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
October 2020, we launched the Sequel IIe System, which has increased
computational capacity, and is designed to enable customers to generate PacBio
HiFi reads more efficiently.
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.
Senior Management
Our President and Chief Executive Officer Christian O. Henry was appointed
effective September 14, 2020, succeeding Dr. Michael Hunkapiller who announced
his retirement, which was effective at the end of the year 2020. Our Chief
Financial Officer Susan G. Kim was appointed effective September 28, 2020,
succeeding Susan K. Barnes who retired on August 7, 2020. Our Vice President and
Chief Accounting Officer Eric E. Schaefer was appointed effective May 26, 2020,
and our Chairman of the Board Dr. John F. Milligan was appointed effective
September 14, 2020. On December 31, 2020, the Board of Directors appointed Mark
Van Oene to the role of Chief Operating Officer and designated him as the
Company's principal operating officer, and appointed Peter Fromen to the role of
Chief Commercial Officer, effective in each case upon his commencement of
employment with the Company on January 8, 2021.
2021 Strategic Objectives
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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 December 2020 through January 2021, we
hired a Chief Commercial Officer, a Vice President of Commercial Operations, a
Vice President of Strategic Marketing, a Vice President of Product Marketing,
and a Senior Director of Product Marketing. During 2021, we expect to more than
double our number of quota-carrying field sales personnel from 22 at the end of
2020 to more than double by the end of 2021. In addition, we plan to expand our
commercial support activities and invest in more sales tools. We also intend to
invest more heavily in marketing programs to increase the awareness of our
products to a broader number of potential customers. As a result of these
commercial expansion activities, we expect our sales, general, and
administrative expense to increase significantly in 2021 as compared to 2020.
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 January 2021, as described below, we
plan to develop a new platform with production-scale high-throughput capability,
which will be in addition to other new products we already have in development.
In order to develop these multiple products in parallel, we anticipate hiring
over 50 additional people into our Research and Development departments. In
addition, we expect to increase our spending on outside development costs. As a
result, we expect our research and development expense to increase significantly
in 2021 as compared to 2020.
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 Stanford University have adopted the
use of our products to study rare and inherited disease. We believe the market
opportunity for clinical sequencing is very large, and could drive significant
revenue growth for the company. In an effort to accelerate this growth, we
entered into the collaboration with Invitae, who is a market leader in medical
genetic testing, and has the desire to sequence hundreds of thousands of genomes
annually with our technology. We will continue to pursue additional partnerships
to further drive the adoption of whole-genome clinical sequencing.
Cash Position
Cash, cash equivalents and investments, excluding short-term and long-term
restricted cash, at December 31, 2020 totaled $318.8 million, compared to $49.1
million at December 31, 2019. In February 2021, we issued the 1.50% Convertible
Senior Notes due 2028 (the "Notes") in the aggregate principal amount of $900.0
million. Please refer to the Liquidity and Capital Resources section below for
additional details relating to the Notes and other financing and cash
considerations.
Invitae Collaboration
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In January 2021 we entered into a multi-year collaboration with Invitae
Corporation, or Invitae, to begin development of a production-scale
high-throughput sequencing platform, or Program Products, leveraging the power
of PacBio's highly accurate HiFi sequencing to expand Invitae's whole genome
testing capabilities in the future. In connection with the development of the
Program Products, Invitae will provide funds to the Company equal to certain
development costs incurred by the Company. Under the development agreement, we
will be primarily responsible for conducting a development program to develop
the Program Products pursuant to a schedule and budget. We will make decisions
regarding the development program jointly with Invitae. The development program
is expected to last approximately sixty months, but may be shorter or longer. We
have the right to broadly commercialize Program Products with other customers.
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 $20-25 million expected to be incurred during 2021. The
Company is still evaluating the accounting impact of the agreement, including
whether the funding received by the Company from Invitae represents discounts
toward future supplies, funding of development efforts, or a combination of
both. There can be no assurances that the development program will be successful
or that the Program Products will become ready for commercial sale.
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 December 31, 2020 were
impacted negatively as many of our customers in multiple regions around the
world shut down operations for various periods of time in efforts to curb the
spread of the COVID-19 pandemic. This resulted in lower product revenues for the
year ended December 31, 2020 as compared to 2019. A significant number of our
customer sites that had shut down due to COVID-19 have re-opened. In addition, a
significant number of customers have delayed purchases or difficulties obtaining
funding for capital expenditures due to the negative impact of the pandemic on
their businesses. This dynamic continues to negatively impact the recognition of
revenue related to the sale of our Sequel and Sequel II/IIe instruments and
associate consumables and software. Due to the uncertain scope and duration of
the pandemic, we cannot reasonably estimate the future impact to our operations
and financial results.
