You should read the following discussion and analysis of our financial condition
and results of operations together with our condensed consolidated financial
statements and the related notes included in this Quarterly Report on Form 10-Q
and those in our Annual Report on Form 10-K for the year ended December 31,
2019. Some of the information contained in this discussion and analysis or set
forth elsewhere in this report, including statements related to our expectations
regarding the potential impacts of the COVID-19 pandemic on our business,
financial condition, and results of operations, and information with respect our
products, plans and strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties, including
statements regarding our expected financial results in future periods. The words
"anticipates," "believes," "could," "estimates," "expects," "intends," "may,"
"might," "plans," "potential," "predicts," "projects," "seeks," "should,"
"target," "will," "would" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. You should read the
"Risk Factors" section of this Quarterly Report on Form 10-Q for a discussion of
important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in
the following discussion and analysis. We do not assume any obligation to update
any forward-looking statements.
Termination of Merger with Illumina, Inc.
On January 2, 2020, we, Illumina and Merger Subsidiary entered into the
Termination Agreement. As part of the Termination Agreement, Illumina paid us a
$98.0 million Reverse Termination Fee, from which we paid our financial advisor
associated fees of $6 million in April 2020. In addition, Illumina paid us the
final Continuation Advances of $34 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), 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.
In addition, up to the $52.0 million of Continuation Advances paid to us are
repayable without interest to Illumina if, within two years of March 31, 2020,
we enter into 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.
Business 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.
COVID-19 Pandemic
23
--------------------------------------------------------------------------------
Table of Contents
The COVID-19 pandemic and efforts to control its spread have significantly
curtailed the movement of people, goods, and services worldwide, including in
the regions in which we sell our products and services and conduct our business
operations. Our first quarter 2020 financial results were impacted negatively as
our customers in multiple regions around the suspended their normal operations
in efforts to curb the spread of the COVID-19 pandemic. In particular, multiple
customers postponed deliveries of our systems they had ordered previously,
resulting in lower instrument revenues for the first quarter of 2020 as compared
to the first quarter of 2019. We cannot be certain when or if these customers
will eventually take delivery of their systems. Additionally, as of the end of
April 2020, normal operations at a majority of our customers with PacBio systems
continued to be suspended. As a result, it is likely that our consumable
revenues will decline from the levels we experienced in the first quarter of
2020. We cannot reliably estimate the size and duration of the negative impact
to our sales and results of operations that will result from the COVID-19
pandemic.
In response to local stay-at-home orders and in alignment with CDC
recommendations, we have limited our manufacturing and commercial operations
based in Menlo Park, California. We will, however, continue to provide
consumables, instruments and support to scientists at government, academic, and
commercial labs working on COVID-19 and other high-priority research needs. To
aid in containing the spread of COVID-19, we have implemented remote-work
options and are limiting employee travel as much as possible. We are monitoring
this rapidly evolving situation.
Even after the COVID-19 pandemic has subsided, we may continue to experience an
adverse impact to our business as a result of its global economic impact,
including any recession that has occurred or may occur in the future.
Specifically, difficult macroeconomic conditions, decreases in discretionary
capital spending, increased and prolonged unemployment or a decline in consumer
confidence as a result of the COVID-19 pandemic could have a continuing adverse
effect on the demand for some of our products. Such economic disruption could
have a material adverse effect on our business, results of operations and
liquidity. The degree of impact of COVID-19 on our business will depend on
several factors, such as the duration and the extent of the pandemic, as well as
actions taken by governments, businesses and consumers in response to the
pandemic, all of which continue to evolve and remain uncertain at this time. See
the Risk Factors section for further discussion of the possible impact of the
COVID-19 pandemic on our business.
24
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our unaudited Financial Statements, which have been prepared in
accordance with the rules and regulations of the SEC. The preparation of these
Financial Statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, we evaluate our critical accounting policies and estimates. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments loss on January 1, 2020,
using the modified retrospective method. Please see "Recently Adopted Accounting
Standards" in the Note 3. Summary of Significant Accounting Policies of Item 1.
Financial Statements.
Except as noted above, there have been no other material changes to our
significant accounting policies as discussed in our Annual Report on Form 10-K
for the year ended December 31, 2019.
