,014 

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

116,277 

 

$

116 

 

$

965,752 

 

$

(32)

 

$

(879,733)

 

$

86,103 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(71,763)

 

 

(71,763)

Other comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

ASC 606 adoption effect

 

 

 

 

 

 

 

 

 

 

 

 

 

189 

 

 

189 

Issuance of common stock in conjunction with equity plans

 

2,007 

 

 

 

 

4,178 

 

 

 —

 

 

 —

 

 

4,181 

Issuance of common stock from ATM equity offering, net of issuance costs

 

14,375 

 

 

14 

 

 

32,849 

 

 

 —

 

 

 —

 

 

32,863 

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

 

16,235 

 

 

16 

 

 

64,652 

 

 

 —

 

 

 —

 

 

64,668 

Stock-based compensation expense

 

 —

 

 

 —

 

 

15,631 

 

 

 —

 

 

 —

 

 

15,631 

Balance at September 30, 2018

 

148,894 

 

$

149 

 

$

1,083,062 

 

$

(24)

 

$

(951,307)

 

$

131,880 

See accompanying notes to the condensed consolidated financial statements

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)





 

 

 

 

 



 

 

 

 

 



Nine Months Ended September 30,

(in thousands)

2019

 

2018

Cash flows from operating activities

 

 

 

 

 

Net loss

$

(84,043)

 

$

(71,763)

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

 

 

 

 

 

Depreciation

 

5,483 

 

 

5,436 

Amortization of operating lease right-of-use assets

 

1,954 

 

 

 —

Amortization of debt discount and financing costs

 

887 

 

 

749 

(Gain) loss on derivative

 

(16)

 

 

(155)

Stock-based compensation

 

12,532 

 

 

15,631 

Accretion from investment discount

 

(821)

 

 

(398)

(Gain) loss on disposition of equipment

 

144 

 

 

 —

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(1,371)

 

 

7,029 

Inventory

 

2,255 

 

 

3,014 

Prepaid expenses and other assets

 

238 

 

 

537 

Accounts payable

 

1,454 

 

 

(2,926)

Accrued expenses

 

3,000 

 

 

(3,497)

Deferred service revenue

 

387 

 

 

(638)

Operating lease liabilities

 

(2,537)

 

 

 —

Other liabilities

 

322 

 

 

(464)

Net cash used in operating activities

 

(60,132)

 

 

(47,445)

Cash flows from investing activities

 

 

 

 

 

Purchase of property and equipment

 

(2,695)

 

 

(1,796)

Purchase of investments

 

(42,710)

 

 

(104,228)

Sales of investments

 

1,500 

 

 

2,442 

Maturities of investments

 

109,360 

 

 

70,680 

Net cash provided by (used in) investing activities

 

65,455 

 

 

(32,902)

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock from equity plans

 

8,417 

 

 

4,181 

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

 

 —

 

 

97,722 

Net cash provided by financing activities

 

8,417 

 

 

101,903 

Net increase in cash and cash equivalents and restricted cash

 

13,740 

 

 

21,556 

Cash and cash equivalents and restricted cash at beginning of period

 

23,344 

 

 

21,007 

Cash and cash equivalents and restricted cash at end of period

$

37,084 

 

$

42,563 

Cash and cash equivalents at end of period

 

33,084 

 

 

38,063 

Restricted cash at end of period

 

4,000 

 

 

4,500 

Cash and cash equivalents and restricted cash at end of period

$

37,084 

 

$

42,563 



 

 

 

 

 

Supplemental disclosure of non-cash operating activities

 

 

 

 

 

Inventory transferred to property and equipment

$

1,784 

 

$

664 

Inventory transferred from property and equipment

$

1,228 

 

$

 —

See accompanying notes to the condensed consolidated financial statements.



 

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



NOTE 1. OVERVIEW 



Product

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



Merger with Illumina

On November 1, 2018, we entered into an Agreement and Plan of Merger with Illumina, Inc. (“Illumina”) and FC Ops Corp. (“Merger Subsidiary”), a wholly-owned subsidiary of Illumina (the “Merger Agreement”) pursuant to which Illumina will acquire us for $8.00 per share of our common stock in an all-cash transaction and Merger Subsidiary will be merged with and into us (the “Merger”), with us surviving the Merger and becoming a wholly-owned subsidiary of Illumina. Completion of the transaction is subject to terms and conditions set forth in the Merger Agreement, including expiration or termination of any waiting periods applicable to the consummation of the Merger under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and clearance under the antitrust laws of certain non-U.S. jurisdictions. At a Special Meeting of Stockholders held on January 24, 2019, our stockholders, among other things, approved the adoption of the Merger Agreement. The Merger has been notified to the United States Federal Trade Commission (“FTC”) and to the Competition and Markets Authority of the United Kingdom (“CMA”) and is under review by both the FTC and the CMA.  On October 24, 2019, as part of its Phase 2 review, the CMA announced that it had reached the provisional view that the proposed acquisition could lead to a substantial lessening of competition. We are reviewing the CMA’s provisional findings and continue to work with Illumina to address the CMA’s concerns. We and Illumina also continue to work cooperatively with the FTC. 