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 that remain open. To aid in containing the spread of COVID-19,
we have implemented remote-work options and are limiting employee travel. 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.
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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
December 31, 2019 and December 31, 2018 has been omitted from this Annual Report
on Form 10-K but may be found in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations of our Annual Report on Form 10-K
for the year ended December 31, 2019, filed with the Securities and Exchange
Commission on February 28, 2020, which is available free of charge on the SEC's
website at www.sec.gov and our corporate website (www.pacb.com).
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
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 December 31, 2020 was $78.9 million compared to
$90.9 million for 2019.
Product revenue for the year ended December 31, 2020 was $65.4 million, compared
to $77.7 million for the year ended December 31, 2019. Product revenue of $65.4
million for the year ended December 31, 2020 consisted of $34.3 million from
sales of Sequel, Sequel II and Sequel IIe instruments and $31.1 million from
sales of consumables, compared to total product revenue of $77.7 million for the
same period during 2019, consisting of $45.1 million from sales of Sequel and
Sequel II instruments and $32.6 million from sales of consumables. The decrease
in instrument sales was primarily attributable to a lower number of instrument
shipments and installations due to COVID-19 as discussed above. The decrease in
consumable sales was primarily attributable to lower utilization of the
installed base of instruments during certain periods of 2020 due to COVID-19 as
discussed above. The negative impact of COVID-19 on our customers will likely
continue to adversely impact our revenues during 2021.
Service and other revenue was $13.5 million and $13.1 million for the years
ended December 31, 2020 and 2019, respectively, and was primarily derived from
product maintenance agreements sold for our installed instrument base.
Gross Profit
Gross profit for the year ended December 31, 2020 was $32.6 million, resulting
in a gross margin of 41% while gross profit for the year ended December 31, 2019
was $34.6 million, resulting in a gross margin of 38%. Gross margin for the year
ended December 31, 2019 was negatively impacted by product transition costs,
including inventory reserves taken in connection with the transition from Sequel
to Sequel II.
Cost of product revenue was $35.4 million for the year ended December 31, 2020,
compared to $44.8 million for 2019. Cost of product revenue decreased by $9.4
million for the year ended December 31, 2020 compared to 2019 primarily
resulting from lower product shipments. In addition, during the year ended
December 31, 2019, we incurred product transition costs including an inventory
reserve taken in connection with the transition from Sequel to Sequel II.
Cost of service revenue was $10.9 million for the year ended December 31, 2020,
compared to $11.5 million for 2019.
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Research and Development Expense
Research and development expense for the year ended December 31, 2020 increased
by $4.5 million, or 8%, compared to 2019. The increase in research and
development expense was primarily driven by an increase of $3.4 million in
compensation expenses and an increase of $1.7 million of higher product
development costs. Research and development expenses included stock-based
compensation expenses of $7.1 million and $7.7 million for the years ended
December 31, 2020 and December 31, 2019, respectively.
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 $20 - $25 million during 2021. Stock-based
compensation included in research and development expense is expected to
increase significantly in 2021.
Sales, General and Administrative Expense
Sales, general and administrative expense for the year ended December 31, 2020
decreased by $2.7 million, or 4%, to $72.8 million compared to $75.5 million for
the year ended December 31, 2019. The decrease in sales, general and
administrative expense was primarily attributable to a decrease in professional
services of $6.7 million, primarily resulting from $12.7 million higher
acquisition-related legal and professional fees incurred for the year ended
December 31, 2019, partially offset by a $6.0 million merger advisory fee
incurred in the first quarter of 2020; an increase of $2.9 million in salary and
bonus expenses for the year ended December 31, 2020 and an increase of $1.0
million in stock-based compensation as a result of resuming the Employee Stock
Purchase Plan ("ESPP") in 2020 and higher executive-level stock-based
compensation. Sales, general and administrative expense included stock-based
compensation expense of $8.2 million and $6.8 million during the year ended
December 31, 2020 and 2019, respectively.
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 $98.0 million in the first quarter of 2020. Pursuant to the Termination
Agreement, in the event that, on or prior to September 30, 2020, we entered into
a definitive agreement providing for, or consummated, a Change of Control
Transaction, then we may have been required to repay the Reverse Termination Fee
(without interest) to Illumina in connection with the consummation of such
Change of Control Transaction. We deferred the gain from the Reverse Termination
Fee from Illumina until the date when the associated contingency was resolved.
On October 1, 2020, the contingency clauses lapsed and we recorded the $98.0
million as a part of other income.
Gain from Continuation Advances from Illumina
As part of the Termination Agreement, Illumina paid us Continuation Advances of
$18.0 million during the fourth quarter of 2019 and $34.0 million during the
first quarter of 2020. We recorded the $34.0 million and $18.0 million as a part
of other income for the year ended December 31, 2020 and 2019, respectively.
Up to the full $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, or consummate a Change of Control Transaction or raise 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 our 1.50% Convertible
Senior Notes due 2028, $52.0 million of Continuation Advances were paid without
interest to Illumina in February 2021. Refer to Note 11. "Subsequent Events"
within the Consolidated Financial Statements on Item 8 of this report for
additional details.
Interest Expense
Interest expense for the year ended December 31, 2020 decreased $2.3 million
compared to 2019, as the debt agreement with Deerfield entered into in February
2013 (the "Facility Agreement") matured in February 2020.
Other Income, Net
The increase in Other income, net was primarily driven by a $1.0 million foreign
exchange gain recognized for the year ended December 31, 2020 compared to a $0.1
million foreign exchange loss recognized for the year ended December 31, 2019.
Liquidity and Capital Resources
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Cash, cash equivalents and investments at December 31, 2020 totaled $318.8
million, compared to $49.1 million at December 31, 2019. The increase was
attributable to the proceeds from our public offerings of common stock completed
in August 2020 and November 2020, as well as the Reverse Termination Fee and
Continuation Advances we received from Illumina, partially offset by cash used
in operations and a $16.0 million repayment of debt in the first quarter of
2020. 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 date of filing of this Annual Report on Form 10-K for the
year ended December 31, 2020.
As part of the Termination Agreement with Illumina, up to $52.0 million of the
Continuation Advances that we received from Illumina 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 a
single equity or debt financing (may have multiple closings), with the amount
repayable dependent on the amount raised by us.
On February 9, 2021, we entered into an Investment Agreement with SB Northstar
LP (the "Purchaser"), a subsidiary of SoftBank Group Corp., relating to the
issuance and sale to the Purchaser of $900 million in aggregate principal amount
of the Company's 1.50% Convertible Senior Notes due 2028 (the "Notes"). As a
result of the Notes, $52.0 million of Continuation Advances were paid without
interest to Illumina in February 2021. Refer to Note 11. "Subsequent Events"
within the Consolidated Financial Statements on Item 8 of this report for
additional details.
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 $19.5 million, reflecting a
net income of $29.4 million, which include a gain from the Reverse Termination
Fee received from Illumina of $98.0 million and a gain from the Continuation
Advances from Illumina of $34.0 million. However, the Continuation Advances are
considered a financing activity and therefore an associated $34.0 million
adjustment has been reflected to cash provided by operating activities. The net
income of $29.4 million included non-cash expense items such as stock-based
compensation of $17.5 million and depreciation of $6.4 million. The change in
net operating assets and liabilities was primarily attributed to an increase of
$4.1 million in accrued expenses and an increase of $5.0 million in other
liabilities, partially offset by a decrease of $5.1 million in accounts payable.
In 2019, cash used in operating activities was $78.3 million, reflecting a net
loss of $84.1 million, adjusted for non-cash items such as stock-based
compensation of $16.4 million and depreciation of $7.3 million. The change in
net operating assets and liabilities was primarily attributed to a decrease of
$3.9 million in inventory, partially offset by an increase of $6.7 million in
accounts receivable.
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 $219.3 million, comprised of
net purchases of investments of $218.3 million and purchases of property and
equipment of $1.0 million.
In 2019, net cash provided by investing activities was $62.0 million, comprised
of net purchase of investments of $64.8 million and net purchase of property and
equipment of $2.8 million.
Financing Activities
In 2020, cash provided by financing activities was $251.8 million, comprised of
total net proceeds of $187.5 million from our August 2020 and November 2020
underwritten public equity offerings after deducting underwriter commissions and
paid offering expenses, $34.0 million of Continuation Advances from Illumina and
proceeds of $46.4 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.