Results of Operations
Comparison of the three months ended March 31, 2020 and 2019
Three Months Ended March 31, $ Change % Change
(in thousands, except percentages) 2020 2019
(unaudited)
Revenue:
Product revenue $ 12,293 $ 13,457 $ (1,164) (9%)
Service and other revenue 3,305 2,968 337 11%
Total revenue 15,598 16,425 (827) (5%)
Cost of Revenue:
Cost of product revenue 5,421 8,618 (3,197) (37%)
Cost of service and other revenue 2,689 2,690 (1) 0%
Total cost of revenue 8,110 11,308 (3,198) (28%)
Gross profit 7,488 5,117 2,371 46%
Operating Expense:
Research and development 15,250 15,485 (235) (2%)
Sales, general and administrative 24,947 19,766 5,181 26%
Total operating expense 40,197 35,251 4,946 14%
Operating loss (32,709) (30,134) (2,575) (9%)
Gain from Continuation Advances from
Illumina 34,000 - 34,000 N/A
Interest expense (267) (625) 358 57%
Other income, net 238 435 (197) (45%)
Net income (loss) $ 1,262 $ (30,324) $ 31,586 104%
Revenue
Total revenue for the three months ended March 31, 2020 was $15.6 million,
compared to $16.4 million for the same period during 2019.
Product revenue of $12.3 million for the three months ended March 31, 2020
consisted of $4.0 million from sales of Sequel and Sequel II instruments and
$8.3 million from sales of consumables, compared to total product revenue of
$13.5 million for the same period during 2019, consisting of $5.6 million from
sales of Sequel instruments and $7.9 million from sales of consumables. The
decrease in instrument sales was primarily attributable to a lower number of
instrument shipments and installations attributed due to COVID-19 as discussed
above. The increase in consumable sales was primarily attributable to
utilization from a larger installed base of instruments.
Service and other revenue of $3.3 million and $3.0 million for the three months
ended March 31, 2020 and 2019, respectively, was primarily derived from product
maintenance agreements sold on our installed instruments. The increase in
service and other revenue was primarily attributable to a larger number of
installed instruments under service contracts.
Gross Profit
25
--------------------------------------------------------------------------------
Table of Contents
Cost of product revenue was $5.4 million for the three months ended March 31,
2020, compared to cost of product revenue of $8.6 million for the same period
during 2019. Cost of service and other revenue for the three months ended March
31, 2020 was $2.7 million, compared to $2.7 million for the same period during
2019.
Gross profit for the three months ended March 31, 2020 was $7.5 million,
resulting in a gross margin of 48.0%, compared to gross profit of $5.1 million,
resulting in a gross margin of 31.2% for the same period during 2019. Gross
margin improved for the three months ended March 31, 2020 compared to the same
period in 2019 primarily due to low margins for the three months ended March 31,
2019. Gross margin of 31.2% for the three months ended March 31, 2019 was
negatively impacted by approximately $1.0 million of product transition costs,
including an inventory reserve taken relating to an updated forecast of a faster
transition from Sequel to Sequel II instrument sales. In addition, gross margin
for the three months ended March 31, 2020 benefited from higher output and
factory utilization compared with the three months ended March 31, 2019.
However, since the middle of March, we have significantly reduced our
manufacturing output, leading to idle capacity. As a result, we expect our gross
margin to decrease significantly until we return to normal capacity, the timing
of which we cannot reliably estimate due to the effects of COVID-19.
Research and Development Expense
During the three months ended March 31, 2020, research and development expense
decreased by $0.2 million, or 2%, compared to the same period during 2019.
Research and development expense included stock-based compensation expense of
$1.8 million and $2.0 million during the three months ended March 31, 2020 and
2019, respectively.
Sales, General and Administrative Expense
During the three months ended March 31, 2020, sales, general and administrative
expense increased by $5.2 million, or 26%, compared to the same period during
2019. The increase in sales, general and administrative expense was primarily
attributable to the financial advisory fee of $6.0 million associated with the
terminated merger with Illumina and $3.7 million associated with higher patent
litigation expenses, partially offset by a $5.1 million reduction in merger
related expenses incurred during the three months ended March 31, 2020 as
compared to the three months ended March 31, 2019. Sales, general and
administrative expense included stock-based compensation expense of $1.7 million
and $1.9 million during the three months ended March 31, 2020 and 2019,
respectively.
Gain from Continuation Advances from Illumina
In accordance with the terms of the Merger Agreement, during the first quarter
of 2020 we received Continuation Advances totaling $34.0 million from Illumina,
which resulted in a non-operating gain of $34.0 million.
Interest Expense
Interest expense for the three months ended March 31, 2020 decreased compared to
the same period in 2019. Interest expense related primarily to the debt
agreement with Deerfield entered into in February 2013 (the "Facility
Agreement") which matured in February 2020.
Liquidity and Capital Resources
Liquidity
Cash, cash equivalents and investments at March 31, 2020 totaled $142.6 million,
compared to $49.1 million at December 31, 2019. The increase was attributable to
the Reverse Termination Fee and Continuation Advances we received from Illumina
partially offset by cash used in operations. We believe that our existing cash,
cash equivalents and investments will be sufficient to fund our projected
operating requirements for at least the next 12 months from the filing date of
the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. However,
the potential economic or other disruptions caused by the COVID-19 pandemic
could have a material adverse effect on our business, results of operations and
liquidity. We will continue to monitor our operating expenses and cash flows in
response to the evolving market conditions.
On January 2, 2020, we and Illumina mutually agreed to terminate the Merger
Agreement. As part of the Termination Agreement, Illumina paid us the Reverse
Termination Fee of $98.0 million from which we paid our financial advisor
associated fees of $6.0 million. In addition, Illumina paid us the additional
Continuation Advances of $6.0 million in January 2020 and $22.0 million in
February 2020 and made the last Continuation Advance payment to us of $6.0
million in March 2020. 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, 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
26
--------------------------------------------------------------------------------
Table of Contents
Transaction. If such Change of Control Transaction is not entered into on or
prior to September 30, 2020 or if such change of control transaction is entered
into on or prior to September 30, 2020 but 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. In addition, up to $52.0 million of the Continuation Advances
that we received 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 (may have multiple closings), with the amount repayable dependent on
the amount raised by us. If we are required to repay the Termination Fee or the
Continuation Advances, we may not be able to fund our projected operating
requirements for at least twelve months from the date of filing this Quarterly
Report.
Factors that may affect our capital needs include, but are not limited to,
whether we will have to repay the Reverse Termination Fee or Continuation
Advances; the pace of adoption of our products which affects the sales of our
products and services; our ability to obtain new collaboration and customer
arrangements; the progress of our research and development programs; initiation
or expansion of research programs and collaborations; the purchase of patent
licenses; future acquisitions; manufacturing costs, service costs, the impact of
product quality, litigation costs, including the costs involved in preparing,
filing, prosecuting, defending and enforcing intellectual property rights; costs
of developing new and enhanced products; and other factors.
We may raise additional capital in the future. To the extent that 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 funds will be available on favorable terms, or at all,
particularly in light of restrictions under the Termination Agreement. If
adequate funds are not available, we may be required to obtain funds by entering
into collaboration, licensing or debt agreements on unfavorable terms. If we are
unable to raise funds 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, 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 cease operations. If our cash, cash equivalents and
investments are insufficient to fund our projected operating requirements, and
we are unable to raise capital, it would have a material adverse effect on our
business, financial condition and results of operations.
Operating Activities
Our primary uses of cash in operating activities are for the development of
ongoing product enhancements and future products, manufacturing, and support
functions related to our sales, general and administrative activities.
We had $75.4 million of cash provided from operating activities for the three
months ended March 31, 2020, compared to cash usage of $25.3 million from
operating activities for the same period in 2019.
Cash provided by operating activities for the three months ended March 31, 2020
was due to the $98.0 million Reverse Termination Fee received from Illumina and
a net income of $1.3 million plus changes in net operating assets and
liabilities, offset by a gain from Continuation Advances from Illumina of $34.0
million that is considered to be a financing activity, and non-cash items such
as stock-based compensation of $4.0 million and depreciation of $1.7 million.