On September 25, 2019, we, Illumina and Merger Subsidiary entered into Amendment No. 1 (the “Amendment”) to the Merger Agreement. The Amendment, among other things, extends the End Time (as defined in the Merger Agreement) to December 31, 2019, subject to Illumina’s unilateral right to further extend the End Time to March 31, 2020. In addition, the Amendment provides that Illumina will make cash payments to us of $6.0 million on or before each of October 1, 2019, November 1, 2019 and December 2, 2019 and we have received the October 1, 2019 and November 1, 2019 cash payments. If Illumina elects to further extend the End Time to March 31, 2020, then Illumina will make cash payments to us of $6.0 million on or before each of January 2, 2020, and March 2, 2020, and a cash payment of $22.0 million on or before February 3, 2020. We will use these payments, which are collectively referred to as the “Continuation Advances,” to fund our continuing operations.  Up to the full amount of the Continuation Advances actually paid to us are repayable without interest if (1) the Merger Agreement is terminated and (2) within two years of termination, we enter into certain change-of-control transactions with a third party (in which case the entire amount will be repayable) or raise at least $100.0 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by us).

The merger is subject to certain customary closing conditions, including the receipt of certain required antitrust approvals. No assurance can be given that the required regulatory approvals will be obtained or that the required conditions to closing will be satisfied, and, even if all such approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals. Under certain circumstances specified in the Merger Agreement, Illumina may be required to pay us a termination fee of $98.0 million (the “Reverse Termination Fee”).  In certain other circumstances, including but not limited to, a termination of the Merger Agreement in connection with us accepting a superior transaction proposal or due to the withdrawal by our board of directors of its recommendation of the Merger and the transactions contemplated by the Merger Agreement, we would be required to pay Illumina a cash termination fee of $43.0 million.

For more information about the effects of our agreement to be acquired by Illumina please see Risk Factors under the section “Risks Related to Our Business”.

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NOTE 2. 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, 2018 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, 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire year or any future periods.

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

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 valuation of a financing derivative and long-term notes, the valuation and recognition of share-based compensation, the expected renewal period for service contracts, the useful lives assigned to long-lived assets, the computation of provisions for income taxes and the determination of the internal borrowing rate used in calculating the operating lease right-of-use assets and operating lease liabilities. Actual results could differ materially from these estimates.

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.

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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 September 30, 2019 and December 31, 2018 respectively:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



September 30, 2019

 

December 31, 2018

(in thousands)

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

$

18,505 

 

$

 —

 

$

 —

 

$

18,505 

 

$

18,844 

 

$

 —

 

$

 —

 

$

18,844 

Commercial paper

 

 —

 

 

14,579 

 

 

 —

 

 

14,579 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total cash and cash equivalents

 

18,505 

 

 

14,579 

 

 

 —

 

 

33,084 

 

 

18,844 

 

 

 —

 

 

 —

 

 

18,844 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 —

 

 

12,118 

 

 

 —

 

 

12,118 

 

 

 —

 

 

53,469 

 

 

 —

 

 

53,469 

Corporate debt securities

 

 —

 

 

4,002 

 

 

 —

 

 

4,002 

 

 

 —

 

 

10,214 

 

 

 —

 

 

10,214 

US government & agency securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

19,827 

 

 

 —

 

 

19,827 

Total investments

 

 —

 

 

16,120 

 

 

 —

 

 

16,120 

 

 

 —

 

 

83,510 

 

 

 —

 

 

83,510 

Long-term restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certified deposits

 

4,000 

 

 

 —

 

 

 —

 

 

4,000 

 

 

4,500 

 

 

 —

 

 

 —

 

 

4,500 

Total assets measured at fair value

$

22,505 

 

$

30,699 

 

$

 —

 

$

53,204 

 

$

23,344 

 

$

83,510 

 

$

 —

 

$

106,854 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing derivative

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

16 

 

$

16 

Total liabilities measured at fair value

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

16 

 

$

16 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The estimated fair value of the Financing Derivative liability was determined using Level 3 inputs, or significant unobservable inputs.





During the three months ended September 30, 2019, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis and our valuation techniques did not change compared to the prior year.

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

We determined the fair value of the Notes from the debt facility that we entered into during the first quarter of 2013 using Level 3 inputs, or significant unobservable inputs. The value of the Notes was determined by comparing the difference between the fair value of the Notes with and without the Financing Derivative by calculating the respective present values from future cash flows using 7.7% and 9.6% weighted average market yield at September 30, 2019 and December 31, 2018, respectively. Refer to Note 5. Notes Payable for additional details regarding the Notes.

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















 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



September 30, 2019

 

December 31, 2018



Fair Value

 

Carrying Value

 

Fair Value

 

Carrying Value

Notes payable

$

16,069 

 

$

15,546 

 

$

15,915 

 

$

14,659 



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Net Loss per Share

The following outstanding common stock options, restricted stock units, or “RSUs”, with time-based vesting and RSUs with performance-based vesting, were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect. See Note 7. Stockholders’ Equity for detailed information on RSUs with time-based vesting and RSUs with performance-based vesting.











 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Nine Months Ended September 30,

 

 

(in thousands)

 

2019

 

2018

 

 

 

 

Options to purchase common stock

 

23,048 

 

27,397 

 

 

 

 

RSUs with time-based vesting

 

1,094 

 

349 

 

 

 

 

RSUs with performance-based vesting

 

138 

 

634 

 

 

 

 



Concentration and Other Risks

For the three and nine months ended September 30, 2019, one of our customers, Gene Company Limited, accounted for approximately 18% and 14% of our total revenue, respectively. For the three and nine months ended September 30, 2018, one of our customers, Gene Company Limited, accounted for approximately 20% and 28% of our total revenue, respectively. Gene Company Limited is our distributor in China. 

Going Concern

Cash, cash equivalents and investments, excluding restricted cash, at September 30, 2019 totaled $49.2  million, compared to $102.4 million at December 31, 2018. Our net cash used for operating activities for the nine-month period ended September 30, 2019 was $60.1  million. Due to our continued losses and operating cash needs as well as significant legal expenses we have incurred and continue to incur in connection with the Merger Agreement, we believe that the timely receipt of the Continuation Advances, the Reverse Termination Fee or other remedies we may receive if the Merger Agreement is terminated under certain circumstances will be necessary to alleviate substantial doubt about our ability to meet the repayment obligation of approximately $16.0 million in aggregate principal amount of our Notes, as defined below, that mature in February 2020 and to fund our projected operating requirements for at least twelve months from the date of filing of this Quarterly Report on Form 10-Q. 

The Merger Agreement provides for the payment to the Company of the Reverse Termination Fee in connection with a termination of the Merger Agreement by either the Company or Illumina after the End Time (as defined in the Merger Agreement) (subject to (i) the satisfaction of conditions that the Company reasonably believes to be within its control; (ii) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement); and (iii) the non-occurrence of specified legal restraints). However, the Company’s right to receive the Reverse Termination Fee is not conditioned on the receipt of applicable antitrust or competition law approvals. The Reverse Termination Fee will not be available in all instances in which the Merger Agreement is terminated, and no assurance can be given that it will be received by the Company. In addition, in certain circumstances we may have to repay the Continuation Advances, which is described in detail in Note 1. Overview.

However, if the Merger Agreement is terminated and we are unable to obtain sufficient funds pursuant to the Merger Agreement, or if such funds are not received on a timely basis, we will need to raise additional capital or may be unable to meet our debt repayment obligations for our outstanding Notes discussed above. If we are unable to repay our indebtedness when due and payable, debt holders could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our property and interests in property, including our intellectual property, as collateral under our existing debt.

To the extent we raise additional funds through the sale of equity or convertible debt, the issuance of such securities will result in dilution to our stockholders. There can be no assurance that such additional capital will be available on favorable terms, or at all, particularly in light of restrictions under our debt agreement and the Merger Agreement.  If we are unable to raise additional capital on favorable terms, or at all, we may have to reduce our cash burn rate and may not be able to support our commercialization efforts, or to increase or maintain the level of our research and development activities. If we are unable to generate sufficient cash flows or to raise adequate funds to finance our forecasted expenditures, including our debt payment obligations in February 2020, we may have to make significant changes to our operations including delaying or reducing the scope of or eliminating some or all of our development programs. We also may have to reduce sales, marketing, engineering, customer support or other resources devoted to our existing or new products, or we may have to cease operations.

Significant Accounting Policies

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Except as noted below relating to our adoption of lease related accounting, there have been no material changes to our significant accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2018.



Recent Accounting Pronouncements

Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2018-13 on our consolidated financial statements and disclosures.

In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We plan to adopt ASU 2016-13 on January 1, 2020. However, we are still in the process of assessing the impact of the new standard on our results of operations and financial position.

Recently Adopted Accounting Standards



Adoption of ASU 2018-07

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of Accounting Standards Codification, or ASC, Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. We adopted this standard beginning on January 1, 2019 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements for the three and nine months ended September 30, 2019.



