PACIFIC BIOSCIENCES OF CALIFORNIA, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this Annual Report on Form 10-K 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.
Overview
We design, develop and manufacture sequencing systems to help scientists resolve genetically complex problems. Based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, our products enable: de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures; full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes; targeted sequencing to more comprehensively characterize genetic variations; and real-time kinetic information for epigenome characterization. Our technology provides high accuracy, ultra-long reads, uniform coverage and the ability to simultaneously detect epigenetic changes. PacBio® sequencing systems, including consumables and software, provide a simple and fast end-to-end workflow for SMRT sequencing.
Our current products include the Sequel II and Sequel IIe instruments, and SMRT
Cell 8M, which when used 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, when used together are capable of
sequencing up to approximately one million DNA molecules simultaneously. In
Our customers and our scientific collaborators have published numerous
peer-reviewed articles in journals including Nature, Science, Cell,
Senior Management
Our President and Chief Executive Officer
2021 Strategic Objectives
38
--------------------------------------------------------------------------------
For 2021, we have outlined three strategic objectives:
?Expand our commercial reach;
?Accelerate our product development pipeline; and
?Drive market leadership in whole-genome clinical sequencing
Expanding our commercial reach includes hiring senior level team members with
extensive commercial experience. From
Accelerating our product development pipeline includes significantly expanding
our research and development team in an effort to accelerate the development of
multiple new products. In association with the collaboration we entered into
with Invitae Corporation ("Invitae") in
We believe that with the capabilities of our SMRT technology, we can be a market
leader in whole-genome clinical sequencing. Leading institutions such as
Children's Mercy Kansas City, Invitae and
Cash Position
Cash, cash equivalents and investments, excluding short-term and long-term
restricted cash, at
Invitae Collaboration
39
--------------------------------------------------------------------------------
In
As a benefit of its contribution, Invitae will be entitled to preferred pricing on the Program Products if and when they are available for commercial sale. Each Program Product will have a preferential pricing period. During the initial period of preferred pricing for each Program Product, Invitae may purchase the Program Product at a substantially reduced margin until it has recouped a mutually agreed multiple of its contributed funds. Subsequently, for up to three years after the initial period of preferred pricing, Invitae has the right to purchase the Program Product at a price higher than the initial preferred pricing period but within a specified price range.
We and Invitae may terminate our collaboration if the other party remains in material breach of agreement following a cure period to remedy the material breach. In addition, our agreement with Invitae includes certain other circumstances for termination by each party, including circumstances where Invitae may terminate for delays, IP concerns, change in control, or without cause.
In certain termination circumstances, (i) we will be obligated to refund all or a portion of the development funds advanced by Invitae and/or (ii) we will owe Invitae a share of the revenue generated from the sale of the Program Products if and when they are commercialized until such time as Invitae has recouped the funds provided to us, and in certain circumstances, a mutually agreed-upon return.
We expect to incur significant development costs over the duration of the
collaboration, including
COVID-19 Update
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. The financial results for the year ended
In response to local stay-at-home orders and in alignment with
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.
40
--------------------------------------------------------------------------------
A discussion of our comparison between 2020 and 2019 is presented below. A
discussion of the changes in our results of operations between the years ended
Results of Operations
Comparison of the Years Ended
Year Ended December 31,
2020 2019 $ Change % Change
Revenue: (in thousands, except percentages)
Product revenue $ 65,424 $ 77,742 $ (12,318) (16%)
Service and other revenue 13,469 13,149 320 2%
Total revenue 78,893 90,891 (11,998) (13%)
Cost of Revenue:
Cost of product revenue 35,424 44,771 (9,347) (21%)
Cost of service and other revenue 10,903 11,544 (641) (6%)
Total cost of revenue 46,327 56,315 (9,988) (18%)
Gross profit 32,566 34,576 (2,010) (6%)
Operating Expense:
Research and development 64,152 59,630 4,522 8%
Sales, general and administrative 72,799 75,491 (2,692) (4%)
Total operating expense 136,951 135,121 1,830 1%
Operating loss (104,385) (100,545) (3,840) (4%)
Gain from reverse termination fee from
Illumina 98,000 - 98,000 -
Gain from continuation advances from
Illumina 34,000 18,000 16,000 89%
Interest expense (267) (2,611) 2,344 90%
Other income, net 2,055 1,022 1,033 101%
Net income (loss) $ 29,403 $ (84,134) $ 113,537 135%
Revenue
Total revenue for the year ended
Product revenue for the year ended
Service and other revenue was
Gross Profit
Gross profit for the year ended
Cost of product revenue was
Cost of service revenue was
41
--------------------------------------------------------------------------------
Research and Development Expense
Research and development expense for the year ended
We expect research and development expenses to increase significantly in 2021,
as we intend to hire a significant number of additional personnel in our
research and development departments. We estimate costs associated with the
Invitae collaboration will amount to
Sales, General and Administrative Expense
Sales, general and administrative expense for the year ended
We expect sales, general, and administrative expense to increase significantly in 2021, as we added a number of senior level executives to our commercial organization in early 2021, and we plan to more than double our number of quota-carrying sales representatives during the year. Stock-based compensation included in sales, general, and administrative expense is expected to increase significantly in 2021.
