Fluidigm Corporation — Q3 2014 Form 10-Q
Entity note: The supplied filing is for Fluidigm Corporation, for the quarter ended September 30, 2014; it is not a filing under the name Standard BioTools Inc.
Business context and reporting period
Fluidigm develops and sells life-science analytical and preparatory systems, consumables and related services for genomics and single-cell analysis. Following its February 2014 acquisition of DVS Sciences, it also sells multi-parameter single-cell protein analysis systems and related products. The filing reports the three and nine months ended September 30, 2014, compared with the same periods in 2013; balance-sheet comparisons are with December 31, 2013.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $29.6m | $18.3m | $83.0m | $50.3m |
| Product revenue | $29.6m | $18.0m | $82.5m | $49.6m |
| Operating loss | $(13.0)m | $(5.0)m | $(42.0)m | $(14.0)m |
| Net loss | $(13.8)m | $(4.3)m | $(41.9)m | $(11.9)m |
| Net loss per share, diluted | $(0.49) | $(0.17) | $(1.52) | $(0.47) |
| Product margin | 61% | 72% | 64% | 71% |
- Revenue increased 62% in Q3 and 65% for nine months year over year. Growth reflected DVS/CyTOF sales and increased sales of Fluidigm instruments and consumables. Excluding acquired DVS operations, instrument revenue grew 29% in Q3 and 35% for nine months; consumables grew 48% and 51%, respectively.
- Q3 product margin fell 11 percentage points; nine-month margin fell 7 points. Management attributed the declines principally to acquired-technology amortization and inventory fair-value charges, as well as higher instrument warranty costs, partly offset by product mix. The acquired-asset and inventory charges were $2.9m in Q3 and $7.8m for nine months.
- Operating expenses rose substantially: nine-month R&D was $31.7m versus $14.2m, SG&A was $52.5m versus $34.8m, and acquisition-related expenses were $10.7m. Stock-based compensation was $15.3m for nine months versus $4.7m.
- Cash and cash equivalents were $30.9m at September 30, 2014; investments were $116.3m. Total cash, cash equivalents and investments were approximately $147.2m. Working capital excluding deferred revenue was $112.1m.
- Operating cash use was $19.1m for nine months, compared with $4.8m in 2013. Investing cash use was $184.0m, including $113.2m for the DVS acquisition net of acquired cash and investment purchases; financing provided $199.3m, mainly from convertible notes. Cash declined $4.3m during the period.
- Fluidigm issued $201.3m principal of 2.75% senior convertible notes due 2034; net proceeds were $195.2m. The balance sheet reports notes, net, of $195.4m. The notes are convertible at an initial price of approximately $55.94 per share and include specified repurchase rights. The $10m bank line had no amount drawn at quarter-end and was due to expire in December 2014.
Material changes and unusual items
- DVS was acquired on February 13, 2014 for an estimated aggregate purchase price of $199.9m, including $126.0m cash consideration and Fluidigm shares. Purchase accounting was preliminary; analysis of acquired technology, royalty obligations and tax liabilities could result in adjustments.
- The acquisition added $112.0m of developed technology, amortized over 10 years, and $104.2m of goodwill. Nine-month results include DVS from the acquisition date. Acquisition-related expenses were $10.7m; acquisition accounting also increased amortization and included inventory fair-value write-up charges.
- Income tax benefit was $4.0m for nine months, primarily reflecting a $2.0m release of a valuation allowance and benefits related to foreign operations and acquired intangible-asset deferred tax liabilities. The company continued to maintain a valuation allowance against U.S. losses and tax assets.
- The $1.0m payment to Life Technologies under a patent cross-license agreement was made in January 2014 while Fluidigm reserved its rights; management disputed that the contractual payment conditions had been met. The prior-year comparison included a $1.0m litigation settlement expense. Fluidigm reported no current material legal proceedings.
Outlook, commentary and risks
- Management expected instrument and consumables unit sales to increase over time through customer-base expansion, broader geographic coverage and new products, while noting that average selling prices may fluctuate with market conditions, product mix and currencies. It expected R&D and SG&A expenses to increase as the business expanded.
- Management stated existing cash, cash equivalents and investments were expected to meet working-capital and capital-expenditure needs for at least 18 months. It also warned that weaker operating cash generation or higher spending could require additional capital; no specific quantified overall revenue or earnings guidance is provided in the filing text.
- Fluidigm specifically cautioned that 2014 revenue from proteomics products was expected to be below DVS’s 2013 revenue for those products, and that it did not expect proteomics revenue to grow, if at all, at prior rates. DVS demand and revenue had varied significantly by quarter.
- Key risks include execution and integration of DVS, possible impairment of acquired goodwill and intangibles, reliance on third-party intellectual-property licenses, and manufacturing and single-source supplier dependencies. Fluidigm disclosed PerkinElmer’s position that its consent was required to negotiate a commercially reasonable license following the acquisition, and that negotiations were expected; a separate Nodality license had expired and reinstatement or a replacement was uncertain.
- Other risks include uncertain development and acceptance of emerging markets, competition, customer research-budget reductions, foreign-exchange exposure, and potential FDA oversight changes affecting research-use-only products and laboratory-developed tests. Management reported effective disclosure controls at September 30; integration of DVS financial processes and controls was ongoing.
Important facts for investors to verify
- How much reported growth is attributable to DVS versus sustained organic growth, and how proteomics revenue compares with management’s stated expectation.
- Whether margins improve as acquired-technology amortization and inventory revaluation charges evolve, and whether warranty costs or product mix continue to weigh on margins.
- The final DVS purchase-price allocation, including developed technology, deferred taxes, royalty obligations and any resulting impairment exposure.
- Status and terms of the PerkinElmer license discussions and the expired Nodality license, including any effects on CyTOF product sales or customer confidence.
- Cash burn and capital requirements relative to management’s stated 18-month liquidity outlook; also verify the status of the bank line after its December 2014 expiry and the long-dated notes’ conversion and repurchase provisions.
- Whether DVS integration, manufacturing capacity, supplier continuity and financial-control integration progress without material disruption or unexpected costs.