Adoption of ASU 2018-02

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows for an entity to elect to reclassify the income tax effects on items within accumulated other comprehensive income resulting from U.S. tax reform to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. We adopted this standard beginning in January 1, 2019 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements for the three and nine months ended September 30, 2019.



Adoption of ASC 842

On January 1, 2019, we adopted the FASB Accounting Standards Codification, or ASC, Topic 842, Leases, or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the condensed consolidated balance sheet. As permitted by ASC 842, we elected the adoption date of January 1, 2019, which is the date of initial application. As a result, the condensed consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC Topic 840, Leases, or ASC 840, which did not require the recognition of operating lease liabilities on the condensed consolidated balance sheet, and is not comparative. The expense recognition for operating leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in our results of operations presented in our condensed consolidated statements of operations and comprehensive loss for each period presented.

We adopted ASC 842 using a modified retrospective approach for leases existing at January 1, 2019. The adoption of ASC 842 had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating

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lease right-of-use assets and the liability for operating leases. Accordingly, adoption of this standard resulted in the recognition of operating lease right-of-use assets of $35.5 million and operating lease liabilities of $49.2 million comprised of $3.4 million of current operating lease liabilities and $45.8 million of non-current operating lease liabilities on the condensed consolidated balance sheet as of January 1, 2019.

As permitted under ASC 842, we elected several practical expedients that permit us:

·

to not reassess whether a contract is or contains a lease;

·

to not reassess the lease classification;

·

to not reassess the initial direct costs as of the adoption date;

·

to not recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less; and

·

to not separate non-lease components for real estate leases.

The application of the practical expedients did not have a significant impact on the measurement of the operating lease liabilities. 

Service and other revenue can include some revenue from instrument lease agreements. Instrument leases are generally classified as operating-type leases and revenue from these leases is recognized on a straight-line basis over the respective lease term. Lease income was not material in fiscal 2018 or for the three and nine months ended September 30, 2019.

Disclosure related to the amount, timing and uncertainty of cash flows arising from operating leases are included in “Leases” section of Note 6. Commitments and Contingencies.



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NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS

The following tables summarize our cash, cash equivalents and investments as of September 30, 2019 and December 31, 2018 (in thousands):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



As of September 30, 2019 



 

 

Gross

 

Gross

 

 



Amortized

 

unrealized

 

unrealized

 

Fair



Cost

 

gains

 

losses

 

Value

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

$

18,505 

 

$

 —

 

$

 —

 

$

18,505 

Commercial paper

 

14,579 

 

 

 —

 

 

 —

 

 

14,579 

Total cash and cash equivalents

 

33,084 

 

 

 —

 

 

 —

 

 

33,084 

Investments:

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

12,117 

 

 

 

 

 —

 

 

12,118 

Corporate debt securities

 

3,992 

 

 

10 

 

 

 —

 

 

4,002 

Total investments

 

16,109 

 

 

11 

 

 

 —

 

 

16,120 

Total cash, cash equivalents and investments

$

49,193 

 

$

11 

 

$

 —

 

$

49,204 

Long-term restricted cash:

 

 

 

 

 

 

 

 

 

 

 

Certified deposits

$

4,000 

 

$

 —

 

$

 —

 

$

4,000 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2018 



 

 

Gross

 

Gross

 

 



Amortized

 

unrealized

 

unrealized

 

Fair



Cost

 

gains

 

losses

 

Value

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

$

18,844 

 

$

 —

 

$

 —

 

$

18,844 

Total cash and cash equivalents

 

18,844 

 

 

 —

 

 

 —

 

 

18,844 

Investments:

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

53,493 

 

 

 —

 

 

(24)

 

 

53,469 

Corporate debt securities

 

10,223 

 

 

 

 

(12)

 

 

10,214 

US government & agency securities

 

19,830 

 

 

 —

 

 

(3)

 

 

19,827 

Total investments

 

83,546 

 

 

 

 

(39)

 

 

83,510 

Total cash, cash equivalents and investments

$

102,390 

 

$

 

$

(39)

 

$

102,354 

Long-term restricted cash:

 

 

 

 

 

 

 

 

 

 

 

Certified deposits

$

4,500 

 

$

 —

 

$

 —

 

$

4,500 



 

 

 

 

 

 

 

 

 

 

 



The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of September 30, 2019:





 

 



 

 

(in thousands)

Fair Value

Due in one year or less

$

30,699 

Total investments

$

30,699 



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



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NOTE 4. BALANCE SHEET COMPONENTS



Inventory



As of September 30, 2019 and December 31, 2018, our inventory consisted of the following components:







 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,

(in thousands)

2019

 

2018

Purchased materials

$

5,193 

 

$

6,222 

Work in process

 

3,874 

 

 

7,341 

Finished goods

 

6,000 

 

 

4,315 

Inventory

$

15,067 

 

$

17,878