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pacb-20220331x10q

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, 2022

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

A picture containing text, clipart

Description automatically generated

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 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, 2022: 224,383,347.

‎

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TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION	PAGE No.

Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021	4

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021	5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	6

Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3. Quantitative and Qualitative Disclosures About Market Risk	35

Item 4. Controls and Procedures	35

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	36

Item 1A. Risk Factors	36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	74

Item 3. Default Upon Senior Securities	74

Item 4. Mine Safety Disclosures	74

Item 5. Other Information	74

Item 6. Exhibits	75

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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)	2022		2021
Assets
Current assets
Cash and cash equivalents	$	428,574	$	460,725
Investments		534,201		583,675
Accounts receivable, net		27,852		24,241
Inventory, net		29,625		24,599
Prepaid expenses and other current assets		8,436		7,394
Short-term restricted cash		500		500
Total current assets		1,029,188		1,101,134
Property and equipment, net		35,510		32,504
Operating lease right-of-use assets, net		44,921		46,617
Long-term restricted cash		4,982		4,592
Intangible assets, net		410,751		410,979
Goodwill		409,974		409,974
Other long-term assets		1,340		1,170
Total assets	$	1,936,666	$	2,006,970
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	17,607	$	11,002
Accrued expenses		19,489		36,261
Deferred revenue, current		12,729		10,977
Operating lease liabilities, current		8,056		7,710
Other liabilities, current		3,129		5,759
Total current liabilities		61,010		71,709
Deferred revenue, non-current		25,246		25,049
Contingent consideration liability, non-current		168,654		169,717
Operating lease liabilities, non-current		47,740		49,970
Convertible senior notes, net, non-current		896,220		896,067
Other liabilities, non-current		3,218		3,471
Total liabilities		1,202,088		1,215,983

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 224,329 and 220,978 shares at March 31, 2022 and December 31, 2021, respectively		224		221
Additional paid-in capital		2,038,030		2,009,945
Accumulated other comprehensive loss		(4,085)		(1,087)
Accumulated deficit		(1,299,591)		(1,218,092)
Total stockholders’ equity		734,578		790,987
Total liabilities and stockholders’ equity	$	1,936,666	$	2,006,970

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 March 31,
(in thousands, except per share amounts)	2022		2021
Revenue:
Product revenue	$	28,244	$	25,303
Service and other revenue		4,929		3,694
Total revenue		33,173		28,997
Cost of revenue:
Cost of product revenue		14,820		12,697
Cost of service and other revenue		4,015		3,323
Amortization of intangible assets		183		—
Total cost of revenue		19,018		16,020
Gross profit		14,155		12,977
Operating expense:
Research and development		52,937		20,548
Sales, general and administrative		39,804		26,139
Change in fair value of contingent consideration		(1,063)		—
Total operating expense		91,678		46,687
Operating loss		(77,523)		(33,710)
Loss from Continuation Advances from Illumina		—		(52,000)
Interest expense		(3,697)		(1,789)
Other (expense) income, net		(279)		64
Net loss		(81,499)		(87,435)
Other comprehensive loss:
Unrealized loss on investments		(2,998)		(11)
Comprehensive loss	$	(84,497)	$	(87,446)
Net loss per share:
Basic	$	(0.37)	$	(0.45)
Diluted	$	(0.37)	$	(0.45)

Weighted average shares outstanding used in calculating net loss per share:
Basic		222,289		194,790
Diluted		222,289		194,790

See accompanying notes to the condensed consolidated financial statements.

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PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)



						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders'
(in thousands)	Shares	Amount		Capital		(Loss) Income		Deficit		Equity
For the three months ended March 31, 2022
Balance at December 31, 2021	220,978	$	221	$	2,009,945	$	(1,087)	$	(1,218,092)	$	790,987
Net loss	—		—		—		—		(81,499)		(81,499)
Other comprehensive income	—		—		—		(2,998)		—		(2,998)
Issuance of common stock in conjunction with equity plans	3,351		3		5,589		—		—		5,592
Stock-based compensation expense	—		—		22,496		—		—		22,496
Balance at March 31, 2022	224,329	$	224	$	2,038,030	$	(4,085)	$	(1,299,591)	$	734,578

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

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)