The change in net operating assets and liabilities was primarily attributed a
decrease of $7.9 million in accounts receivable and an increase of accrued
liabilities of $4.7 million, partially offset by a decrease of $4.1 million in
accounts payable and an increase of $3.3 million in inventory.
Cash used in operating activities for the three months ended March 31, 2019 was
due primarily to a net loss of $30.3 million, offset by non-cash items such as
stock-based compensation of $4.4 million and depreciation of $1.8 million. The
change in net operating assets and liabilities was primarily attributed to an
increase of $2.1 million in accounts payable, partially offset by an increase of
$1.9 million in inventory.
Investing Activities
Our investing activities consist primarily of capital expenditures and
investment purchases, sales and maturities. We used $54.3 million of cash for
investing activities for the three months ended March 31, 2020, compared to
receiving cash of $38.0 million from investing activities for the same period in
2019.
Cash used in investing activities for the three months ended March 31, 2020 was
due primarily to net purchases of investments of $54.2 million and purchases of
property and equipment of $0.1 million.
Cash provided in investing activities for the three months ended March 31, 2019
was due primarily to net maturities of investments of $39.2 million.
27
--------------------------------------------------------------------------------
Table of Contents
Financing Activities
Cash provided from financing activities was $18.2 million and $6.7 million for
the three months ended March 31, 2020 and 2019, respectively.
Cash provided by financing activities during the three months ended March 31,
2020 was due to $34.0 million of Continuation Advances from Illumina and
proceeds of $0.2 million from the issuance of common stock through our equity
compensation plans, partially offset by $16.0 million we repaid for the
remaining outstanding principal to Deerfield upon the maturity of the Facility
Agreement.
Cash provided by financing activities during the three months ended March 31,
2019 was due to $6.7 million from the issuance of common stock through our
equity compensation plans.
Capital Resources
In August 2017, we filed a shelf registration statement on Form S-3 with the SEC
pursuant to which we may, from time to time, sell up to an aggregate of $150.0
million of our common stock, preferred stock, depository shares, warrants,
units or debt securities. On August 18, 2017, the registration statement was
declared effective by the SEC, which allows us to access the capital markets for
the three-year period following this effective date. However, the Termination
Agreement currently limits our ability to issue additional securities or incur
indebtedness as up to the $52.0 million of Continuation Advances paid to us are
repayable without interest to Illumina if, within two years of March 31, 2020,
we enter into a Change of Control Transaction or raise at least $100 million in
equity or debt financing in a single transaction (with the amount repayable
dependent on the amount raised by us).
Off-Balance Sheet Arrangements
As of March 31, 2020, we did not have any off-balance sheet arrangements.
In the ordinary course of business, we enter into standard indemnification
arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and
agree to reimburse the indemnified parties for losses suffered or incurred by
the indemnified party in connection with any trade secret, copyright, patent or
other intellectual property infringement claim by any third party with respect
to its technology, or from claims relating to our performance or non-performance
under a contract, any defective products supplied by us, or any acts or
omissions, or willful misconduct, committed by us or any of our employees,
agents or representatives. The term of these indemnification agreements is
generally perpetual after the execution of the agreement. The maximum potential
amount of future payments we could be required to make under these agreements is
not determinable because it involves claims that may be made against us in
future periods, but have not yet been made. To date, we have not incurred costs
to defend lawsuits or settle claims related to these indemnification agreements.
We also enter and have entered into indemnification agreements with our
directors and officers that may require us to indemnify them against liabilities
that arise by reason of their status or service as directors or officers, except
as prohibited by applicable law. In addition, we may have obligations to hold
harmless and indemnify third parties involved with our fundraising efforts and
their respective affiliates, directors, officers, employees, agents or other
representatives against any and all losses, claims, damages and liabilities
related to claims arising against such parties pursuant to the terms of
agreements entered into between us and such third parties in connection with
such fundraising efforts. To the extent that such indemnification obligations
apply to the lawsuits described in "Note 6. Commitments and Contingencies" in
Part I, Item 1 of this Form 10-Q, any associated expenses incurred are included
within the related accrued litigation expense amounts. No additional liability
associated with such indemnification agreements has been recorded as of March
31, 2020.
© Edgar Online, source Glimpses
PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 