Gain from Reverse Termination Fee from Illumina
As part of the Termination Agreement, Illumina paid us a Reverse Termination Fee
of
Gain from Continuation Advances from Illumina
As part of the Termination Agreement, Illumina paid us Continuation Advances of
Up to the full
Resulting from the issuance and sale of
Interest Expense
Interest expense for the year ended
Other Income, Net
The increase in Other income, net was primarily driven by a
Liquidity and Capital Resources
42
--------------------------------------------------------------------------------
Cash, cash equivalents and investments at
As part of the Termination Agreement with Illumina, up to
On
Factors that may affect our capital needs include, but are not limited to, 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. There can be no assurance that funds will be available on favorable terms, or at all.
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.
In 2020, cash provided by operating activities was
In 2019, cash used in operating activities was
Investing Activities
Our investing activities consist primarily of capital expenditures and investment purchases, sales and maturities.
In 2020, net cash used in investing activities was
In 2019, net cash provided by investing activities was
Financing Activities
In 2020, cash provided by financing activities was
In 2019, cash provided by financing activities was
Underwritten Public Equity Offering
43
--------------------------------------------------------------------------------
In
In
In total, for the year ended
Debt Facility Agreement
In
In
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our Consolidated Financial Statements, which we have
prepared in accordance with
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of our instruments and related consumables; Service and other revenue consist primarily of revenue earned from product maintenance agreements.
We account for a contract with a customer when there is a legally enforceable contract between us and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods or services is transferred to our customers or services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Taxes we collect concurrent with revenue-producing activities are excluded from revenue.
Our instrument sales are generally sold in a bundled arrangement and commonly include the instrument, instrument accessories, installation, training, and consumables. Additionally, our instrument sale arrangements generally include a one year period of service. For such bundled arrangements, we account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Our customers cannot benefit from our instrument systems without installation, and installation
44
--------------------------------------------------------------------------------
can only be performed by us or qualified distributors. As a result, the system and installation are considered to be a single performance obligation recognized after installation is completed except for sales to qualified distributors, in which case the system is distinct and recognized when control has transferred to the distributor which typically occurs upon shipment.
The consideration for bundled arrangements is allocated between separate performance obligations based on their individual standalone selling price ("SSP"). The SSP is determined based on observable prices at which we separately sell the products and services. If a SSP is not directly observable, then we will estimate the SSP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, internal costs, profit objectives, pricing practices and other observable inputs.
We recognize revenues as performance obligations are satisfied by transferring control of the product or service to the customer or over the term of a product maintenance agreement with a customer. Our revenue arrangements generally do not provide a right of return.
Contract liabilities and contract assets - Contract liabilities consist of deferred revenue. We record deferred revenues when cash payments are received or due in advance of our performance for product maintenance agreements. Deferred revenue is recognized over the related performance period, generally one year to three years, on a straight-line basis as we are standing ready to provide services and a time-based measure of progress best reflects the satisfaction of the performance obligation.
Other practical expedients and exemptions - Customers generally are invoiced upon acceptance of the system, which is also the start of the one year service period. As such, there is typically not more than a one year difference between the receipt of cash and the provision of services. Therefore, we apply the practical expedient and do not account for any potential significant financing benefit. However, it is noted that some customers will pre-order extended service periods at the time of the initial system sale. These customers may choose to make quarterly or annual payments or prepay multiple years of service upfront but there is no pricing difference between these different payment options. As such, no significant financing component is believed to exist with any of our existing arrangements.
Inventories
Inventories are stated at the lower of cost or net realizable value on a first-in, first-out ("FIFO") basis. The cost basis of our inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand, market conditions and the release of new products that may supersede old ones. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on the results of our operations.
Recent Accounting Pronouncements
Please see "Note 3. Summary of Significant Accounting Policies", subsection titled "Recent Accounting Pronouncements", in Part II, Item 8 of this Annual Report on Form 10-K for information regarding applicable recent accounting pronouncements.
Contractual Obligations, Commitments and Contingencies
The following table provides our future contractual obligations as ofDecember 31, 2020 : Payments due by period (in thousands) Total 2021 2022 2023 2024 2025 After
Operating lease obligations (1)
(1)Maintenance, insurance, taxes and contingent rent obligations are excluded.
Other Purchase Commitments
In addition, we had other purchase commitments of an estimated amount of
approximately
License Agreements
Payments related to licensing and other arrangements not included in the contractual obligations table include amounts related to cancelable license agreements with third parties for certain patent rights and technology. Under the terms of these agreements, we may be obligated to pay royalties based on revenue from the sales of licensed products, or minimum royalties, whichever is greater, and license maintenance fees. The future license maintenance fees and minimum royalty payments under the license agreements are not deemed to be material.
45
--------------------------------------------------------------------------------
The table above reflects only payment obligations that are fixed and determinable. Future royalties under our license agreements are not included in the table above because we cannot, at this time, determine when or if the events triggering any such payment obligations will occur or the amounts that will become potentially payable.
Legal Proceedings
Please see Item 3 "Legal Proceedings" of this Annual Report on Form 10-K for additional information.
Off-Balance Sheet Arrangements
As of
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 negligent 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 such third parties and us 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 II, Item 8 of this Annual Report on Form 10-K, any associated expenses
incurred are included within the related accrued litigation expense amounts. No
additional liability associated with such indemnification agreements has been
recorded at
© Edgar Online, source
