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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, 2020

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

T

Accelerated Filer

o

Non-accelerated Filer

o

Smaller Reporting Company

o

Emerging Growth Company

o


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, 2020: 154,068,216  


2


TABLE OF CONTENTS

.

PART I - FINANCIAL INFORMATION

PAGE No

Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

4

Condensed Consolidated Statements of Operations and Comprehensive Income (loss) for the Three Months Ended March 31, 2020 and 2019

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

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

28

Item 4. Controls and Procedures

28

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

30

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

54

Item 3. Default Upon Senior Securities

54

Item 4. Mine Safety Disclosures

54

Item 5. Other Information

54

Item 6. Exhibits

54

3


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)

2020

2019

Assets

Current assets

Cash and cash equivalents

$

68,862

$

29,627

Investments

73,729

19,472

Accounts receivable

7,325

15,266

Inventory

16,124

13,312

Prepaid expenses and other current assets

3,490

3,369

Total current assets

169,530

81,046

Property and equipment, net

29,076

30,070

Operating lease right-of-use assets, net

32,118

32,827

Long-term restricted cash

4,000

4,000

Other long-term assets

40

42

Total assets

$

234,764

$

147,985

Liabilities and Stockholders’ Equity

Current liabilities

Accounts payable

$

4,223

$

8,368

Accrued expenses

17,963

13,242

Deferred revenue, current

7,107

7,610

Operating lease liabilities, current

3,967

3,837

Notes payable, current

15,871

Deferred gain from Reverse Termination Fee

98,000

Other liabilities, current

714

225

Total current liabilities

131,974

49,153

Deferred revenue, non-current

1,484

1,951

Operating lease liabilities, non-current

40,903

41,964

Total liabilities

174,361

93,068

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 153,953 shares and 153,119 shares at March 31, 2020 and December 31, 2019, respectively

154

153

Additional paid-in capital

1,125,229

1,120,999

Accumulated other comprehensive income

30

5

Accumulated deficit

(1,065,010)

(1,066,240)

Total stockholders’ equity

60,403

54,917

Total liabilities and stockholders’ equity

$

234,764

$

147,985

See accompanying notes to the condensed consolidated financial statements.

4


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)

2020

2019

Revenue:

Product revenue

$

12,293

$

13,457

Service and other revenue

3,305

2,968

Total revenue

15,598

16,425

Cost of revenue:

Cost of product revenue

5,421

8,618

Cost of service and other revenue

2,689

2,690

Total cost of revenue

8,110

11,308

Gross profit

7,488

5,117

Operating expense:

Research and development

15,250

15,485

Sales, general and administrative

24,947

19,766

Total operating expense

40,197

35,251

Operating loss

(32,709)

(30,134)

Gain from Continuation Advances

34,000

Interest expense

(267)

(625)

Other income, net

238

435

Net income (loss)

1,262

(30,324)

Other comprehensive income (loss):

Unrealized gain on investments

25

42

Comprehensive income (loss)

1,287

(30,282)

Net income (loss) per share:

Basic

$

0.01

(0.20)

Diluted

$

0.01

(0.20)

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

Basic

153,453

151,274

Diluted

155,855

151,274

See accompanying notes to the condensed consolidated financial statements.


5


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, 2020

Shares

Amount

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 

For the three months ended March 31, 2019

Balance at December 31, 2018

150,244 

$

150 

$

1,096,053 

$

(36)

$

(982,106)

$

114,061 

Net loss

(30,324)

(30,324)

Other comprehensive income

42 

42 

Issuance of common stock in conjunction with equity plans

2,428 

3 

6,687 

6,690 

Stock-based compensation expense

4,381 

4,381 

Balance at March 31, 2019

152,672 

$

153 

$

1,107,121 

$

6 

$

(1,012,430)

$

94,850 

See accompanying notes to the condensed consolidated financial statements

6


PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended March 31,

(in thousands)

2020

2019

Cash flows from operating activities

Net income (loss)

$

1,262

$

(30,324)

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

Gain from Continuation Advances

(34,000)

Depreciation

1,657

1,796

Amortization of operating lease right-of-use assets

709

653

Amortization of debt discount and financing costs

129

279

Gain on derivative

(16)

Stock-based compensation

4,032

4,381

Amortization (accretion) from investment premium (discount)

(83)

(416)

Changes in assets and liabilities

Accounts receivable

7,909

1,316

Inventory

(3,374)

(1,888)

Prepaid expenses and other assets

(58)

87

Accounts payable

(4,129)

2,075

Accrued expenses

4,721

(1,703)

Deferred revenue

(970)

(230)

Operating lease liabilities

(931)

Other liabilities

489

(1,323)

Deferred gain from Reverse Termination Fee

98,000

Net cash provided by (used in) operating activities

75,363

(25,313)

Cash flows from investing activities

Purchase of property and equipment

(117)

(1,253)

Purchase of investments

(72,960)

(17,623)

Sales of investments

Maturities of investments

18,750

56,860

Net cash provided by (used in) investing activities

(54,327)

37,984

Cash flows from financing activities

Proceeds from Continuation Advances

34,000

Notes payable principal payoff

(16,000)

Proceeds from issuance of common stock from equity plans

199

6,690

Net cash provided by financing activities

18,199

6,690

Net increase in cash and cash equivalents and restricted cash

39,235

19,361

Cash and cash equivalents and restricted cash at beginning of period

33,627

23,344

Cash and cash equivalents and restricted cash at end of period

$

72,862

$

42,705

Cash and cash equivalents at end of period

68,862

38,205

Restricted cash at end of period

4,000

4,500

Cash and cash equivalents and restricted cash at end of period

$

72,862

$

42,705

See accompanying notes to the condensed consolidated financial statements.

 

7


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 instrument 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.

Our customers and our scientific collaborators have published numerous peer-reviewed articles in journals including Nature, Science, Cell, PNAS and The New England Journal of Medicine highlighting the power and applications of SMRT sequencing in projects such as finishing genomes, structural variation discovery, isoform transcriptome characterization, rare mutation discovery and the identification of chemical modifications of DNA related to virulence and pathogenicity. 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 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”). 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, which is less than the amount we initially expected. In addition, Illumina paid us cash payments (“Continuation Advances”) of $34.0 million during the first quarter of 2020.

However, pursuant to the Termination Agreement, in the event that, on or prior to September 30, 2020, we enter into a definitive agreement providing for, or consummate, a Change of Control Transaction (as defined in the Termination Agreement) (“Change of Control Transaction”), then we may be required to repay the Reverse Termination Fee (without interest) to Illumina in connection with the consummation of such Change of Control Transaction. If such Change of Control Transaction is not consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction, then we will not be required to repay the Reverse Termination Fee. Please refer to “Note 5. Balance Sheet Components” for the accounting treatment of the Reverse Termination Fee.

In addition, up to the $52.0 million of the Continuation Advances paid to us are repayable without interest to Illumina if, within two years of March 31, 2020, we enter into, or consummate a Change of Control Transaction or raise at least $100 million in equity in a single transaction or debt financing (that may have multiple closings), with the amount repayable dependent on the amount raised by us. Please refer to “Note 3. Summary of Significant Accounting Policies” for the accounting treatment of the Continuation Advances.

8


NOTE 3. 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, 2019 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, 2019. The results of operations for the three months ended March 31, 2020 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, 2020.

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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 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 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.

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, 2020 and December 31, 2019 respectively:

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March 31, 2020

December 31, 2019

(in thousands)

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Assets