	Three Months Ended March 31,
(in thousands)	2022		2021
Cash flows from operating activities
Net loss	$	(81,499)	$	(87,435)
Adjustments to reconcile net loss to net cash used in operating activities
Loss from Continuation Advances		—		52,000
Depreciation		2,268		1,606
Amortization of intangible assets		228		—
Amortization of right-of-use assets		1,696		790
Amortization of debt discount and financing costs		159		74
Stock-based compensation		22,703		10,165
Amortization from investment premium		758		565
Change in the estimated fair value of contingent consideration		(1,063)		—
Loss on disposition of equipment		100		—
Changes in assets and liabilities
Accounts receivable		(3,611)		3,931
Inventory		(6,275)		(2,556)
Prepaid expenses and other assets		(1,185)		(675)
Accounts payable		6,373		153
Accrued expenses		(17,234)		(2,680)
Deferred revenue		1,949		5,004
Operating lease liabilities		(1,884)		(1,066)
Other liabilities		(2,512)		(2,980)
Net cash used in operating activities		(79,029)		(23,104)
Cash flows from investing activities
Purchase of property and equipment		(3,638)		(401)
Purchase of investments		(76,369)		(64,426)
Sales of investments		—		4,597
Maturities of investments		122,060		68,400
Net cash provided by investing activities		42,053		8,170
Cash flows from financing activities
Continuation Advances		—		(52,000)
Proceeds from issuance of Convertible Senior Notes, net of issuance costs		—		895,624
Proceeds from issuance of common stock from equity plans		5,592		22,343
Notes payable principal payoff		(377)		—
Other		—		(246)
Net cash provided by financing activities		5,215		865,721
Net increase in cash and cash equivalents and restricted cash		(31,761)		850,787
Cash and cash equivalents and restricted cash at beginning of period		465,817		85,947
Cash and cash equivalents and restricted cash at end of period	$	434,056	$	936,734
Cash and cash equivalents at end of period		428,574		932,398
Restricted cash at end of period		5,482		4,336
Cash and cash equivalents and restricted cash at end of period	$	434,056	$	936,734

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. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

We are a life science technology company that designs, develops, and manufactures advanced sequencing solutions to help scientists and clinical researchers resolve genetically complex problems. Our products and technology under development stem from two highly differentiated core technologies focused on accuracy, quality and completeness which include our existing HiFi long read sequencing technology and our emerging short read Sequencing by Binding (SBB^®) technology. Our products address solutions across a broad set of applications including human germline sequencing, plant and animal sciences, infectious disease and microbiology, oncology, and other emerging applications. Our focus is on providing our customers with advanced sequencing technologies with higher throughput and improved workflows that we believe will enable dramatic advancements in routine healthcare. Our customers include academic and governmental research institutions, commercial testing and service laboratories, genome centers, public health labs, hospitals and clinical research institutes, contract research organizations (CROs), pharmaceutical companies and agricultural companies.

References in this report to “PacBio,” “we,” “us,” the “Company,” and “our” refer to Pacific Biosciences of California, Inc. and its consolidated subsidiaries.

Basis of Presentation and Consolidation

Our unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, as set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. The unaudited condensed consolidated financial statements include the accounts of Pacific Biosciences and our wholly owned subsidiaries. Certain information and footnote disclosures typically included in our audited financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on a consistent basis with the December 31, 2021 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state our financial position, results of operations, comprehensive income (loss), and cash flows for the period, but are not necessarily indicative of the results to be expected for the entire year or any future periods. All intercompany transactions and balances have been eliminated.

The financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the financial statements. On an ongoing basis, we evaluate our significant estimates including, but not limited to, the valuation of inventory, the determination of stand-alone selling prices for revenue recognition, the fair value of contingent consideration, the valuation of acquired intangible assets, the fair value of certain equity awards, 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 probability associated with variable payments under partnership development agreements, and the valuations related to our convertible senior notes. While the extent of the potential impact of the ongoing COVID-19 pandemic on our business is highly uncertain, we considered information available related to assumptions and estimates used to determine the results reported and asset valuations as of March 31, 2022. Actual results could differ materially from these estimates.

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Cash, Cash Equivalents, and Investments

We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.

We classify our investments in debt securities as available-for sale and report the investments at fair value in current assets. We evaluate our available-for-sale investments in unrealized loss positions and assess whether the unrealized loss is credit-related. Unrealized gains and losses that are not credit-related are recognized in accumulated other comprehensive (loss) income in stockholders’ equity. Realized gains and losses, expected credit losses, as well as interest income, on available-for-sale securities are also reported in other income, net. The cost used in the determination of gains and losses of securities sold is based on the specific identification method. The cost of marketable securities is adjusted for the amortization of premiums and discounts to expected maturity. Premium and discount amortization is recorded in other income, net.

Our investment portfolio at any point in time contains investments in cash deposits, money market funds, commercial paper, corporate debt securities and US government and agency securities with high credit ratings. We have established guidelines regarding diversification and maturities of investments with the objectives of maintaining safety and liquidity, while maximizing yield.

Concentration and Other Risks

For the three months ended March 31, 2022, two customers accounted for approximately 14% and 11%, respectively, of total revenue during the period. For the three months ended March 31, 2021, one customer accounted for approximately 12% of total revenue during the period. No other customers exceeded 10% during those periods.

As of March 31, 2022, 56% of our accounts receivable were from domestic customers, compared to 53% as of December 31, 2021. As of March 31, 2022, one customer represented 17% of our accounts receivable, while no customer represented 10% or greater of our net accounts receivable as of December 31, 2021.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

There are no accounting standards updates (“ASUs”) that have been recently adopted.