In 2019, cash provided by financing activities was $26.5 million, comprised of
$18.0 million of Continuation Advances from Illumina and net proceeds of $8.5
million from the issuance of common stock through our equity compensation plans.
Underwritten Public Equity Offering
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In August 2020, we entered into an underwriting agreement, relating to the
public offering of 19,430,000 shares of our common stock, $0.001 par value per
share, at a price to the public of $4.47 per share. Under the terms of the
underwriting agreement, we also granted the underwriters a 30-day option to
purchase up to an additional 2,914,500 shares of our common stock, which was
subsequently exercised in full, and the offering including the sale of shares of
common stock subject to the underwriters' option, closed in August 2020. In
total, we sold 22.3 million shares of our common stock. We paid a commission
equal to 6% of the gross proceeds from the sale of shares of our common stock.
The total net proceeds to us from the offering after deducting the underwriting
discount were approximately $93.9 million, excluding approximately $0.3 million
of offering expenses.
In November 2020, we entered into an underwriting agreement, relating to the
public offering of 6,096,112 shares of our common stock, $0.001 par value per
share, at a price to the public of $14.25 per share. Under the terms of the
underwriting agreement, we also granted the underwriters a 30-day option to
purchase up to an additional 914,416 shares of our common stock, which was
subsequently exercised in full, and the offering including the sale of shares of
common stock subject to the underwriters' option, closed in November 2020. In
total, we sold 7.0 million shares of our common stock. We paid a commission
equal to 6% of the gross proceeds from the sale of shares of our common stock.
The total net proceeds to us from the offering after deducting the underwriting
discount were approximately $93.9 million, excluding approximately $0.3 million
of offering expenses, $0.2 million of which was unpaid as of December 31, 2020.
In total, for the year ended December 31, 2020, we issued 29.4 million shares of
our common stock through our two underwritten public offerings with an average
offering price of $6.40. The total net proceeds to us from the two offerings,
after deducting the underwriting commission and offering expenses, were
approximately $187.2 million.
Debt Facility Agreement
In February 2013, we entered into a debt facility agreement with Deerfield,
pursuant to which we received $20.5 million in funding and issued promissory
notes in the aggregate principal amount of $20.5 million. The promissory notes
bore simple interest at a rate of 8.75% per annum, payable quarterly in arrears
commencing on April 1, 2013 and on the first business day of each January,
April, July and October thereafter. The debt facility agreement had a maximum
term of seven years. We received net proceeds of $20.0 million, representing
$20.5 million of gross proceeds, less a $500,000 facility fee, before deducting
other expenses of the transaction. On June 23, 2017, pursuant to a partial
exercise by the promissory notes holders of their right to elect to receive up
to 25% of the net proceeds from any financing that includes an equity component,
we paid $4.5 million of outstanding principal, together with accrued and unpaid
interest, to one of the promissory notes holders with proceeds from our
underwritten public equity offering. As of December 31, 2019, a balance of $16.0
million aggregate principal amount of debt remained outstanding under this
facility and was presented as "Notes payable, current" on the consolidated
balance sheet as of December 31, 2019.
In February 2020, upon the maturity of the debt, we repaid the remaining
outstanding principal of $16.0 million and interest to Deerfield.
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 U.S. GAAP. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, cost of revenue, and operating
expenses, and related disclosure of contingent assets and liabilities.
Management based its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgements about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates under different
assumptions or conditions.
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
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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 of
December 31, 2020:
Payments due by period (in thousands)
Total 2021 2022 2023 2024 2025 After
Operating lease obligations (1) $ 54,054 $ 7,330 $ 7,502 $ 7,704 $ 7,920 $ 8,136 $ 15,462
Total contractual obligations $ 54,054 $ 7,330 $ 7,502 $ 7,704 $ 7,920 $ 8,136 $ 15,462
(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 $18.2 million as of December 31, 2020, consisting of open purchase
orders and contractual obligations in the ordinary course of business, including
commitments with contract manufacturers and suppliers for which we have not
received the goods or services, and acquisition and licensing of intellectual
property. A majority of these purchase obligations are due within a year.
Although open purchase orders are considered enforceable and legally binding,
the terms generally allow us the option to cancel, reschedule and adjust our
requirements based on our business needs prior to the delivery of goods or
performance of services.
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.
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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 December 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 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 December 31, 2020.
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