Significant Accounting Policies

There have been no changes to our significant accounting policies as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, however, as a result of certain changes to the standard contractual terms and conditions with customers implemented during the quarter ended March 31, 2022, we concluded a change in the application of our accounting policy, in accordance with ASC 606, was appropriate.

Specifically, we modified the standard contractual terms with customers during the current quarter, to reflect transfer of title and risk of loss and right to invoice upon delivery. We also updated the terms of the warranty provided with the instrument to remove the service component. As a result, the warranty is no longer a separate performance obligation and, accordingly, we accrue for the cost of the assurance warranty when revenue of the instrument is recognized. In addition, because of technical enhancements associated with our more recent instrument releases, including the Sequel IIe systems, installation services are now distinct from the instrument itself. Therefore, instrument revenue is now recognized upon transfer of control of the asset to the customer, which is generally upon delivery for sales made to our non-distributor customers.

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NOTE 2. BUSINESS ACQUISITIONS

Omniome, Inc.

On September 20, 2021, we completed our acquisition of Omniome, Inc. (“Omniome”), a San Diego-based company developing a highly differentiated, proprietary short-read DNA sequencing platform capable of delivering high accuracy.

In connection with the acquisition, the contingent consideration of $200 million (composed of $100 million in cash and $100 million in shares of our common stock) is due upon the achievement of a milestone, defined as the first commercial shipment to a customer of a nucleotide sequencing platform, comprising both an instrument and related consumables, that utilizes SBB technology. The number of shares of stock to be issued will be determined using the volume-weighted average of the trading prices of our common stock for the twenty trading days ending with and including the trading day that is two days immediately prior to the achievement of the milestone. Of the $100 million in shares of our common stock to be issued as part of the milestone, $4.1 million was attributable to stock options issued by PacBio in replacement of Omniome’s unvested options as part of the transaction.

The contingent consideration is accounted for as a liability at fair value, with changes during each reporting period recognized in our Consolidated Statements of Operations and Comprehensive Loss. The fair value of the contingent consideration liability is calculated, with the assistance from a third-party valuation firm, using a scenario-based method which considers a range of possible outcomes and their assigned probabilities of occurrence. The potential outcomes are discounted to present value at a discount rate equal to the sum of the term-matched risk-free-interest rate plus PacBio’s credit spread.

The acquisition was accounted for as a business combination and, accordingly, the total fair value of the consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands):


Cash and cash equivalents	$	15,338
Property and equipment, net		6,123
Operating lease right-of-use assets, net		18,095
In-process research and development ("IPR&D")		400,000
Goodwill		390,665
Other assets		3,203
Deferred income tax liability		(91,814)
Liabilities assumed		(26,821)
Total consideration transferred	$	714,789

We expect to finalize the purchase price allocation within 12 months of the acquisition date. We will recognize adjustments to the preliminary amounts with a corresponding adjustment to goodwill in the reporting period in which the adjustments to the preliminary amounts are determined, which we expect to be primarily due to the review of certain tax attributes.

Circulomics, Inc.

On July 20, 2021, we acquired Circulomics Inc. (“Circulomics”), a Maryland-based biotechnology company focused on delivering highly differentiated sample preparation products that enable genomic workflows.

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We paid $29.5 million in cash in exchange for all outstanding shares of common stock of Circulomics. We allocated the consideration transferred to the identifiable assets acquired and liabilities assumed based on their respective fair values at the date of the completion of the acquisition. The major classes of assets and liabilities to which we have allocated the total fair value of the consideration transferred were as follows (in thousands):


Cash and cash equivalents	$	987
Property and equipment, net		214
Intangible assets		11,360
Goodwill		19,309
Other assets		467
Deferred income tax liability		(2,672)
Liabilities assumed		(118)
Total consideration transferred	$	29,547

We expect to finalize the purchase price allocation within 12 months of the acquisition date. We will record adjustments to the fair value of the assets acquired, liabilities assumed and goodwill within the twelve-month measurement period, if necessary, which we expect to be primarily due to the review of certain tax attributes.

NOTE 3. 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 us to develop products relating to production-scale high-throughput sequencing (“Program Products”). If Program Products become commercially available, Invitae may purchase the Program Products. We are currently renegotiating the terms of the Development Agreement. As of March 31, 2022 and December 31, 2021, we have recognized payments received from Invitae of $23.5 million in deferred revenue, non-current, on the Consolidated Balance Sheet.

NOTE 4. TERMINATION OF MERGER WITH ILLUMINA

On November 1, 2018, we entered into an Agreement and Plan of Merger (as amended, the “Illumina Merger Agreement”) with Illumina, Inc. (“Illumina”) and FC Ops Corp., a wholly owned subsidiary of Illumina (“Illumina Merger Sub”). On January 2, 2020, we, Illumina and Illumina Merger Sub, 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”) totaling $52.0 million. 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 a corresponding non-operating expense was recorded in the Consolidated Statements of Operations and Comprehensive (Loss) Income during the quarter ended March 31, 2021.

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NOTE 5. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value hierarchy established under 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.

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.

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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 March 31, 2022 and December 31, 2021 respectively: